On the last day of February, the Senate Banking Committee held the second in its series of hearings on how to reform the Federal Housing Administration (FHA), the agency within the Department of Housing and Urban Development that provides 100 percent insurance on low-down payment loans of up to $729,500 that, along with the failed government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, achieved a market share of over 90 percent after the housing bubble burst in 2008.
Both Chairman Tim Johnson, D-S.D., and the ranking Republican, Michael Crapo, R-Idaho, stated that the purpose of the hearing was to begin to work toward bipartisan legislation to restore the solvency of the FHA. Good luck with that.
The FHA’s independent actuary issued an estimate last November that the FHA insurance fund stands at -$16.3 billion and its capital ratio, which is mandated to be no less than 2 percent, is -1.44 percent. One might look at this and say, ho-hum. At a time when the Fed is buying $45 billion of treasuries and $40 billion of mortgage-backed securities every month, $16 billion, or even the larger amounts critics charge may be required to bail out the FHA, is quite small.
The FHA itself says not to worry, since it has $30 billion in cash (not really very much either, given the size of this operation) and that the losses were incurred in 2007 through 2009, whereas the loans guaranteed from 2009 on are projected to be profitable. Critics wonder what is going to happen to these projections if the Fed ever withdraws its quantitative easing and/or the economy slips back into a recession. At the moment, some legislators and the administration might be embarrassed if the FHA had to join the list of public and private entities bailed out by the government.
The hearing itself was reminiscent of a sporting event where a fan went to a fight and a hockey game broke out, because the most interesting part of the hearing took place after most of the senior senators had left.
Another analogy would be to Fantasy Island, where Tattoo has yelled, “Da plane! Da plane!” and a cast of characters arrive with their stories and issues.
In this episode, the witnesses consisted of two trade association leaders, two private experts and two representatives of niche participants in the mortgage-finance industry. As usual, each has an angle, something he or she wants from the legislative process that is about to unfold.
In inviting two trade representatives, the committee got the right ones, as realtors and mortgage bankers are two that benefit the most from the existence of the FHA, because it and the GSEs enable them to move their products and earn generous commissions with little or no capital at stake.
A regulation under Dodd-Frank to fix this is languishing along with most of the other regulations, 2 ½ years after the legislation was enacted. A distinction should be made between the realtor’s representative, Gary Thomas, president of the National Association of Realtors, and the mortgage bankers’ representative, David Stevens, CEO of the Mortgage Bankers Association who is probably paid a couple million dollars annually to speak for the group after having headed the FHA and previously worked for Freddie Mac and Wells Fargo.
The private witnesses, Phillip Swagel, a professor of international economic policy at the University of Maryland who was a Treasury official during the George W. Bush administration, and Sarah Rosen Wartell, president of the Urban Institute who formerly worked at the FHA, represent moderate critics of the FHA who endorse the legitimacy of its mission.
Finally, Teresa Bryce Bazemore, president of the Radian Guaranty Corp., a private mortgage insurer that offers insurance for part of the risk not guaranteed by the GSEs, and Peter Bell, president of the National Reverse Mortgage Lenders Association who was perhaps the first representative of the reverse mortgage industry to testify before Congress, testified at the hearing.
Most of the senior senators on the committee asked friendly questions designed to give the witnesses a chance to “elaborate” on their testimony, and often they would respond simply by repeating what they had already said.
Just as one might have fallen asleep, David Vitter, R-La., stated that he continues to be concerned that the FHA will have to be bailed out, that the FHA is continuing to broaden its “footprint” and that changes are taking place in the industry that may permanently alter the landscape in a manner that permanently extends the government’s involvement and the exposure of taxpayers to further bailouts.
Elizabeth Warren, D-Mass., then extended the discussion to Fannie and Freddie and probed for ideas as to whether all three agencies need to be reformed at once, because they are all, in effect, part of the same enterprise of government backing of the mortgage industry, along with other federal agencies such as Veterans Affairs and Ginnie Mae.
The witnesses told Warren that the policymakers would not be ready to deal with Fannie and Freddie anytime soon, so forget it. Pat Toomey, R-Penn., declared that if it were not for crowding out by the federal government, a private mortgage finance market would reassert itself. Both he and Vitter discussed ideas with Bazemore about how to require the FHA to reduce its role in the market so that private mortgage insurers could expand.
Then the last questioner, Joe Manchin, D-W.Va., engaged in a remarkable colloquy with the realtor, Thomas, on whether it is really the mission of the FHA to back mortgages as big as $729,500 for people who could be making unlimited incomes. As the discussion proceeded, Thomas insisted that, yes, this is a proper role for the FHA, to be there to finance mortgages whenever market conditions cause the private lenders to withdraw.
Thus, as the controversy builds over what to do about the growing exposure of the financial sector to the prospect of further bailouts, the questions arise as to why the government should continue to pick winners from well-heeled homebuyers in Orange County and losers from retirees, perhaps also in Orange County, who have seen their fixed-income returns shrink in order to finance another bubble in housing and bank stocks.
Another way to put it is that the advocates of expanded government intervention as the answer to every perceived market failure decided decades ago that the housing sector should be provided a steady flow of funds at all costs.
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