Who To Blame For New Worries At The FHA

by Peter G. Miller
October 12th, 2009

The headlines are now filled with dire worries regarding the FHA mortgage program.

___FHA: Another Shoe Dropping — Baltimore City Paper.

___ FHA Could Be Next Up For Bailout — NBC News, Los Angeles

___ FHA mortgage loans stumble — St. Louis Examiner

These items would be interesting if only they got to the major issues.

First, the FHA program is an insurance plan. The FHA does not make loans. Insurance plans set aside reserves for tough times. Note that the private mortgage insurance industry has seen massive losses — and also growing reserves.

Second, the FHA has taken a number of steps to protect itself. It raised the basic down payment from 3 percent to 3.5 percent and it banned (with Congressional help) seller-assisted third party down payment plans. FICO scores are now 692 versus 660 last year.

Third, no one complained — or even noticed — when the FHA mortgage program was converted from a mutual insurance plan to a plan old insurance program on December 8, 2004 under the Bush Administration. This is why you cannot get a premium refund from new FHA loans.

Fourth, no one complained — or even noticed — when more than $14 billion was taken out of FHA reserves to prop up the government. About $13.5 billion was given to the Treasury under the Bush Administration, about $550 million is expected to go to the Treasury under the Obama Administration during the past fiscal year. Who gave me these numbers? HUD.

Fifth, that $14 billion would have generated an estimated $2 billion in additional interest over the past eight years.

Sixth, the money taken from the FHA and the interest lost would have added roughly $16 billion to FHA reserves — meaning that there would be no “crisis.”

In other words, in this economy you would expect more delinquencies, foreclosures and reserve losses regardless of who was running the program. Major university endowments are down 30 percent, so why wouldn’t the FHA run into trouble?

But the problem with the FHA is not that it made risky loans. It’s not that it is a “subprime” lender of some sort. The problems we now see didn’t just happen. It took years. The FHA program was driven into the ground by the Bush Administration and the money it removed from the program.

Why did the Bush Administration removed borrower premium dollars from the FHA program? Very simple.

Remember that during the last four years of the Clinton Administration we had four budget surpluses in a row and there was actually talk of paying off the federal debt. What happened to those conversations?

Under the Bush Administration there were eight straight years of massive deficits, deficits that amounted to $4.35 trillion.

In other words, if you take in money (like FHA premiums) without raising income taxes it appears that you have a smaller annual deficit.

It’s fair to worry about the future of the FHA — but it would be equally fair to talk about how the program wound up in this position.

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