Is the FHA Mortgage Crisis Overblown?
gone out to every village and town that the FHA is in trouble. Very soon
taxpayer dollars may be needed to bail out the venerable mortgage insurance
program, which makes home ownership accessible to so many people through FHA home loans.
thought of using taxpayer funds to support a federal housing program is
philosophically offensive to those who believe the government should provide
little more than postage stamps and coastal defenses. Others are using current
FHA troubles as a pretext to shrink the size of the FHA, something they have
been unable to do with open competition and better loan products.
issue with the FHA is fairly simple. The FHA is an insurance program. It loans
no money but it protects lenders when borrowers do not make their loan
payments. When borrowers get an FHA loan, they only need to have a 3.5% down
payment -- the FHA promise to cover the debt is both believable and proven.
collected for the mortgage insurance premium – or MIP – goes into a reserve
fund. Given the fact that home values are now 15% lower than they were in April 2007, it
is not a surprise that the FHA reserve fund is shrinking. Depending on who you
ask, the reserve fund is either on the verge of insolvency, headed toward
insolvency or simply broke.
So now, for
the first time since the FHA’s inception during the 1930s, the Treasury
Department might have to step in and provide some backup funding.
imagine that federal funding is required. Is this a big deal?
Hurricane Sandy hit the East Coast, the federal government provided $60 billion
in assistance. Although a few people complained that such spending was somehow
inappropriate, most understood that helping a battered section of the economy
is the job of the federal government. It's what the government does following hurricanes,
floods, earthquakes, fires and other natural disasters.
the federal government has been there to protect the privately-owned national
banking system, which has required trillions of dollars in assistance. This
assistance has taken the form of the ZIRP -- the "zero interest rate policy" followed by the Fed – as
well as massive purchases of mortgage-backed securities. And in addition, there
have been hundreds of billions of dollars in cash bailouts and debt guarantees
extended to individual Wall Street banks.
Why is the
case for the FHA any less compelling than the need to assist victims of
Hurricane Sandy, communities hit by a tornado or impoverished bankers on Wall
originations between 2000 and 2009 lost money every year and nobody said a
word. FHA operations were profitable before this period and they were
profitable after -- in fact, $20 billion has been added to FHA reserves during
the current administration, but from the current "debate" no one
would ever know that.
The FHA is
on the right track, so here's a reform idea: let's leave it alone, give
assistance if needed, and be grateful that it was in place to bail out the
housing sector when other mortgage sources left the market.
This post was created for LendingTree by Peter G. Miller. It is original content and has bot been published anywhere else.