FHA Commissioner Outfoxes Republicans in Policy Debate

Thursday, 14 Feb 2013 01:39 PM

By Robert Feinberg

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A fairly routine hearing of the House Financial Services Committee on the future of the Federal Housing Administration (FHA) turned into a minor defeat for the home team Wednesday. At the hearing, Carol Galante, commissioner of FHA, jousted with Jeb Hensarling, R-Texas, the new head of the committee, and his colleagues over the issues raised by proposals to reform the FHA as part of what could be a broader consideration of reform of the housing finance system, whose faults and excesses contributed mightily to the 2008 financial crisis.

Readers may differ with this assessment, but as a former member of the staff of this committee, the hearing looked like one of those college basketball games where the favored team is routed by an underdog because it takes too many hasty shots, commits too many turnovers and generally seems less prepared to play than its archrival.

Admittedly, the Democrats had advantages because they control the administration, and this put them in a position to take credit for the part the FHA has played in restoring the housing market to a semblance of vigor in response to unprecedented monetary policy measures. On the whole, the minority Democrats may have done a better job of presenting its case, while the majority Republicans were left to grumble, in the immortal words of the defeated 1996 Republican presidential candidate Bob Dole: “Where’s the outrage?”

Republicans took the initiative as Hensarling laid out the case in his opening statement that the American people are entitled to answers as to why, as the national debt continues to climb out of control, the FHA has been allowed to morph from the mortgage insurer of last resort to an agency that now controls 56 percent of the mortgage insurance market. In addition, the FHA has crowded out private mortgage insurers by expanding into the high end of the business by insuring mortgages as large as $729,000 on million-dollar homes, yet the agency is flat broke and may require a government bailout, according to an annual report last November by the FHA’s independent actuary.

When Spencer Bachus, R-Ala., asked Galante if she was disturbed by the fact that the FHA now experiences the same number of defaults every 12 days as occurred in its first 20 years, she responded that these results occurred at the height of the crisis and do not necessarily lead to foreclosure.

Beginning with the ranking Democrat, Maxine Waters, D-Calif., committee Democrats used their time to make the case that the FHA has merely fulfilled its mission by stepping in when the private sector abandoned the business after the 2008 crisis. Waters and her colleagues repeatedly cited a report by the Republican economist Mark Zandi, Congress’s favorite expert, that if the FHA had not been on the scene to fill the gap left by private insurers in October 2010, housing construction would have plunged 60 percent, home prices would have dropped an additional 25 percent and the economy would have slipped into a double-dip recession, losing 3 million jobs and $500 billion in economic output.

Other Democrats followed a pattern of asking leading questions that enabled Galante to embellish the administration’s case that the FHA has fulfilled its mission, making necessary policy changes to improve its solvency, that it has $31 billion cash on hand, enough to last seven years, and that it has seen its market share overall decline to 15 percent and mortgage insurance share to 42 percent, with this trend expected to continue as the housing market recovers and the private sector re-enters the market.

Democrats made emotional appeals as Carolyn Maloney, D-N.Y., hailed the FHA’s response to Superstorm Sandy, and Gregory Meeks, D-N.Y., credited the FHA for enabling his parents to buy their home and for providing access to credit for most minority homebuyers and for as many as 80 percent of first-time homebuyers, consistent with its mission.

Another high point for the Democrats came when Patrick McHenry, R-N.C., challenged Galante as to where the authority came from to allow the FHA to lend on expensive homes whose owners make more than $100,000 per year. She responded that the authority came from Congress, and while it is scheduled to expire at the end of the year, having been renewed by Congress at the end of 2012, the agency plans to continue to use this authority.

A defining moment occurred when a Republican demanded to know whether an 11 percent delinquency rate was acceptable to the FHA and Galante responded that it is acceptable, because it means that 90 percent of borrowers were successful as homeowners, consistent with the FHA’s mission. Republicans failed to marshal available data presented recently in a conference at the American Enterprise Institute showing that the average figures the FHA relies on mask extreme damage to minority communities in cities across the country and conceal the fact that the FHA has been following a “barbell” strategy of insuring loans to risky borrowers at the low end and financing these loans by serving high-end borrowers in million-dollar home in high-cost areas.

Despite the occasional rancor of this debate, the outlook going forward is that the two sides will ultimately get together on legislation that will build on the bill the House passed in the last Congress, but the Senate never considered. If the economy relapses or interest rates increase significantly — and many economists expect at least the latter event to occur whenever the Federal Reserve finally gives up on quantitative easing — the FHA may need a bailout after all.

Meanwhile, each party will continue to cling to its version of events and expectation as to how the scenario will unfold as the returns come in on the business the FHA touts as its most profitable ever, while Republicans taunt the FHA for its string of several years of inaccurate predictions.

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