The Senate Banking Committee held a hearing recently to discuss the Independent Foreclosure Review, the goal of which is to identify borrowers who suffered financial harm because of errors in their foreclosure processing. Congress could have done better by helping families avoid foreclosure in the first place, but how?
Congress should recognize that for the past 37 years the Federal Housing Administration has been the foreclosure leader. Foreclosures used to be rare in the U.S. — even for the FHA. Yet over this period, 3.14 million mostly working-class families — 1 in 8 — who have an FHA-insured loan have seen their American dream end in foreclosure.
This high rate of foreclosure betrays the FHA’s original mission of insuring sustainable loans to first-time and low-income borrowers. Further evidence of the FHA’s terrible fiscal position is seen in Obama’s budget, which has allocated $943 million to bail out the FHA.
Before proposing a bipartisan overhaul, Congress should consider these five myths:
Myth 1: The FHA is held to higher capital standards than the private sector.
Today the FHA is insolvent to the tune of at least $31 billion. It has been required to conduct an annual actuarial study covering the next 30 years to accurately project the expected value of its books of accounts. Yet, over the past 20 years, the FHA has batted 0.000 in accuracy. This is because the FHA is required to guess — generally using rosy scenarios — interest rates, house prices, inflation and the program’s current assets, along with future income and losses on its existing $1.1 trillion book of business. This methodology severely underestimates the FHA’s true condition. Any financial institution proposing to calculate its capital in the same manner would be stripped of its charter.
Myth 2: The FHA played no role in the housing boom and bust.
Fannie and Freddie played a visible role in pumping the housing bubble and the foreclosures that ensued. Congress’ affordable housing mandate required the government-sponsored enterprises to increase loans to families — earning less than the area’s median income — from 30 to 56 percent. But if the GSEs were the faces of subprime failure, the FHA was the brain, orchestrating programs to expand debt thus setting off a race to the bottom. The FHA took the lead in crafting the National Homeownership Strategy, which urged doing away with down payments. The FHA’s leadership role is evident in statements made in a 2000 Quicken Loans release touting a partnership with the agency:
• “FHA permits borrowers to have a higher debt-to-income ratio than most insurers typically allow.”
• “It is also perfectly acceptable for people with NO established credit to receive a loan with this program.”
When the GSEs imploded in 2008, the FHA quadrupled its guaranteed loans to more than $1 trillion. While proponents of the FHA feel the organization played a countercyclical role, they ignore the FHA’s role in inflating and prolonging the housing bubble.
Myth 3: The FHA 30-year mortgage is an indispensable part of the American dream.
For decades, the FHA’s usual loan term was for 20 years. For good reason: it builds equity, and thus safety, much faster. It wasn’t until the late 1970s that the average loan term became a 30–year one.