Housing Chief Rebuts Warning of FHA Bailout
Friday, October 9, 2009
A former Fannie Mae executive warned a House panel Thursday that the Federal Housing Administration is destined for a multibillion-dollar taxpayer bailout in 24 to 36 months, an analysis that the agency's top official immediately dismissed as "completely unfounded."
At a hearing before a House Financial Services panel, Edward J. Pinto predicted that the FHA will suffer $40 billion in losses, leaving it unable to cover its bad loans without taxpayer help. Pinto, a real estate finance consultant who served as Fannie Mae's chief credit officer from 1987 to 1989, said he testified so lawmakers would "not be able to say that no one told them of the magnitude of the impending losses."
His testimony came at a sensitive time for the FHA, which faces increased scrutiny now that it has backed nearly a quarter of all loans made this year. The loans it insures are the sole source of financing for most people who lack good credit or cannot make hefty down payments. But its defaults have been climbing, raising concerns that taxpayers may be forced to kick in if bad loans overwhelm the FHA.
The agency recently said that a soon-to-be-released audit will show that its reserve fund has fallen below the level required by law, meaning it will not be enough to cover 2 percent of all outstanding FHA mortgages.
But absent a catastrophic decline in home prices, "we will not need a bailout," FHA Commissioner David H. Stevens told the panel.
While the reserve fund is at a historic low, it represents only part of the money the agency can tap to cover its losses, Stevens said. There's a second fund the agency can also use when loans go bad. In total, the two funds had $30.4 billion to meet future losses as of June 30.
The data from the forthcoming audit, performed annually, also project that the reserves will rebound to the required level within two to three years, largely as a result of the recovery in the housing prices, Stevens said.
Home prices should bottom out in early 2010, according to IHS Global Insight, the firm responsible for the price forecasts used in the audit. "According to a number of measures, housing prices are stabilizing," said Patrick Newport, the firm's U.S. economist told the panel.
In his testimony, Pinto called the audit's underlying assumptions "overly optimistic." The FHA's escalating default rate, its rapidly eroding reserves, and a recent dramatic increase in the amount of money people can borrow on FHA loans will have disastrous consequences, he warned the panel. FHA loans are especially vulnerable because they require only a 3.5 percent down payment -- well below the 10 to 20 percent private lenders demand.
Pinto compared the FHA loans with Fannie Mae's book of loans in 2006, which he said have similar characteristics, and he applied the default rate on the Fannie loans to the FHA mortgages. By that measure, the FHA was short $40 billion on its main financing account as of Sept. 30, in effect stripping the reserve account of its required funding and leaving it $14 billion in the hole, he said. The FHA, based on its history, will not be able to modify enough loans to thwart the losses.
Pinto suggested that the FHA raise its down payment requirement to 10 percent, reduce the cap on how much money FHA borrowers can borrow, and require FHA-approved lenders to co-insure the loans.
In an interview, Stevens said Pinto's analysis is flawed in part because many of Fannie Mae's loans at the time did not require borrowers to verify their income, something the FHA requires of all its borrowers.
After the hearing, Rep. Maxine Waters (D-Calif.), the subcommittee's chairwoman, said she found Stevens's presentation "convincing."
"I am feeling very confident about FHA," Waters said. "I think it's going to be able to continue to be a major source of support for home mortgages."