Apr 26 2012

Shelby Calls for FHA Reform

U.S. Senator Richard Shelby (R-Ala.), ranking Republican on the Committee on Banking, Housing and Urban Affairs, today made the following statement at a hearing on the Fiscal Year 2013 Budget for the Department of Housing and Urban Development.


Statement of Senator Richard C. Shelby
Committee on Banking, Housing and Urban Affairs
April 26, 2012

“Thank you, Mr. Chairman.

“Today, we meet to discuss the Department of Housing and Urban Development’s (HUD) fiscal year 2013 budget.  Although HUD’s $45-billion budget is just one slice of the Federal government’s overall budget, the skyrocketing Federal debt means every Department needs to practice fiscal discipline.

“Last year, the Federal deficit reached $1.3 trillion.  That’s the third year in a row of deficits over $1 trillion.  These deficits have put the Federal debt at nearly $11 trillion, or about 70 percent of GDP, its highest level since World War II.  We cannot continue to ignore our mounting fiscal problems.  Instead, we must begin to address the issue by enacting budgets that curb the culture of spending in Washington and institute fiscal reforms.

“Unfortunately, during this Administration, HUD has focused on achieving short-term goals, without adequately considering the long-term costs.  Most importantly, the Department has not taken sufficient action to address the growing risks to the budget and taxpayers presented by the Federal Housing Administration (FHA).  Over the past 3 years, FHA’s portfolio has expanded from $500 billion to $1.3 trillion.  It now insures more than 20 percent of all new mortgages.  While some of this expansion was an appropriate response to the housing crisis, FHA’s growth has not been managed wisely. 

“First, even though the Administration’s public position called for reducing conforming loan limits, the President signed legislation to allow FHA to continue to insure mortgages of up to nearly $730,000.  Prior to 2008, FHA could insure mortgages only up to $417,000.   This means that FHA is now helping homeowners purchase million dollar homes.  FHA should be focused on helping first-time and moderate-income homebuyers, not millionaires.

“Second, FHA insurance premiums are insufficient to cover losses and build up needed capital reserves.  According to FHA’s own reporting, over the past year, FHA insurance premiums covered less than 80 percent of its $9.4 billion in net default losses.  As a result of insufficient premiums, the President’s 2013 budget estimates that FHA would have needed a bailout to the tune of $688 million, if FHA had not received funds from the mortgage servicing settlement.

“Even more troubling is the fact that the HUD budget has historically underestimated the cost of FHA loans.  Because its estimates of FHA loan performance are not adjusted for market risk, the budget does not reflect the true cost of guaranteeing loans during weaker economic cycles.  Indeed, the Congressional Budget Office has said that by not incorporating a market-risk premium, the HUD budget underestimated the cost of FHA’s single-family loan program in 2012 by about $8 billion.

“Furthermore, Wharton Professor Joseph Gyourko has argued that FHA’s accounting also greatly underestimates default risk and loan losses.  After factoring in the huge growth of FHA’s portfolio, he predicts that FHA will ultimately need a bailout of $50 to 100 billion.

“It is clear that FHA needs to be reformed to prevent another taxpayer bailout.  I would hope that we could all agree that the first place to start is by ensuring that FHA is properly accounting for the risks it assumes.  I also hope that we could enact broader reforms before the problems at FHA grow larger and become more expensive to fix.

“This Committee made a serious mistake by not reforming the GSEs when we had the chance.  That mistake has cost the taxpayers nearly $200 billion.  I hope that this Committee will not make the same mistake with FHA.

“Thank you, Mr. Chairman.”