Losses stemming largely from the Federal Housing Administration’s reverse mortgage program sparked debate among house democrats and republicans on Tuesday as FHA Chief Carol Galante responded to questions on the agency’s capital position.
FHA requested a $1.7 billion capital infusion in September, the first in its history, to shore up its insurance fund following losses on loans made during the housing crisis.
Testifying before the House Financial Services Committee Tuesday, Galante spoke of the agency’s current position and projected stability due to its current loan portfolio and those made following the housing crisis.
Galante noted the past losses attributable to reverse mortgages but noted the positive position going forward.
“If not for HECM losses, FHA’s capital reserve would have been positive by at least $3 billion,” Galante said, testifying before the House Financial Services Committee. “The discussion would be different if not for losses on legacy books from 2006 to 2009.”
Factors such as lower than anticipated home price appreciation, as well as greater numbers of borrowers utilizing the HECM product in full draws via the Fixed Rate Standard product, shifted the risk profile of the reverse mortgage program, according to a written testimony from Commissioner Galante.
“Thus many borrowers are taking all of the funds available to them up-front and often do not have the resources necessary in later years to pay property taxes and insurance, thereby triggering a default on the loan,” Galante said.
During the hearing, Committee members were divided on the terminology regarding FHA’s $1.7 billion Treasury infusion, with some calling it an outright “bailout,” whereas others—Galante included—preferred the phrase “accounting transfer,” or “mandatory appropriation.”
“‘Mandatory appropriation’ might be the phrase used in Washington, but the phrase on main street is ‘bailout,’” said Committee Chairman Jeb Hensarling (R-TX).
Hensarling, who has long voiced concerns that FHA will require a taxpayer funded bailout, was skeptical that the agency had taken the proper action to improving its financial position, citing a previous hearing held on February 6, 2013 on the topic of FHA’s declining fiscal health.
“Today, eight months later, our witnesses have been proven correct. The FHA is indeed broke; it is officially bailout broke,” Hensarling said. “Twenty-nine days ago FHA became the recipient of the latest Washington bailout—funded courtesy of hardworking taxpayers—to the tune of $1.7 billion.
Rather than accelerating the recovery of FHA’s MMI fund, Chairman Hensarling accused the FHA of accelerating the nation’s debt.
“When Commissioner Galante last appeared before us, the national debt stood at $16.5 trillion. A mere eight months later, the national debt now stands at a staggering $17.3 trillion and counting,” he said.
Other Committee members offered statements of supports for FHA, referring to the “bailout” as a necessary accounting transfer that is required by law to ensure the federal agency has sufficient capital reserves to pay its obligations for the next 30 years, as outlined within the Federal Credit Reform Act of 1990.
But others in the Committee could not ignore the fact that an actuarial review in November 2012 revealed the FHA had a capital reserve ratio of -1.44% when the agency is required by law to maintain a ratio of 2%.
“The American people clearly want to end the destructive cycle of boom, bust and bailout that Washington policies have helped fostered. They do not want an economy laid low by unsustainable levels of debt,” Hensarling said. “Regrettably The FHA, as it operates today, exacerbates both. The FHA has gone from backstopping the market to supplanting the market. The time for FHA reform is now. We can truly wait no longer.”
Written by Jason Oliva