Looming FHA Bailout Raises New Prospects for Reform Legislation

WASHINGTON — The Federal Housing Administration is facing a bailout for the first time in its almost 80-year history, raising a host of fresh questions about the potential for standalone legislation to the reform the agency.

The FHA plans to take a $1.7 billion draw from the U.S. Treasury to shore up its books at the end of the fiscal year. The bulk of the agency's losses are from its reverse mortgages program, after the FHA burned through much of its cash reserves in the wake of the financial crisis when it expanded its reach to offer more loans to needy borrowers.

Some said the renewed scrutiny of the agency's finances will spur momentum for FHA reform in Congress amidst the broader conversation over housing finance reform playing out in both chambers.

"This is an important moment. It gives Republican members who have been pushing for reforms a whole new set of talking points, and I think it really could put some Democrats on the defensive as it relates to defending the FHA," said Edward Mills, a policy analyst at FBR Capital Markets. "I think that the draw has the effect of peeling out FHA reforms — in trying to pass an FHA solvency bill as standalone legislation."

Yet others argued it would instead provide more momentum to broader housing finance reform. The House bill, for example, includes both measures to reform the FHA and wind down the government-sponsored enterprises.

"The FHA bailout gives a boost to GSE reform," said Mark Calabria, head of financial institution studies at the Cato Institute. "The problems at FHA illustrate the broader question about how well federal mortgage finance policies protect the taxpayer. So if one has concerns about all the homeownership policies, this just reinforces the point."

Congress has already made some recent strides to help FHA shore up its finances, passing a narrow bill in July that authorized it to make certain changes to the struggling reverse mortgages program. The Senate Banking Committee also passed a bipartisan bill in July that would help strengthen the agency's underwriting standards and give it more authority to go after lenders for making fraudulent or inappropriate loans, while the House Financial Services Committee passed its broader mortgage finance bill containing more sweeping changes to the agency's structure and finances.

GOP lawmakers were quick to jump on news of the looming bailout, renewing calls for structural fixes to the agency.

"I'm not one to say 'I told you so,' but geez," said Sen. David Vitter, R-La., in a statement. "Instead of managing their funds responsibly, and making appropriate reforms, FHA prefers to lean on taxpayers to bail them out, and enough is enough."

Vitter urged the Senate to take up the legislation passed out of the banking panel, along with other proposed changes.

"The Senate must take up the FHA Solvency Act as soon as possible and include additional reforms in light of this news," he said. "It is clear neither the FHA [nor] the taxpayers can wait any longer for Congress to act to protect the taxpayers because FHA sure won't."

House Financial Services Committee Chairman Jeb Hensarling, a lead author of a plan to overhaul the mortgage finance market, pointed to the bailout as evidence that Congress should take up his Protecting American Taxpayers and Homeowners Act, which would also wind down Fannie Mae and Freddie Mac.

"Over the years, the FHA has strayed far from its original mission," he said he said in a statement. "It has become the nation's largest subprime lender. It's time to return the FHA to its traditional mission of helping first-time homebuyers and those with low and moderate incomes, and that's exactly what the PATH Act does."

Jaret Seiberg, an analyst at Guggenheim Securities, noted that the current focus on FHA could provide some boost for reform measures like those passed by the Senate Banking Committee, noting that "momentum is always 85% of the game when it comes to enacting legislation."

But he noted that the bailout out is relatively insignificant in the grand scheme, given the losses largely stem from the agency's reverse mortgages program, the estimated size of the bailout relative to the overall program and the fact that the transfer is based on accounting projections and not an explicit need for cash to fund day-to-day operations.

Mills, meanwhile, cautioned that any movement on narrower FHA legislation isn't likely to come until and unless efforts to overhaul the mortgage finance market more generally begin to stall.

"We'll probably have to go through the motions where we push for larger housing finance bill, and if and when that stalls, that's at the point where lawmakers might pull out the FHA provisions," he said. "It significantly helps the prospect, but it's not as if it's going to happen tomorrow."

He noted, for example, that lawmakers were able to agree on authorizing certain changes to the agency's reverse mortgages program this summer, despite the fact that some would have probably liked to see such changes contained in broader legislation.

"As much as lawmakers wanted those to be part of the larger FHA reforms or housing finance reforms, they had agreement on this piece of it, and they said, 'Okay, let's strip that out now,'" said Mills.

But others were even less optimistic about the possibility for standalone legislation on FHA, warning that Republicans might not be so quick to separate out reforms from the broader reform effort.

"What's the political upside for Hensarling to move forward on FHA reform on a standalone basis?" said Isaac Boltansky, an analyst at Compass Point Research & Trading. "You weaken leverage on the PATH Act and you remove a major talking point."

Moreover, Boltansky argued, there's no clear vehicle for swift legislative action to reform FHA, because the draw from Treasury doesn't require congressional authorization.

"There isn't a direct catalyst — and by that I mean a must-pass piece of legislation" tied to the transfer of funds, he said.