The Federal Housing Administration, which insures home mortgages, not only failed to learn the lessons of the subprime meltdown, it’s been doubling down on failure. As a result, this taxpayer-backed agency is headed for disaster.
In 2006, the FHA insured just 3 percent of home mortgages; today, it insures one of every three. Together with Fannie and Freddie, the FHA is putting the risk for the entire, $11 trillion US home-mortgage market on the back of the American taxpayer.
How did that happen? Simple. Private lenders responded to the bursting of the housing bubble and the subprime (and now prime) mortgage crisis by toughening their underwriting standards. Meanwhile, the FHA has stubbornly refused to touch the most basic standard — the down payment requirement.
Private-mortgage lenders now require 10 to 20 percent down payments. But a strapped homebuyer can still get the FHA to insure his mortgage with as little as 3.5 percent down.
Since the average residential-brokerage commission is 6 percent, that means someone can buy a home by investing about half of what the broker makes on the sale — and get the US government to insure his mortgage.
FHA Commissioner David Stevens doesn’t even propose touching this basic error; his only “fixes” are peripheral, raising the FHA insurance premium (from 1.75 percent to 2.25 percent) and requiring somewhat higher down payments (10 percent) from borrowers with very low credit scores.
Meanwhile, the agency is bleeding. As defaults have skyrocketed among FHA-insured mortgages, the FHA’s capital reserves have dwindled to about a quarter of the congressionally mandated minimums. As of Sept. 30, the FHA’s capital reserves stood at $3.6 billion, about half a percent of the value of the mortgages it insures, down 72 percent from a year earlier.
Yes, the FHA has other accounts it can tap — but if its capital-reserve fund falls below zero, the FHA can get funded directly from the Treasury without having to ask Congress for more money.
At the end of February, the “seriously delinquent” rate for FHA-insured mortgages spiked to 7.5 percent, up from 6.2 percent a year earlier. And FHA default rates are far higher in some cities. At the end of 2009, they were at 18 percent in Punta Gorda, Fla.; 15.6 percent in Flint, Mich.; 15.1 percent in Fort Meyers-Cape Coral, Fla. and 15 percent in Elkart-Goshen, Ind.
Apart from insuring one in every three mortgage loans taken out to buy homes, the FHA also now insures one in five refinancings.
And President Obama recently announced that he’ll use FHA insurance to enable upper-income homeowners who are underwater but still current on their mortgages to refinance. While Obama claims that the cost of this program will be limited to the $50 billion he has earmarked as bribes to convince lenders to accept a reduction in the principal owed to them on underwater mortgages, the real cost will come down the road when the FHA-insured refinancings go into default.
Thanks to the FHA, subprime-mortgage lending is alive and well. And thanks to Obama’s latest program, private-mortgage investors will be able to pick the riskiest of their not-yet-defaulted underwater loans, and get them off their books and onto the FHA’s.
Bottom line: The Federal Housing Administration is continuing the toxic policies that produced the housing bubble and the subprime crisis, and putting the taxpayers on the hook for it. Expect it to be the next big bailout.
Stephen B. Meister is a partner in Meister Seelig & Fein LLP.