Lawmakers scrutinize lending at FHA
WASHINGTON — The Federal Housing Administration was born in the Great Depression to help revive a devastated real estate market with government mortgage insurance. But the worst economic downturn since then is shaking what had been a stable housing pillar.
A congressional committee last week started examining how the FHA’s reserves for loan losses have dwindled so fast that they soon might fall below their mandated level.
Some lawmakers worry that the FHA is overexposed to the housing market and might need a government bailout. Indeed, they argue, the agency’s lending standards are too weak and repeat some of the problems that led to the crash in the subprime housing market.
They’re particularly concerned about the agency allowing down payments as low as 3.5 percent. With little stake in their homes, they believe, otherwise creditworthy borrowers could walk away should they lose their jobs and can’t afford monthly payments.
“You have to ask the question: ‘Have we figured out what got us here in the first place and are we going to make sure we don’t replicate that failed system?’ ” said Rep. Scott Garrett, R-N. J., who proposed changing the minimum down payment to 5 percent in order to reduce the risk of foreclosures as delinquencies rise.
But new FHA Commissioner David H. Stevens said such a move could threaten the nascent housing recovery. A person looking to buy a $300,000 house, for instance, would have to raise an additional $4,500 for the down payment.
“All that’s going to do is retard recovery,” he said.
Stevens said the agency is making changes to reduce risk, such as lending to people with higher credit scores. And he insisted that the FHA will not need a taxpayer bailout.
But the agency is straddling a difficult line — trying to prime a housing recovery without overextending itself so that it requires an infusion of taxpayer money.
For decades, the FHA played a vital housing role by insuring mortgages for people with steady work but who could not afford a large down payment. The agency allows low down payments to encourage home ownership and insures mortgages from approved lenders. It is funded by premiums paid by homeowners, and those premiums drop off after five years or when the remaining loan balance is 78 percent of the home’s value.
But after the subprime bubble burst and the recession set in, the agency became a major player in keeping the housing market afloat.
“With the collapse of subprime, suddenly they’re more important than ever,” said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank. “I don’t know that they’re prepared to take on that burden.”
With credit tight and savings difficult, the FHA insured 21 percent of new U. S. mortgages last year, from less than 6 percent a year earlier. In some markets, the Mortgage Bankers Association trade group estimates that the FHA insures 50 percent of home loans.
With subprime lenders gone and banks hesitant to make loans with less than a 20 percent down payment, the FHA has become the only option for many home buyers. As of the end of August, the FHA had insured nearly 1.8 million mortgages worth $328 billion this year alone. That’s nearly half the total of $675 billion worth of mortgages on its books, which puts it on pace for its busiest year.
With that extra business comes extra concerns. The percentage of FHA loans that are 90 days or more past due or in foreclosure climbed to nearly 8 percent at the end of June, from about 5.5 percent at the start of 2006, according to the mortgage bankers group.
Fraud by lenders is also a concern, according to an inspector general’s report in June. The number of FHA-approved lenders shot up from 692 in 2006 to more than 3,300 last year, and the agency’s business picked up in some markets, such as Los Angeles, that were largely unfamiliar to it. Those factors, the report said, increased the risk of such lender abuse as fraudulent appraisals.
But alarm bells went off last month when the FHA projected that its secondary reserve fund will fall below the congressionally mandated level of 2 percent of all its mortgages. The fund was at 6.4 percent at the end of September 2007.
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