Five Myths about the Federal Housing Administration

May 15, 2013

The Senate Banking Committee held a hearing recently to discuss the Independent Foreclosure Review, the goal of which is to identify borrowers who suffered financial harm because of errors in their foreclosure processing. Congress could have done better by helping families avoid foreclosure in the first place, but how, asks Edward J. Pinto, a former executive vice president and chief credit officer for Fannie Mae, and a resident fellow at the American Enterprise Institute.

Congress should recognize that for the past 37 years the Federal Housing Administration (FHA) has been the foreclosure leader.

  • Foreclosures used to be rare in the United States -- even for the FHA.
  • Yet over this period, 3.14 million mostly working-class families -- 1 in 8 -- who have an FHA-insured loan have seen their American dream end in foreclosure.

This high rate of foreclosure betrays the FHA's original mission of insuring sustainable loans to first-time and low-income borrowers. Further evidence of the FHA's terrible fiscal position is seen in Obama's budget, which has allocated $943 million to bailout the FHA.

Before proposing a bipartisan overhaul, Congress should consider these five myths:

  • Myth 1: The FHA is held to higher capital standards than the private sector. In fact, today the FHA is insolvent to the tune of at least $31 billion.
  • Myth 2: The FHA played no role in the housing boom and bust. In reality, the FHA took the lead in crafting the National Homeownership Strategy, which urged doing away with down payments.
  • Myth 3: The FHA 30-year mortgage is an indispensable part of the American dream. However, for decades, the FHA's usual loan term was for 20 years. For good reason: it builds equity, and thus safety, much faster. It wasn't until the late 1970s that the average loan term became a 30-year one.
  • Myth 4: High delinquency rates overstate the problem. In reality, nearly 1 in 6 FHA borrowers is delinquent today. The FHA claims this isn't a big problem because borrowers go in and out of delinquency and don't necessarily lose their homes. This ignores the harm of delinquency.
  • Myth 5: FHA lending is safe and responsible -- it has an 80-year track record. In reality, even as the FHA helped working-class families achieve homeownership following World War II, it was investigated by the FBI as early as 1954 for involvement in fraudulent home improvement schemes.

The FHA has been plagued by fraud and mismanagement and has become synonymous with foreclosure. Worse, the FHA's foreclosures are not evenly distributed. Congress needs to change the FHA now: It sets up American families for failure and threatens taxpayers.

Source: Edward J. Pinto, "Five Myths about the Federal Housing Administration," Roll Call, May 3, 2013.

 

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