by Peter J. Wallison
The Wall Street Journal
October 15, 2009
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government’s role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.
The FHA’s function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation’s low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as “policy”—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.
Far more interesting than the FHA’s prospective losses on its 2007 and 2008 book are the agency’s losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a “policy” effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis…
…t was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD’s guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA’s turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government’s own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials…
The entire article is here.
