Tags: Vitter | Galante | Senate | FHA

Senate Banking Wallows Some More in FHA Mess

By    |   Thursday, 25 July 2013 02:48 PM

The Senate Banking Committee, chaired by Tim Johnson, D-S.D., held a full committee hearing on July 24 with the hopeful title "The FHA Solvency Act of 2013." Hopeful because the Federal Housing Administration (FHA) has a statutory mandate to maintain capital of 2 percent in the Mutual Mortgage Insurance Fund (MMIF), but it is underwater by 1.44 percent.

The sole witness was Carol Galante, assistant secretary of the Department of Housing and Urban Development, who took over the FHA from the previous head, David Stevens, who became CEO of the Mortgage Bankers Association (MBA), a trade association the represents one of the industries that benefits most from the activities of the FHA.

The urgency of the hearing stems from a deadline for the FHA to change the rules related to the Home Equity Conversion Mortgage, reverse mortgage program. This program has lost tons of money for the FHA because the banks have designed it so that borrowers must take out all of the equity, thus leaving them vulnerable to foreclosure if anything goes wrong. The FHA proposes that Congress pass legislation to authorize several short-term measures that could be enacted without controversy before Congress adjourns next week for the August recess.

On the House side, the Republican leadership has decided to go for the bundle and push for a bill that combines fixes for Fannie Mae, Freddie Mac and the FHA, along with a grab bag of goodies for the industry in one bill.

The Democrats have said nothing doing. The tone at this hearing was that the Senate will mark up a fix for the FHA alone next week, then come back to the subject in the fall and deal with the government-sponsored enterprises and with other issues regarding the FHA. At this point, the House will have to find a rationale for doing a deal or risk leaving constituents and clients stranded.

In their opening statements, both Chairman Johnson and ranking Republican Michael Crapo, R-Idaho, stated that they are prepared to go forward with a bipartisan bill.

As she has done before, Galante expressed a desire to cooperate in order to get the short-term bill the agency needs, but she gallantly defended the right to pursue the traditional, shaky business model in the interest of enabling the industry to do the same.

As the CEOs of other "too big to fail" entities have done, Galante acted as if she has not fully processed the fact that the insolvency of the FHA means that something is very wrong. For their part, the too big to fail banks were bailed out without ever having to acknowledge that they were insolvent.

When critics of the FHA try to establish what the true condition of the agency is, they start with the negative figure provided by the independent actuary, but the agency counters that it has "already" made changes, such as by raising fees on the mortgages it guarantees five times. At the same time, it resists imposing further increases, because this would constrain its growth. As with the too big to fail banks, the FHA might not have actual capital, but it confidently trades on an abundance of political capital.

Thus, when the lone critic of the FHA, David Vitter, R-La., tried to find out what the independent actuary is saying now, the following colloquy ensued:

Vitter: As you know, last week, on July 17, I wrote to you about a stress test that was conducted, but not disclosed to Congress or the American people, and I have not gotten anything back in response, so I want to ask you about that. It's really troubling to a lot of us that the only reason we know about it is The Wall Street Journal happened to report on it. The Wall Street Journal wrote that it was a "hidden report based off of annual tests done by the Federal Reserve Board, and it projected losses over 30 years that could reach as high as $115 billion." First of all, will you submit the full, un-redacted, stress test report for the record of this hearing in the next few days.

Galante: Senator, let me say, first, thank you for the question, and also say that there is no "hidden" report. If I could give you the background on, I believe, what The Wall Street Journal article was referring to, the annual actuarial review is a eight-month-long process, and there is substantial conversation back and forth between FHA staff and the independent actuary performing the actuarial on our behalf, and we submit a report to Congress and also write a report on. That back and forth includes data collection, data analysis, conversations of what model changes we might want to deploy this year from their perspectives, what model changes FHA might want to deploy from our perspective, they've got inspector general input, Government Accountability Office input, into what happens to go into the actuarial each year, and I think what this report is referring to is the actuary, at one point in an early draft, did provide an economic scenario that included a Fed stress test. By the way, not a report, as a line or a column in a chart, with a variety of other economic range of factors.

Vitter: Let me back up. Is there a Fed stress test?

Galante: Again, the independent actuary, when, in an early draft of a report, showed to FHA staff a chart that had a "Fed stress test" as one of the scenarios in that report.

Vitter (interrupting): Will you submit for the record all of the information regarding that Fed stress test that FHA has?

Galante: So, again, I would say we have, you know that The Wall Street Journal article that you're referring to is subject to Rep. Darrell Issa's Oversight Committee, and we have been very cooperative with his committee in providing all of that data that they've asked for, and so anything that we've provided, I defer to him, in terms of . . .

Vitter (interrupting): I'll defer to him, too, and he tells me that they have not gotten the Fed stress test and everything regarding it they've asked for. Will you make everything FHA has, with regard to that Fed stress test, part of the record of this hearing?

Galante: So again, all I can say is, we have given them everything that we have.

Vitter (interrupting): Forget about them. Will you make part of this record that Fed stress test and any material you have regarding it?

Galante: We've been responsive to every request that they've asked for. We don't have any additional information.

Vitter: I'm making a request. Forget about them. Will you make the Fed stress test, and any information you have regarding it, part of this record?

Galante: Again, I would defer to Congressman Issa on that.

Vitter: So if he says you will, you will?

Galante: We've given them everything that we have.

Vitter (raising his voice): I'm not asking about his request. I'm making a request, to make part of this Senate committee record the Fed stress test and the material you have regarding it. I think that's a reasonable request for the oversight committee of FHA.

Galante: Senator, what I'm trying to say is that I don't have that information. I have what was given to us in a draft report.

Vitter (interrupting): Whatever you have regarding the Fed stress test; whatever that is, whatever universe that is, will you make it part of the record of this hearing?

Galante: I can do that.

Vitter: Thank you. OK.

Two points in conclusion. First, for an agency head who is asking for action by a committee from the Senate, where every member is capable of holding up the process, this is an example of why senators need to slow down CEOs of entities like the FHA, Eximbank and the too big to fails who are evidently unable to process the fact that their risky behavior threatens the entities they run and, with the exception of Eximbank, the health of the financial system.

Second, the best way to proceed with the restructuring of government-sponsored insurance programs that support the financial sector is to go to Warren Buffett, the leader of the insurance industry, and ask him what the private sector is willing to do, so that the government can get out of a business that it has proven is subject to unmanageable moral hazard when the industry seeks to treat government support, whether implicit or explicit, as a blank check to take excessive risk.

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The Senate Banking Committee, chaired by Tim Johnson, D-S.D., held a full committee hearing on July 24 with the hopeful title "The FHA Solvency Act of 2013."
Thursday, 25 July 2013 02:48 PM
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