House Panel Holds Second Hearing on Financial Health of FHA

The Federal Housing Administration’s (FHA’s) single family housing business was the subject of a February 13 House Committee on Financial Services hearing. HUD FHA Commissioner and Assistant Secretary for Housing Carol Galante was the sole witness for the three-hour hearing. She responded to questions about the financial health of the FHA, the probability of HUD seeking federal appropriations from Congress because of ongoing losses on FHA’s single family loans, and how much mortgage insurance market share the FHA inhabits today and will in the future. Committee Chair Jeb Hensarling (R-TX) began the hearing by saying the country needs to be on a sustainable fiscal path and, for this to occur, the country also needs a sustainable housing finance system. “I have great fear that the Federal Housing Administration as it is operating today is a detriment to both,” Chair Hensarling said. Chair Hensarling described the FHA as the nation’s largest mortgage insurance company and as “broke, flat broke,” with projected claims far exceeding its cash on hand.Representative Ed Perlmutter (D-CO) thanked the FHA for keeping the housing market alive during the recession and blamed practices from the George W. Bush Administration for causing the FHA’s projected losses. Ms. Galante’s testimony said that house prices would have fallen 25% further than they did already had it not been for FHA’s presence during the recent housing crisis.Subcommittee on Housing and Insurance Ranking Member Michael Capuano (D-MA) said it was his understanding that most of the FHA’s current delinquencies are comprised of business conducted between 2007 and 2009, when mortgages with seller-funded down payments were frequently insured by the FHA. Ms. Galante confirmed this, and in her written testimony states that “if FHA had not insured any seller-funded down payment loans, the net economic value of the MMI [Mutual Mortgage Insurance] Fund would be positive $1.7 billion today.” At the end of FY12, the net economic value of the MMI was negative $16.3 billion. Congress eliminated seller-funded down payment loans from the FHA program in 2008.While Ms. Galante did not say whether the Administration will seek federal funding to back-stop the FHA from single family claims, she did testify to changes made at the FHA over the last four years. Ms. Galante referred to these as “the most sweeping changes to policy in the FHA’s nearly 80 year history.” The changes include improvements to FHA’s monitoring and oversight of lenders, with a focus on risk management; implementation of Congress’s elimination of the seller-funded down payment loans from FHA insurance products; increased down payment requirements for borrowers with credit scores below 580; increased mortgage insurance premiums; and improvements to how the FHA manages its portfolio of real estate-owned properties.Ms. Galante was asked repeatedly about the FHA’s loan limits and if she believed they should be as high as $729,750 in high-cost markets. Ms. Galante responded that she does believe that the FHA loan limits should recede over time, but that Congress needs to decide to what level and at what pace.Some Republican Committee members made clear that they are not interested in doing away with the FHA, but seek to improve it. Representative Lynn Westmoreland (R-GA) expressed his agreement with Ms. Galante on shrinking FHA’s footprint, that any changes to the housing government sponsored enterprises Fannie Mae and Freddie Mac might bring changes to the FHA, and that both want the FHA on sound financial footing.This was the committee’s second hearing on FHA issues in the 113th Congress. Another hearing is expected in the Subcommittee on Housing and Insurance in late February.Click here to access an archived webcast of the hearing as well as testimony.