Chairman Hensarling Op-Ed: Giving the FHA a new lease on life

Washington, November 27, 2013 -

Chairman Hensarling Op-Ed | November 27, 2013

Persistently weak job growth, higher taxes on families and record-breaking government debt are the hallmarks of the failed economic experiment known as Obamanomics. It is an experiment made up of many policies, but its core revolves around one central belief: A larger, more powerful, more intrusive government can and should fix every problem.

The fact that you can no longer keep your health insurance, even if you like it, is yet more proof that government today has more control over our lives than ever. Perhaps nowhere is the presence of government more intrusive and dominant than in housing.

Government has maintained an oversized role in housing, based largely on the noble — but ultimately unsound — proposition that everyone should be encouraged to own a home. Tragically, a federal government that lives well beyond its means also encourages Americans to do the same.

What has been the effect of government housing policy? A dizzying cycle of booms and busts, first regionally in places such as California, New England and the western "oil patch" states, culminating finally in the massive national housing bubble that gave way to the financial crisis.

That crisis should have shown the wealth-destruction and significant social costs of exaggerated government intervention in housing. Yet instead of pursuing meaningful reforms, President Obama used the crisis to create a virtual government monopoly of the housing finance system.

At the heart of this monopoly are taxpayer-backed entities like Fannie Mae, Freddie Mac and the Federal Housing Administration, which now guarantee nine of every 10 new mortgages. This puts hardworking taxpayers on the hook for more than $6 trillion in mortgage guarantees, more than one-third the size of our entire economy.

The unfortunate irony here is that the very institutions the administration is relying upon to prop up our housing system are themselves already broken, broke and bailed out. Fannie and Freddie infamously received the biggest taxpayer-funded bailout in history: nearly $200 billion. Now there is a crisis at the Federal Housing Administration, which in good times is used to partially finance the operations of the Department of Housing and Urban Development.

A New Deal creation designed to help first-time homebuyers and those with low and moderate incomes to buy homes, the Federal Housing Administration has experienced extreme mission creep since the start of the crisis. It now insures loans on homes valued as high as $729,750 — far beyond the reach of those with truly low or moderate incomes — and controls nearly 60 percent of the mortgage-insurance market, nearly twice its pre-crisis level.

This untenable expansion finally caught up with the Federal Housing Administration in September when it became the latest recipient of a taxpayer bailout. The agency's $1.7 billion bailout — the first in its history — equals roughly 10 percent of its annual receipts.

To make matters even worse, the agency bailout took place without a vote of Congress. The Federal Housing Administration has a permanent and unlimited direct line to the U.S. Treasury, so taxpayers could be writing blank checks for its bailout indefinitely. Every penny gets added on top of our already staggering $17 trillion national debt.

The bailout occurred despite years of assurances from the Obama administration that "all was well" at the agency. Administration officials repeatedly disregarded warning signs of its deteriorating condition, such as last year's actuarial report that revealed the agency's mutual mortgage insurance fund has a negative economic value of $16.3 billion. In fact, every year since 2008, the agency has been in violation of federal law for failing to maintain reserves equal to 2 percent of the current value of its guarantees.

The Federal Housing Administration's financial decline has been hastened by employing many of the castigated practices of subprime lenders such as small down payments, low credit scores and cheap upfront pricing. As a result, families become trapped in homes they ultimately cannot afford to keep. One in eight agency loans ends in default or foreclosure.

The agency has also refused to make full use of the tools it has at its disposal, such as raising premiums to their maximum or increasing minimum down payments. Commissioner Carol Galante testified recently before Congress that such increases would upset the "balance between strengthening the fund [and] making the cost of credit prohibitive for qualified homebuyers."

However, such arguments miss the fundamental point that a bankrupt Federal Housing Administration helps no one.

Clearly, the Obamanomics approach of more government to fix our housing problems is not working, nor is it sustainable.

That's why Republicans on the House Financial Services Committee, of which I am chairman, have offered a new vision for a sustainable housing system for America called the Protecting American Taxpayers and Homeowners Act. The Path Act is designed to reduce the government's domination of housing and right-size the agency's market share.

Specifically, the Path Act reforms the agency by returning its focus to its historic role of helping first-time, and low- and moderate-income homebuyers. It also gives the agency a clear countercyclical role to assist borrowers in times of significant credit contraction.

The Path Act removes the Federal Housing Administration from the Department of Housing and Urban Development, establishing it as a separate, self-sufficient agency. It requires the agency to charge minimum annual premiums, limit taxpayer exposure by properly adjusting the agency's maximum insurable loan limit, and maintain a strict 4 percent minimum capital reserve ratio.

The reforms enacted in the Path Act will create a sustainable housing-finance system and end the ruinous cycle of Washington's failed boom-bust-bailout housing schemes once and for all.

Americans deserve and demand a healthy economy. We cannot borrow, spend or bail out our way to prosperity. President Reagan said, "As government grows, liberty contracts." That applies to our economy as well. If government continues to dominate the housing market, we may never have a truly healthy and sustainable economy.

Print version of this document