Just How Cash-Strapped is the FHA?

A top House Republican challenged the Obama Administration Monday over the financial health of the Federal Housing Administration a day before a hearing on the agency’s recent $1.7 billion Treasury Department bailout.

Rep. Jeb Hensarling, (R-TX), chairman of the House Financial Services Committee, questioned the FHA’s suggestion that its need for a taxpayer loan was likely temporary and was required in part because of outdated financial information.

“That's a lot of Washington talk,” Hensarling said in an interview with FOX Business. “For years, FHA has been making predictions about their fiscal sustainability and they have been consistently wrong and hugely wrong. What they hear on Main Street is bailout.”

FHA Commissioner Carol Galante is scheduled to testify Tuesday at a hearing set by Hensarling’s committee.

The FHA does not make home loans. Rather, for a fee, it insures them against loss for banks that do. The FHA underwrites mainly low down payment mortgages for first-time homebuyers.

In September, the FHA tapped its unlimited line of credit with the Treasury for the first time ever after an annual review found its capital reserve account – its financial “cushion” -- too low.  The account, mandated by Congress, was designed to cover unexpected losses in the agency’s portfolio.

At the time, the FHA said its capital account had fallen short of required thresholds because of losses on mortgages it backed from 2007 to 2009 when the housing market tanked. It also blamed weaker revenues caused by declining mortgage lending amid rising interest rates.

But in a letter to Congress, the FHA downplayed the Treasury loan and pushed back on critics who have been warning of a  taxpayer bailout of the agency, which is part of the Department of Housing and Urban Development. The letter said the agency expects updated budget estimates in a few months and that they "would reflect significant improvements in FHA's portfolio."

“To be clear: this doesn’t reflect the [FHA mortgage insurance] fund’s current health,” Housing Secretary Shaun Donovan said in a speech Monday. “This was an accounting transfer that has not yet caught up with reality.  It’s based on the housing market more than a year ago and doesn’t reflect policy changes we’ve made since then. In fact, FHA has strengthened underwriting standards and its portfolio, resulting in dramatic improvements, even since this time last year.”

Donovan said the FHA has “nearly $50 billion in liquid assets, including more than $17 billion added in the fiscal year that just ended.”

But Hensarling said Congress “has been misled for years as to the true fiscal health of the FHA” and that the hearing Tuesday will “try to get to the bottom of this and find out why aren't they using the tools that are available to them to make FHA more fiscally sound, because a broke FHA does no one any good…They are not on a sustainable path.  We've got to get off the boom-bust bailout cycle.” He said FHA changes will require additional legislation from Congress, which last approved fixes for the agency in 2010. In July, Hensarling’s committee passed a bill to reform the FHA and the government’s two other mortgage insurance entities, Fannie Mae and Freddie Mac, which received more than $180 billion in taxpayer bailouts in the financial crisis. (Thanks to the rebound in the housing market, Fannie and Freddie have repaid most of those funds.)

The Senate Banking Committee also approved FHA legislation in July and is considering a separate measure to overhaul Fannie and Freddie.

Hensarling said he expects the full House to vote on his committee’s FHA bill “soon” and that he is optimistic about the chances of bipartisan housing finance reform.

‘’I'm more optimistic about those prospects than I am about other prospects,” he said. “And, clearly, the Senate seems to be moving in that direction. The White House has indicated their interest (as well)…We have to have a sustainable housing policy in America, one that is sustainable for homeowners, so that we don't put people into homes they can't afford to keep, one that is sustainable for taxpayers, so that you never again have to engage in bailouts of Fannie and Freddie and FHA. ”