There’s no doubt that we now live in tough times and very little doubt that times are about to get tougher. That means a lot of things will change, including the government’s FHA mortgage insurance program.
Instead of being a cash cow for the Treasury, Rep. Barney Frank, the Massachusetts Democrat who chairs the powerful House Financial Services Committee, wants FHA profits to finance a national housing trust that would create low-income housing nationwide.
With a little tinkering, however, the Frank plan could not only create new housing opportunities for the poor, it could also reduce the stock of foreclosed homes, thus pushing up neighborhood home values.
The Frank Plan
Writing in the New Yorker magazine, Jeffrey Toobin says Frank “wants to fund the trust with profits from an FHA program that allows older homeowners to borrow money against the equity in their homes.”
“We’re going to expand that program, which makes money for the federal government, and start with part of the profits from it,” Frank said. (See Barney’s Great Adventure, January 12, 2009).
It’s not clear how much money Frank could raise. Does he want funding to only come from the FHA reverse mortgage program — those would be the FHA loans for “older homeowners,” or does he want to tap the FHA program in general?
If Frank looks at the entire FHA program then money for his trust fund could be substantial. During the past eight years the Bush administration transferred roughly $14 billion in FHA profits to the Treasury.
Fourteen billion dollars! You’re kidding.
Actually, I’m not. According to official HUD figures I obtained, from fiscal 2001 through fiscal 2007 HUD handed over $13,502,000,000 to the Treasury Department.
In fiscal 2008, the accounting year that ended Sept. 30, HUD chipped in another $435 million. That’s a total of $13.937 billion — not including another $3 billion or so in lost interest during the past eight-years. Combine the $14 billion in principal with $3 billion in missing interest and the total is $17 billion, a pretty impressive sum.
The loss of this money to the FHA program has been significant for several reasons:
First, government revenues magically “increased” by $17 billion — in other words, by taking the money from FHA borrowers the government created a back-door tax increase.
Second, the FHA single-family loan guarantee fund was out $17 billion. This money could have been used to bulk up the FHA reserve fund and thus hold down borrower insurance premiums.
“HUD has sustained significant losses in its single-family program, making a once fairly robust program’s reserves smaller,” says James A. Heist, an assistant inspector general with HUD.
As of Sept. 30, 2008, the end of the government’s fiscal year, Heist said in congressional testimony that “the fund’s economic value was an estimated $12.9 billion, an almost 40 percent drop from over $21 billion a year ago.”
The question which arises from such testimony is this: Why are the reserves lower? Given the current state of the economy it might seem like rising foreclosure levels would be responsible for the reduction in FHA reserves, but Mr. Heist never actually says that growing foreclosure numbers are the problem.
There’s substantial evidence to suggest that FHA foreclosure levels are level if not falling. The Mortgage Bankers Association says that in the third quarter of 2008 “FHA foreclosure starts were unchanged at 0.95 percent.” In the second quarter, MBA reported that “FHA foreclosure starts decreased one basis point to 0.95 percent.”
The reduced reserve fund has been used to justify higher FHA costs — the minimum down payment in the past few months has risen from 3 to 3.5 percent while the insurance premium is going from 1.5 percent up front to 1.75 percent.
In addition, the annual mortgage insurance premium on the outstanding loan balance has increased from 0.50 percent to 0.55 percent.
If the FHA insurance reserve fund is lower than the desired level why would HUD keep giving away borrower premiums to the Treasury Department? Would it not make more sense to keep the money in the insurance reserve fund where it’s obviously needed? Instead, HUD has instead raised the FHA down payment requirement and insurance premiums precisely at the time when borrowers need lower-cost mortgages and not higher-cost financing.
Frank’s basic proposal is to take the FHA money that has been siphoned off to the Treasury and instead use it to build and renovate housing for those with low incomes. The money would be placed in a trust fund and the fund would provide cash for local construction projects nationwide.
There’s a lot of merit to the Frank approach, but because of evolving market conditions it seems possible that the central emphasis could change from new construction to renovation. Here’s why:
The good news is that we do not have a housing shortage. If anything, we have a surplus of homes including huge numbers of foreclosed properties now owned by lenders. Building more units increases inventories and as a result home values are held down.
Alternatively, if the goal is to both help low-income households and to reduce the stock of empty homes, then one possible use for FHA profits would be to acquire selected foreclosed units, fix them up and then re-sell them at cost with FHA financing to financially-qualified lower-income households.
Builders and contractors would be needed to do such work, and there would also be additional employment opportunities to manage and operate such a program. The only aspect that would change within Frank’s plan would be to place a greater emphasis on refurbishing existing units rather than developing new ones.
What About Returning Profits To Borrowers?
It’s true: The FHA mortgage program was originally designed as a mutual insurance program, meaning that any profit from loan premiums would be refunded to borrowers. As the FHA itself wrote in 1960, “the accumulation of premiums would make the agency self-supporting and possibly provide dividends for mortgagors. The system was similar to that used by private mutual life insurance companies.”
It would be great to return to the original premise of the FHA program, a program developed to restore the housing market during the Depression. The idea was that profits from the program would go back to borrowers and not to the government. HUD, however, discontinued the rebate program for loans issued after December 8, 2004.
“Times change and the operational and political reality is that FHA refunds are not coming back,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the largest source of foreclosure listings and data. “The Frank program would use FHA money to build homes and potentially to reduce the stock of bank-owned properties. The result would be more housing and yet less housing inventory, exactly what we need at this time.”
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.