GAO Says FHA a ‘High Risk’ to Taxpayers

Congress’ independent watchdog, the Government Accountability Office (GAO), issued a report recently warning that the cash-strapped Federal Housing Administration (FHA) is a “high risk” federal institution.

“Since 2009, FHA’s Mutual Mortgage Insurance (MMI) Fund has not met its statutory 2 percent capital requirement,” the GAO wrote in the report. “Further, a weakening in the performance of FHA insured mortgages has heightened the possibility that FHA will require funding from the U.S. Treasury to help cover its costs on insurance issued to date. Recent events suggest that the 2 percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios.”

On Feb. 6, the House Financial Services Committee, looking at ways to shore up the finances of the FHA, held a hearing on the role of the FHA, the first in a series of panels that may lead to legislation that would shrink the government mortgage insurer’s market share.

Four experts spoke to the panel, three of which were highly critical of FHA’s current practices, while one defended the agency. Critics included Edward J. Pinto, resident fellow of the American Enterprise Institute, who presented a paper titled How the FHA Hurts Working Families. Anthony B. Sanders, a senior scholar at George Mason University, told the committee members that the first step towards shrinking the FHA’s footprint was to reduce the loan limit to $625,000. And Basil N. Petrou, managing partner of Federal Financial Analytics, Inc., presented a laundry lists of recommendations for the agency.

Julia Gordon, director of housing finance and policy at the Center for American Progress Action Fund, defended the FHA, which she said appears to be returning to normal profitability.

Critics of the FHA expect that the agency will require a Treasury bailout for the first time since it was founded in 1934, largely due to rising defaults on loans it insured as the housing market crashed. It could need as much as $16.3 billion in taxpayer cash to keep it solvent.

Together, FHA, Fannie Mae and Freddie Mac own or guarantee more than 90 percent of all home loans.

These are the first skirmishes in a larger battle that will be waged over the government’s role in the mortgage finance system. Republicans, who control a majority in the House, want to shrink the FHA’s market share, while Democrats, who control a majority in the Senate, want to expand the agency’s role for low-income and first-time home buyers.

Readers, what do you think? Is the FHA headed for a bailout?

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