FHA Cash Reserves & The Pretext Problem

by Peter G. Miller
September 23rd, 2009

The government is out with its latest home price statistics and there’s both good news and bad: The Federal Housing Finance Agency says home prices in July rose 0.3 percent when compared to June — but values remain 10.5 percent below the highs seen during April 2007.

Combine lower home values with rising unemployment rates and the result for any organization that insures home mortgages is fairly obvious — there will be losses. Thus it hardly comes as a shock that FHA reserves are falling and might dip below 2 percent.

The catch is that much of the yelling and screaming this news has created is out-of-context, the sky-is-falling kind of yammering that makes good political theater but lousy housing policy. It’s a pretext to change the system, to get rid of the FHA program.

One idea is that for some reason there should be no bailout for the FHA. First, the FHA says no bailout is necessary. Second, if a bailout was necessary why would that be more objectionable than a bailout for banks, car companies and Wall Street? Could it be that the benefit would actually be widespread or that the money would not go to executive bonuses?

For instance, the private mortgage insurance industry has had massive losses in the past few years. Is anyone talking about closing down the MI companies? Nope. Instead the idea is to give them additional capital so they can insure more loans.

In an April letter to Treasury Secretary Tim Geithner, it was written that “given current market conditions, it is our understanding that the capital levels for the industry are coming under considerable pressure and that capital constraints are constricting the ability of the mortgage insurance industry to fully support the GSE’s and the lending community in providing needed liquidity to the marketplace. With appropriate capital, the mortgage insurance industry can support significant incremental growth in housing and ensure that mortgage money is available for all creditworthy borrowers. For every additional billion dollars in capital in the mortgage insurance industry, eighty billion dollars of mortgages can be funded and over 500,000 homes can be financed.”

Who wrote this letter? Among others, it was signed by the Financial Services Roundtable, the Housing Policy Council, the Mortgage Bankers Association and the National Association of Home Builders.

In other words, even though the private mortgage insurance industry has had massive losses the idea is to bulk it up — even as there are calls to essentially dump the FHA.

You’ll notice that no one has complained about the $13.5 billion in FHA borrower premiums that was sent over to the Treasury between 2000 and 2007. Think how much bigger the FHA reserve would be if such money has been retained.

The real issue with the FHA program is that it exists. Without the FHA insurance plan the public would have fewer mortgage options and the private sector would have less incentive to offer competitive financial products. If you don’t believe it, just ask someone with an option ARM or an interest-only mortgage — they sure didn’t get such financing with FHA insurance.

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