- Israel hits symbols of Hamas rule; scores killed
- Mississippi abortion law can’t be enforced
- Teacher who survived Sandy Hook has book deal
- Jury awards Jesse Ventura $1.8M in case vs. ‘American Sniper’ author Chris Kyle
- Middle Eastern firm’s deal to manage U.S. cargo port raises security concerns
- Bob McDonnell’s defense: Lonely wife developed ‘crush’ on CEO
- Chinese hackers stole ‘huge quantities’ of sensitive data on Israel’s Iron Dome
- House Republicans unveil bill to speed deportations of border children
- Californians protest middle school for hiring white man to teach cultural studies
- Killer’s sentencing overturned because mother couldn’t find seat in courtroom
EDITORIAL: Another housing bailout?
Thousands of new homes are being built on federal quicksand
Question of the Day
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
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
About the Author
- LETTER TO THE EDITOR: Reject any legislation dubbed 'comprehensive'
- LETTER TO THE EDITOR: Media are complicit in Hamas' tactics
- LETTER TO THE EDITOR: Gazans should help defeat Hamas
- EDITORIAL: The impeachment trap
- EDITORIAL: Illegal aliens in the shadows? What shadows?
Latest Blog Entries
TWT Video Picks
Get Breaking Alerts
- Boehner rules out impeachment: 'Scam started by Democrats'
- Obama thanks Muslims for 'building the very fabric of our nation'
- Obama's brother wears Hamas scarf bearing anti-Israel slogans in photo
- Obama: 'Not a new Cold War,' but new Russia sanctions announced
- Smugglers, rainstorm combine to poke holes in border fence
- Federal judge grants 90-day stay in D.C. gun case
- PHILLIPS: Once-in-a-century stupidity
- D.C. seeks to stay judge's order allowing gun owners to carry in public
- Illegal immigrants demand representation in White House meetings
- PRUDEN: When the hangman botches the job