The Federal Housing Administration (FHA) was the focus of a Senate Committee on Banking, Housing and Urban Affairs hearing on February 28. Dubbed the second part of a hearing held by the committee in December during which FHA Commissioner/Assistant Secretary for Housing Carol Galante testified, the February hearing included a spectrum of witnesses. HUD delivered its annual report on the FHA’s single-family Mutual Mortgage Insurance Fund to Congress in November 2012. In FY12, according to the report, the fund’s economic value was a minus $16.3 billion. Since the November report, both the House and Senate have held hearings scrutinizing the FHA’s reserves, the potential for the FHA to seek federal appropriations, and its share of the mortgage insurance market.Committee Chair Tim Johnson (D-SD) opened the hearing, saying that the negative $16.3 billion figure “does not mean the FHA will seek funds from the Treasury.” More will be known about this need when the President’s FY14 budget request is released and the ultimate decision as to whether the FHA needs federal funds is made by the Office of Management and Budget in September. Ranking Member Senator Michael Crapo (R-ID) said in his opening statement that taxpayers and homebuyers both need a sustainable FHA. Witness Sarah Rosen Wartell of the Urban Institute testified that the FHA should be allowed to be more reactive to its risks. She said that if the FHA’s ability to constrain its losses was not dependent on legislation or lengthy rulemaking, it would not have suffered such significant losses. It took HUD more than 15 months to stop seller-financed loans from receiving FHA insurance, long after HUD itself proposed banning them and Congress prohibited the practice. “It shocks the conscience that officials must continue to accept loans for insurance when they know that taxpayers are being exposed to unnecessary risk,” Ms. Wartell said.Seller-financed loans are to blame for a significant portion of the FHA’s current negative balance. In Ms. Galante’s December testimony before the committee, she stressed the damage such loans have had on the FHA’s financial health. “Those loans are projected to cost the Fund $15 billion as they continue to experience elevated rates of insurance claim. In fact, the Actuary estimates that, if FHA had not insured any seller-funded-down payment loans, the net economic value of the MMI Fund would be positive $1.77 billion today,” Ms. Galante wrote in her testimony.The FHA’s loan limits were also a topic of discussion. In response to a question from Senator Bob Corker (R-TN) as to whether the FHA’s loan limits should be so high, David Stevens, former FHA Commissioner and now President and CEO of the Mortgage Bankers Association, said that the loan limit is mission issue, rather than a risk issue. The limit, Mr. Stevens said, would need to be scaled back, but that must done in a way that ensures private capital is stepping into to cover any gaps. The current FHA loan limit in high-cost areas is $729,750. Senator Joe Manchin, III (D-WV) also commented on the FHA’s high loan limits, saying, “Loaning $700,000? I don’t think that’s FHA’s role.” Senator Patrick Toomey (R-PA) suggested that it might make sense to look at income limits for participation in FHA loan products.The House Committee on Financial Services has two upcoming hearings on the FHA. The first is a Subcommittee on Capital Markets Hearing on FHA’s competitive advantages on March 13. The second is a full committee hearing on the FHA on March 19. Both hearings will be at 10am in room 2128 of the Rayburn House office building.Click here to access a webcast of the hearing as well as all testimony.