Undisclosed stress test shows FHA could lose $115 billion

Article Highlights

  • According to the WSJ, FHA losses could hit $115 billion under Federal Reserve bank stress test.

    Tweet This

  • It appears that material information about the FHA may have been intentionally withheld from Congress.

    Tweet This

  • This nascent scandal demonstrates why Congress urgently needs to enact common-sense reform to end the nightmare at FHA.

    Tweet This

The WSJ reported today (Tuesday, June 4) that the FHA had conducted a previously undisclosed stress test which found FHA losses could hit $115 billion under the Federal Reserve bank stress test. FHA chose to not disclose the test’s results or even note that it had been performed. One FHA email stated “we just do not want that analysis to be in the actuarial review report” and continued “in Congressional hearings, it is quite possible that we will be required to present this information on-the-record, but that will be well after the actuarial review is released and the initial media coverage takes place.” The existence of the undisclosed test came about as the result of an investigation by the House Oversight and Government Reform Committee.

This report is troubling on two levels.

First, I have written extensively about the FHA’s weak financial condition and that it has a net worth of negative $27 billion under private generally accepted accounting principles. The FHA insures over $1.1 trillion in mortgage loans — an amount larger than the assets of all but the top four bank holding companies in the US. The Fed test is a regulatory tool used “to ensure that financial institutions have robust capital planning processes and adequate capital.” The stress scenario is not a forecast, but a hypothetical environment two years in duration designed to assess the bank’s strength and resilience to an adverse economic environment. Its application to the FHA would be critical in helping gauge the level of exposure faced by taxpayers — the ultimate backstop behind the FHA. Similarly, had such a stress test been applied to Fannie and Freddie (GSEs), there would have been obvious warning signs of their potential for losses in a down market. For that matter, the Federal Housing Finance Agency should immediately consider putting the GSEs through the paces of the Fed stress test.

Second, any publicly traded private company engaging in practices similar to those FHA is alleged to have done, would hear from the SEC and be on the wrong side of a flurry of class-action law suits. Publicly traded companies must provide meaningful financial and other information that is timely, comprehensive, and accurate; does not contain any material misstatements or misrepresentations; makes available all relevant information; and does not have material omissions that make the contents of the disclosure misleading. It appears that material information may have been intentionally withheld from Congress. This needs to be investigated fully and the FHA and responsible officials should be held to no less standard than the private sector.

This nascent scandal demonstrates once again why Congress urgently needs to enact common-sense FHA reform to end the nightmare at FHA.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.