WASHINGTON — House Republicans continued their assault on the struggling Federal Housing Administration Tuesday, taking the FHA chief to task for a projected shortfall in the agency's finances and warning it could be the next bailout candidate if nothing more is done.
Led by Rep. Jeb Hensarling, R-Texas, members of the House Financial Services Committee grilled FHA Commissioner Carol Galante for three hours Wednesday, focusing primarily on a recent independent audit that raised concerns that the agency may have to borrow money from the Treasury Department for the first time in its 78-year history.
"The FHA is broke. The FHA is flat broke. And I fear soon the FHA will prove to be bailout broke," Hensarling, the chairman of the committee, said in the panel's second hearing of the year on the FHA's fiscal health.
The government mortgage insurer has been in the hot seat since an independent actuarial report in November found that projected losses from FHA programs over the next 30 years could result in the agency being more than $16 billion in the red, far out of reach of its required capital buffer of 2%. Republicans on the panel said the assessment, which contrasted sharply with the agency's optimistic estimates, suggests the FHA has not been totally up front about its finances.
"As I sit here, I wonder: have we been misled here in Congress?" said Rep. Sean Duffy, R-Wis.
But both Galante and Democrats on the committee were steadfast in defending the agency, arguing that the actuarial audit is still just a projection, and that the FHA — which expects continued income and has taken steps reduce its presence in the market — still has over $30 billion in its coffers.
Galante, who was confirmed in December, said the agency takes the report's conclusions "extremely seriously." But she cited actions taken both to boost revenue and curb risks, including an increase in down payment requirements for jumbo loans and steps to roll back a program related to the agency's insuring of reverse mortgages. She also urged passage of pending legislation designed to increase the agency's ability to safeguard its insurance reserves.
"It is important understand … that the actuary's report does not in and of itself mean that it will be necessary for FHA to use its authority to draw from Treasury to reserve for projected losses over the next 30 years," Galante said. "While this is a possibility, it is dependent on several factors, including estimates in the president's upcoming budget submission and the actions and activities of FHA throughout the remainder of the fiscal year."
She rejected any comparisons between her agency and Fannie Mae and Freddie Mac, the formerly private government-sponsored enterprises that are now under conservatorship.
"The actuarial study" was "done independently on long-term economic forecasts on long-term projected losses," she said. "Even if we needed to draw [from Treasury], it is to put money into reserves. To be clear, this is totally different than Fannie and Freddie, which were private entities, taking private risk, taking profits privately and giving them to shareholders and then the government comes years later."
Still, Republicans on the committee bore into Galante on the agency's fiscal health. They said the FHA's problems stem from the agency's expanding too far outside its traditional role — of insuring fixed-rate loans for reliable, first-time borrowers — into home loans for riskier borrowers and a bigger slice of the jumbo market.
In 2011, the FHA insured 27% of all home purchases — not including refinancings — up from just 5% in 2006, according to agency data.
"The policy of cheap up-front pricing and elevated maximum loan limits as high as $729,750 has allowed the total size of FHA's insurance book of business to explode," said Hensarling.
But Democrats countered that while the agency did expand its reach to fill a gap in credit availability during the crisis, the agency's presence in the market has been overblown, and it never strayed from its traditional role of insuring plain-vanilla loans.
"Let's be clear about what FHA is, and what it is not," said Rep. Maxine Waters, R-Calif. "Emerging out of the foreclosure crisis that occurred during the Great Depression, the FHA was instrumental in creating the long-term, fixed-rate mortgages that form the backbone of our housing finance system and that millions of middle-class families have used to build their long-term economic security."
Galante noted there has been bipartisan agreement about how the FHA should proceed, including consensus about the need for the agency to shrink its market share. For example, the limits on loan amounts that FHA can insure should come back to earlier levels, she said. The FHA can now insure loans of amounts up to $729,750, up from $625,500 in 2010.
"We do believe the FHA should be playing a smaller role, a more targeted role," Galante said.