Between 2007 and 2009 the Federal Housing Administration took on a counter-cyclical role as the real estate market plunged. To help prop up demand, FHA rapidly expanded its portfolio and backed riskier loans.
Now many of those mortgages are going bad.
FHA might have kept the housing crash from becoming worse, but at the risk of hitting a bailout-weary public with another huge bill.
In only three years, its loan portfolio ballooned from about $685 billion to $1.1 trillion. According to a recent independent audit, its reserves were at $30.4 billion while estimated losses were $46.7 billion, leaving a projected deficit of more than $16 billion.
Most of the losses are on loans backed during the 2007-09 frenzy.
Not to worry, the agency says. It plans to raise mortgage insurance fees and sell off 10,000 delinquent loans every three months; a Treasury bailout won’t be needed.
That’s nice, but the trend is hardly encouraging. In 2009, administration officials airily dismissed talk of a potential FHA bailout and said the agency knew what it was doing. Now the portfolio is gargantuan and the rot could well overtake FHA’s capacity to keep up.
If a bailout is needed, it will be the first in the 78-year history of the agency, created in 1934 to guarantee home loans for low- and moderate-income borrowers. In recent years, however, federal policy pushed the ideal of homeownership to unsustainable levels. Credit standards deteriorated and the FHA guarantee was extended well beyond its initial parameters.
The minimum down payment has fallen to 3.5 percent and in some regions, FHA is still guaranteeing jumbo loans — mortgages up to $729,750 — thanks to Congress’ inability to say no to the real estate industry.
Along with Fannie Mae and Freddie Mac, the Treasury is backing one out of every 10 mortgages in the nation.
The FHA’s troubles are an example of how policies with laudable goals — extending home ownership to people of modest means — can run off the rails with the help of eager industry lobbyists and compliant lawmakers.
While FHA loans guaranteed after 2009 are expected to be profitable, Congress should put this agency on a path that will return it to its original mission: reasonable help for low- and moderate-income borrowers.
Two important steps in that direction would be higher minimum down payments and a lower maximum-loan cap.
Copyright The Kansas City Star. Reprinted with permission.