NCPA - National Center for Policy Analysis

Get A Modest Mansion From The Feds

September 23, 1997

Analysts say the Federal Housing Administration is making home loans to increasingly affluent borrowers so they can buy increasingly pricey homes -- not exactly the original mission of the New Deal agency. The original purpose of the government-subsidized mortgage program was to help first-time, low- and middle-income home buyers get a loan.

Now, the Clinton administration has a bill before Congress to lift the cap on FHA home loans to well over $200,000. Critics point out such largess will slowly squeeze private lenders out of the marketplace.

  • The FHA is now authorized to insure mortgages of up to $160,950 in expensive markets like New York and California -- up from $67,500 in 1980.
  • There is no income test to qualify for an FHA-backed mortgage.
  • Only 18 percent of FHA loan applications in 1993 were for homes in low- or moderate-income census tracts, according to a Federal Reserve study.
  • The median down payment for an FHA loan is only 4 percent of the purchase price -- about half the industry standard.

Almost every mortgage insurance study shows that the lower the down payment the greater the risk of default.

While the FHA is now in the black, it lost $1.4 billion in 1988 due to shoddy underwriting standards and a mini-crash in real estate prices. The potential taxpayer liability is more than twice what it was then.

Reform advocates believe it is time the 60-year-old, Depression-era program be privatized.

Source: Stephen Moore (Cato Institute), "Federal Mortgage Scheme Is Boon For Bankers," Investor's Business Daily, September 23, 1997.


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