This morning's
New York Times has an
important article on the Federal Housing Administration. The FHA has stepped in to back up mortgage loans as the private sector has stopped making them.
Essentially, it is playing the role of a sub-prime lender, and appears to be making many of the same mistakes the fallen or defunct sub-prime lenders made. For starters, it is allowing people to buy with down payments of only 3.5%.?Further, people can use the $8,000 first time homebuyer tax credit for that 3.5%.?Buy a house and walk away from the closing with a check in your pocket.
The historical record of people who bought houses with the assistance of charitable down payment assistance programs (DAP) is not a pretty one when it comes to default rates.?The tax credit is acting like a massive DAP.
The agency now insures 5.4 million mortgages worth a total of $675 billion.?Its reserves are down to just $30 billion.?A total of 411,000 FHA loans are in default, up 76% from 233,000 a year ago.?Recent loans are defaulting at far higher rates than older loans.
Private lenders, on the other hand, have gotten religion and have returned to the safer, more conservative and traditional 20% down payments.?The graphic from the story below speaks volumes. The number of loans being insured has soared, and so have the number of loans that are defaulting.
The number of defaults should come as no surprise, since the policy is to make loans to people who will have very little skin in the game.?When housing prices are declining, it means that the homeowner is almost immediately in an underwater situation.?Owing more on your house than what it is worth is the single biggest risk factor in defaulting on your mortgage.
The huge increase in risky loans by the FHA is a deliberate policy to try to prop up house prices nationwide.?In a remarkable quote, this was admitted to by Rep. Barney Frank (D-MA) who chairs the House Banking Committee:
?"I don't think it's a bad thing that the bad loans occurred," he said. "It was an effort to keep prices from falling too fast. That's a policy."
The question is, can such a policy be sustained? Residential housing is a very big market, and trying to place a price floor under it can get very expensive.
On the other hand, one has to realize that if the FHA were not out there being as aggressive as it is, there would probably be no residential housing market at all right now.
