Congressional pressure on FHA continued to mount last week, with the ranking Republican on the House Financial Services Committee demanding hearings on the stability of the housing agency.

Congressman Spencer Bachus of Alabama said FHA's declining capital reserves, estimated by independent auditors as barely one quarter of the congressionally-mandated minimum, raises the possibility that FHA could come hat in hand to Congress seeking a bailout.

"It is incumbent (that we) get prompt answers to the many questions surrounding FHA's risk management practices and finances," Bachus said in a letter to committee chairman Barney Frank, a Massachusetts Democrat.

Both HUD Secretary Shaun Donovan and FHA Commissioner David Stevens have acknowledged that FHA faces financial challenges as a result of the recession and housing price declines, but insist that there will be no need for appropriations from Congress.

Donovan said the agency is now actively considering ways to raise its capital reserves, including increasing insurance premiums and minimum downpayments. Stevens noted that FHA is cracking down on lenders that underwrite loans poorly or violate agency guidelines.

But the drumbeats on Capitol Hill are getting louder. One bill has been introduced in the House that would require FHA to raise its downpayment minimum from the current 3.5 percent to 5 percent.

On the Senate side, Kansas Republican Kit Bond called the recent audit results further evidence that FHA "is a power keg that will explode unless we act now."

Potshots at FHA also are coming from private industry, including from companies who use its financing.

Robert Toll, the CEO of Toll Brothers, a large, publicly-traded home builder, called the agency's rapid growth -- from a three percent market share a few years back to a 30 percent share of higher of home purchase loans -- "a trainwreck" waiting to happen.

Roughly one in twelve of Toll Brothers home buyers reportedly use FHA financing on their purchase, so Mr. Toll's critique of FHA drew significant attention on Wall Street.

Edward Pinto, the chief credit officer for Fannie Mae during the late 1980s and now a mortgage industry consultant, told Congress recently that FHA should raise its downpayment minimum to 10 percent and slash home seller contributions to buyers' closing costs from six percent of the house price to just two percent.

FHA officials, for their part, insist that the quality of new loans they are insuring is high -- and that capital reserves, even under a worst case scenario, are adequate to handle claims as far out as 30 years.

Published: November 23, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.