Financial problems at the FHA: homeownership for many vs. the private sector

The Federal Housing Administration may be helping the lower ends of the housing market but it is also running into some financial difficulties:

The House Financial Services Committee heard testimony from Housing and Urban Development Secretary Julian Castro on Feb. 11 and the Housing and Insurance Subcommittee heard from several witnesses on Feb. 26…

Historically, the FHA has controlled about 10 to 20 percent of the mortgage market. But after Congress increased the size of mortgages the agency could insure from $360,000 to $625,000, the FHA controlled about 60 percent of the low down-payment mortgage market from 2008 to 2010. That means the income eligible for FHA mortgage insurance went from the national average of about $64,000 to $110,000. Put another way, more than twice as many people can get FHA insurance than they could before the limit was raised.

At the same time that eligibility has exploded, FHA has faced serious solvency problems, culminating in a $1.7 billion bailout from the U.S. Treasury at the end of 2013. The Congressional Budget Office estimated that FHA insurance cost taxpayers $15 billion from 2009 to 2012. Nonetheless, the agency’s website falsely claims it “is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.”

Even with all of the taxpayer money that has been thrown at the agency, the FHA is seriously undercapitalized. The law says FHA needs to keep 2 percent cash on hand, which would be about $18 to $20 billion, but as of the beginning of 2015, it had only less than half of 1 percent, or $4.7 billion.

This piece was written by an activist against government waste yet it highlights the contrast of priorities: homeownership for many versus letting the market sort this out. Americans, including politicians and presidents, have pushed homeownership for decades. We assume this is a positive outcome as people will take better care of their property if they own as well as enjoy the status and privacy of their own home. Yet, if homeownership were entirely left to the private sector, the lower end of the housing market may not do very well. Even with the efforts of the FHA in recent years, we can see some of this in action: luxury building is booming in places like New York and Miami as cheaper and smaller homes don’t generate as much profit. In the recent past, the private sector resorted to tricks to help lower-income borrowers but we saw how those subprime loans worked out for everyone.

In other words, if Americans want homeownership as a social good available to many, it still needs to be worked out how this can be done effectively.

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