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Bachus Warns that FHA Is Assuming too Much Risk

By Brandon Moseley
Alabama Political Reporter

On Wednesday, Congressman Spencer Bachus (R) from Vestavia warned that the Federal Housing Administration is risking taxpayer funds and may be facing a new bailout.

The House Financial Services Committee began a series of hearings on the Federal Housing Administration (FHA)last week. FHA has a fund with a negative economic value of $16.3 billion according to a recent independent actuarial report.

Congressman Bachus said, “We have learned to our regret what happens when the government’s role in housing finance becomes so large that taxpayers are put at risk. The FHA once had a limited and defined role to assist creditworthy low and middle income Americans. Now the agency is putting taxpayer guarantees behind everything from high-cost loans to loans that approach subprime status. As delinquencies have gone up, this has become a riskier business for taxpayers and it is also stunting the recovery of a robust private housing market.”

The statement released by Bachus’s office said, “The FHA was created in the 1930s to provide assistance to a limited group of customers shut out of traditional mortgage markets. In recent years, it has expanded to provide government backing to loans as high as $729,750 and lowered its down payment standards on loans to 3.5%, compared to the typical private market standard of 10-20%.”

Rep. Bachus was the Chairman of the Financial Services Committee during the 112th Congress, Bachus as well as Senator Richard Shelby have warned about the increasing financial risks at the agency and helped lead a package of reforms that passed in the House of Representatives. That package was not acted on by the Democrat controlled U.S. Senate.

The reason that FHA has a negative value in its single-family insurance fund is the extremely low interest rates that the government is subsidizing to make homes affordable and grow the economy.  A percentage of loans are going to fail.  When interest rates are 3.5% or less, the good loans don’t generate enough revenue to make up for nonpayments on loans that the FHA has facilitated through the government mortgage insurance it offers to homeowners. Taxpayers are then responsible for making good on the guarantees provided by government mortgage insurance.

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Congressman Bachus said that the FHA has taken on greater financial risk in recent years by vastly expanding its mission and now controls 56.4% of the entire U.S. mortgage insurance market.

The Great Recession was caused largely by a mortgage industry that was then (and still is0 dominated by the federal government.  The federal government, through its taxpayer supported federal housing agencies: Freddie Mack and Fannie Mae.  Banks signed people up for the federally backed mortgages, then Freddie and Fannie packaged those loans into derivatives that commercial banks and brokerages then turned around and bought then sold to investors, mutual funds, and pension funds all over the world.  Loose lending standards in so-called sub-prime mortgages meant that millions of people who should never have qualified for a mortgage got them.  When their low introductory rate variable rate mortgages began to roll over to a higher rate millions defaulted on their loans sending shock waves throughout the housing, banking, and financial services industries resulting in the worst economic meltdown in the United States since the Great Depression.  The Great Recession ended in 2009, but this has been the weakest recovery in memory.

Congressman Spencer Bachus is the Chairman Emeritus of the Financial Services Committee.  Bachus represents Alabama’s Sixth Congressional District.

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

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