Lawmakers accuse FHA of downplaying financial realities

December 02, 2011 10:12AM

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HUD Secretary Shaun Donovan
Controversy continues to swirl around the Federal Housing Administration, as lawmakers are accusing the agency of exacerbating its problems by downplaying the extent of its financial struggles.

The Wall Street Journal reported that lawmakers are concerned the agency will need a bailout, a belief that both University of Pennsylvania research and an independent audit confirmed in recent weeks, and want Department of Housing and Urban Development Secretary Shaun Donovan to come clean.

The independent audit found that projected losses on the $1.1 trillion in mortgages the FHA backs would leave just $2.6 billion in reserves, or 0.24 percent of the value of the agency’s insured mortgages, to cover losses over the next three decades. Federal law requires the FHA to maintain a 2 percent reserve ratio.

But Donovan said with an improving housing market, the agency expects its reserves to recover to 2 percent by 2014. The agency has long insisted that its portfolio of loans issued since President Barack Obama took office in 2009 is profitable and that the revenue it generates from three insurance premium increases will prevent financial disaster.

Lawmakers from both parties aren’t convinced. “You’re going to need a bailout,” said Rep. Stephen Lynch, a Democrat from Massachussetts. “We can’t have [lawmakers] raising concerns and the agency blowing us off and saying there’s no problem.”

Rep. Jeb Hansarling, a Republican from Texas added “FHA is likely a disaster in the making … If we’re not careful, it may even become Fannie and Freddie, the sequel.” [WSJ]