Congress is looking at what to do about FHA in light of the pressure on its reserves and it’s clear from a hearing that senators held yesterday the agency presents them with a conundrum. Lawmakers acknowledge the indispensable role FHA played in the aftermath of the mortgage crisis and continues to play today, yet it’s equally clear the agency is in a tough spot, although given the pressure it’s been under it’s been managing its reserves remarkably well.
Testimony by market experts that appeared before the Senate Banking Committee yesterday indicated that the housing market, and the broader economy by extension, would have been in much worse shape had FHA not stepped in with affordable mortgage credit when it did. By some estimates, it prevented home values from dropping an additional 25 percent in the darkest days after the downturn.
Testimony also made clear that the cause of FHA’s challenge to its reserves is the very opposite of what caused the mortgage meltdown. The mortgage meltdown was caused by lax underwriting and confusion about the strength of the mortgages that collateralized the private-label mortgage-backed securities that were so popular among investors during the housing boom. FHA’s challenge is very different. It never relaxed it’s underwriting standards and it maintained the safety and soundness of its mutual mortgage insurance fund throughout the boom.
After the crisis, the federal government and private sector looked to it to help shore up the market, and it did, but as a side-effect of that, it took on a lot more borrowers at a time when the broader economy was struggling. As a result of many factors outside its control, including widespread job losses and declining home prices, a portion of the borrowers it took on struggled. The result is a shortage in one of its reserve funds. But even here, the problem is not as acute as it sometimes sounds in the media, because FHA maintains reserves for 30 years, a requirement that far exceeds the private sector.
Against this backdrop, NAR President Gary Thomas made a strong case for careful action by Congress as it decides what, if anything, it should do. He shared with lawmakers the compelling story of how FHA stepped in at a critical juncture and through little fault of its own, took a hit to its reserves. In a sense it saved the economy from a much bigger blow but it did so at the expense of its own reserve fund.
Snippets of Thomas’ remarks to the Senate Banking Committee are in the 3-minute video above.