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.