690,000 Extra FHA Mortgages Save Housing Market

by Peter G. Miller
September 8th, 2009

There have been two contrasting pieces of FHA news lately.

First, we have the dull reality that the FHA program is enormously popular. HUD reports that the FHA program during the first half of August was getting 10,000 applications per day. Meanwhile, many of the companies that were gleefully selling option ARMs and interest-only loans are no longer with us.

Second, the FHA is being criticized precisely because it is successful.

“The Federal Housing Administration,” says the Wall Street Journal, “hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.” (See: Loan Losses Spark Concern Over FHA, Sept. 4, 2009)

Really? Gee, which government officials say this? Do they actually work for HUD or some other part of the government?

“Once the housing market started to collapse,” says MarketWatch, “the government decided the FHA should try to prop up the market. The FHA loosened its standards a bit, though not as far as the subprime sharks had. FHA guaranteed loans with a down payment as small as 3.5% and let borrowers take a lot of cash out of refinancings. Congress also doubled the maximum loan to $729,750.” (See: FHA adopts Countrywide model, but it still doesn’t work, Sept. 4, 2009)

Really? Gee, did not the FHA raise it’s general down payment requirement to 3.5 percent from 3 percent last year? Wasn’t it the FHA that pushed Congress to dump downpayment assistance plans (DPAs) to reduce claims? How, exactly, did the FHA loosen its qualification standards?

“The taxpayers continue to get hit for Uncle Sam’s profligate ways in guaranteeing and insuring loans to virtually anyone and everyone who wanted to buy a house,” says the Cato Institute. “The financial fall-out continues, and this time it isn’t Fannie Mae and Freddie Mac. It is the Federal Housing Administration.” (See: The Coming FHA Bail-Out, Sept. 5, 2009)

Really? Gee, according to HUD the average FICO score in June 2009 was 690 — that’s up from 676 a year earlier. Isn’t 690 higher than 676?

Let’s imagine that in fact FHA loan volume stagnated during the past year. Instead of approving 829,300 purchase money mortgages, 742,041 refinances and 100,308 FHA-backed reverse mortgages, we went back to the totals from a year earlier. That would mean 490,974 loans to buy homes, 390,145 mortgages to refinance and 98,167 reverse mortgages. Hmm. Let’s see, that’s 1,671,649 FHA loans so far this year — and the year isn’t over — versus 979,286 for all of fiscal 2008.

Now ask a question: Given the lousy housing market and the terrible difficulties that people have had financing and refinancing real estate this year, does anyone really think the market would be better if the FHA did not insure an additional 692,363 mortgages? Just how would this have made things better?

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