Now that the Senate has passed its “Foreclosure Enhancement Act,” attention turns to the House, which will hold hearings on its own response to the housing “crisis.” As the Christian Science Monitor reports, “at the heart of the emerging consensus is a bigger role for the Federal Housing Administration in helping borrowers refinance loans they cannot afford to pay. … [A]ll competing plans require an FHA that is up to the task of dealing with a crisis that industry experts say is uncharted territory.”
But is the FHA up to the task? A quick look at recent history shows the answer is a resounding “no.” The New York Times reported Friday that thanks to its own recent expansion into credit-riskier markets, the FHA is on the edge of the first financial shortfall in the agency’s history. If current trends continue under existing policy, the FHA will face a $1.4 billion deficit in 2009. The source of the agency’s shortfall is the agency’s seller-financed down payment loan program that seeks to help low-income and minority home buyers by allowing the seller to provide the down payment, which is then tacked on to the total cost of a house. In 2000, such mortgages made up less than 2% of FHA-insured loans. In 2007 they accounted for 35%.
The problem with the program is that participating borrowers are defaulting at rates two to three times the rates of others. Not insured at the proper level for this increased risk, the FHA is now at the brink of insolvency. Some officials at Housing and Urban Development want to stop the bleeding by ending the program. But longtime defenders of the practice such as Rep. Barney Frank (D-Mass.) not only want to continue the program — they want to vastly expand the authority of the FHA to insure risky borrowers in order to tackle rising foreclosures nationwide.
Frank claims his proposal would not push the FHA into even further financial trouble since he plans to charge borrowers insurance fees to protect the government from future defaults. But an independent analysis from the Congressional Budget Office points out that the costlier and more realistic these insurance premiums are, the less people the Frank plan will actually help:
Direct federal provision or guaranteeing of credit to mortgage markets could help avoid foreclosures and ease the downward pressure on house prices, helping the market to adjust in an orderly manner. It would also shift part of the cost of mortgage losses from current lenders and investors to taxpayers. Most of the proposals under discussion involve modest federal subsidies and would probably affect several hundred thousand homeowners.
Frank has already admitted that it is “irrelevant” how many homeowners are actually helped under his plan. Meanwhile, since July 2007, the voluntary alliance of servicers, investors, counselors and other mortgage market participants that make up the Hope Now program has reworked 1.2 million loans to American homes. The U.S. can not afford Frank’s new bailout plan or the hundreds more it will engender. David Ignatius explains in the Washington Post:
Last week, the Bush administration agreed to rescue 100,000 homeowners who are at risk of foreclosure on their mortgages. Congressional Democrats promptly announced that this wasn’t fair enough and that they intended to expand the bailout to as many as 2 million distressed borrowers. But why stop there? What about onerous commercial mortgages? And credit card debt? And student loans? Why should anyone have to pay back anything? It’s not fair.
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