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business newsWhy FHA Insured Mortgages Are a Disaster in the Making
The FHA drastically expanded program to keep mortgage lending from drying up. But that will soon expose taxpayers to $1 trillion in direct mortgage risk.
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In a previous article, I pointed out that there were two main props supporting the housing market now. We examined the first one in detail -- the banks withholding most foreclosed homes from the market.
The second prop is even more important: the soaring percentage of home mortgages that are insured by the Federal Housing Administration (FHA). Let's take an in-depth look at the FHA.
A Little History
The Federal Housing Administration (FHA) was created by Congress in 1934 to enable lower-income families to purchase homes that they'd otherwise not have been able to afford. Remember, this was only a year after the banking system totally collapsed and roughly 4,000 banks had permanently shut their doors. To encourage reluctant banks to write mortgages, the FHA was authorized to provide insurance for mortgage loans backed by the full faith and credit of the United States.
FHA-Insured Loans Saved the Housing Market from Collapse
During the housing bubble years of 2004-2006, the FHA played no role in supporting the boom. When the market finally seized up in the spring of 2007, the FHA made a determined effort to keep mortgage-lending from completely drying up. The chart below puts this into perspective.
As of June 2010, the FHA had 6.4 million insured loans in force. Three and one-half million of them were put in place during FY 2008-2009. The total dollar amount of FHA insurance in place through June was $865 billion. At the current rate of insured loan originations, the total of insured loans in force will exceed $1 trillion within six months.
FHA Underwriting Standards
Although the FHA was essentially a non-factor in facilitating the housing boom, its standards for providing mortgage insurance have been extremely lax to say the least.
During his appearance before the House of Representatives this past March, the FHA Commissioner, David Stevens, submitted detailed written testimony which pointed out that 6.2% of the entire insured loan portfolio had been issued to homebuyers with FICO scores below 500. Really. That's roughly 360,000 insured loans that were provided to owners with FICO scores less than 500. Keep in mind that the accepted standard for subprime mortgages during the bubble years was a FICO score lower than 620. More than 37% of these loans are now at least 60 days delinquent, in foreclosure, or in bankruptcy.
Compounding the problem, between 2001 and 2008 the FHA provided a program known as seller-funded down-payment assistance (SFDP). It allowed non-profit consumer advocacy groups to "donate" the 3.5% down payment to low-income buyers seeking an FHA insured loan. The seller was often a homebuilder who "contributed" the funds to the non-profit which passed it on to the buyer.The program was riddled with fraud. Many of the non-profits were really tools of the builders. To cover their costs, the builders simply jacked up the price of the home. In 2006, the Commissioner of the IRS called these mortgages "scams" which "damage the image of honest, legitimate charities." After mounting criticism, the program was finally ended in 2008. The FHA actuarial report issued in 2009 calculated that the program had cost the Agency nearly $10 billion in losses.
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