Republicans Seek FHA Changes as Prelude to Housing Overhaul

Republican lawmakers say they will seek changes at the financially troubled Federal Housing Administration as a first step toward a broader overhaul of the U.S. government role in housing finance.

The House Financial Services Committee held a hearing today on the role of the FHA, the first in a series of panels that may lead to legislation that would shrink the government mortgage insurer’s market share and shore up its bottom line. That is a more urgent priority than winding down government-owned Fannie Mae and Freddie Mac, which buy mortgages from lenders and securitize them, lawmakers said.

“It is going to be a priority of this committee to forge a sustainable housing finance system in this country,” Representative Jeb Hensarling, the Texas Republican who leads the Financial Services panel, said at today’s hearing.

“Given their high loan to value, low credit score policies and high rates of default, it’s an open question whether FHA has now morphed into Countrywide,” Hensarling said, referring to the troubled mortgage bank that was purchased by Bank of America Corp. during the financial crisis. “Arguably the FHA has now become the largest subprime lender all with the blessings of the administration.”

President Barack Obama’s 2013-2014 budget is expected to reflect that FHA will require a Treasury subsidy for the first time since it was founded in the 1930s, largely due to defaults on loans it insured as the housing market crashed. The FHA could fall as much as $16.3 billion short of the cash it is required to keep on hand to cover all projected future losses, according to an independent actuary.

Democratic Support

To become law, any legislation that emerges from the House must eventually win support from Democrats who control the Senate and are also scrutinizing the agency. Democrats said today that they are eager to preserve FHA’s countercyclical role of shoring up the housing market when private financing isn’t available.

“All the members here today are deeply concerned about the health of the FHA’s mutual mortgage insurance fund,” said Representative Maxine Waters of California, the senior Democrat on the committee. “Along with that concern, I think it is important to recognize FHA’s crucial role in the housing finance system.”

Representative Brad Sherman, a Democrat from California, said a previously passed bill in the House on FHA would strengthen the agency. He said his current concern is with their underwriting standards.

‘Nudge Them’

“We certainly want FHA to be guaranteeing loans to creditworthy borrowers but they certainly themselves can make those changes,” Sherman said in an interview. “If we need to nudge them, we’ll nudge them.”

Together, FHA, Fannie Mae and Freddie Mac own or guarantee more than 90 percent of home loans. Lawmakers from both parties and President Obama have called for an overhaul of housing finance that shrinks the government footprint.

At the same time, Fannie Mae and Freddie Mac have begun to post quarterly profits after drawing $190 billion in taxpayer aid, shifting lawmakers’ focus to the more immediate financial shortfall at the FHA.

Legislation now under consideration by Republican lawmakers could set off a debate over whether the FHA needs fundamental changes to shrink its traditional role supporting home lending to low- and moderate-income families. The agency insures $1.1 trillion worth of mortgages, almost quadrupling its share of insured loans from 4 percent in 2007 to more than 15 percent.

‘Trapping’ Borrowers

“Instead of ensuring our housing market is put on a more sustainable path forward, FHA decided to help thousands of borrowers get into homes that they couldn’t afford and that wound up going down in value, trapping them underwater,” said Representative Scott Garrett, a Republican from New Jersey.

The FHA has already taken some steps to shore up its finances. It raised the annual premiums that borrowers pay to insure their mortgages against default, boosted down payment requirements and premiums for loans greater than $625,500, and required more scrutiny of loan applications for buyers with weak credit or high debt loads.

‘100-Year Flood’

Supporters of the agency say that should be enough. “FHA has contributed to broadly shared prosperity in this country,” Julia Gordon, director of housing finance and policy at the Center for American Progress, a research group aligned with Democrats, said in testimony at today’s hearing. “The finances are not a reflection of a flawed business model but instead are consequences of the 100-year flood of the Great Recession.”

Gordon said the recovery in the housing market would also help FHA’s bottom line. The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5 percent in the year through November, the biggest gain since August 2006, according to data released on Jan. 29.

Democrats and Republicans agree that the FHA needs more authority to weed out bad actors among the lenders who issue loans it insures. That and other changes were written into a bill that passed the House with bipartisan support last year.

Still, Republicans say they want to go further, perhaps changing the agency’s accounting methods and requiring higher down payments on FHA-insured loans. The agency currently insures mortgages with down payments as low as 3.5 percent for certain borrowers.

Sharing Risk

The FHA also takes 100 percent of the losses on the defaulted loans it insures. Lawmakers are investigating whether private interests should take on some of that risk.

“Reducing coverage levels will effectively cap the severity of loss on FHA loans and improve their underwriting by putting the lender at risk,” Basil Petrou, managing partner of Washington-based Federal Financial Analytics, which tracks housing policy, said in testimony at today’s hearing.

Senate Democrats probably won’t support all of the changes proposed by House Republicans. Still, they’re also scrutinizing the agency.

South Dakota Democrat Tim Johnson, chairman of the Senate Banking Committee, said at a hearing in December that he would seek legislation to restore FHA’s fiscal health “if the administration’s actions and proposals will not be sufficient.”

The Senate panel is expected to hold a hearing on the FHA later this month, allowing the panel to “identify necessary legislative actions to address its troubling financial situation,” Sam Gilford, spokesman for the Banking Committee, said in an e-mail.

Johnson is looking forward to working with Republicans “toward a bipartisan agreement that protects taxpayers and restores the financial health of this critical piece of the nation’s housing finance system.”