An independent auditor determined in November that the FHA's portfolio, worth over $1 trillion in home loans, has taken a beating due to mounting defaults and the overall housing downturn.
"If the FHA were a private financial institution, likely somebody would be fired," said Hensarling.
Democrats said they were similarly concerned about the state of the FHA's finances, but at the same time wanted to ensure that any changes would not make it more difficult for some to obtain affordable home mortgages.
"I think all of the members here today are deeply concerned," said Rep. Maxine Waters (D-Calif.), the ranking member of the committee. "But along with that concern, I think it is important to acknowledge FHA's crucial role in our housing finance system.
"In the aftermath of a housing crisis … the FHA stepped up, providing crucial liquidity and access to the mortgage market," she added.
The hearing comes as both sides of the aisle are looking for ways to reduce the government's footprint in the housing market, and coax a return of more private capital. Ever since the subprime mortgage crisis, the FHA, Fannie Mae and Freddie Mac have assumed a dominant role in housing finance, and the latter two have required billions of dollars in government assistance to stay afloat.
While the ongoing recovery of the housing market will help the FHA's finances, the agency is also taking steps of its own. FHA Commissioner Carol Galante recently announced a series of changes to help the FHA manage risk and strength its insurance fund.
While both sides of the aisle are looking for a way forward on housing finance, Wednesday's hearing made evident there are still going to be some points of tension.
At one point, Hensarling said his staff had tracked down an ad from a private company called MyFHA that claimed the FHA could provide loans to individuals with bad credit or who have filed for bankruptcy. Hensarling said the "verbiage" was troubling.
But Waters called foul on using the ad, emphasizing that since it came from a private company, it had nothing to do with the FHA.
"This was not an FHA ad soliciting anything, is that correct, Mr. Chairman?" she said.
"That is correct," Hensarlng said.
This post updated at 1:29 pm.