On Feb. 6, the House Financial Services Committee, now chaired by Rep. Jeb Hensarling, R-Texas, held a hearing on the condition of the Federal Housing Administration (FHA) and the issues it raises for the long-pending agenda for reform of housing finance that has been languishing for years. The reform extends to the future of Fannie Mae and Freddie Mac, as well as the restructuring of the secondary market for mortgages that housing industry advocates promote as necessary to support the industry’s resurgence.
• Edward Pinto, resident fellow at the American Enterprise Institute
• Anthony Sanders, senior scholar at the Mercatus Center at George Masson University
• Basil Petrou, managing partner at Federal Financial Analytics Inc.
• Julia Gordon, director of housing finance and policy at the Center for American Progress
In his opening remarks, Hensarling decried evidence that the U.S. economy contracted slightly in the fourth quarter of 2012, and he asserted that the economy could grow at a rate of 4 percent or more if it weren’t for the effects of factors like the FHA that act as a drag on growth. He and the first three witnesses complained that the FHA has taken over the role of acting as not only the largest provider of mortgage credit to low- and moderate-income homebuyers, but it has also strayed into the business of lending to purchasers of million-dollar homes, as permitted by its loan ceiling of $729,750.
This ability to lend to the lowest and highest ends of the market, according to Hensarling, has enabled the FHA to take on more risk and to crowd out participation of the private sector in the business of mortgage finance. Hensarling and other Republicans cited a report by the FHA’s independent actuary last November that FHA’s capital position has sunk to -$16.3 billion, or -1.44 percent.
Gordon and committee Democrats defended the FHA and praised it for filling the vacuum in mortgage lending that occurred when private lenders withdrew after the 2008 episode of the financial crisis. They claimed that the book of business over the past three years has been profitable, and they repeatedly cited testimony by the Republican economist Mark Zandi of Moody’s Analytics that without the support of the FHA, the decline in house prices would have been 25 percent deeper than the 30 percent drop that occurred, and 2 million more jobs would have been lost.
Gordon argued further that there would not be a need for a federal bailout, because the FHA can draw on federal funds. Faced with a challenge by Republicans that such a draw would be a bailout, she retreated and said it would be automatic and would not require congressional action.
Republicans responded that if the FHA were a private insurer, it would have been closed by regulators, but Democrats rejoined that the FHA lost less money due to poor risk management than did the banks that were rescued by the government in 2008.
It should be stressed, though, that despite all of the partisan debate, the parties have agreed in the past on legislation to give the FHA more authority to take steps to improve its financial position, including increasing the premiums it charges borrowers, tightening underwriting standards and reducing seller-provided financing, a major contributor to high-delinquency rates among borrowers with low credit scores and high debt-to-income ratios.
Pinto estimated that under private-sector accounting rules, the actual exposure of the FHA is close to the $54 billion he predicted when he testified before the committee three years ago, and he pointed out that the default rate of the FHA has remained fairly steady at 11 percent throughout the nearly 80 years of its existence.
Petrou also called for application of a strict actuarial model to measure the financial performance of the agency.
Sanders proposed that the FHA cut loan limits in half and drastically cut the guaranteed portion of insured loans from 100 percent so that the rest could be shared by private mortgage insurers and by lenders that would retain some of the risk entailed by the loans they originate.
Rep. Michael Capuano, D-Mass., challenged the Republicans to dispense with and move forward immediately with legislation similar to the reform package the House passed in the last Congress, in the hope that this time the Senate would pass the bill. It remains to be seen whether any part of the housing reform legislation will actually be enacted.
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