WASHINGTON -- One of Washington state's leading realtors told a congressional subcommittee Thursday that the housing market in Pierce County and elsewhere around the state appears to have stabilized, especially for first-time homebuyers, since Congress approved a massive economic stimulus bill.
But others warned the Senate Appropriations housing subcommittee that there could be more trouble on the horizon.
Even as the Federal Housing Administration has stepped in to help stabilize the market by underwriting more home mortgages, the Depression-era agency is seeing growing default rates that could undermine its financial health, the inspector general of the Department of Housing and Urban Development, Kenneth Donohue, testified.
Donohue also said that unscrupulous lenders who helped precipitate the current housing crisis with subprime loans are now moving into the FHA loan system, and the number of fraud cases are a growing concern.
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Sen. Patty Murray, D-Wash., who chairs the subcommittee, said that if the FHA can't pay its debts, Congress may have to cover the shortfall.
"And we don't have the dollars to do it," Murray said.
While some see the FHA as the "savior of the market," Murray said, she is concerned the agency suffers from outdated technology, personnel shortages and inadequate underwriting.
"Just because FHA has become a major player in saving the housing market doesn't mean these challenges have disappeared," she said.
The resurgence of FHA guaranteed mortgage loans has been a major factor in helping calm the real estate market in Washington state, said J. Lennox Scott, the chief executive of John L. Scott Real Estate.
"FHA is playing a critical role," Scott said.
Pierce County has the highest foreclosure rate in the state, but Scott said the market even there has improved as the inventory for lower-end homes sought by first-time homebuyers has shrunk to a 4.6-month supply from a seven-month supply before President Barack Obama signed the $787 billion stimulus bill on Feb. 17.
"It was like pushing the restart button on Feb. 17," Scott said after the hearing. Stabilizing the first-time homebuyer market was the first step in a housing market recovery, he said.
The inventory of medium-prices houses in Pierce County is about eight months, and for houses above the median price 13 months. The inventory of high-priced homes in Pierce County has shown little recovery and stands at about 20 months. A five- to six-month inventory of homes is generally considered normal.
In addition to FHA loans and the stimulus bill, Scott said lower interest rates and an $8,000 first-time homebuyer tax credit helped the market.
Mia Vermillion, a mortgage adviser for Guild Mortgage Co., based in Lakewood, Wash., testified that the FHA has provided a stable source of liquidity in what has been an uncertain market.
"FHA loans are playing a critical role in reviving this real estate market," she said.
Two years ago, FHA-backed loans made up only 3 percent of the market. The agency did not underwrite subprime or adjustable rate loans. As prices rose, the FHA was barred from writing loans on mortgages above $362,500.
The underwriting maximum was raised in the stimulus bill to nearly $730,000. As subprime loans and adjustable rate loans disappeared, the FHA now guarantees nearly 30 percent of all mortgages. At the same time, the number of lenders doing business with the FHA has grown by more than 500 percent.
In Washington state, the number of FHA loans increased from roughly 9,000 in 2007 to 30,000 in 2008.
"As is the case with other mortgage market participants, currently FHA is experiencing elevated default rates and foreclosures and with it, losses that exceed prior estimates," said HUD Secretary Shaun Donovan.
Donovan said the primary reason for the FHA defaults were growing unemployment and other negative economic factors. Donovan said FHA-guaranteed loans didn't include "unsafe features" and poor underwriting that made subprime and other loans risky.
About 7 percent of FHA loans are delinquent, greater than 90 days or in foreclosure, compared to more than 23 percent of subprime loans, he said.
But, Donohue, the department's inspector general, said the delinquent rate can be misleading. As of Sept. 30, the FHA's reserve fund for single-family loan guarantees was $12.9 billion, down almost 40 percent from $21 billion a year earlier.
Pressed about whether the FHA may need a significant congressional bailout, Donohue said "it's hard to say. Based on the numbers we have seen it is going in the wrong direction."
In his testimony, Donovan said that "for FHA to realize its full potential to respond to the current mortgage crisis, it will require additional resources and development of new and innovative reform initiatives."
The FHA could raise the rate it charges for the mortgage guarantees or ask Congress for more money.
Under questioning from Murray, Donovan said he, too, worried that the FHA may not have all the procedures in place to guard against an influx of fraudulent lenders.
"I am absolutely concerned and focused to ensure troubled lenders don't migrate to FHA" Donovan said.
Donohue said the FHA may simply be overwhelmed by both the increased number of loans it is underwriting and the number of new lenders using the system.
"The surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender oversight difficult," he said. "In addition, our experience in prior FHA volume periods show the program was vulnerable to exploitation by fraud schemes ... that undercut the integrity of the program."