4 WAYS TO FIX THE FHA
The implosion of the government-sponsored enterprises Fannie Mae and Freddie Mac in 2008 did not end the government's massive -- and distorting -- role in the housing market. Instead, in the wake of their bailouts (taxpayers have forked over $180 billion and counting), much of the risk was simply shifted to the FHA. Indeed, FHA's insurance portfolio quadrupled in the past 5 years to $1.1 trillion today. The result is that FHA now guarantees 16 percent of all US mortgages, and 30 percent of all new home purchase mortgages. This is not an accidental trend: the FHA deliberately tried to "grow" its way out trouble, essentially betting the house on housing's recovery. Friday's numbers confirm that like Fannie and Freddie, it's easy to gamble when the taxpayer covers your losses.
This wasn't a surprise. Research published last fall by the American Enterprise Institute showed that the agency had become as overleveraged as Lehman Brothers and Bear Stearns before their fall. Barring a dramatic economic recovery, the report noted that the increasingly poor-quality loans the FHA absorbed to grow its portfolio would compel the agency to seek a multibillion dollar bailout. Since then, AEI's monthly "FHA Watch" has chronicled the agency's slide into insolvency.
In the short term, Congress has little choice but to recapitalize FHA to make sure it can fulfill its obligations. But fixing the FHA requires far more than plugging a fiscal hole. It requires four fundamental reforms.
First, end the practice of knowingly lending to people who cannot afford to repay their loans. Second, help homeowners establish meaningful equity in their homes. Third, return to the agency's historical roots: concentrate on those who truly need help purchasing their first home. Finally, step back from markets that can be better served by private lenders and insurers.
Together, these changes will transform the FHA from an agency that sets people up to fail to one that actually helps them live the American Dream.
A BETTER AMERICAN DREAM
So far, though, Congress has shown little appetite to rein in the FHA. In fact, lawmakers last year approved a higher loan limit of $729,750 to FHA-insured loans, accelerating the agency's monopoly.
This monopoly goes deeper than the FHA to the underlying government mortgage complex of big lending that's leading to a bad ending. Fannie, Freddie, FHA, Ginnie Mae, and even the USDA act as the five faces of Uncle Sam's home loan shop; they account for 90 percent of all new mortgages. Together with HUD, the complex backed - at taxpayer expense - the toxic mix of low down payments, poor credit scores, and lax oversight that precipitated the sub-prime housing crisis. In concert with the realtors, builders, and other members of the housing lobby, this complex got rich handing people keys with no skin in the game. No matter that the political push for an ownership society resulted in a debtor society, because taxpayers and hapless home buyers covered the bill.