There are glimmers of hope in the housing market. Starts and prices are on the rise — an upbeat signal the likes of which hasn’t been seen in years. Still, the recovery is fragile and could be easily reversed given the huge numbers of homeowners who are underwater, heading into foreclosure, or both. Should that happen, taxpayers could find themselves on the hook once again, as the balance sheet at the Federal Housing Administration (FHA) becomes awash with billions in red ink.
Concern over loan defaults seem Cassandra-like considering housing starts jumped 15 percent in September. The Commerce Department found improvement in new construction for the third month in row. While September’s annualized new construction rate of 872,000 is well below the 1.3 million annual average that held before the housing bust, it’s a relief from the 500,000 rate we’ve seen over the last three years. Home prices are also up almost 6 percent this year through July, with the Case-Shiller Index now reporting higher prices in all 20 metropolitan areas surveyed.
So why worry? An alarming number of these new purchases are being funded through loans insured by the FHA instead of conventional mortgages. Interest rates have dropped to such absurdly low levels that the potential reward for providing loans to buyers has diminished. As a result, lenders have become much more selective, tightening their standards and offering credit only to those with stellar records.
Almost a third of new home sales now come through the FHA. This is a popular option because the government-backed option requires far smaller down payments — currently averaging a minuscule 3.5 percent. This allows people to take on more debt, since the risk falls on the FHA, which is on the hook if the buyer defaults on the mortgage.
As the National Legal and Policy Center’s Carl Horowitz detailed recently, the FHA has moved from being a lender of last resort to the lender of first resort. The value of the loans the agency insures has tripled in the last five years, now exceeding $1 trillion. At the turn of this century, the FHA was insuring less than 10 percent of new home purchases.
The warning signals are present on the FHA’s balance sheets. As of July, almost 17 percent of FHA loans were delinquent. The third quarter of the year saw the FHA paying out $5.3 billion in claims. The FHA had negative net worth of almost $25 billion in July. Its largest insurance fund had a capital ratio of 0.25 percent, well below the 2 percent required by law. The best estimates put the FHA in the hole for anywhere from $44 billion to $63 billion, according to Mr. Horowitz.
Sooner or later, taxpayers will have to bail out this mismanaged agency. It is yet another example of how serious problems with the housing market begin with government intervention. Nine out of 10 housing loans are backed by the government, that is, taxpayers. This is bad because federal insurance programs sever risk from reward, inevitably encouraging risky behavior. In the housing market, that means extending credit to buyers who are not creditworthy, and the result is the mess we’re in now. The best hope for a sustainable recovery in the housing market is to get government out, meaning ending the FHA, and mortgage giants Fannie Mae and Freddie Mac.
The Washington Times
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