Congress Members, Experts Weigh Tough Question of FHA, GSE Reform

Housing specialists and market experts weighed in on new legislation introduced by members of the House Financial Services Committee that outlines major changes to the housing finance system in the U.S. 

Largely, they agreed the legislation needs improvement, with congressmen and witnesses expressing mixed views on the bill during a committee hearing Thursday. 

The Protecting American Taxpayers and Homeowners Act, introduced last week, spells change for the housing market including winding down of Fannie Mae and Freddie Mac over the next five years; increasing competition by ending the domination of the Federal Housing Administration; and giving consumers more choices in mortgage products. 

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One item also calls for repeal of the FHA’s Home Equity Conversion Mortgage program as of two years from the passage of the act, should it be voted into law. 

Some opposed the legislation outright, but all panelists agreed the bill needs work.

“I think this is a significant piece of work,” said Moody’s Chief Economist Mark Zandi, but he continued to express several cautions. “The vision in the PATH of the private mortgage finance system is not viable,” Zandi said, referencing mortgage rates that will likely rise for the typical buyer, leading to the 30-year fixed rate mortgage becoming marginal under a market governed by PATH.

“We have to get this right,” Zandi said. 

Experts agreed reform for Fannie Mae and Freddie Mac is important, though there is not yet a clear cut solution as to the path that reform should take. 

Most agreed there should be less participation on the part of the FHA in favor of private capital returning to the market. 

“[The plan] creates a much more prudent FHA,” said Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies for the American Enterprise Institute. “…so it is only covering low income, first-time buyers of homes. That would be exactly the right thing we ought to permit through this system. If we can encourage people like that to make their first purchase so we then bring them into the housing market, that would be FHA working best without the taxpayers.”

The reverse mortgage topic was not discussed. 

The legislation was introduced during the same week as a Senate bill that works to reform FHA specifically, including language that would reform the HECM program by granting FHA additional authority to make program change. 

Written by Elizabeth Ecker

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  • With already 10% of the HECMs endorsed during fiscal 2009 terminated as of the end of last fiscal year (the last date of such information from HUD on its public website), all the wishful thinking about lowered loss estimates due to dreams of higher than normal home value appreciation offsetting the projected losses is beginning to wane.

    All FHA achieved by keeping the fixed rate HECM and the fixed rate HECM Standard so long is prove that a government agency can ruin any previously self-sustaining program with just a few creative ideas “to help.” The short sighted encouragement from our industry to this malicious product may ultimately result in the end of the HECM program.

    Industry leaders who met with members of Congress trying to justify the program by saying the program is self-sustaining should be embarrassed. There is no fiscal year yet in which HECMs have shown themselves to be self-sustaining since moving to the MMI Fund and finally being accounted for separately to Congress in actuarial reports, reports of independent auditors, and HUD reports to Congress.

    What was completely surprising is that FHA tried to window dress the problems through permanent transfers from other MMI Fund programs into the HECM portion of the MMI Fund in both fiscal years 2010 and 2011 totaling over $2.2 billion. Of course those transfers were fully swallowed up in the massive $4.2 loss for last fiscal year alone. FHA HECM MMI Fund cupboards are bare and there is nothing in reserve.

    In the middle of last decade, some challenged conventional thinking asking what would happen to the program if home values suddenly dropped and stayed depressed for a period of years. The typical answer was that the HUD actuaries had that situation well under control, accompanied with “that is a very unlikely turn of events.” Then came the huge rise in the number of endorsed adjustable rate HECMs (2007, 2008, and 2009) concurrent with the sudden drop in home values and suddenly those questions were being answered.

    It is now time to question the very foundation of the financial model upon which the HECM program rests. It has proven to be not only unreliable and misleading even to FHA itself but it is also detrimental to American taxpayers. After 23 years, it is time to stop tweaking the model and reexamine each and every part of it. While terminating legislation may not pass this session Congress, it could in the next session following mid term Congressional elections. Despite claims to the contrary, FHA is in deep trouble with the HECM program and it is only getting worse.

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