Federal Housing Administration: The Next Big Fannie? | Citizens Against Government Waste

Federal Housing Administration: The Next Big Fannie?

The WasteWatcher

In the upcoming session of the 112th Congress, lawmakers will be faced with the daunting challenge of what to do with Fannie Mae and Freddie Mac, the nation’s two mortgage giants. These government-sponsored enterprises (GSEs) have been under conservatorship since September, 2008 and they have sponged up $150 billion in taxpayer bailout money to date. The CBO estimates that the bailout will cost $380 billion, more than three times the cost to taxpayers of the savings and loan crisis in the 1980s.

As analysts and expert look back and try to determine the origins of the subprime meltdown and the subsequent financial crisis, the GSEs’ pivotal role in the debacle is becoming clearer and clearer. Yet, even as government officials are grappling with the Rubik’s cube-like conundrum that Fannie Mae and Freddie Mac present, yet another federally-backed mortgage agency, the Federal Housing Administration (FHA), is being permitted to follow in their footsteps down the same irresponsible road to potential bankruptcy and taxpayer bailout.

In testimony before the Subcommittee on Housing and Community Opportunity Hearing on October 8, 2009, former Fannie Mae executive, real estate financial services consultant, and American Enterprise Institute Resident Fellow Ed Pinto warned about growing foreclosures at the mortgage agency, stating that it “appears destined for a taxpayer bailout in the next 24 to 36 months.”

The FHA insures mortgages with low downpayments, often to first-time homebuyers. A prospective homebuyer can get FHA-backed loans with only a 3.5 percent downpayment and, with additional help, such as seller concessions, the borrower can emerge from closing with little or no financial skin in the game. The agency’s mortgage volumes have quadrupled since 2006 as private-sector mortgage lenders beat a retreat after the housing slump, and its annual foreclosure starts nearly doubled from 2.36 percent in 1998 to 4.4.percent in 2008. In addition, FHA loan limits have skyrocketed; in 2008, FHA was limited to backing loans up to $362,000. Today, FHA is permitted to back loans up to a whopping $729,750.

According to Pinto, along with two other federal agencies “FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans.”

In multiple articles and testimonies, Pinto has compiled a laundry list of similarities between what happened with the GSEs and what is occurring today with FHA, asserting that “Fannie and Freddie’s serious delinquency rate on their $1.6 trillion in default prone lending is now on par with FHA's still unacceptably high rate. And it’s getting worse by the month! Rather than Congress straightening FHA out, it proceeded to create a new problem.”

In an eerie replay of her early obstructionist posture, Rep. Maxine Waters (D-Calif.) said at the October 8, 2010 hearing that it is a “myth” that the FHA is the “next subprime.”

This is the same Maxine Waters who made exceptional efforts to stymie even modest oversight of Fannie Mae and Freddie Mac in 2004 when then-Chairman of the House Financial Services Committee Richard Baker (R-Ala.) repeatedly held hearings, to no avail, trying to persuade lawmakers that they should exercise fiduciary responsibility to ensure the safety and soundness of Fannie Mae and Freddie Mac.

At one hearing in 2004, Rep. Waters made a show of praising former Fannie Mae CEO Franklin Raines, blathering obsequiously that the subcommittee held “nearly a dozen hearings where, frankly, we were trying to fix something that wasn’t broke. Mr Chairman, we do not have a crisis at Freddie Mac and particularly Fannie Mae under the outstanding leadership of Frank Raines.”

Interestingly, Rep. Waters still faces charges from the House Ethics Committee resulting from activities she allegedly undertook to intervene on behalf of a bank in which her husband owned shares. According to The New York Times, the bank has “lost $50 million on an investment it held in Fannie Mae and Freddie Mac, the federal housing finance agencies…The charges against the congresswoman stem from a phone call Ms. Waters placed to Treasury Secretary Henry M. Paulson Jr. in early September 2008, just after Fannie and Freddie were taken over by the federal government, creating big losses for OneUnited, and asked him to arrange a meeting with minority bankers to discuss the crisis.”

Eighteenth-century author and critic Samuel Johnson said that “People need to be reminded more often than they need to be instructed,” wise words that frequently fall on deaf ears in the U.S. Congress.

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