Paper Economy: Pork and Circus!

The House Committee on Financial Services, chaired by Massachusetts Congressman Barney Frank [D-MA], yesterday held a hearing to discuss the current FHA modernization effort.

Although a bill with the same objective passed the House by an overwhelming majority last year, a new bill (H.R. 1852) has now been introduced that would essentially expand the modifications to FHA including those of the last bill plus provisions to establish a new Mutual Mortgage Insurance Fund.

To date, the FHA operates out of a National Housing Acts “General Insurance Fund” which was established in 1965 to serve as a “as a revolving fund for carrying out all the insurance provisions”.

It appears that this new fund is creating some contention as its full purpose seems unclear and has been interpreted by some Republicans as an attempt by Democratic lawmakers to funnel surplus money out of FHA for use elsewhere.

“Now it looks like we are going down the road of another extortion of an organization for money for purposes other than for what that organization is proposed and chartered to do… creating other funds and taking money out of FHA when we’re embarking down a road of a new program I think is a very dangerous precedent.” said Representative Randy Neugebaue [R-TX].

To that, Representative Frank quickly followed up “I’ve worked with my friend from Texas on a lot of issues and there are a lot of areas where this committee can cooperate across party lines but nowhere have the difference between the parties been made more clear then in his last statement when he described as an effort by the gentle woman from California and myself as an effort to provide more funding for affordable housing as quote extortion unquote.”

There is, in fact, an additional provision found in the bill entitled “Use of FHA Savings for Affordable Housing Grant Fund” that would allow for “only for grants to provide affordable rental housing and affordable homeownership opportunities for low-income families.”

Later in the hearing, Brian D. Montgomery, Assistant Secretary for Housing, addressed the committee to share his outlook on the proposed changes which include the elimination of the a down payment as a qualification for an FHA insured mortgage.

“This year, as we all know, we have two bills pending before this committee. Both bills would raise loan limits in high cost areas. They would eliminate FHA’s antiquated down payment requirements. And they would allow, to varying degrees, risk-based pricing to occur and eliminate the burdensome cap on reverse mortgages.”

When asked about his take on the new housing insurance fund, Montgomery added “I, speaking for FHA, have IT system requirements, as the worlds largest mortgage insurance company, I would like to be able to have the ability to get staff, professional staff that would allow us to carry out our mission, especially in a reformed FHA. To be able to pay them similar to how other government agencies are. So speaking selfishly for FHA I could use those funds to help do some of what I just articulated.”

In an odd line of questioning, Representative Emanuel Cleaver, Democrat from Missouri seems to confuse the business of Fannie/Freddie GSE’s to that of FHA, “In your testimony, when you talked about the drop in the FHA share of the market in Chairwoman Waters district, that just is mind-boggling. What I would like to ask.. find out from you, is Freddie Mac has said that hey are going to buy up to $20 billion dollars in subprime mortgages, you can’t compete with the giants, but is that a way… a possibility for you to beef up your portfolio? Is it possible for FHA to buy any of the subprime mortgages?”

To that Montgomery responds “Thank you sir and as I have mentioned here on Tuesday in the subprime hearing, we are helping subprime borrowers today … with a reformed, modernized FHA, there’s no doubt in my mind we can assist many more. That’s not to say we are going to throw open the barn door so to speak, we have to protect the solvency of the Mutual Mortgage Insurance Fund so many of these families would still have to go through our eligibility and underwriting criteria.”

Cleaver further adds “There’s a lot of discussion going on about Freddie Mac and Fannie Mae and the size of their portfolio. And it seems to me that the best way to reduce that portfolio, to bring it in to some kind of normality, would be for FHA increase in its share of the market.”

Later, Representative Al Green [D-TX] asks Montgomery “Do you consider yourself, in terms of positioning, are you positioned somewhere between prim and subprime... is that a fair statement?”

To be fair, it seems many of the representatives appeared to have confused FHA’s role as an agency that works in concert with private lenders, originators and brokers, to insure loans while generating income only from mortgage insurance premiums paid by FHA borrowers, with that of the GSEs by whom loans are purchased, held or sold to the secondary market.

Later a panel of real estate industry “experts” from organizations such as the National Association of Realtors, the Mortgage Bankers Association, and the National association of Home Builders convened to add their take on the FHA changes.

The hearing can be viewed in its entirety now on BNN!

Friday, April 20, 2007

Pork and Circus!