Banking and Finance Law Daily Wrap Up, GOVERNMENT SPONSORED ENTERPRISES—FHA draws $1.7 billion from Treasury, (Sep 30, 2013)

By J. Preston Carter, J.D., LL.M.

The Federal Housing Administration sent a letter to Senators Tim Johnson (D-SD), Chairman of the Senate Banking Committee, and Mike Crapo (R-Idaho), Ranking Member of the Committee, informing them that it needs $1.7 billion from the Treasury Department in order to comply with the Federal Credit Reform Act of 1990 requirement that at the end of each federal fiscal year, every credit agency must have sufficient reserves to cover 100 percent of anticipated future losses.

The Sept. 27, 2013, letter noted that "This amount is higher than the estimate provided in the president's budget because of a decline in FHA endorsement volume in the last few months of the fiscal year—consistent with the trend in the broader housing market in response to higher interest rates. It is also consistent with FHA’s goal of reducing its footprint in the market.” The FHA stated that the “required mandatory appropriation is an accounting transfer and does not reflect an up-to-date view of the mutual Mortgage Insurance Fund’s performance, its long-term health, or its current position.”

Crapo statement. In response to the letter, Crapo stated, “This failure reinforces the need for Congress to pass FHA and broader housing finance reform. Taxpayers have already been forced to provide hundreds of billions of dollars to Fannie Mae and Freddie Mac. He noted that “In July, the Senate Banking Committee passed the FHA Solvency Act of 2013 (S.1376) with broad bipartisan support. The bill would give the FHA tools to improve its financial condition, including strengthened underwriting standards, enhanced lender accountability measures, and reforms to the FHA’s reverse mortgage program.”

Hensarling comments. After receiving confirmation of the FHA’s financial requirement, House Financial Services Committee Chairman Jeb Hensarling (R-Tex) said, “In April, the Obama administration estimated the FHA would need a taxpayer bailout of $943 million. As bad as that was, now we learn—just five months later—that the bailout will be almost twice that amount.” Hensarling continued, “Unless Congress enacts sustainable housing finance reform, it’s possible taxpayers will be forced to write blank bailout checks to the FHA indefinitely. That is unacceptable, and it is further evidence Congress needs to pass the sustainable housing finance reforms found in the PATH Act.”

Waters statement. Rep. Maxine Waters, Ranking Member of the Committee on Financial Services, noted that, “Despite corrective action taken in recent years, the severity of the financial crisis weakened the health of FHA’s Mutual Mortgage Insurance Fund. Although this one-time transfer of funds from the Treasury is legally necessary, it’s important to note that FHA is far from bankrupt, holding over $30 billion in reserves and continuing to generate revenue.”

Garrett release. According to Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, “[T]he FHA benefits from an unlimited and direct line of credit from Treasury.…The PATH Act, recently passed by the House Financial Services Committee, will reform our housing finance system and get the FHA back on track to prevent future bailouts.”

Neugenbauer statement. “This news is a clear sign that we must act quickly to reform the FHA, or taxpayers will be paying the price again and again,” said Rep. Randy Neugebauer (R-Texas), Chairman of the Financial Services Subcommittee on Housing and Insurance

Center for Responsible Lending release. According to the Center for Responsible Lending, the “FHA played a crucial role through the foreclosure crisis. When private capital fled, FHA remained in operation, keeping the housing market alive by insuring millions of mortgages.” The Center’s release stated that the draw from the Treasury Department “would not have been needed if Congress had not prevented FHA from clamping down on fraudulent seller-funded down payment loans, as it tried to do.” It also noted that this is the first time in the FHA’s 79-year history that supplemental funding has been needed and that increased pricing and tightened underwriting have “led recent loans to perform extremely well.”

Companies: Fannie Mae; Freddie Mac

IndustryNews: GovernmentSponsoredEnterprises Loans Mortgages