Does The Federal Reserve Support FHA Modernization?
July 31st, 2007
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Usually when the Chairman of the Federal Reserve speaks just about everyone listens, in part because it’s tough to get a straight answer or to find a simple sentence.
Speaking before the Senate Banking, Housing and Urban Affairs Committee, Fed Chairman Ben Bernanke offered the following comments regarding FHA reform according to a http://www.knowledgeplex.org/news/649531.html”>transcript from Knowledgeplex.com, comments which hardly represent a strong endorsement of modernization.
“There’s clearly less reliance on the FHA than in the past,” said Bernanke. “My sense is that part of the problem is lack of flexibility — the costs of dealing with the FHA, lack of diversity of products, and so on. So I think that modernizing the FHA — trying to make it more responsive, easier for ultimate lenders to work with, and so on, might reverse this trend. It might give the FHA a larger share in the market, which could be a positive thing.
“I guess I would point out that the FHA does have, I think - if I remember correctly, I think it still has a fairly high delinquency and default rate and it doesn’t - it hasn’t solved the problem of, you know, delinquencies, and so on. And so as those changes get made, I would suggest moving with some caution to make sure that we don’t create yet another source of problems in terms of inappropriate loans for specific borrowers. So I do see a case for trying to make the FHA more modern and to expand its role but I would, you know, urge some caution and go slow on that.”
The solution to defaults under modernization, of course, is simply to get rid of risky borrowers — the GAO says that 20 percent of today’s borrowers would not qualify under the modernization program.
But if the FHA is not going to take a chance on risky borrowers, then why do we need a federal mortgage program? The private sector can churn out mortgages to low-risk borrowers — though given recent foreclosure headlines a lot of private lenders have obviously been insufficiently cautious.
Bernanke, of course, can be quoted as being for modernization (”I do see a case for trying to make the FHA more modern and to expand its role”) and against modernization (”I would, you know, urge some caution and go slow”).
As a result of such clear and crisp thinking it will never be possible to say that Mr. Bernanke gave incorrect advice.
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October 6th, 2007 at 12:39 pm
Thank you for sharing!
January 5th, 2008 at 8:06 pm
I’m just wondering if modernizing the conventional loan is such a good idea. Not even mentioning FHA loans. I mean look at what modernization did to the the mortgage industry. I really hope we can stick this one out and learn from this mistake. Dept is a problem.