Can FHA Mortgages Re-Start the Real Estate Marketplace?

by Peter G. Miller
August 20th, 2007

Writing in the Boston Globe, Robert Kuttner says “the subprime mess is not so much a new crisis as a continuation of the saga that began with the savings and loan scandal of the early 1980s, when executives of S&Ls went on a risky lending binge with government-insured money. Then, as now, there are many individual culprits, but the real problem is the ideology of deregulation and the capture of public policy for private gain by the financial industry.”

Let me offer several responses which relate to FHA financing.

First, when you hear the arguments for FHA “modernization” you can also hear a basic truth in what Kuttner is saying. FHA modernization has good points and bad points from a borrower perspective — but it is the negative items which get almost no attention. If the program produces huge losses then it will be a “taxpayer” project, but if it produces huge profits they will go to the private sector.

Second, a major reason the S&Ls failed is NOT because they engaged in risky lending — though some did. Instead, the government redefined the meaning of “assets” and the result was that profitable S&Ls became magically insolvent. The government paid out billions to S&L owners and investors once courts determined what really happened.

Kuttner says “the government should resume directly subsidizing starter mortgages and construction of homes for moderate-income buyers. These programs need to combine careful credit assessment with counseling, rather than relying on the tender mercies of the sleaziest wing of the private mortgage industry. It does no favor to aspiring home buyers when dreams end in foreclosure.”

The government already has such a program in place. The FHA mortgage features careful credit assessing — and also real appraisals and full-documentation loan applications. The present FHA program helps many first-time buyers with moderate incomes.

We don’t need something new — we just need what we’ve got.

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