The Corner

The Republican Retreat on Housing Reform: Part II


Last week, I highlighted an ongoing debate in the House that could mark a Republican retreat from the party’s pledge to pare back government control of the housing market.

There is a new wrinkle that has the potential to change the outcome of this debate. Any day now, the Federal Housing Administration (FHA) is expected to release its (latest) quarterly report to Congress on the status and health of its mortgage-insurance fund.

Here is a link to FHA’s last quarterly report. If you flip to page 15, FHA shows that it has $2.8 billion in its capital-reserve account. This is the capital that is supposed to protect taxpayers against the default risk on the total amount of FHA insurance that’s still in-force, which now stands at ~$1 trillion. (By way of background, the capital account had more than $20 billion as recently as 2007.)

What are the implications of all of this? Well, that it’s possible that FHA will require a congressional bailout. And the new numbers could signal that this dreaded “bailout” day may be closer than most people think.

The situation is particularly worrisome because the current capital level means that FHA is levered ~300 to 1 — and there is still downward pressure on home prices, defaults, and foreclosures throughout the country.

Now back to the debate from last week — on whether the House will decide to keep FHA in the business of: 1) providing a 100 percent taxpayer guarantee on mortgages up to $729,000; and 2) insuring mortgages with values up to 125 percent of an area’s median home price (when the level used to be 95 percent).

First, it’s important to note that the credit quality of FHA lending can certainly be improved — and there should still be time for Congress to act. (It would be a rather big surprise if FHA released a negative number next week for its capital account.) Congress and/or FHA could increase the premiums that are charged for its 100 percent taxpayer-backed mortgage insurance. (FHA has already taken some steps in this direction over the past year, but the quarterly report is likely to show that they haven’t been sufficient.)

FHA could also increase down-payment requirements, so there is more of an equity cushion that can protect borrowers (and FHA) against further home-price declines and default. Borrowers right now must only put down 3.5 percent to get an FHA-backed loan.

Rather than taking these steps, the House is contemplating a move in exactly the opposite direction.

If you want to read more about how FHA got into this perilous position, here is an op-ed I wrote with Jason Delisle over the summer. The key point is that the accounting practices for FHA are questionable (e.g., too often numbers get released that are later revised down).

And while accounting issues can seem trivial at times, in this case they are very important because FHA lending (and thus taxpayer exposure) is still growing. It will be interesting to see what the House decides to do.

At minimum, I’m sure the Obama administration would welcome bipartisan support for keeping loan limits elevated. That way, if FHA does require a bailout, a popular narrative could be that both political parties contributed to the mess, all the way to the end.

— Christopher Papagianis is the managing director of Economics21, a nonpartisan policy-research institute, and previously was special assistant for domestic policy to Pres. George W. Bush.


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