(Updates with Duffy remarks in 11th paragraph.)
Feb. 13 (Bloomberg) -- The head of the U.S. Federal Housing Administration downplayed a coming budget estimate that is expected to show the agency will need taxpayer aid for the first time since it was founded in the 1930s.
FHA could avoid taking Treasury aid even if the budget President Barack Obama releases next month shows it has a shortfall, FHA Commissioner Carol Galante said at a hearing of the House Financial Services Committee today. The committee’s chairman, Texas Republican Jeb Hensarling, questioned Galante’s numbers, and said the agency is “flat broke.”
FHA will take additional steps this year to avoid foreclosures on loans that have defaulted and raise the fees it charges borrowers to insure their loans against default, Galante said. Those and other measures could be enough to offset any shortfall the budget shows, she said. FHA has until Sept. 30 to determine whether it needs aid.
“The ultimate need will be borne out in the actual performance of the FHA single-family program over the course of the fiscal year, and will be impacted by the steps FHA takes over the course of the year to increase revenue or reduce losses,” Galante said.
An independent actuary said in November that FHA could need a subsidy of as much as $16.3 billion due to defaults on loans it insured as the housing market crashed. The agency is required to keep enough funds on hand to cover all projected future losses. The president’s budget will contain an updated estimate.
The Republican-led House is ramping up scrutiny of the government-run mortgage insurer. The $1.1 trillion worth of home loans insured by FHA represent 15 percent of the U.S. mortgage market, almost quadruple the 4-percent share of mortgages it covered in 2007.
Lawmakers from both parties have been anticipating the budget estimate for FHA as they gauge whether they should step in with legislation that would shrink the agency’s market share and shore up its bottom line.
“The FHA is broke. The FHA is flat broke and I fear soon the FHA will prove to be bailout broke,” Hensarling said at the hearing.
Galante said the administration has already made “the most sweeping changes to policy in FHA’s nearly 80-year history” to improve the agency’s financial situation. It is due to those reforms, she said, that the agency hasn’t needed to take taxpayer aid before this year.
The committee has been told that “FHA is in the course of a recovery, indeed healthier but in fact it is not,” said Representative Randy Neugebauer, a Republican from Texas. “If the CEO of a major company kept telling its shareholders that things are getting better and keep having poor earnings, that CEO would be removed.”
“I wonder how we’ve been misled in Congress,” said Representative Sean Duffy, a Republican from Wisconsin, who broadened his criticism to include the Department of Housing and Urban Development, which oversees FHA. “You and HUD have been negligent, incompetent.”
Democrats defended the FHA’s role and said it was vital to the recovery from the 2008 housing crisis, when Congress granted it authority to insure higher-cost loans. That authority ends at the end of this year. FHA backs 56.4 percent of the mortgage insurance market, according to HUD.
“We must recognize the tremendous value that FHA has contributed to our economy, particularly since the financial crisis,” ranking member Maxine Waters, a Democrat from California, said. “And we must be cautious about moving too precipitously to constrain FHA‘s role,’’ she said.
Galante, testifying before Congress for the first time since she was confirmed to her post in December, urged lawmakers to move forward with a bill that passed the House with bipartisan support last year but didn’t get through the Senate. That measure would have given FHA more authority to weed out bad actors among the lenders who issue loans it insures, among other things. Galante dismissed further premium changes.
‘‘We’ve raised premiums five times, and we think that is the right place for the pricing of the risk of the new loans we’re taking on,” Galante said.
Republicans say they want to go further, perhaps changing the agency’s accounting methods and requiring higher down payments on FHA-insured loans. The agency currently insures mortgages with down payments as low as 3.5 percent for certain borrowers.
--With assistance from Phil Mattingly in Washington. Editors: Anthony Gnoffo, Gregory Mott