The financial future of the Federal Housing Administration (FHA) has been a politically charged affair that some analysts have categorized as a potential black eye for President Barack Obama’s handling of the housing recovery. There has been wide speculation that the FHA’s battered mortgage portfolio is so laden with risk that the government agency would need a cash infusion from the U.S. Treasury to stay afloat, but recent testimony from FHA Commissioner Carol Galante seems to indicate otherwise.
At a hearing before the House Financial Services Committee on Wednesday, February 13th, Ms. Galante told lawmakers that the FHA will still be able to continue its mission as mortgage guarantor of last resort even if another shortfall is determined by federal budget calculations. Ms. Galante’s statement raised eyebrows in Congress, particularly from Representative Jeb Hensarling (R-Texas), who asserted that the FHA is broke and ready for a major bailout by taxpayers.
A Matter of Numbers
Commissioner Galante never mentioned that the FHA is in the clear; in fact, she mentioned that without the consecutive mortgage insurance premium increases, the risk on the agency’s portfolio would be considerably higher now. The federal budget is expected to be released next month, and Ms. Galante does not think that a bailout would be needed at that time. She believes that the FHA’s actual need to tap into a substantial line of credit from the Treasury could be determined at the end of the fiscal year instead of next month.
House Republicans have a strong reason to be worried about the FHA’s future. Independent audits back in November 2012 showed that the burden of non-performing home loans the FHA has guaranteed since the bursting of the housing bubble could be higher than $16 billion. The FHA’s charter calls for sufficient reserves to cover all potential losses, which is something that House Republicans firmly doubt.
The fact that the FHA is still standing despite the massive amount of risk it carries in its books may come down to accounting. Republicans would like to see different accounting methods at the FHA as well as an increase in down payments, which are currently as low as 3.5 percent for the neediest borrowers.