In a Wednesday hearing on the role of the Federal Housing Administration in the mortgage market, House Financial Services Committee Chairman Jeb Hensarling said that the agency has “now become the nation’s largest subprime lender.”
“Last week many of us awoke to news that we had negative economic growth in the last quarter,” Hensarling said. “Although one quarter a trend does not make, it was not welcome news; it was not expected news. Unfortunately what has become expected news is subpar 1.5 to two percent economic growth; when historic trends are above 3 percent and clearly the economy is capable of four percent or greater. Two percent economic growth means that millions of Americans lay awake at night pondering insecure financial futures for themselves and their families.”
Hensarling said that the FHA is not conducive to a stable housing finance market.
“Hardworking Americans demand a healthy economy and we cannot have a healthy economy until we have a housing finance system that is both sustainable and competitive,” Hensarling said. “In its current form FHA is clearly an impediment to such a system.”
Hensarling said that while the FHA has helped to serve qualified first-time homebuyers and low- to moderate-income families, the agency has “strayed far from its original mission and legislative purpose.”
“It doesn’t just focus on low- and moderate-income Americans; it provides mortgage insurance for expensive homes valued as high as $729,000,” Hensarling said. “By offering riskier terms than private competitors, the FHA today controls 56 percent – well more than half — of the total mortgage insurance market in terms of numbers of loans, talk about Too Big to Fail. So instead of complementing a robust private mortgage market, the FHA high cost loan limits and extremely low down payment requirements put it in direct competition with the private sector.”
Additionally, Hensarling cited a November study that revealed that the FHA single-family mutual insurance fund has a negative value of $16.3 billion.
“If the FHA were a private financial institution, likely somebody would be fired, somebody would be fined, or the institution itself would find itself in receivership,” Hensarling said. “Instead, it is merely, and merrily, on its way to becoming the recipient of the next great taxpayer bailout.”
Hensarling said that “arguably, the FHA has now become the nation’s largest subprime lender—all with the blessing of the Administration.”
“FHA’s loan down payments lure families into having an unrealistic view of homeownership obligations,” Hensarling said. “Their high home loan limits encourage people to buy more home than they can possibly afford to keep. Putting borrowers in homes where 1 in 8 loans end in default, the FHA can make entire communities worse off, trapping more and more families as property values fall. You do not help families achieve the American dream by putting them into homes they cannot afford. This is how you turn the American dream into a nightmare.”