Royce Questions the FHA’s Readiness to Weather a Market Downturn


Washington, D.C. – February 18, 2016 – (RealEstateRama) — U.S. Representative Ed Royce (R-Calif.) questioned Mr. Edward Golding, Acting Commissioner of the Federal Housing Authority (FHA), on whether the FHA is able to withstand a downturn in the housing market at a Housing and Insurance Subcommittee Hearing entitled “The Future of Housing in America: Examining the Health of the Federal Housing Administration.”

Congressman Ed Royce
Congressman Ed Royce

“The GSEs, under the direction of the FHFA, have engaged in innovative methods of offloading risk to shield the American taxpayers currently holding the bag for Fannie and Freddie losses. I’ve been encouraged by the progress that the GSEs have made in this regard, although I think a lot more could be done. Risk sharing with the private sector is a way to slowly but quite surely remove the federal government’s grip on the housing market and introduce private capital in a way to let us better price risk and avoid a calamity. It’s my belief that the FHA has the authority to do risk share transactions, or at least co-insurance, to reduce the risk. We had a conversation with Secretary Castro here and he told me, ‘we can find ways to introduce more private capital into the market.’ What are you doing to work with the private sector to reduce taxpayer risk and increase the role of private capital in mortgage finance, with an eye to… avoiding any taxpayer-funded bailout?” asked Rep. Royce.

“I am aware of what the GSEs have done, some of their innovative products. On the multi-family side, we do risk sharing. I’d also mention that there is a lot of private capital in the FHA market in terms of the origination, the servicing, and the funding of the mortgages. As it relates to credit risk, it is a difficult one on the single-family side for the FHA to share credit risk. As I’m sure the GSEs would tell you, there’s a lot of systems work involved in setting up these programs. The other thing I’d point out is you’re also giving up significant income. While you are shedding some of the downside, you are also shedding considerable revenue when you do a risk sharing transaction,” replied Golding.

“I remember a conversation I had with Mark Zandi after he finished his book. In particular, we were talking about the GSEs. For FHA, the issue of a target capital ratio of 2%…I know you are looking at this. [Zandi] felt that 4.5% was the proper capital ratio; at least 4.5%. I just wanted to get your feedback on that,” concludedRep. Royce.

“Tough question of exactly what the right level is. I will point out that the 2% target has served us well. While we came through the Great Recession… I think FHFA came through, of all the major participants of the mortgage market I know of, this crisis better than any of them did. I do think we have the wherewithal. The way this 2% works, it’s a projection of whether we’re going to run out of cash in year 27. It’s not an immediate cash need. We have lots of cash at hand. But I’d be glad to continue the discussion of what a different target might be,” replied Golding.

Watch Rep. Royce’s questioning of the witness here

Contact: Saat Alety (202-225-4111)
Source: U.S. Representative Ed Royce

Congressman Ed Royce

Edward Randall "Ed" Royce (born October 12, 1951) is an American politician who currently serves as a member of the United States House of Representatives for California's 39th congressional district, and previously the 40th, serving in Congress since 1993. A member of the Republican Party, Royce became the Chairman of the United States House Committee on Foreign Affairs in 2013.


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