In a hearing before the House Financial Services Committee Feb. 6, housing experts warned that the private mortgage market will never take off if Congress doesn’t clarify and significantly shrink the role of the Federal Housing Administration and government-sponsored enterprises, HousingWire reported.
Congressional leaders agreed with much of the expert testimony. Committee Chair Jeb Hensarling, R-Texas, said he considered a sustainable housing market a high priority for Congress but feared the FHA and GSEs have become a hindrance to a healthy private mortgage market.
Edward Pinto, resident fellow at the public policy think tank American Enterprise Institute, told the committee that the FHA’s current mission only will result in a continued practice of policies that lead to “a high proportion of families losing their homes,” HousingWire reported. He added that “by unfairly competing with private capital, housing finance reform is blocked.”
Basil Petrou, managing director at consulting firm Federal Financial Analytics, advised the committee to create rules that did not favor government-backed mortgages over those backed by private capital.
HousingWire reported that the FHA currently does not have sufficient reserves to cover future expected losses, and its Mutual Mortgage Insurance Fund capital reserve ratio has fallen to a negative 1.44 percent. Many committee members and those offering industry expertise said they feared that the agency would have to draw funds from the U.S. Department of the Treasury when President Obama releases his full-year 2013 budget proposal.
Julia Gordon, who works in housing finance and policy at the Center for American Progress, told the committee that FHA loan losses from 2005 through 2009 will continue to show up on the agency’s books, but she noted that the FHA’s present book of business is looking profitable.
Nevertheless, the consensus was that the government’s role in housing must shrink. Anthony Sanders, a real estate professor at George Mason University, noted that the FHA’s share of mortgage originations currently is more than 25 percent, HousingWire reported. Sanders said the agency needed to return to its pre-crisis size; in 2003, for example, its market share was only 10 percent.
Sanders told the committee that the FHA should require borrowers to have a FICO score of at least 660 before it insured loans and that it should adjust its minimum down payment to 5 percent while also lowering its loan limit to $625,000. He said he would like to see that limit eventually drop to $350,000 and see the agency lower its insurance coverage to 80 percent, HousingWire reported.