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Shelby Criticizes HUD Budget Request

By Brandon Moseley
Alabama Political Reporter

Senator Richard C. Shelby released a transcript of his remarks delivered in the Senate’s Committee on Banking, Housing and Urban Affairs.  Senator Shelby was critical of the Obama Administration’s $45 billion Department of Housing and Urban Development’s (HUD) fiscal year 2013 budget.  Federal spending has grown exponentially under President Barack H. Obama’s term while economic growth has been almost stagnant.  Shelby said that the Federal Debt has reached 70% of GDP, levels that were last seen in the Second World War.

Senator Shelby said, “The Department has not taken sufficient action to address the growing risks to the budget and taxpayers presented by the Federal Housing Administration (FHA).  Over the past 3 years, FHA’s portfolio has expanded from $500 billion to $1.3 trillion.  It now insures more than 20 percent of all new mortgages.  While some of this expansion was an appropriate response to the housing crisis, FHA’s growth has not been managed wisely.”

Sen. Shelby continued, “Even though the Administration’s public position called for reducing conforming loan limits, the President signed legislation to allow FHA to continue to insure mortgages of up to nearly $730,000.  Prior to 2008, FHA could insure mortgages only up to $417,000.   This means that FHA is now helping homeowners purchase million dollar homes.  FHA should be focused on helping first-time and moderate-income homebuyers, not millionaires.”

Sen Shelby warned, “FHA insurance premiums are insufficient to cover losses and build up needed capital reserves.  According to FHA’s own reporting, over the past year, FHA insurance premiums covered less than 80 percent of its $9.4 billion in net default losses.  As a result of insufficient premiums, the President’s 2013 budget estimates that FHA would have needed a bailout to the tune of $688 million, if FHA had not received funds from the mortgage servicing settlement.”  “The Congressional Budget Office has said that by not incorporating a market-risk premium, the HUD budget underestimated the cost of FHA’s single-family loan program in 2012 by about $8 billion.”

Sen. Shelby continued, “Wharton Professor Joseph Gyourko has argued that FHA’s accounting also greatly underestimates default risk and loan losses.  After factoring in the huge growth of FHA’s portfolio, he predicts that FHA will ultimately need a bailout of $50 to 100 billion.”  “It is clear that FHA needs to be reformed to prevent another taxpayer bailout.  I would hope that we could all agree that the first place to start is by ensuring that FHA is properly accounting for the risks it assumes.  I also hope that we could enact broader reforms before the problems at FHA grow larger and become more expensive to fix.”

Sen. Shelby said, “Last year, the Federal deficit reached $1.3 trillion.  That’s the third year in a row of deficits over $1 trillion.  These deficits have put the Federal debt at nearly $11 trillion, or about 70 percent of GDP, its highest level since World War II.  We cannot continue to ignore our mounting fiscal problems.  Instead, we must begin to address the issue by enacting budgets that curb the culture of spending in Washington and institute fiscal reforms.”

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The federal government has taken on historic debts while also underwriting the mortgage industry.  This exposes them to an even larger potential risk in the next economic downturn.  In the first quarter of 2010, 96.5 percent of all home loans were backed by a Federal Government entity.  When the lending power of the government starts to decrease and the government’s ability to subsidize the lending industry goes away, the potential risk to the housing market will increase.

To read Sen. Shelby’s statement in its entirety:

http://shelby.senate.gov/public/index.cfm/2012/4/shelby-calls-for-fha-reform

Brandon Moseley is a former reporter at the Alabama Political Reporter.

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