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Budget Hearing Spotlights Concerns With FHA, GSEs

Talk of reform for ""Fannie Mae"":http://www.fanniemae.com/portal/index.html, ""Freddie Mac"":http://www.freddiemac.com/, and the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory (FHA) featured prominently at a hearing convened by the ""Senate Banking Committee"":http://banking.senate.gov/public/ Thursday to address ""HUD's"":http://portal.hud.gov/hudportal/HUD budget for the next fiscal year.

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Before stepping out for another committee hearing, Sen. ""Richard Shelby"":http://shelby.senate.gov/public/ (R-Alabama) helped begin the hearing by airing concerns about the FHA's ability to withstand net default losses over the next fiscal year.

""Over the past three years, FHA's portfolio has expanded from $500 billion to $1.3 trillion. It now insures more than 20 percent of all new mortgages,"" he said. ""And while some of this expansion was an appropriate response to the housing crisis, FHA's growth has not been managed wisely.""

He took the opportunity to reference GSE reform, offering that he felt the Senate Banking Committee ""made a serious mistake by not reforming the GSEs when [it] had the chance├â┬ó├óÔÇÜ┬¼├é┬ª. I hope the committee will not make the same mistake with FHA.""

HUD Secretary ""Shaun Donovan"":http://portal.hud.gov/hudportal/HUD?src=/about/hud_secretary defended agency's budget proposal by nodding in the direction of Congress for recent conforming loan increases and citing estimates from the nonpartisan Congressional Budget Office that hold FHA actuarial estimates in good faith.

The FHA has fallen under scrutiny in recent years over an inability to meet the 2 percent capital ratio buffer required

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by law.

A white paper last fall by ""Joseph Gyourko"":http://real-estate.wharton.upenn.edu/people/faculty.cfm?id=805, a professor of real estate and finance at the University of Pennsylvania, estimated that low home prices and loan defaults could lead an undercapitalized FHA to need anywhere from $50 billion to $100 billion in bailout funds from Treasury.

Shelby also lobbed concerns that recent increases in premiums for lenders, some by as much as 10 basis points, could fail to cover projected losses for the FHA's hard-hit Mutual Mortgage Insurance Fund.

The HUD official responded by saying, ""If anything, we are underestimating the strength of the loans we will insure next year.""

Donovan demurred on the topic of reform for Fannie Mae and Freddie Mac, expressing hope for bipartisan solutions from Congress.

""We do not at this point have a specific timetable, nor legislation to submit to Congress,"" he said.

GSE reform remains a dead issue this election year, despite numerous proposals for reform from lawmakers and public outcry over withdrawals worth more than $180 billion in taxpayer funds. Donovan cited a three-option white paper from the Treasury Department that awaits action by lawmakers.

In March the ""National Association of Home Builders"":http://www.nahb.org/ released a comprehensive proposal for GSE reform, which built on an earlier strategic plan from the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ in February. Bills helmed by Rep. ""Scott Garrett"":http://garrett.house.gov/ (R-New Jersey), Sen. ""Bob Corker"":http://www.corker.senate.gov/public/ (R-Tennessee), and Rep. ""Jeb Hensarling"":http://hensarling.house.gov/ (R-Texas) similarly continue to stall.

Donovan also said during the hearing that HUD would prefer to more authority when it comes to disqualifying lenders that fall beneath the standards for FHA-insured loans.

He said that agency would like to ""hold lenders accountable for poor originations that do not meet our standards under FHA rules. That is legislation we have come close to passing in the past and I believe this year is an important year to get across the finish line with that legislation.""

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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