Should FHA Mortgages Be Eliminated?
I don’t think so, but Senator Rand Paul seems to be a proponent of doing away with the FHA. Last week I wrote about proposed legislation from Paul that would slash the budgets of many federal agencies in an effort to cut the federal budget by $500 billion. Although I have difficulty imagining that many politicians have the stomach to actually vote for such legislation, I think it is worth re-examining one portion of the bill the would be particularly problematic for those in the mortgage industry, as well as many prospective homebuyers: the elimination of the Federal Housing Administration (FHA), which has become a key cog in keeping the housing market from utter collapse in recent years.
This is a link to the actual proposal from Senator Paul’s website. If you skip ahead to page 16, you can read where he proposes defunding the Department of Housing and Urban Development (HUD), which oversees the FHA. The FHA has become increasingly important to mortgage lending over the last three years, insuring 37 percent of all mortgages originated in 2009, up from 26 percent in 2008, and 7 percent in 2007. Part of the increase in FHA mortgages has been due to the tightening of lending standards of private lenders. The FHA only requires a 3.5 percent down payment, compared to 20 percent or more from other funding sources. This makes FHA mortgages very attractive to those with limited means for a down payment. Since the inception of the FHA, home ownership rates have risen from around 40 percent of the population to about 70 percent of the population.
Some of the criticism that Paul lays at the feet of HUD, the FHA, and the Community Reinvestment Act (CRA) is warranted. The policies of these agencies did contribute in part to the subprime debacle and resulting recession. However, that HUD/FHA/CRA was the primary cause of the housing meltdown is a largely discredited idea. The truth is far more complex.
Further, the exponential growth of the FHA has not been without issue, as the FHA is presently significantly undercapitalized. Statute requires the FHA to hold capital reserves equal to 2% of the mortgages it is insuring. Currently it only holds reserves equal to .53 percent of of insured mortgages. In response to this shortfall, the FHA raised some of the premiums and fees it charges.
There are many, many valid arguments for the reform of the FHA. Whether or not widespread home ownership is a goal that the government should strive toward is an open question. Whether the government should be involved in the housing market, and to what extent is also a fair question. What is unquestionable to me is that government support is one of the few things that is keeping the housing market going right now. FHA mortgages have become so extraordinarily important that the sudden elimination of the FHA would likely throw the market into a tailspin that would cause incalculable damage to potential borrowers as well as those of us in the real estate industry who have become somewhat reliant on the FHA. In opinion, elimination or significant changes to the FHA should be tabled until such a time that the housing market is ready to stand on its own. What do you think? Are you in the real estate or mortgage business? How would this proposal impact your business? Let me know in the comments section below.