Another Senator Questions FHA Mortgage Reform

by Peter G. Miller
August 2nd, 2007

For all the support in the lending community, not everyone on Capitol Hill is equally thrilled.

Last week we mentioned the reservations expressed by Sen. Richard C. Shelby (R-AL), who worried that taxpayers could be left holding the bill if a reformed FHA also produced a massive number of foreclosures.

Not to be outdone, Sen. Jim Bunning (R-KY) also has objections to FHA modernization. Bunning wonders why we need an expanded FHA when the private sector already produces a variety of loans. Unlike many politicians, Bunning could not be more clear.

Here’s what Sen. Bunning had to say at a congressional hearing last month:

“I am glad we are talking about this subject today because there are a lot of issues that need to be discussed before any legislation moves forward. The Administration’s F.H.A. reform proposal went nowhere in the Senate last year, and it should not go anywhere this year.

“Some members of Congress and folks at the Department of Housing and Urban Affairs are concerned that F.H.A. marketshare has fallen to 6 percent or less from much higher levels. I am not surprised, but I am also not concerned. The Federal Housing Administration was created in 1934. While I am not saying 73 years is old, a lot has changed since then.

“Much like the rest of the financial marketplace, the mortgage market has evolved tremendously in those 73 years. More money is available to more people. It is available faster, and on more diverse terms than ever before. While this program may have addressed a market failure 73 years ago, that is not the case today.

“What problem would expanding an already faltering F.H.A. fix? The mortgage market ranges from the extreme high end to – until recently – no money down, no documentation subprime loans. I and others, including the Chairman, have been critical of some of those products and practices, and of the regulators for letting things get out of control. But that is a problem of people buying houses when they were not able, and not a problem of someone who is able and ready but can not find money. In other words, a larger F.H.A. would not have prevented that problem. Again, I do not see the hole that F.H.A. is needed to fill.

“This Committee has always operated on the principle that government should not compete with the private sector. But strangely, that is exactly what F.H.A. is proposing with their so-called reforms. By asking Congress to raise the loan limit and open the door to no down payment and 40 year mortgages, F.H.A. is positioning itself to compete with the private sector. That is not only un-American, but it is a step towards a state-run economy.

“This would bring great risk to the taxpayers who will have to the foot the bill if there are too many non performing loans. And that is a real possibility. No money down mortgages are some of the worst performing loans in the market. We should discourage them, not encourage them. F.H.A. loans are not immune from problems. Right now, F.H.A. insured loan delinquency rates are comparable to or worse than subprime. I do not have a lot of confidence that the taxpayers will not be left holding the bag.

“F.H.A. also does not have a good track record of management or execution. Estimates of the costs and performance of loans are often revised, and it seems always in only one direction. Furthermore, F.H.A. has been unwilling or unable to do anything about the down payment assistance programs that are mortgage fraud and a tax shelter.

“All of these reasons should give us pause when considering whether F.H.A. will really be able to execute the new powers it wants, particularly calculating risk-based premiums. Even private insurers with years of experience pricing based on risk do not calculate premiums in the way that F.H.A. proposes. That proposal will also contradict the very mission of F.H.A. by making assistance more expensive for the most needy borrowers.

“Finally, I fear this F.H.A. reform is a back door way to shut down subprime lending. While we all agree that there have been problems in subprime, there has been strong market action to correct the problems, and the regulators have finally taken action too. If we try to shut down subprime by expanding F.H.A., not only will the taxpayers be exposed to risks that are not fully understood, but innovation and new product development, particularly for less creditworthy borrowers, will be stunted. That would set back the financial system a good number of the 73 years that the mortgage market has been growing since F.H.A. was created.

“Mr. Chairman, we have a lot of questions to resolve before we can come to a consensus on what needs to be done with F.H.A. It should be clear just who F.H.A. should be targeting. How much, if at all, F.H.A. should compete with the private sector? What types of mortgage products should the government be offering? How much risk are we willing to put on the backs of the taxpayers? Is F.H.A. up to the task? Anything that we do hastily will come back to haunt us in the future.”

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