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Donovan: Taxpayer bailout option still in play for FHA

Shaun Donovan

Shaun Donovan, the secretary of the Department of Housing and Urban Development, said during a Senate Banking Committee hearing on Thursday that there is no guarantee that the Federal Housing Administration will not need a taxpayer-funded bailout.

Donovan told senators worried about the financial state of the FHA, which is overseen by HUD, that making changes to the agency’s operations could hinder the housing recovery.

“We are seeing a recovery, but it is still fragile,” Donovan said, according to the Los Angeles Times. “We don’t want to hurt the market and in turn the FHA fund by going too far and stopping that recovery.”

Several congressmen expressed concerns regarding the way the FHA operates and the efforts made over the past four years by HUD to reconcile the agency’s finances. The FHA has backed loans for individuals who underwent foreclosure as recently as three years earlier.

Under federal law, the FHA’s net worth cannot fall below two percent of the outstanding loan balances it guarantees, but as a result of the recent housing crisis, the agency’s reserve ratio has been in decline since 2006 and dipped to minus-1.44 percent at the end of the fiscal year on Sept. 30, the Los Angeles Times reports.

The FHA had $30.3 billion in reserves as of Sept. 30 to cover $46.6 billion in projected losses, which could force the agency to, for the first time in its history, go to the U.S. Treasury for assistance.

“Hopefully, the shock produced by these latest projections will finally be a wake-up call for everyone,” Sen. Richard Shelby (R-Ala.), the ranking member of the Senate Banking Committee, said, according to the Los Angeles Times. “It is time for serious reform of the FHA before it needs a taxpayer bailout, if it isn’t too late already.”

Legislation aimed at preventing the agency’s insolvency has yet to be considered by the Senate. The FHA Emergency Fiscal Solvency Act, which was sponsored by Judy Biggert, the chairman of the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity, would provide the agency with the necessary tools to protect itself.

Spencer Bachus, the chairman of the HFSC, urged the Senate to pass the measure “as quickly as possible.”

“The deteriorating financial position of the FHA’s capital reserves has raised concerns that, like Fannie Mae and Freddie Mac, the FHA may soon expose taxpayers to significant losses,” Bachus said. “Given the dire finances at FHA, it is important that Congress act on needed reforms before the end of the year.”

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