Lawmakers Press HUD Secretary on Possible FHA Bailout

  • An independent audit found that the Federal Housing Administration's capital reserve ratio fell into negative territory, meaning the agency may need a bailout from the Treasury Department for the first time in its 78-year history.

    November 16
  • The agency's annual independent actuarial report is expected to show that its capital reserves have been depleted by rising levels of defaults. FHA could shore up its finances by increasing its enforcement against banks and other lenders, but it may also need to tap the Treasury for the first time in its history.

    November 13

WASHINGTON — Senate lawmakers hammered Housing and Urban Development Secretary Shaun Donovan on Thursday, raising concerns about a report that said the struggling Federal Housing Administration may soon need a bailout.

Donovan told the Senate Banking Committee what HUD is doing to prevent such a scenario, including what further actions might be needed to bolster the mortgage insurer's finances.

But lawmakers on both sides of the political aisle expressed strong dismay with the agency's financial health, raising the prospect of whether the next steps may require additional legislative action.

"While HUD has already taken some action to prevent the mutual mortgage insurance fund for single family loans from sinking federal funds, the fiscal year 2012 report suggests that much more needs to be done to prevent such a draw," said Senate Banking Committee Chairman Tim Johnson, D-S.D. "If the administration's actions and proposals will not be sufficient to restore FHA's fiscal health, then I plan to work with my colleagues on both sides of the aisle on the banking committee to find a bipartisan way to make that happen."

An independent audit conducted last month found that the mortgage insurer may have to draw from the Treasury for the first time since it was established almost 80 years ago, due to dwindling capital reserves.

The agency has said it is taking steps to avoid a bailout, but Donovan warned that he could not say for sure whether it would need additional funds or when exactly that need would arise.

"I wish I had a crystal ball and could tell you that we won't [need to draw funds] at the end of the year. Given the actuarial report this year, obviously I'm highly concerned about that possibility," Donovan said.

He declined to assign a specific probability on the chance of a bailout, despite repeated pressing from lawmakers.

"Can you commit to us that you will keep us and the Congress fully apprised of your moving projections with regard to that, and certainly fully apprised when that happens?" said Sen. David Vitter, R-La. "I think you all have some idea, some best guess, and you are not giving it to us. We'd really like that as soon as you could give it to us, and from then on, on an updated basis."

Lawmakers also pushed Donovan on the pace of changes at FHA to help avert the need for a bailout.

"I do think there are things you could do now to really cause the fund to be far more sound, and I do think you all are being a little slow in moving that way," said Sen. Bob Corker, R-Tenn., pointing to the agency's reverse mortgages program. "You are losing your shirt on reverse mortgages. … I don't understand why you don't shut this program down for 24 months, as I know has been suggested to you."

But Donovan said that some of the more significant agency changes, including those for reverse mortgages, would require approval from Congress.

"Frankly, we did make changes," Donovan said. "We introduced a much safer, better alternative through our Saver program. We could effectively do what you said, which is just to create a moratorium on the other programs. What we're concerned about, particularly given the economic crisis seniors have gone through is that we would be eliminating an option that works for some seniors if it's done safely, in order to eliminate the bad loans that are being made."

Donovan added that: "Our preference would be if we could get authority from you to change the structure of the program to make it much more effective and safe — that would be the way to go."

He also told lawmakers that he continues to support legislative action to lower FHA's loan limits, noting that Congress reduced the limits for government-sponsored enterprises Fannie Mae and Freddie Mac last year, but kept FHA's at a higher level.

"I do not believe that given Congress explicitly extended those higher limits that we can take that step [to lower them]," said Donovan. "We have supported before and I will state again today that going back to pre-[Housing and Economic Reform Act] limits makes real sense. And I will go further than that. That we should lay out a path to go back to even lower limits that existed before the crisis in a way that is done consistent with how we do housing finance reform."

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