The Federal Housing Administration (FHA) is one of the unsung heroes of the housing market. Despite helping to save the housing market following the mortgage crisis in 2007, the FHA is continuously attacked, erroneously, for its commitment to encourage lending to low income households. For decades, lenders have been able to successfully provide reliable and sustainable mortgage products to low income communities across the country that are profitable for the markets and fair to vulnerable borrowers. A decade long study conducted by UNC Center for Community Capital of 46,000 low-income homeowners found that of those who received traditional 30-year, fixed-rate mortgages with a small down payment, 95% of homeowners were paying their mortgages. UNC's study shows that correctly structured home loans to low-income households perform quite well, leading to sustainable homeownership and sound business opportunities for lenders.
However, American Enterprise Institute’s (AEI) recent report on the riskiness of the Federal Housing Administration’s (FHA) lending practices conflates and confounds data to reach misleading conclusions and recommends unnecessary changes. FHA’s current financial challenges are overwhelming due to loans insured between 2007 and early 2010 as well as a single loan product: seller-financed mortgages. However, its losses are not due to creditworthy borrowers with lower credit scores and lower down payments, and AEI would do well to remember that correlation is not causation. Furthermore, FHA no longer insures seller-financed loans.
But for many low- and middle-income American households and communities of color, the FHA is a critical part of the mortgage lending repertoire to access homeownership. By insuring loans made by private lenders — even during severe economic downturns — the FHA provides stability to the housing market and access to credit. This was never truer than after the recent housing crisis, when credit became difficult to access and many lenders turned to the FHA. Now the 78-year-old agency may need help to continue its good work, and if it does, American taxpayers should lend a hand. Doing so benefits not only families looking to purchase their first home but the economy at large. The FHA helped hold down the fort as the housing market reeled from the aftermath of bad loans and Wall Street greed. Based on an analysis by Moody's Analytics, the agency's actions in 2011 alone helped prevent housing prices from decreasing an additional 25% from a 40% decrease in the sales of new and existing homes, saving three million jobs and half a trillion dollars in economic output. By stepping in, the FHA rescued tens of thousands of middle-class families from losing their home equity and, in many instances, their homes. The agency did this by backing a larger share of mortgage originations as private investors fled the housing market. At the peak of the housing bubble, FHA insured one-third of loans made in 2009, compared to 5% before the alarms rang in 2006.
Despite the important role that the FHA played in keeping the housing market from total economic collapse, Edward Pinto from AEI stated that, “This paper reports on a comprehensive study that shows the FHA is engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes.” Fiscal projections point to a shortfall between what the FHA needs to cover all its claims over the next 30 years and how much it has on hand. FHA’s possible shortfall was not caused by lending to low- and middle-income households but rather due to maintaining liquidity in the housing market. The shortfall does not mean a definitive need for taxpayer monies to cover it — it will be months before we know that for sure.
The FHA has already addressed unsustainable programs that contributed to its trouble. Its seller-financed down payment assistance program, which called for the originator to cover the down payment, often resulted in originators inflating the purchase price of a home in order to do so. This in turn led to financially unstable loans, especially during the recession, that resulted from the subprime debacle. Congress banned the program from FHA insurance in 2008, after FHA had tried to eliminate the program for years.
While the seller-financed down payment program did not work, most FHA products do. Low- and middle-income borrowers and communities of color have benefited from sustainable and profitable mortgage loans insured by the FHA. The FHA provides a necessary service that the conventional market does not provide. However, by pointing fingers at the FHA, critics are undermining the ability of an agency that has been critical in keeping the mortgage market accessible and affordable, providing sustainable pathways to homeownership for millions of Americans.