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Should FHA Homes Be Sold To “Bad” Investors?

by Peter G. Miller
December 1st, 2009

Cleveland has been hit hard by the economic downturn, as has the state of Ohio. Curiously, the FHA is now being blamed in part for the continuing woes which impact the Cleveland area.

“Right now,” says the Cleveland Plain Dealer in an editorial, “HUD’s left hand — its mandate to maximize a return on assets — appears to have the upper hand over its right, the stabilization of communities hard-hit by foreclosures.”

The paper goes on to say the result of such conflicts is “a cataclysm of HUD-owned eyesores sapping the vitality of economically fragile Cleveland neighborhoods and inner-ring cities.

“While some HUD homes, which are always sold ‘as is,’ are allowed to languish, other foreclosed homes are sold for a pittance to investors with poor performance records.

“Those sales eviscerate HUD’s community-salvaging efforts — but they boost the coffers of the Federal Housing Administration. HUD takes title of foreclosed homes with FHA-backed mortgages and sells them to help the FHA replenish its declining reserves.”

The paper’s complains are unfair in the sense that the FHA is not acting alone. Every lender and mortgage insurer is happy to sell foreclosed homes for as much as possible and no lender or insurer takes any responsibility for the actions of the buyer once the home is purchased.

National Problem

You can guess that the criticism in Cleveland is likely echoed nationwide. That said, what is the solution?

The paper says the remedy is to “stay clear of bad investors and work more closely with cities to remedy blighted properties.”

I’m good with the communication part, but how is HUD supposed to identify “bad” investors? “Bad” according to whom? And how do you know in advance?

It’s hard to argue that HUD is selling homes in some areas at bargain prices but this is hardly by design. The reality is that no one other than HUD would be more elated to get higher prices for foreclosed homes because that’s the surest way to keep up FHA mortgage reserve requirements.

The real issue here is different. The reason prices are low is a lack of demand. If more people were interested in buying HUD homes in the Cleveland area then prices would go up.

It would be great if HUD could sell homes at premium prices to city governments and local housing groups. Alas, these are the very groups that have no money — thus defeating an important HUD mandate to raise cash when homes are foreclosed. Also, it should be said that local governments are sometimes notorious for owning thousands of abandoned housing units which are not fixed up for years on end. They may not be any better than HUD when it comes to handling housing — and some may be worse.

A Way Out

There is a solution here but it requires a different approach. Look at the repair and improvement of foreclosed FHA homes as a public works project. Put local people to work fixing up area homes. Use FHA mortgage money to finance qualified buyers when the properties are refurbished. This approach would create jobs, improve the local housing stock and raise area home values.

A jobs program would require that governments spend tax dollars for such projects, but given today’s economic circumstances why is funding home construction less of a government task then funding roads or schools? In the end, all dollars spent enhance the public good.

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