FHA Out-Guarantees Fannie and Freddie Combined

The government isn't really curtailing the activity of the government-sponsored entities Fannie Mae and Freddie Mac -- it's just pushing business over to the Federal Housing Administration instead. In fact, the FHA was the guarantor of choice in the first-quarter. It backed more loans than Fannie and Freddie combined. And the broken system sputters on.

Bloomberg reports, quoting FHA head David Stevens:

"This is a market purely on life support, sustained by the federal government," he said at the Mortgage Bankers Association conference. "Having FHA do this much volume is a sign of a very sick system."

The FHA, which backs loans with down payments as low as 3.5 percent, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners.

The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.

Put another way, the FHA has become the savior for the mortgage market since the housing bubble's pop. Without it, far fewer people would have obtained home loans. The risk premium has been too great for banks or investors to stand behind these mortgages without a government back-stop. Luckily, the government has a seemingly unlimited tolerance for risk. After all, taxpayers have deep pockets -- or at least, China has a strong appetite for Treasuries.

But in all seriousness, this data shows the need for housing policy reform. The FHA was never meant play the role it has taken on. While it would have been frustrating in the short-term if consumers didn't have access to funding in order to secure as many mortgages over the past few years, the precedent this potentially sets in the long-term for the government's permanence in the mortgage business is arguably more dangerous.

And what's worse: there's no end in sight. With the economy picking up, the government is backing more loans recently, not fewer. The Wall Street Journal reported a few weeks ago:

Government-related entities backed 96.5% of all home loans during the first quarter, up from 90% in 2009, according to Inside Mortgage Finance.

Yet the power in Washington still stubbornly refuses to solve the GSE problem, despite the evidence that it's getting worse instead of better. In several thousand pages of financial regulation bills approved by Congress, there isn't a single provision that would reform the government's role in the mortgage industry.