Fed Chairman Bernanke Warns Against Turning FHA into A Subprime Haven

On July 19th, Fed Chairman Bernanke testified before the Senate Banking, Housing and Urban Affairs chaired by Senator Dodd. In the Q and A portion of his testimony, Senator Carper asks Mr. Bernanke about the modernization of the FHA mortgage program. FHA mortgage programs have lost ground to more “adaptive” mortgage programs in the last few years. So much so, they have nearly fallen into obscurity. I wrote an article about a month ago if you’d like a refresher on the FHA home mortgage demise.

As you read the comments below, remember politicians aren’t looking to do the right thing. They look for political cover to do what the lobbyists want done. So, if you are Senator, you ask questions of other politicians to see if they’ll agree with you…effectively giving you the cover you’re looking for. In this case Mr. Bernanke helped…but gave a warning too.

Below is an excerpt of Mr. Bananke’s testimony from the Federal News Service originally published on knowledgeplex.org:

SEN. THOMAS CARPER (D-DE): Thanks, Mr. Chairman.

Chairman Bernanke, welcome. It’s good to see you again. Thank you for coming and joining us today - and for your service.

Others have asked about subprime mortgage market. I want to just touch briefly on that as we start out here. Yesterday we tried to have a hearing in this same room on FHA reauthorization. And in my opening statement yesterday, I mentioned that if you look at the increase in the subprime mortgage market, it really mirrors the decrease of FHAs market presence for subprime lending.

And the administration has come to us with a recommendation - series of recommendations on how to change things in the FHA program, and I just wanted to ask if you have any thoughts on what might be an appropriate course for us.

MR. BERNANKE: Well, the FHA’s market share has declined quite radically, as you - I’m sure you know, to down to about three percent.

SEN. CARPER: Actually I think they reported about six, down from about 14 to six just in the last couple of years - something like that.

MR. BERNANKE: So there’s clearly less reliance on the FHA than in the past. My sense is that part of the problem is lack of flexibility — the costs of dealing with the FHA, lack of diversity of products, and so on. So I think that modernizing the FHA — trying to make it more responsive, easier for ultimate lenders to work with, and so on, might reverse this trend. It might give the FHA a larger share in the market, which could be a positive thing.

I guess I would point out that the FHA does have, I think - if I remember correctly, I think it still has a fairly high delinquency and default rate and it doesn’t - it hasn’t solved the problem of, you know, delinquencies, and so on. And so as those changes get made, I would suggest moving with some caution to make sure that we don’t create yet another source of problems in terms of inappropriate loans for specific borrowers. So I do see a case for trying to make the FHA more modern and to expand its role but I would, you know, urge some caution and go slow on that.

Mark my words. Congress will “modernize” FHA into a subprime haven in the name of “saving” the American Dream.

It’s what the banks want. It’s what the real estate agents want. It’s what the home builders want.

So it’s as good as done and these few words will be the only words of warning you’ll ever hear.

Author: Rob K. Blake
Published July 26, 2007
Modified January 9, 2008

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