Republican Lawmakers Hoping to Reform FHA

By Sari R. Updated on 2/6/2013

Republican lawmakers are hoping to overhaul the U.S. government role in housing finance by focusing on the troubled Federal Housing Administration.  The House Financial Services Committee is meeting today to discuss the role of the FHA; this meeting may lead to legislation that would decrease the FHA’s market share.  These lawmakers believe that this priority is greater than focusing on Fannie Mae and Freddie Mac. 

Given the high rates of default, high LTV and low credit score policies, lawmakers are debating whether or not the FHA has turned into Countrywide.  In President Obama’s 2013-2014 budget, the FHA will require a subsidy by the Treasury for the first time since the 1930s.  This is due to numerous loan defaults; the FHA could be short as much as $16 billion in cash that it is always supposed to have on hand as an emergency supply.

Any legislation that comes from the House must also gain widespread support from Democrats who are in control of the Senate.  Democrats said that they want to keep the FHA’s role of shoring up the housing market when there isn’t any private financing.  Democrat lawmakers are extremely concerned about the welfare of the FHA’s mutual mortgage insurance fund and continue to support the FHA’s role in the housing system.  Many Democrats believe that the changes to the FHA should have to do with the underwriting standards.

The FHA, Freddie Mac and Fannie Mae guarantee over ninety percent of home loans.  Fannie Mae and Freddie Mac have been reporting quarterly profits after obtaining taxpayer aid, hence why the focus is on the future of FHA.  The FHA has already taken several steps to improve its finances, including: raising annual premiums, boosting down payment requirements, and requiring more loan scrutiny for low-credit borrowers.

Supporters of the FHA believe that these changes should be enough and blame the troubled finances on the consequences of the recession.  Nevertheless, the Republican lawmakers still want to change the accounting methods of FHA as well as to require higher down payments.

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