* FHA faces $16.3 billion cash shortfall
* FHA financial problems may require Treasury cash infusion
* FHA backs about $1.1 trillion in mortgages
By Margaret Chadbourn
WASHINGTON, Feb 6 Lawmakers in the U.S. House of
Representatives on Wednesday drew battle lines ahead of the next
fight over the government's role in the mortgage finance system,
focusing on the cash-strapped Federal Housing Administration.
The House Financial Services Committee opened a series of
hearings to look into ways to shore-up the finances of the FHA,
a government mortgage insurer that is facing a projected $16.3
billion shortfall in its insurance fund.
The projected losses on the $1.1 trillion in mortgages it
backs could lead the agency to turn to the U.S. Treasury for a
cash infusion for the first time in its 79-year history.
Republicans, who control a majority in the House, want to
shrink the FHA's market share. At the hearing, they said the
agency's problems were so severe that it needed to be reformed,
while Democrats defended the agency as a vital source of funding
for low-income and first-time home buyers.
"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, declared at the hearing.
The FHA's presence in the mortgage market expanded rapidly
after the U.S. housing bubble burst. It now insures about 1.2
million mortgages, supporting about 15 percent of all U.S. home
loans, up from 5 percent in 2006.
It has faced mounting losses from defaults on mortgages it
guaranteed from 2007-09 as the housing bubble deflated.
"If the FHA were a private financial institution, likely
somebody would be fired, somebody would be fined and the
institution would find itself in receivership," said Hensarling.
"It is merely and merrily on its way to becoming the recipient
of the next great taxpayer bailout."
House Republicans have not said what steps they believe are
needed to bolster the agency, but they are likely to face
push-back from Democrats if they seek to curtail the FHA's reach
and make it harder to obtain FHA-backed loans. If the House were
to pass a bill only along party lines, it would likely not clear
the Democrat-controlled Senate.
The determination of whether or not FHA needs to draw funds
from the Treasury will come later this year. The White House
will issue a projection of the agency's capital needs in the
president's upcoming budget proposal.
The FHA's financial woes have become a pressing priority for
lawmakers, deflecting attention away from efforts to reform
government-run Fannie Mae and Freddie Mac,
the biggest providers of mortgage funds to the U.S. housing
Those two firms, put under government control in 2008, have
drawn almost $190 billion in taxpayer aid. They have started to
return to profitability in recent quarters.
Hensarling, one of the most conservative members in the
House, has angled to push lawmakers to take a more aggressive
approach to changing the current housing finance system.
Combined, Fannie Mae, Freddie Mac and the FHA back about nine
of 10 new U.S. home loans.
Democrats on the committee argued that the agency had helped
prevent a deeper housing bust. The FHA does not make loans but
instead insures qualified lenders against losses if borrowers
default. With an FHA loan, buyers can put down as little as 3.5
"It is important to acknowledge FHA's crucial role in our
housing finance system, particularly in the last few years,"
said Representative Maxine Waters, the committee's ranking
Democrat. "All the members here today are deeply concerned about
the health of the FHA's mutual mortgage insurance fund."
So far, the agency has been able to cover its costs and
avoid asking for a Treasury subsidy by raising premiums that
borrowers pay and tightening credit standards.
Julia Gordon, director for housing finance and policy at the
liberal Center for American Progress, said those actions needed
more time. "It is now important to give sufficient time to see
the results of the significant improvements made by FHA before
adding still more changes to the mix," she said in her
Gordon said that while the FHA's losses from problem loans
will be on the agency's books for several years, more recent
business would likely be very profitable.