Feb. 28 (Bloomberg) -- Leaders of the Senate Banking Committee promised a bipartisan bill to restructure the Federal Housing Administration as it faces its first shortfall since it was founded in the 1930s.
The pledge today by Senator Tim Johnson, a South Dakota Democrat and chairman of the panel, and ranking member Michael Crapo, a Republican from Idaho, contrasts with partisan divisions over the future of the FHA in the House of Representatives.
“I hope that ranking member Crapo and I can work together to reach a bipartisan agreement to ensure the FHA’s fiscal stability,” Johnson said at a hearing on the agency. “I look forward to your suggestions for ensuring the FHA’s fiscal health now and in the future.”
The House approved an FHA bill last year while the Senate failed to pass a measure. Since a November report that FHA could need a subsidy of as much as $16.3 billion from the Treasury, lawmakers have promised to push for broader changes than were included in last year’s attempt.
House Democrats have resisted that, leaving the Financial Services Committee divided. On the Senate Banking Committee, members on both sides of the aisle pushed for broader reform of the government insurer.
“This committee needs to come together to craft bipartisan legislation that will best equip the FHA to accurately assess its risks and build capital to insure against them,” Crapo said.
Senator Bob Corker, a Republican from Tennessee, is among the advocates of a more comprehensive FHA measure. “I hope it’s a lot more robust than what was looked at last year and I think there’s a chance it will be actually,” he said in an interview.
The FHA insures $1.1 trillion worth of mortgages and backs about 15 percent of the U.S. loan originations for home purchases, almost quadruple the 4 percent share it covered in 2007.
FHA could avoid taking Treasury aid even if the budget President Barack Obama releases next month shows it has a shortfall, FHA Commissioner Carol Galante has said. The agency will take additional steps to reduce defaults on loans it insures and raise the fees it charges for insurance, Galante said.
Democrats in the House have argued that FHA played a critical role in aiding the housing market after the 2008 financial crisis and that Congress should pass the FHA legislation offered last year.
That measure would have given FHA more authority to weed out bad actors among the lenders who issue loans it insures, among other things. Representative Michael Capuano, a Democrat from Massachusetts, said at a previous hearing that the committee should pass last year’s bill instead of exploring broader reform.
“If the chairman wants to put out the bill that this committee put out last cycle, we should do it today,” Capuano said at a Feb. 6 hearing. “Get it on the floor, get it through.”
At today’s hearing, Senator David Vitter, a Republican from Louisiana who is working on an FHA bill, suggested indemnifying the agency so that lenders are on the hook for losses from a flawed loan that goes bad.
“It seems to me there should be some no-brainer things we can do to shore up fiscal solvency,” Vitter said, so that “the taxpayer isn’t on the hook for fraud, misrepresentation and not meeting the proper criteria at origination.”
Senator Elizabeth Warren, a Democrat from Massachusetts, said FHA reform should not be considered in isolation from broader housing finance reform.
“FHA is not the only large actor in the mortgage marketplace,” Warren said. “It is not the only one with the taxpayer backup and it is not the only one that currently threatens the taxpayer. We’ve got Fannie and Freddie out there that are creating huge problems.”
Mortgage Bankers Association President and Chief Executive Officer David Stevens said the private sector could fill the demand for high-cost loans after the FHA’s loan limit, which Congress increased to $729,750 during the housing crisis, expires at the end of the year.
“The expiration would not greatly affect national FHA lending and would expand the opportunity for private lenders to serve higher-income borrowers,” Stevens said.
Phillip Swagel, a professor at the University of Maryland’s School of Public Policy in College Park, Maryland. suggested tying the FHA’s downpayment level to a borrower’s credit score.
To contact the editor responsible for this story: Maura Reynolds at email@example.com