The Federal Housing Administration, (FHA), is an insurer of mortgage loans. Created by congress during the great depression to help spur the housing market, FHA has become one of the most important institutions ever created to help fund mortgages for home buyers, especially for home buyers who want a home but have very little money to put down.
Most folks don't know that back in the mid 1930's when FHA first began, the average down payment required was something on the order of 50% of the price of the home. But in more recent times, the FHA has regularly insured mortgages with as little as 3.5% down.
On the surface this seems to be an ideal way to stimulate housing sales - facilitate a way for first time home buyers to buy a home with virtually no money down. But the problem is that FHA, (like Fannie and Freddie), is a government backed - i.e. taxpayer backed - entity. As with Fannie and Freddie, if FHA insured loans go bad, it's the taxpayers who foot the bill.
FHA is default insurance for the lender. When a borrower defaults on an FHA mortgage, it's FHA who steps in to pay the lender who agreed to fund a low down payment loan for a borrower who represents a higher risk. Without such insurance, lenders simply would not loan money to home buyers who could not make a 20% down payment. And if there are no loans for high risk borrowers, there are fewer home sales, and fewer home sales means fewer sales commissions for NAR members. And, fewer commissions means fewer NAR members.
In mid 2008, as the housing crisis was really beginning to take shape, the National Association of Realtors lobbied congress heavily to increase FHA loan limits and use FHA to keep the housing market going at a time when the housing market was showing serious signs of problems. At the time, I was a member of the NAR, and I vividly recall their massive efforts to get myself and the tens of thousands of other members to contact congress to demand that they vote in favor of expanding FHA. In my view, their demands for expansion of FHA were nothing more than an attempt to replace the collapsing subprime market via FHA insured loans. At the time I wrote an article for my real estate blog that tried to argue that FHA expansion was not a good idea.
NAR members were simply expected to support this idea. There was no general discussion about whether or not this was in the best interest of the public we purported to serve, and no thought for the fact that FHA was taxpayer backed insurance, that could cost the taxpayers billions of dollars if these loans did default.
Not to mention tainting the reputation of the members themselves, who already looked pretty bad at the time for appearing totally unaware of the impending collapse of home prices. And, as I have shown in previous articles, even as late as July of 2008, the NAR was still oblivious to the fact that the housing market was collapsing, resulting in further tainting of public confidence in the NAR's ability to report accurately on the housing market. Indeed their Chief Economist at that time, David Lereah, was eventually named one of the 25 people most responsible for the housing crisis, by Time Magazine. Such publicity hardly helps reinforce the public image of NAR members.
So here we are in 2012, with a housing market that has lost some 7 trillion dollars of value, and FHA has announced higher loan fees, to help bolster their reserves, which are used to cover losses that must be paid by FHA insurance. The NAR is saying that FHA is in good financial shape, and that this latest fee increase is needed because of falling home prices. Watch the NAR's video explanation here.
But according to Edward J. Pinto and Peter J. Wallison of the American Enterprise Institute, FHA uses lax accounting standards to obscure the fact that they are insolvent. In fact, in this article, the AEI says that "If FHA were a private mortgage insurer, they would have been taken over by their regulator long ago."
Here is an excerpt from AEI's detailed analysis of FHA's financial status:
"As complicated and unusual as it is, the FHA’s accounting system can still be penetrated and understood. It shows that the agency’s traditional single-family program has about $1.2 billion in “economic value”—which under government accounting is called “capital”—supporting over $1 trillion on loan guarantees. That is leverage of close to one thousand to one, far outstripping even the government-sponsored enterprises’ (GSEs’) scandalous record. As we will show, using its own optimistic assumptions, the FHA is already on the verge of insolvency. If its accounting were closer to the customary accounting for a mortgage insurance company, it would be deeply insolvent, and no state insurance regulator would allow it to continue operating."
Why does all of this matter?
First, higher FHA funding fees mean that borrowers are paying more to buy a home. But that's only part of this story.
Fannie, Freddie and FHA are the glue that holds what's left of the U.S. mortgage market together at this point. But it's all taxpayer backed. Private investor confidence in the mortgage market has been destroyed. As a result, private investment in the secondary mortgage market has all but disappeared. Sweeping the financial problems with FHA under the rug only continues to undermine confidence in the U.S. mortgage market as a viable investment.
Without a private source of funding for this market, the entire U.S. housing industry will be left with no one but the taxpayers to guarantee home mortgages and make the mortgage payments too. If we fail to restore confidence in FHA and the general secondary mortgage market, so that private investment will return, we're looking at a housing market that will never return to the tradition it once had as one of the world's blue chip investments.***
Donna S. Robinson is a 16 year veteran of the real estate industry. Her book, "Fundamentals & Strategies For Buying & Selling Homes" is available on her website at RealtyBizConsulting.com.
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