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U.S. Rep. Lynn Westmoreland thinks taxpayers may be dragged into the bailout business again, thanks to the Federal Housing Administration.
The FHA provides mortgage insurance to encourage banks to write loans to people who have little cash for a down payment. Many of these loans went bad when the housing bubble burst, and FHA officials are trying to raise money to keep the insurance afloat.
It’s not the first time, Westmoreland said during a Feb. 29 congressional hearing.
"There’s not been one single federal housing program yet that has not needed a bailout to survive," Westmoreland said.
All federal housing programs? We contacted a Westmoreland spokeswoman to get the story.
Leslie Shedd, the spokeswoman, said Westmoreland was referring to three programs that were started to keep the housing market stable and encourage Americans to buy homes: Fannie Mae, Freddie Mac and the FHA.
Here’s how the feds got involved in the housing market:
After the real estate market collapsed during the Great Depression, the feds took steps to encourage banks to make home loans and families to buy houses.
They created the FHA, which issues mortgage insurance to guarantee that banks will get their money back even if a homeowner doesn’t make payments. This encourages banks to approve mortgages for people who don’t have a lot of money or have mediocre credit.
They also created Fannie Mae, and later Freddie Mac, to help lenders raise money to make more loans. Fannie and Freddie do this by selling the mortgages lenders’ make in bulk as securities and guaranteeing they will make a return.
Other programs perform similar tasks. For instance, the U.S. Department of Agriculture, like the FHA, insures home loans, but only for houses in rural areas. The Office of Public and Indian Housing backs them for native lands, while the Department of Veterans Affairs guarantees them for veterans.
Ginnie Mae, like Fannie and Freddie, guarantees mortgage securities, but its securities are made up of government-backed loans by the FHA, the U.S. Department of Agriculture, the Department of Veterans Affairs, and Public and Indian Housing.
This is what our research found:
Fannie Mae and Freddie Mac
Fannie and Freddie were bailed out by taxpayers in 2008. But calling them "federal housing programs" is a thorny issue.
They weren’t controlled by the government until the bailout.
Congress chartered Fannie and Freddie as "government-sponsored enterprises," or GSEs. They are supposed to help the U.S. meet its housing policy goals, but they were designed as for-profit corporations with their own shareholders and boards of directors. The federal government explicitly said it did not back the GSEs’ securities.
"They are in no way categorized as federal housing programs," said Ted Gayer, co-director of the economic studies program at the Brookings Institution.
The feds estimate the bailout will cost between $220 billion and $311 billion through 2014, though some of that will be paid back.
Federal Housing Administration
The president’s proposed budget for 2013 says the U.S. Treasury might have to give the FHA $688 million in emergency funds, but whether help will come in the form of a taxpayer-funded bailout is uncertain.
The FHA hiked the cost of mortgage insurance earlier this month to raise money, and it is set to receive about $1 billion from a legal settlement over fraudulent foreclosure practices. Its officials say these measures will avoid a bailout, but critics say this won’t be enough.
Ginnie Mae hasn’t been bailed out, and it’s not clear it’s in dire trouble.
A November 2011 General Accounting Office report found that higher-than-expected defaults could force Ginnie Mae to dip into its reserves. It also concluded that Ginnie should do better at predicting future costs and documenting its methods.
But so far, Ginnie has taken in more money than it has spent, the GAO said.
All the rest
The remainder of the federal programs are smaller players in the mortgage markets.
As of the second quarter of 2011, the FHA backed nearly $1 trillion in single-family loans. Veterans Affairs backed less than a quarter of that, while the USDA backed some 7 percent, according to data from the federal agency that took over Fannie and Freddie.
They have yet to run into the kinds of trouble that Fannie, Freddie and the FHA are experiencing.
The USDA and PIH have not needed a bailout so far, but Edward Pinto, a former Fannie Mae executive and scholar at the conservative American Enterprise Institute, warns the USDA might need one, in part because it makes riskier loans.
The FHA requires down payments of 3.5 percent. The USDA allows loans with no money down.
As for Veterans Affairs, the word "bailout" does not apply. Whenever one of its loans defaults, taxpayers automatically pick up the tab. The program is not expected to pay for itself.
Westmoreland’s claim that "there is not one single federal housing program yet that has not needed a bailout to survive" has shortcomings.
Fannie Mae and Freddie Mac have been bailed out. And the FHA is in need of help, though it has not been bailed out at this point.
But Fannie and Freddie did not come under federal control until 2008. They are strange creatures on the U.S. financial landscape. They were created by the government but operated independently until the housing bust. At that time, they were bailed out by the feds.
The three other federal housing efforts have not been bailed out. And it’s not clear that they will need taxpayer assistance.
Fannie Mae, Freddie Mac and the FHA are much larger players in the housing market. This bolsters Westmoreland’s larger point that organizations designed to help the housing market need help, too.
Westmoreland earns a Half True.
YouTube, "Westmoreland Opening Statement at Financial Services Hearing with HUD on FY13 Budget," posted March 2, 2012
The website of U.S. Rep. Lynn Westmoreland, "Westmoreland Questions HUD Officials on President’s Failed Housing Policies," Feb. 29, 2012
Federal Housing Finance Agency, "FHFA Updates Projections of Potential Draws for Fannie Mae and Freddie Mac," Oct. 27, 2012
U.S. House of Representatives, The Committee on Financial Services, "Views and Estimates of the Committee on Financial Services on Matters to be Set Forth in the Concurrent Resolution on the Budget for Fiscal Year 2013," accessed March 19, 2012
Bloomberg, "Ginnie Mae Passing Freddie Mac as Second-Biggest Mortgage Funder," Nov. 9, 2011
Los Angeles Times, "FHA could need taxpayer bailout next year, report says," Nov. 16, 2011
Bloomberg Business Week, "FHA Insurance Fund May Need Fannie-like Bailout, Hensarling Says," Dec. 6, 2011
U.S. Government Accountability Office, "Ginnie Mae: Risk Management and Cost Modeling Require Continuing Attention," Nov. 14, 2011
U.S. Government Accountability Office, "Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises' Long-term Structures," Sept. 19, 2009
The New York Times, "Buyers Face Higher Fees at F.H.A.," Feb. 27, 2012
American Enterprise Institute for Public Policy Research, "Is FHA the Next Housing Bailout?," November 2011
The Wall Street Journal, "FHA commissioner says agency won’t need bailout," March 8, 2012
U.S. Department of Housing and Urban Development, "Section 184 Indian Home Loan Guarantee Program," accessed March 19, 2012
Cornell University Law School, Legal Information Institute, 12 USC § 1715z–13a - Loan guarantees for Indian housing, accessed March 19, 2012, www.law.cornell.edu/uscode/text/12/1715z-13a
The Washington Post, "FHA a beneficiary in mortgage settlement," Feb. 13, 2012
Federal Housing Finance Administration, Single-Family Mortgages Outstanding, 1990 - 2011 Q2, accessed March 15, 2012
Email interview, Phillip Swagel, professor of international economic policy, Maryland School of Public Policy, University of Maryland, March 15, 2012
Telephone interview, Ted Gayer, co-director, economic studies program, Brookings Institution, March 15, 2012
Telephone interview, Edward Pinto, resident fellow, American Enterprise Institute, March 15, 2012
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