Here is a riddle:  Why did the homeowner stop making their mortgage payments?

Because they ran out of money. The riddle does not end with “because they only put down 3.5 percent of the purchase price.”

It is the difference between bad economic policy and bad lending policy – Federal Housing Administration (FHA) lending policy in this example.

On the heels of the recent House Financial Services Committee hearings, and the release of FHA’s Actuarial Report, we have and are likely to continue to hear calls to drastically reshape and limit the types of borrowers that FHA can insure. The borrowers most at risk of losing this valuable bridge to homeownership are the ones who most need consideration - low- to moderate-income Americans.

Low- to moderate-income Americans were also disproportionately affected by the Great Recession – losing anywhere between half and two-thirds of their household net worth. With the unemployment rate sitting at recessionary levels for the past five years, stagnant wage growth for those fortunate enough to have a job, and savings rates at negative levels, it’s hard to imagine how or when these households’ economic circumstances will improve. Given that the median net-worth of a homeowner is roughly forty times higher than that of a renter, one would hope that policymakers will not lose sight of these dire and vexing circumstances when it comes to housing reform. Homeownership is virtually the last legitimate wealth creation opportunity for low- to moderate-income families.

We are no longer facing a housing market riddled with exotic subprime products with increasing interest rates and payments.  Instead the greatest challenge facing these remaining low- to moderate-income homeowners, especially those with loans backed by FHA who never offered such products, is economic circumstances that either prevent them from becoming homeowners or trigger their default. Today’s defaults are symptoms of other macro economic policies and not necessarily the result of bad lending policy at the FHA.

As the saying goes, you can pay me now or you can pay me later. Investing in helping these families, who make up half of the country’s population with annual incomes of less than $50,000, purchase their first home supports household financial stability.  Investing in these families also helps to control the future of entitlement spending given that they will not have any money to take care of themselves when they get older otherwise. Let’s not forget that the federal government is subsiding homeownership for wealthy Americans to the tune of over $300 billion a year through tax write-offs and interest rate deductions - which I am also in favor of. Lower income households deserve the same opportunity to access housing credit. But access does not translate to charity for these families. On the contrary, FHA has operated independently on its lending profitability for over 80 years without ever receiving a nickel of government appropriations.

So should we stop lending to low-income and minority households simply because of the economic climate? If so, how long would it take these households to save even a modest five percent or ten percent downpayment required in the private market?  The Mortgage Bankers Association estimates that for median households – not even low-income households – in major metropolitan areas a five percent downpayment would take up to five years to save. A ten percent downpayment would take up to nine years to save.  Even worse, a 20 percent downpayment, as proposed by the regulators drafting the Risk Retention/Qualified Residential Mortgage (QRM) rule, would take up to 18 years to save.

So again, do we wait for the ideal economic circumstances to manifest to combat the causes of default or prevent a family from saving enough for a five or ten percent downpayment? Or do we strive for ways to meet these households where they are and provide them meaningful venues for wealth creation through FHA lending policies which have historically been used to assist these households and the housing market in general.

Tim Rood, Collingwood Group Partner and Managing Director, was recently interviewed on FOX Business discussing the role of FHA and housing policy. The interview can be viewed here.