Executive Session

Floor Speech

By:  Richard Shelby
Date: Dec. 30, 2012
Location: Washington, DC

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Mr. SHELBY. Mr. President, I wish to take a few minutes this afternoon to explain why I will be opposing the nomination of Carol Galante and why I encourage my colleagues on both sides of the aisle to do the same.

This nomination is not one of the many ``go along to get along'' nominations we do so often in the Senate; this is a nomination that will have a direct effect on our constituents' pocketbooks and it demands, I believe, our serious attention today.

Carol Galante has been the Acting Assistant Secretary and Federal Housing Commissioner at the Department of Housing and Urban Development since July 2011. Therefore, this nomination vote, in a sense, will serve as a referendum of sorts on the current management of the Federal Housing Administration.

Ms. Galante, in her role as Acting FHA Commissioner, has failed to take serious actions to shore up the solvency and prevent a taxpayer bailout of the Federal Housing Administration that we know as FHA.

The latest actuarial report shows that FHA has a negative economic value, and a taxpayer bailout is most likely. Despite these warnings, FHA waited until April 2012 to raise additional premiums, and Secretary Donovan, the Secretary of HUD, has testified to the Senate Banking Committee that it will wait until next year to increase premiums by a meager 10 basis points despite having statutory authority to do more to protect the taxpayers.

Ms. Galante has denied the true severity of the problems at the FHA. In a New York Times piece last year, Ms. Galante said: ``[there] is no evidence or widespread prediction that home prices are going to decline to the kind of levels'' that would require a bailout.

Really? Yet although some prices have risen slightly, the FHA's financial position continues to deteriorate. Several experts now conclude that a taxpayer bailout is simply a matter of time.

The 2012 actuarial report and the disastrous state of FHA's finances led the Washington Post editorial board to conclude:

Right now the critics are starting to look pretty prescient. ..... Affordable possession of one's own home is the American dream. Government support for excessive borrowing has turned into a national nightmare.

The FHA's capital reserve is still well below the level determined by Congress to be the bare minimum to cover FHA's future losses. Even though FHA narrowly avoided a bailout this year, dangers remain in the years ahead due to its over $1 trillion exposure to risky loans and precarious economic conditions.

Most of the FHA's recent actions have only concealed these dangers. For example, instead of adequately raising insurance premiums over the life of the loan, FHA has increased upfront premiums to simply cover losses in the short term. Also, upfront premiums can be rolled into the mortgage principal balance, thereby decreasing equity for borrows who, in most cases, have little equity to begin with. Increasing the upfront premiums could make FHA loans even riskier for both the borrower and the taxpayer who stands behind the mortgages.

I believe it is time to face the reality that the Federal Housing Administration is dangerously undercapitalized, and because of the lack of serious reform FHA teeters on the brink of a bailout, as I have said.

Andrew Kaplan, a New York University economics professor said:

They [the FHA] are doing very badly ..... there's no two ways about it. Over the next five years, there won't be enough of an economic recovery to fix FHA's finances. Not a chance.

A study by a Wharton professor estimates that an FHA bailout could cost between $50 billion and $100 billion and warned that only a ``quick and substantial economic and housing market recovery'' can avoid ``substantial losses for the American taxpayer.''

Data from the actuarial report shows that the serious delinquency rate for all FHA loans is 9.6 percent. The delinquency rates for loans originated in 2006, 2007, and 2008 are between 20 and 30 percent. Approximately 739,000 loans are seriously delinquent, an increase of over 100,000 loans from last year. If the borrowers of these delinquent loans all default on their mortgages, it would result in $57 billion in claims to the FHA. We hope that would not happen.

The FHA's latest quarterly report shows capital resources of $32 billion. It also states that cash flow from operations, which largely consists of premium revenues, covered only 80 percent of net claims last quarter.

The latest actuarial report in 2012 confirms that FHA's finances are dramatically worse than last year.

FHA's capital ratio has gone negative for the first time since 1991, and economic value is in excess of negative $16 billion. Last year the report projected a $9.4 billion value, representing a decline of $24.9 billion.

FHA's delinquencies continue to rise and continued high loan limits keep FHA's role in the market very broad. The projected loss on outstanding business is at an all-time $39 billion.

FHA is leveraged at 422:1--422:1--and has a sparse $2.55 billion equity cushion on its over $1 trillion portfolio. Think about it. FHA has underestimated its loan losses every year for the past 3 years.

In addition, since the Treasury Department already has so-called permanent and indefinite authority to provide funding for the FHA, a bailout of the FHA could occur without, as the Presiding Officer knows, any congressional vote. This is not a vote today to determine whether we support the President. This is also not a vote to determine whether we can vote in a bipartisan manner. I think this is a vote to determine whether we support the American taxpayer.

I believe Ms. Galante has demonstrated her inability to identify the multitude of problems at the FHA, and I believe it is incumbent upon us, on behalf of the American people--the taxpayers--to reject this nomination and demand real reforms at FHA and a nominee who represents and appreciates the urgency of this situation and a willingness to address it.

Mr. President, I yield the floor.

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