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HUD Secretary Defends Troubled FHA

By    |   Thursday, 12 Feb 2015 07:55 AM

The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing Feb. 11 titled "The Future of Housing in America: Oversight of the Federal Housing Administration." The sole witness was Julian Castro, secretary of the Department of Housing and Urban Development (HUD).

In his opening statement, Hensarling announced that the committee would conduct a review of HUD to mark the 50th anniversary of the founding of HUD as part of LBJ's War on Poverty. He expressed pride in the fact that Castro had served as mayor of San Antonio and is the twin brother of Rep. Joaquin Castro, D-Texas. (Both of them graduated from Stanford University and Harvard Law School and practiced law with the powerful firm Akin Gump as well as in their own firm. Julian appears to be on a fast track to higher office, perhaps the White House.)

Hensarling then led a vigorous criticism of HUD that was picked up by his senior Republican colleagues. He accused the agency of engaging in a "race to the bottom" with the government-sponsored enterprises Fannie Mae and Freddie Mac to see who can do the most to promote subprime mortgage lending of the same type that marked the housing boom and bust of the 2008 episode of the ongoing financial crisis. He blasted the agency for reducing the premiums it charges homebuyers by 40 percent at the same time that its capital remains below the prescribed level of 2 percent, and he proclaimed, "This cannot be allowed to stand."

Rep. Maxine Waters, D-Calif., and senior Democrats eagerly joined the debate, and she defended the very reduction in premiums that Hensarling had targeted as she praised HUD for acceding to the call of housing lobbies and civil rights groups and argued that even with the reduction, the premiums remain 50 percent higher than during the housing bust.

In his testimony, Castro asserted that the housing market is "coming back as an engine of economic prosperity," and he repeated the theme now being propagated by Treasury Secretary Jack Lew that "the administration has turned the page on the financial crisis." He asserted that the FHA is in a strong position to help make home ownership and the American Dream affordable, particularly for minority homebuyers. Castro repeatedly claimed that the FHA would rebuild its reserves by collecting an average premium of $17,000 against losses averaging only $4,400.

In his response to questions, Castro seemed to be still learning his lines and to lack the firm grasp of the details of the business that he will presumably acquire over time. Also, at one point he parried a suggestion that he should have sought independent advice about whether to reduce FHA premiums by objecting that an independent authority would not be on the HUD staff.

Decades ago economist Milton Friedman advised that housing is a consumption good and should not be viewed as an investment vehicle. This hearing is just the beginning of the latest chapter in the longstanding debate over whether FHA is doubling down on subprime practices when, as Rep. Scott Garrett, R-N.J., observed, at the end of the day, the results would not be positive.

(Archived testimony and the staff memorandum can be found here.)

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Robert-Feinberg
The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing Feb. 11 titled "The Future of Housing in America: Oversight of the Federal Housing Administration." The sole witness was Julian Castro, secretary of the Department of Housing and Urban Development (HUD).
HUD, FHA, Castro, home
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2015-55-12
Thursday, 12 Feb 2015 07:55 AM
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