Tags: House | FHA | reform | housing

FHA Debate Begins to Heat Up

By    |   Thursday, 11 April 2013 01:17 PM

On Wednesday, the House Financial Services Committee’s Subcommittee on Housing and Insurance, chaired by Rep. Randy Neugebauer, R-Texas, held the fourth in its series of hearings on the status of the Federal Housing Authority (FHA), titled “Sustainable Housing Finance: Perspectives on Reforming the FHA.”

The hearing took place against the background of the release of an administration budget estimate that it may request nearly $1 trillion to bolster the FHA’s insurance fund in light of its accumulated losses.

The subcommittee moved closer to the consideration of legislation by convening a panel of mostly industry witnesses to present views on how the FHA might be reformed in a manner that would enable it to operate on a sustainable basis in the future on behalf of first-time and low- and moderate-income homebuyers. Consider for yourself whether the ideas presented at the hearing would come anywhere close to sustainability if proper management and accounting principles were followed.

Opening statements repeated the themes of the other hearings in the series in which Republicans decried the fact that an actuarial study late last year found that the FHA’s insurance fund is under water, whereas Democrats praised the agency for some changes it has adopted to improve the management of the FHA’s portfolio and touted the business put on the books in the past several years as likely to restore the health of the FHA.

Nearly all of the legislators, many with close industry ties, expressed eagerness to begin drafting bipartisan legislation to provide just enough reform to provide cover for the agency to resume business as usual, and they were looking to the industry witnesses for advice on how to do that.

A couple of the statements appeared to be drafted by trade groups represented on the panel. Rep. Scott Garrett, R-N.J., who has generally joined his colleagues in criticizing efforts to contain the financial crisis as too restrictive of the lending and job creation efforts of banks, on this occasion warned that the FHA does not offer a free lunch, and he blasted accounting practices that allow the FHA to avoid charging market rates and using fair value accounting to report the true costs of the losses entailed by the subsidies it provides to the industry.

All of the witnesses proclaimed their devotion to the view that the FHA must continue to play a countercyclical role in support of the housing industry when market conditions cause private capital to flee this market, which historically has proven highly sensitive to interest rate levels and other conditions in the financial markets.

The first witness represented a new mortgage insurer that has managed to grab a 10 percent share of the private mortgage insurance business and wants to get nice and cozy with the FHA to operate under a reformed system as partners rather than as competitors.

The next three witnesses represented the heavy hitters of the housing industry — the mortgage bankers, realtors and homebuilders — which have become accustomed to living off government support that amounts to an entitlement program and want to be certain that this “critical” program will ensure access to credit for first-time homebuyers and those of low and moderate incomes.

What they really mean is that with the help of subsidies, they can continue to meet their sales goals and operate their businesses with as little capital as possible. The homebuilder witness was especially forthright in stating that the industry counts on a government backstop under any “reform” scenario.

David Stevens, CEO of the Mortgage Bankers Association, ran the FHA in an industry-friendly manner before defecting to the industry through the proverbial revolving door, and he urges continued caution in any reforms so as not to sacrifice market share.

Several witnesses connected reform of the FHA to the larger issue of reform of Fannie Mae and Freddie Mac, which has languished in Congress for many years while Wells Fargo, backed by Warren Buffett, appears to have joined Fannie and Freddie in a government-backed mortgage finance cartel.

The final two witnesses made specific proposals for management reforms, some of which have been urgently needed for years. Sarah Rosen Wartell, who worked for the FHA commissioner during the Clinton administration, stated that “it shocks the conscience” that the FHA cannot due more to protect itself against the risk of dealing with lenders whose practices are bound to cost the FHA money and add to the cost of any taxpayer bailout.

Clifford Rossi of the University of Maryland presented a detailed proposal to restructure the FHA along the lines of the FDIC and improve its risk management systems in accordance with the standards of private industry.

What is missing from the debate so far is an appreciation for the fact that the real beneficiary of the FHA is the constellation of interest groups that make up with I call the “Housing Industrial Complex.”

Milton Friedman famously said that everyone has a right “to do good with his own money.” If the debate ever gets around to the question of who should pay for all the good the industry leaders claim the FHA does, then the focus could shift to why the oligarchs who benefit as contractors from government housing programs should not find a way to finance the FHA, if its role in the housing finance market is as “critical” as they insist it must continue to be.

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On Wednesday, the House Financial Services Committee’s Subcommittee on Housing and Insurance held the fourth in its series of hearings on the status of the Federal Housing Authority (FHA), titled “Sustainable Housing Finance: Perspectives on Reforming the FHA.”
Thursday, 11 April 2013 01:17 PM
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