Battle begins over FHA housing finance agency

By Gretchen Wegrich

On Wednesday, members of the House of Representatives announced their intent to go to battle over the government's authority in the mortgage finance system, directing their attack on the Federal Housing Administration, which is currently facing financial difficulties.

The House Financial Services Committee began a series of hearings investigating possible ways to improve the financial outlook of the Federal Housing Administration (FHA), a government mortgage insurance agency that is currently facing what amounts to a $16.3 billion shortfall in insurance funds.

For the first time in the FHA's 79-year history, the agency may be forced to rely on the U.S. Treasury for funding. Without assistance, the FHA is expected to lose $1.1 trillion in mortgage profits.

Battle Lines

The battle over the FHA is following polictical party lines. Republicans, who control the House of Representatives with a majority, want to decrease the FHA's market share. The result would be an increase in privately-owned mortgages.

At the committee hearing, Republicans declared that the FHA's financial problems were so exacerbated that major structural reforms were needed. In contrast, Democrats argued that the agency was an important resource for low-income and first-time homebuyers.

"It is going to be a priority of this committee to forge a sustainable housing finance system in this country," Representative Jeb Hensarling, the Republican chairman of the committee, reassurred attendees at the hearing.

FHA Expansion

Following the collapse of the U.S. housing market, the FHA's share of the mortgage market rapidly expanded. Today, the FHA insures approximately 1.2 million mortgages or 15 percent of all U.S. home loans. In 2006, the FHA owned just 5 percent of U.S. home loans.

The FHA has struggled to continue funding itself after facing increasing losses from mortgage defaults on home loans guaranteed during 2007-2009 during the housing market deflation.

"If the FHA were a private financial institution, somebody would be fined and the institution would find itself in receivership," declared Hensarling. "It is merrily on its way to becoming the recipient of the next great taxpayer bailout."

Members of the House of Representatives who favor curtailing the reach of the FHA have not yet delineated an exact plan for restructuring the FHA and making it more difficult for homeowners to obtain FHA-backed loans.

Backlash From the Left

Democrats are expected to fight to protect the FHA's reach and the ability of homeowners to receive FHA-backed loans.

Should the House bill pass along party lines, it is not expected to pass in the Democrat-majority Senate.

The decision regarding the FHA's need to withdraw funds from the U.S. Treasury will take place later this year. The president's upcoming budget proposal will contain a projection of the FHA's financial needs.

Lawmakers have become increasingly focused on the FHA's financial difficulties, which in turn has shifted attention away from attempts to reform Fannie Mae and Freddie Mac, the largest two government-run providers of mortgage funds in the U.S. housing market.

After being placed under government control in 2008, Fannie and Freddie have received almost $190 billion in taxpayer funding. Both have recorded profits in recent quarters.

In combination, Fannie, Freddie and the FHA back about 90 percent of new U.S. home loans.

Supporters of the FHA argued that the agency prevented the housing bust from taking an even greater toll on the U.S. economy. Although the FHA does not make loans, the agency guarantees against losses to lenders in the case of borrower default. Borrowers who receive an FHA-backed loan can pay down as little as 3.5 percent.

"It is important to acknowledge FHA's crucial role in our housing finance system, particularly in the last few years," said Representative Maxine Waters, a ranking democrat sitting on the committee. She added, 'All the members here today are deeply concerned about the health of the FHA's mutual mortgage insurance fund."

The FHA's strategies for recovering its costs have included raising borrower premiums and tightening credit requirements.

"It is important to give sufficient time to see the results of the significant improvements made by the FHA before adding more changes to the mix," said Julie Gorden, directing for housing finance and policy at the liberal Center for American Progress.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.