Hensarling Bill Calls for Reduction in FHA Insurance Coverage

In reforming government-backed mortgage programs, the chairman of the House Financial Services Committee wants private investors to share in some of the credit risk on Fannie Mae, Freddie Mac and Federal Housing Administration loans.

To reduce taxpayer exposure, chairman Jeb Hensarling, R-Texas, is proposing that FHA establish a risk-sharing program where the private investors cover “at least 10% of FHA’s new business each year,” according to an outline of his bill.

Hensarling also calls for a gradual 10% reduction of FHA’s mortgage insurance coverage from 100% of the loan amount to 50% over five years.

Several years ago, the Texas congressman floated a proposal to wind down Fannie and Freddie over five years.  Now he wants to place the GSEs in receivership after five years,” at which point the GSEs would be stripped of their government charter, liquidated, and any remaining assets would sold off.”

During the wind-down period, the GSEs would establish a credit risk-sharing program where private investors cover at least 10% of the GSEs’ credit risk.

The House Financial Services Committee is expected to hold a July 18 hearing on the chairman’s bill.