Federal Housing Administration Commissioner Carol Galante pushed back at claims from Congress that the FHA’s recent request for a $1.7 billion Treasury draw is a bailout or proof that the agency's model is a failure.
A hearing in front of the House Financial Services Committee showed a strong bipartisan divide, with Republicans accusing the agency of misstating its stability by falling below the 2% cap ratio and failing to accurately account for taxpayer risk.
Democrats, meanwhile, defended the program saying it took on more risk as part of its mission during one of the worst financial meltdowns in U.S. history—a crisis they blame on gambling in the private sector.
The more detailed exchanges occurred between Commissioner Galante and Rep. Jeb Hensarling, R-Texas, who serves as chairman of the Committee and author of the PATH Act to reform Fannie Mae, Freddie Mac and FHA.
Hensarling cited a recent Congressional Budget Office report, which claims FHA single-family mortgage guarantees made from 1992 through 2012 will have a federal budgetary cost of $15 billion, despite initial estimates of $45 billion in savings.
"It is another rosy scenario dashed," Chairman Hensarling said. He added that the CBO report and the $1.7 billion Treasury bailout request "reinforce what everyone has said about the FHA for a long time, they are a high risk to taxpayers and to the mortgage insurance market."
Galante suggested the $1.7 billion request filed with the Treasury has nothing to do with the stability of the FHA. Instead, she said it’s a direct result of the HECM reverse mortgage program stressing the mutual mortgage insurance fund and the result of legacy loans taxing the housing system.
Galante said the draw is needed to ensure the FHA MMI fund has the funds necessary in its capital reserves to cover all future losses.
"This mandatory appropriation of $1.68 billion is not an indication of FHA’s cash position or its ability to pay claims on outstanding loans insured by the MMIF," she said. "Rather, it is a function of FHA’s obligations under Federal Credit Reform to maintain sufficient reserves to pay all expected losses as measured each year at a single point in time, and therefore does not account for the effect of future endorsements."
The Commissioner added that the FHA remains solvent with $48 million in liquid assets. "The discussion we are having today would be very different if it were not for the significant losses on legacy books," Galante pointed out.
Hensarling used the hearing to revisit his proposed PATH Act, which aims to reform the FHA along with the entire mortgage finance system.
"The PATH Act shifts risk from the taxpayer to the private sector by shifting the FHA footprint, ensuring it runs its insurance fund based on the basic tenants of mortgage insurance," Hensarling said.
Hensarling’s PATH Act received encouraging data from the Congressional Budget Office, which analyzed the economic outcome of deploying such legislation.
The PATH Act aims to reform the FHA and wind down the GSEs, bringing more private capital into the system, while pushing mortgage insurance risk away from taxpayers.
CBO says the higher reserve requirement proposed for the FHA under the PATH Act would result in a net decrease in discretionary spending of $41.2 billion over the 2014 through 2023 period.
"That potential reduction in discretionary spending would stem from a provision establishing a higher reserve requirement than under current law for the Federal Housing Administration’s (FHA’s) single- and multifamily programs and from an increase in the value of mortgages guaranteed by FHA after the GSEs cease operations," CBO said.
The same budget report estimates the enactment of PATH would increase direct spending by $229 million during the 2014 through 2018 time period, while decreasing direct spending by $6.6 billion from 2014 through 2023.
"The savings over the coming decade as a whole are due primarily to the winding down of Fannie Mae and Freddie Mac and the resulting reduction in federal subsidies for mortgages that will be guaranteed by those entities under current law," CBO said when discussing PATH.