Those who dislike the Federal Housing Administration (FHA) are no doubt elated by news that the federal loan insurance program may need to borrow from the Treasury Department to bulk up disappearing reserves. Overlooked will be the fact that the reports do not show actual operating results nor do they get to a bottom-line reality: If the FHA has to be bailed out why would that be any worse or less moral than the very much larger sums used to bail out our biggest banks?
The U.S. Department of Housing and Urban Development (HUD) says a new actuarial report suggests that the FHA’s reserves may be short $16.3 billion in the coming year. Such a loss has not actually happened and may never happen because the report does not include $11 billion from new business nor does it fully reflect the fact that home values nationwide have largely been rising, meaning that new claims against the FHA are likely to be smaller than in the past few years.
The biggest problem faced by the FHA actually stems from loans originated during the Bush era when so-called “seller assisted” financing was allowed. These are loans where the owner made a “contribution” to a charity which then turned around and supplied down payment money to a purchaser, thus getting around the general FHA requirement that borrowers must come up with their own down payment money or get it in the form of a gift — a provision which was designed to encourage financial help from families.
“Losses on loans insured between Fiscal Years 2007 and 2009 continue to place a significant strain on the Fund with $70 billion in FHA claims attributable to loans insured in those years,” said HUD. “Though they were prohibited in 2009, the ongoing effect of “seller-funded down payment assistance loans” is still significant. The net expected cost of those loans, as projected by the independent actuaries, is more than $15 billion.”
But, let’s imagine the worst projections are true and that the FHA really does have a huge loss and must go to the Treasury for funding. Such an event would raise howls among those who dislike the FHA because of the fact that it supplies mortgage insurance, an activity which is also undertaken by companies in the private sector. In other words, critics say the FHA is nothing more than government-sponsored competition, ignoring the size and history of the FHA program.
If it turns out that the FHA really does need $16.3 billion how is that any worse than the $45 billion handed over to Citigroup or the $306 billion in Citigroup assets guaranteed by the federal government? How did average citizens benefit by extending $25 billion to JPMorgan Chase? And what about the $45 billion advanced to the Bank of America and the $118 billion in BOA assets that taxpayers guaranteed?
If there is no FHA program, then who will insure reverse mortgages? Who will guarantee minority loans of which about 50 percent are insured through the FHA?
Several suggestions have been made to “improve” the FHA program or to make it less competitive, whichever view you prefer. One idea is to raise required credit scores — even though the typical FHA credit score at this time is 701, an extremely solid rating. Another idea is to demand a larger down payment — even though the Veterans Administration (VA) program has the lowest foreclosure level of any form of mortgage financing and it routinely requires nothing down.
Of course there’s one change which nobody seems to suggest: Right now lenders who make FHA loans have a 100 percent guarantee against losses. Maybe the FHA reserve fund would be in better shape if lenders had some skin in the game and the guarantee was reduced to say, 96.5 percent. That would mean lenders would have as much at risk as borrowers who put down 3.5 percent.
Now what’s unfair about that?
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