How to Fix the Federal Housing Administration

November 21, 2012

The Federal Housing Administration (FHA) has released its fiscal year 2012 Actuarial Study for its main single-family insurance program.  The report confirms that the economic value or capital position has turned negative by $13.5 billion, says Edward Pinto of the American Enterprise Institute.

There are constant swings in the projection of future fiscal year. For example, fiscal year 2018 is negative $17 billion compared to last year's projection. This is primarily due to the model that the FHA uses to calculate actuarial soundness.

Despite the constant negative reports, the FHA assures Congress that future years will be better. However, delinquencies continue to increase with one in six FHA loans delinquent 30 days or more.

Given the FHA's poor performance and irresponsible lending practices, two important steps must be taken:

  • First, Congress should require a safety and soundness review of the FHA.
  • Second, the FHA must show Congress that it has a way to deal with its insolvency.

The latter can be accomplished in a few ways:

  • Reduce the risk layering combining on its high risk mortgages.
  • Announce that it will no longer knowingly insure a loan for any family where the expected foreclosure rate is 10 percent or more.
  • Additionally, borrowers that take out high risk loans should be offered either a loan with minimal down payment or a slowly amortizing 30 year term.

Source: Edward Pinto, "How to fix the Federal Housing Administration," American Enterprise Institute, November 19, 2012.

 

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