Why Is There A Federal Housing Administration?
Some of their flubs noted here, at Cato. From the WSJ:
...Late Monday a bipartisan Congressional committee announced an agreement to increase FHA's maximum mortgage limits to $729,750 from $625,500 through Dec. 31, 2013. The bill is linked to a continuing resolution to fund Congress past Saturday, increasing the likelihood that this backroom deal will become law. The House is scheduled to vote on the bill today without debating these changes, in what ought to be an embarrassment to Speaker John Boehner and Majority Leader Eric Cantor.The National Association of Realtors is lauding this idea as great for housing "stability," by which it means that the taxpayer subsidies for its industry will keep coming, even for fancy homes. The median sales price of existing single-family homes nationwide in the third quarter was $169,500, according to the Realtors's own data. Politicians from higher-cost regions argue that higher loan limits are needed, but even Los Angeles has seen median prices fall to $324,800 from $402,100 in 2008--well below $729,750.
This FHA payoff to the housing lobby comes as the agency has had to publicly reveal the extent of its financial travails. In its annual report to Congress Tuesday, the Department of Housing and Urban Development and an independent auditor reported the FHA has a 0.24% capital reserve, well below its statutory 2% minimum for the third year running. Take $1.1 trillion of outstanding loan guarantees divided by $2.6 billion in capital reserves and you get a 422-to-1 leverage ratio, up from 33-to-1 in 2009. By this standard, Lehman Brothers was risk-averse.
So how much would a bailout cost, even before the proposed loan-limit increase? University of Pennsylvania real-estate finance professor Joseph Gyourko noted in a paper last week that FHA "systematically" underestimates future default risk, not least because it lends to borrowers with very little equity in their homes and uses rosy economic assumptions. Mr. Gyourko estimates that FHA is "materially underreserved by at least $50 billion, with the true figure likely higher."
These numbers are no surprise, given FHA's inherently risky business model. It provides 100%, explicitly taxpayer-backed mortgage loans to first-time, moderate- to low-income borrowers. Down payments can be as low as 3.5%, at a time when most private lenders are prudently insisting on 20% after the housing bust. In fiscal 2011, 85% of FHA loans had a down payment of less than 5%.
We have way too much government intervention in markets. Can't afford to buy a home? I can't either -- not in Los Angeles. So I rent. How about you do the same instead of sucking off the taxpayer teat?
Why are we subsidizing a government role that is at least PARTIALLY responsible for the entire mortgage crisis in the first place?
Not to diminish the responsibilities of bankers who made short sighted loans, or the people who took them out, or the organizations that formed specifically to buy and sell debt, but we can't exclude government interference as being blameless.
No, without agencies such as Freddie Mac & Fannie Mae, I doubt the problem would have ever been half as bad as it was.
Robert at November 17, 2011 2:21 AM
You might also mention that the heads of those agencies were paid 35 million in bonuses and salary over the last two years while losing 13 billion dollars of our money.
Is there nothing the government can't make worse?
MarkD at November 17, 2011 5:13 AM
There is an FHA because FDR was a totalitarian who wanted to control other peoples' lives. There are damn fool policies because the FHA is run by socialists who think the purpose of government is redistribution of wealth. They are not interested in banking and housing but in the social justice, redistribution and punishing the bourgeois.
Stop assuming an absence of malice for western civilization and FHA's number make sense.
Storm Saxon's Gall Bladder at November 17, 2011 6:03 AM
Malice & incompetence are not mutually exclusive.
They can be malicious AND incompetent at the same time.
Robert at November 17, 2011 9:19 AM
> There is an FHA because FDR was a totalitarian who wanted to control other peoples' lives.
EXACTLY.
Well put.
TJIC at November 17, 2011 10:27 AM
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