Friday’s grim financial report from the Federal Housing Administration (FHA) — it’s insolvent to the tune of negative $31 billion — is prompting fresh scrutiny of the government’s role in housing, particularly the mayhem caused by federal backing of mortgages involving low down payments and low credit scores.
Despite the likelihood of yet another taxpayer bailout of a government agency, industry and community groups insist that the housing market can’t survive without an explicit guarantee. The facts demonstrate it cannot survive with one. Government housing policies have played a leading role in industrywide abandonment of underwriting standards to promote affordable housing. This has been well-documented.
Less well-known are the consequences of the government’s policy of attempting first to prolong and then to reinflate the bubble. From 2006 to 2009, various arms of the government mortgage complex backed trillions of dollars in mortgages as home prices collapsed. The result was more than $400 billion in defaults and 2.5 million expected foreclosures. It ultimately would take until 2012 — seven years after the bubble’s peak — for prices to stabilize.
Neither of these acts of folly were accidents.
In 2004, the Department of Housing and Urban Development proudly summed up its leadership role in weakening lending standards: “Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households.”
In late 2009, in response to a report that FHA loans were defaulting at an alarming rate, Rep. Barney Frank stated: “I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
On the contrary, those were policy follies.
First, government-sponsored enterprises Fannie Mae and Freddie Mac pumped about $2 trillion into the market, resulting in an estimated $250 billion in eventual foreclosures and other loan liquidations. As the market realized the limits of Fannie’s and Freddie’s implicit guarantee, FHA, armed with the full backing of the taxpayer, was thrown into the breach.
The FHA, along with its siblings, the Rural Housing Program and the U.S. Department of Veterans Affairs, nearly doubled in size from 2005 to 2009, ending 2009 with nearly $1 trillion in insured loans. Those loans from 2006 to 2009 will result in an estimated $150 billion in eventual foreclosures and other loan liquidations. Thanks to the combined efforts of the government mortgage complex, this second policy folly will result in about 2.5 million foreclosures.
Last week, the FHA released its fiscal 2012 actuarial study, which revealed its insolvency as its economic value turned to a deficit of $31 billion under the current low-interest-rate environment. For the fourth year in a row, the FHA has failed to meet its congressionally mandated minimum capital standard of 2 percent and is undercapitalized by a total of $56 billion. It survives only with the sufferance of the taxpayer. The report should be a serious red flag, but instead, the FHA tells Congress not to worry, next year will be better.
It has adopted yet a third policy folly: using its government credit card to grow its way out of insolvency. This isn’t working any better than the earlier follies.
These policies have given us what we have today: a nationalized housing finance market in which 90 percent of all new loans are guaranteed by the taxpayer. Half of all home-purchase mortgages still have a down payment that rounds to zero. One in 6 of FHA’s 7.7 million loans is delinquent 30 days or more. This poses great dangers to the housing industry, the economy and the taxpayer.
The FHA’s irresponsible behavior jeopardizes the families its mission has charged it to help: low- and moderate-income families and communities. Its loose standards hurt the very people it attempts to help by setting them up for financial failure.
It is time for Congress to address the follies of the government mortgage complex. There is no better place to start than with the FHA.
Edward Pinto is a resident fellow at the American Enterprise Institute.