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Hensarling: FHA may be “bailout broke”

Jeb Hensarling

Jeb Hensarling

Jeb Hensarling, the chairman of the House Financial Services Committee, was critical of the Federal Housing Administration during a Wednesday hearing, saying that the agency is detrimental to a healthy economy and a “sustainable fiscal path.”

“For us to have a healthy economy, we must put the nation on a sustainable fiscal path,” Hensarling said. “And to have a sustainable fiscal path, we must also have a sustainable housing finance system. I have grave fears that FHA, as it is operating today, is an impediment to both.”

The burst of the housing bubble in 2007 led to the collapse of the private housing finance market when home prices plummeted and banks were left holding nearly worthless home mortgages, which prompted the FHA to intervene. The FHA, established in 1934, insured private mortgages using borrower fees to fund its operations but took on more risk than ever before, leading to significant losses. The administration could eventually exhaust its cash reserves and require a $16 billion bailout from the government to cover its projected losses.

“In fact, the FHA now controls more than 56 percent of the total mortgage insurance market in terms of new loan endorsements, crowding out its private competitors with extremely low down payment requirements and expanding its insurance to higher income individuals and houses in the upper end of the marketplace,” Hensarling said. “The policy of cheap up-front pricing and elevated maximum loan limits as high as $729,000 has allowed the total size of FHA’s insurance book of business to explode by more than 64 percent, up to $1.13 trillion in FY12, making it the largest mortgage insurance company in the United States. And what is the result for the FHA—and taxpayers—of this unprecedented mission creep? The FHA is broke. The FHA is flat broke. And I fear soon the FHA will prove to be bailout broke.”