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Repeating Mistakes?

Sometimes it seems like Congress didn’t learn anything from the housing crisis at all. Early Tuesday morning, leaders in the House and Senate unveiled an appropriations bill, called a “minibus,” to fund several government agencies for the fiscal year 2012. Tucked inside the 401-page bill was language to increase the limits for which the Federal Housing Administration can insure mortgage loans up to $729,750, effectively allowing the agency to back McMansions with taxpayer dollars. Adding further insult to hard-working taxpayers an independent audit revealed, just hours later, that there is a “close to 50%” chance the agency would run out of money and need a taxpayer bailout.

It’s as if Congress is actively trying to collapse the agency by inflating its limits while it’s already going bust. The situation is eerily similar to the Fannie Mae and Freddie Mac bailouts that have cost taxpayers nearly $170 billion to date. Yet, Congress is making the same mistakes by increasing FHA limits and exposing taxpayers to even greater risk, rather than reining the agency in and reforming it.? ?Since 2008 the FHA, which insures mortgage loans unlike Freddie Mac and Fannie Mae which buys those loans from banks, repackages them as securities and sells them to investors, has not had enough assets to cover its losses. Congress requires it to hold a 2% cash reserve rate. Last year it only had .5 % cash holdings and this year, only .24%–prompting calls for a future bailout.

One academic study has pegged the potential cost of that bailout between $50 billion and $100 billion.  Even more worrisome is the fact this bailout could take place without a single vote from Congress. Because FHA gets its financing from the Treasury Department, Secretary Tim Geithner could issue FHA an unlimited bailout all on his own, very much like the quarterly, billion-dollar bailouts that the Treasury Department gives Fannie and Freddie now.

Those who want to increase FHA limits argue that the action is needed to jump start the housing market, but this approach has already failed. In 2008, as part of President Obama’s stimulus package, conforming loan limits for GSE’s and FHA were temporarily, yet significantly, raised in an effort to artificially boost the housing sector and overall economy. ? ?It didn’t work. Foreclosures are higher than ever. The U.S. continues to experience stagnant economic growth, unacceptably high levels of unemployment, and historic levels of debt. There was no major market disruption when the overinflated loan limits expired last month, either.

The only way to restore a healthy housing market is by allowing private capital to replenish it—a goal shared both by the Obama Administration’s “Reforming America’s Housing Finance Market” and the House Republicans’ “Pledge to America.”

In the past, Secretary Geithner has called for “reducing conforming loan limits by allowing the temporary increases enacted in 2008 to expire as scheduled on October 1, 2011.” And that’s exactly what Congress should do.

Congress must learn from its mistakes and refuse to pass this measure. Because, lest anyone forget, the last time Secretary Geithner was presented with the opportunity to grant an unlimited taxpayer bailout, he did.

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