The American Enterprise Institute (AEI) convened a panel of experts on Jan. 25 to speak about how serious the state of affairs at the Federal Housing Administration (FHA) is and how much it matters. The main presentation was given by Ed Pinto of the AEI. Then three experts, two of them former FHA commissioners and one who worked for the National Economic Council on FHA matters, tried their best to downplay the import of Pinto’s findings.
Pinto produced detailed charts and statistics showing that while the historical foreclosure rate for prime mortgages is less than 1 percent, for 9,000 zip codes where the median income is below the metro area rate, the projected foreclosure rate exceeds 10 percent, with an average of 15 percent. Pinto accused the FHA of setting up families with marginal incomes to fail as homeowners, and he pointed to similar spikes in foreclosures during earlier periods, such as 1998, to show that this is a chronic circumstance at the FHA.
The stated mission of the FHA, as quoted by Pinto is to be “the provider of responsible mortgage credit to low- and moderate-income Americans and first-time homebuyers.” He gave four recommendations as to how the FHA can return to its historical mission:
• Stop lending to people who can’t repay their loans.
• Help borrowers create real equity in their homes.
• Step back from markets served by the private sector.
• Concentrate on homebuyers who truly need help.
Pinto asserted that his findings, based on data for 2009 and 2010, cover a period when the conditions that prevailed during the height of the 2008 episode of the financial crisis had largely abated, but his critics challenged that point. For his part, Pinto offered statistics showing that in some zip codes, the foreclosure rates were dramatically higher than were the averages he cited, such as 35 percent to 73 percent in the five worst zip codes in Chicago and 24 percent to 30 percent in the five worst zip codes in Atlanta.
According to Pinto, these communities suffered reductions in property values; higher levels of blight and crime; poorer health, especially for children, seniors and minorities; stress on community services; and reduced property tax receipts, which in turn lead to reductions in community services.
One of the practices of the FHA Pinto criticized is the allowance of seller concessions of up to 6 percent, versus 3 percent in the conventional market, with the median for the FHA at 4 percent. In February of last year, Acting FHA Commissioner Carol Galante (now appointed Commissioner) proposed a limit of 3 percent, or $6,000, whichever is higher.
Seller concessions are correlated with much higher rates of default, approaching twice the rate, than those for loans without them or with lower concessions. Pinto contrasted the performance of the FHA with that of the Veterans Administration (VA), another major federal guarantor of mortgages, largely because the VA guarantees only 25 percent of the mortgages, versus 100 percent for the FHA, and the VA has much stricter appraisal processes.
John Weicher, director of the Center for Housing & Financial Markets at the Hudson Institute, described the mission of the FHA as “to promote homeownership, especially for young, first-time homebuyers — without losing money.” To do this, he emphasized, requires balancing tradeoffs, and these change as conditions in the economy change. Therefore, professional experts need to determine how much risk to put on or take off at any given time.
Weicher asserted that the FHA was not the cause of the 2008 financial crisis, but rather it was the subprime lenders and borrowers, who found it faster and easier to work with Fannie Mae and Freddie Mac “until the roof fell in.” He reviewed the provisions of the 1990 FHA Reform Act and found that it restored the agency’s solvency by 1997. According to Weicher, the current situation is much less favorable, due to a bottoming in mortgage rates, the sluggish economy and flat housing prices in most areas. He listed policy changes the FHA is expected to implement in 2013, including tightening underwriting standards, raising premiums slightly on top of larger previous increases, expanding loss mitigation and selling defaulted loans to private lenders.
Weicher concluded that the FHA costs taxpayers nothing to operate and that it can become solvent again as it was after earlier crises.
Sarah Rosen Wartell, president of the Urban Institute, complained that Pinto’s data were “taken out of context and left misleading impressions.” She insisted that the losses of the FHA were “inevitable” because it assumed the role of lending in a falling housing market, “to expand access and play a countercyclical role.” The mortgage insurers urged this, “to protect the value of their book,” and Mark Zandi, chief economist of Moody’s Analytics, has argued that there would have been a 25 percent worse collapse in house prices of the FHA had not stepped in.
Wartell called for more authority for the FHA to act faster to mitigate losses in down markets and for the FHA to include a 3 percent long-term appreciation assumption in its projections. She concluded that the FHA’s book of business has improved significantly and that it “performs a larger social role” by promoting home ownership as “the best opportunity.”
David Stevens, CEO of the Mortgage Bankers Association (MBA), continued in the same vein as the other critics of Pinto’s work, calling it “a presentation in search of a crime.” He agreed that the FHA needed reforms and increased transparency, but he pointed to extensive audits and studies that he argued place the FHA under greater scrutiny than most other federal agencies are.
Stevens argued further that the FHA has taken on the role of providing 80 percent of mortgage loans for the black and Hispanic communities that used to be served by conventional loans, and he attributed this change to a lack of capital. He proclaimed that the recent books of business will be “the best in three decades,” and concluded that with “massive” increases in premiums, the FHA might have taken enough steps to restore its credibility.
The most important data point may be that Stevens headed the FHA and then went to work as the highly compensated head of the industry lobby, the MBA. He is correct to cite lack of capital as the fundamental issue. Perhaps the burning question should be, what is the industry going to do about this?
If homeownership is such a good thing for society, in spite of the evidence over the past few years that this is not as clear as industry advocates claim, it may be time for the industry’s boosters, who have profited so gloriously over many decades, to back their ideology with sufficient risk capital to support the housing market.
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