The Federal Housing Administration today releases its report projecting the health of the FHA fund that is backstopping 40% of new mortgages being made in America.
There will no doubt be some who are shocked -- shocked! -- that FHA is under stress. We don't really get it. Every major private financial institution in the country has taken taxpayer cash to cover their losses from the mortgage meltdown. In fact, the largest financial institution that hasn't taken a dime of federal funds is....are you ready....a federal corporation -- the FHA.
Now, that may change in the future. FHA is not immune from the laws of economics. Facing the equivalent of a 500 year flood in the housing market, and having stepped into the void left by reckless lenders who pillaged the mortgage system, FHA now finds itself tight on capital. Duh, as my 11-year-old would say.
The real surprise is not that FHA might need an infusion of funds in the midst of an historic disruption in the housing market, but that it has fared so well until now compared to private bank lenders.
Here is one thing for certain: today's report will be used as a proxy for a larger debate about the extent of government support for the housing market. There are some people in Washington who simply believe that the federal government just should not be involved in the business of home lending, especially to non-traditional borrowers.
The numbers on minority lending are particularly startling -- FHA and VA together accounted for 60% of all mortgage lending to African Americans last year. They accounted for 50% of all mortgages to Hispanics. The private market has abandoned minority lending in the guise of raising credit standards. As a consequence, we have a tale of two mortgage systems in this country -- one for affluent whites, and one for people of color. Curtailing FHA lending beyond what is really necessary for prudent risk management will shut the door to homeownership for qualified minority borrowers. That is what is at stake in the debate over FHA, which is as much about ideology as it is about risk.
More broadly, FHA is critical to a stable housing market, and housing is critical to economic recovery. We have to be very careful that, in addressing FHA risk, we do not pull the plug on the housing market.
Now, we are not saying that FHA does not have serious problems. The 2007 and 2008 book of FHA business is in deep trouble. As the subprime market collapsed in late 2006 and early 2007, mortgage brokers and lenders who had feasted on exotic loans simply took off their subprime hat and put on their FHA hat. And FHA was not prepared for that. But the real sin is that once they saw it coming midway through 2007, FHA's response was: do nothing. Some of the more responsible private lenders instituted --for their own self protection-- much higher standards than FHA's requirements. But many did not -- and FHA failed to tighten standards when it would have made a difference. That's why today there are 100 FHA approved lenders with a total default rate in excess of 14% -- ten points above the national average for FHA lenders. And the worst 25 FHA lenders have a default rate in excess of 20%.
The shame is that had FHA taken some responsible actions to increase credit standards in 2007 or 2008 the agency would not be facing a crisis today. Instead, they kicked the can down the road and left a mess for the newly installed FHA chief, David Stevens and Obama HUD Secretary Shaun Donovan.
We raised many of these concerns privately with FHA back in 2007. When it became apparent that FHA did not want to institute risk controls (presumably out of concern for reducing mortgage credit to a market starving for capital), we went public with warnings that FHA could be the next casualty of the housing meltdown, as reported in the New York Times, Washington Post, Wall Street Journal and elsewhere.**
Today, there is a new sheriff in town. In the three months that Stevens and Donovan have been at the helm, they have done more to protect FHA from risk than the agency had done in three years, including installing FHA's first Chief Risk Officer. They will have to do more. Because the failure to deal with FHA risk earlier, before the trickle of FHA lending grew to a flood, has made today's problems that much more challenging and left Stevens and Donovan with a raft of unpalatable solutions.
**Public Warnings To Bush Administration on FHA:
"Looming Deficit Impedes Federal Housing Agency", New York Times, April 22, 2008
"It's a toxic brew," said Howard Glaser, a mortgage industry consultant who served as HUD general counsel during the Clinton administration. "All the ingredients are there for the problem to escalate."
"The Risks of Rescuing Borrowers" New York Times, May 22, 2008
''There's real concern about the degree of risk that FHA is taking on,'' said Howard Glaser, a mortgage industry consultant.
"FHA Faces $4.6 Billion in Losses", New York Times, June 22, 2008
Howard Glaser, a mortgage industry consultant who served as HUD general counsel in the Clinton administration, sees the anticipated loss as a concern. "Congress is relying on F.H.A. to help stabilize the mortgage market, but it's not clear that F.H.A. is as strong as it could be," he said.
"Danger Looming for FHA" Washington Post, October 4th 2008
"FHA is assuming the risks of a mortgage market abandoned by private investors -- without the risk management tools ...My fear is that next year at this time, we will be debating an FHA bailout."
"Obama Inherits Neglected Housing Department" Washington Post: Nov 20th, 2008
"The early warning signals are there," Glaser said. "We may be in a situation where, 'Who is going to rescue the rescuer?' ....An FHA bailout is a clear and present danger."
"As FHA's Role Grows, So Does Risk of Fraud", New York Times, December 8, 2008
Howard Glaser, a onetime HUD official who is a mortgage industry consultant in Washington, said that F.H.A. had largely been treated as a stepchild. Over the last five years, for instance, the agency's staffing levels have remained essentially flat. "If we don't have the capacity to monitor systemic risk in F.H.A., then we are in real trouble," he said.
"Rate of Defaults Is Rising Among FHA-Backed Loans" Washington Post, January 24, 2009
"It confirms the fear that FHA, as the lender of last resort, is getting the debris of the mortgage system," said Howard Glaser, a consultant and former HUD official. "They're suffering adverse selection. . . . They're totally reliant on lenders to protect taxpayer interest in FHA."
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