Republicans seek FHA changes as prelude to housing overhaul

, Bloomberg

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Republican lawmakers say they will seek changes at the financially troubled Federal Housing Administration as a first step toward a broader overhaul of the U.S. government role in housing finance.

The House Financial Services Committee held a hearing Wednesday on the role of the FHA, the first in a series of panels that may lead to legislation that would shrink the government mortgage insurer's market share and shore up its bottom line. That is a more urgent priority than winding down government-owned Fannie Mae and Freddie Mac, which buy mortgages from lenders and securitize them, lawmakers said.

"It is going to be a priority of this committee to forge a sustainable housing finance system in this country," Representative Jeb Hensarling, the Texas Republican who leads the Financial Services panel, said at Wednesday's hearing.

"Given their high loan to value, low credit score policies and high rates of default, it's an open question whether FHA has now morphed into Countrywide," Hensarling said, referring to the troubled mortgage bank that was purchased by Bank of America Corp. during the financial crisis. "Arguably the FHA has now become the largest subprime lender all with the blessings of the administration."

President Barack Obama's 2013-2014 budget is expected to reflect that FHA will require a Treasury subsidy for the first time since it was founded in the 1930s, largely due to defaults on loans it insured as the housing market crashed. The FHA could fall as much as $16.3 billion short of the cash it is required to keep on hand to cover all projected future losses, according to an independent actuary.

Democratic Support

To become law, any legislation that emerges from the House must eventually win support from Democrats who control the Senate and are also scrutinizing the agency. Democrats said Wednesday that they are eager to preserve FHA's countercyclical role of shoring up the housing market when private financing isn't available.

"All the members here Wednesday are deeply concerned about the health of the FHA's mutual mortgage insurance fund," said Representative Maxine Waters of California, the senior Democrat on the committee. "Along with that concern, I think it is important to recognize FHA's crucial role in the housing finance system."

Representative Brad Sherman, a Democrat from California, said a previously passed bill in the House on FHA would strengthen the agency. He said his current concern is with their underwriting standards.

'Nudge Them'

"We certainly want FHA to be guaranteeing loans to creditworthy borrowers but they certainly themselves can make those changes," Sherman said in an interview. "If we need to nudge them, we'll nudge them."

Together, FHA, Fannie Mae and Freddie Mac own or guarantee more than 90 percent of home loans. Lawmakers from both parties and President Obama have called for an overhaul of housing finance that shrinks the government footprint.

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