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Five Myths about the Federal Housing Administration | Commentary

For borrowers with erratic incomes, or little savings, the 30-year mortgage does not amortize quickly enough to gain the equity needed to protect a family during hard times. This fact alone goes a long way toward explaining the FHA’s 3.14 million foreclosures since 1975.

Myth 4: High delinquency rates overstate the problem.

Nearly 1 in 6 FHA borrowers is delinquent today. The FHA claims this isn’t a big problem because borrowers go in and out of delinquency and don’t necessarily lose their homes. This ignores the harm of delinquency. Consumers with a 660-740 FICO score lose an average of 75 points on their credit score with just one new 30-day delinquency. Those lower credit scores add up to higher costs for individual borrowing — and collectively affect entire neighborhoods. That’s why even one missed mortgage payment is a big deal.

Myth 5: FHA lending is safe and responsible — it has an 80-year track record.

Even as the FHA helped working-class families achieve homeownership following World War II, it was investigated by the FBI in 1954 for involvement in fraudulent home-improvement schemes. In 1962, Time magazine noted the FHA’s escalating foreclosure rates. In 1973, author Brian D. Boyer chronicled “how the FHA Scandal worked on a day-to-day basis [to destroy neighborhoods] in the big cities of the United States.” In 1998, the late community advocate Gale Cincotta warned Congress about the FHA’s abusive lending practices.

The FHA has been plagued by fraud and mismanagement and has become synonymous with foreclosure. Worse, the FHA’s foreclosures are not evenly distributed. My research found that 9,000 ZIP codes, in working-class neighborhoods, had an average projected foreclosure rate of 15 percent.

Congress needs to change the FHA now: It sets up American families for failure and threatens taxpayers.

Edward J. Pinto, a former executive vice president and chief credit officer for Fannie Mae, is a resident fellow at the American Enterprise Institute.

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