The House Committee on Financial Services held the first hearing of the 113th Congress on February 6. It was also the first in a series of hearings on the Federal Housing Administration.Committee Chair Jeb Hensarling (R-TX) opened the hearing, listing many reasons he believes the FHA “has strayed from its original mission and legislative purpose.” These include the FHA placing itself in direct competition with the private sector, its “low credit score policies and high rates of default,” and its “morphing into Countrywide,” the mortgage financing firm that became the symbol of the housing market collapse. Subcommittee on Housing and Insurance Chair Randy Neugebauer (R-TX) said at the hearing that there has been mission creep at the FHA over the last 30 years and that the FHA has gone from helping people become homeowners to practically controlling the mortgage insurance market. Subcommittee on Housing and Insurance Ranking Member Michael Capuano (D-MA) said that while he is happy the committee is looking at the FHA, it is important to remember that the original mission of the FHA was to protect the U.S. housing market in a counter-cyclical way in order to keep mortgage credit flowing when private credit fades. Witness Julia Gordon, representing the Center for American Progress, agreed. Ms. Gordon testified that the FHA’s counter-cyclical support of the mortgage market is indeed a major role it was designed to play from its outset in 1934. “This so-called counter-cyclical support is critical to promoting stability in the U.S. housing market,” she said.Ms. Gordon testified that the FHA’s mounting losses are attributable to a few very bad years. The FHA estimates that losses from business conducted between 2005 and 2009 will be about $30 billion. One year alone, 2008, accounts for $13 billion of those expected losses. Ms. Gordon testified that these years included “a high concentration of loans under a special program to provide seller-financed down payment assistance. This particular brand of seller-financed loans was often riddled with fraud and defaulted at a much higher rate than traditional FHA-insured loans. These loans made up about 19% of the total origination volume between 2001 and 2008, but account for 41% of the agency’s accrued losses on those books of business.” Seller-financed down payment assistance programs were banned from receiving FHA insurance in 2009.While the hearing focused almost exclusively on the FHA’s single-family business, multifamily housing was briefly addressed. Committee Chair Emeritus Spencer Bachus (R-AL) stated that multifamily housing is a very important, and profitable, role for the FHA. Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance and Senior Scholar at the Mercatus Center at George Mason University, responding to a question from Representative Nydia Velazquez (D-NY), said he agrees with HUD Secretary Shaun Donovan that the nation needs more multifamily housing.The committee will hear from FHA Commissioner Carol Galante at its next hearing on the FHA, “FHA November 2012 Actuarial Report and Potential for Tax Payer Bailout,” on February 13 at 10am ET. The hearing will be in room 2128 of the Rayburn House office building. A third hearing on FHA issues, again focusing on the FHA’s single-family business, is expected in the Subcommittee on Housing and Insurance the week of February 25. Click here to view the testimony and webcast from the February 6 hearing.
Click here to access the FHA’s November 2012 actuarial report.