New FHA Worries: Are They Justified?

by Peter G. Miller
March 8th, 2010
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According to New York magazine, the Wall Street Journal and related properties were bought for $5 billion in 2007 and already the News Corporation, the new owner, has written off $3 billion.

That’s a 60 percent loss in three short years, a matter I bring up for two reasons. First, rich people are not immune from marketplace forces. Second, the Journal’s continuing complaints regarding the FHA mortgage program should be seen for what they are: provocative, sensational and over-blown.

“The federal government’s mortgage-insurance agency is understating how much risk it has taken on, says a group of economists from the New York Federal Reserve and New York University, increasing the likelihood the agency may need taxpayer funds,” says the paper. (See: Mortgage Insurer’s Risk Criticized, March 5, 2010)

Wall Street Bailouts

Not to be a cynic, but if the New York Federal Reserve is so damn smart how come they didn’t stop the flood of mortgage-backed securities which were populated with junk loans and flawed ratings? If they were on their toes would we have needed to bail out Wall Street?

But I digress….

“The economists,” says the paper, “warn that the Federal Housing Administration—which has jumped to fill the void left by the collapse of the private mortgage market—is overlooking factors that signal higher losses, according to a working paper released Thursday. The economists warn that by underestimating the risks it faces, the FHA has increased the likelihood that it will have to ask Congress for money for the first time in its 75-year history.”

Really? The FHA jumped in? Or did lenders who had been making toxic loans fall out? Or go bankrupt? Or need a bailout?

Imagine the marketplace today without FHA mortgages. About 30 percent or more of all new mortgages today come from the FHA. What would happen to home sales if that financing was unavailable? No doubt the Wall Street Journal would be mooing and screaming about the lack of federal action.

No Taxpayer Money

And notice that the Wall Street Journal confirms that the FHA program has NOT asked Congress for a dime in taxpayer money during the past 75 years.

According to the paper, “the FHA requires a minimum 3.5% down payment, while most private lenders require at least 10%.”

No Money Down

Really? What about private mortgage insurance? According to its 2009 study of buyers and sellers, the National Association of Realtors reports that 20 percent of all first-time buyers purchased with nothing down and 58 percent bought with 5 percent down or less. Among all buyers — including repeat purchasers who had sold a prior home — 15 percent bought with nothing down and 43 percent bought with less than 5 percent up front.

If down payments are a concern, what about all the loans with no-money-down that are still be issued? Does the paper really want to get rid of VA financing?

Here’s the reality: Forbes magazine says “the FHA has a $45 billion cushion to cover $757 billion in home-loan guarantees.”

In other words, there’s a 6 percent reserve. That’s awfully good for hard times.

It’s an absolute fact of life that the FHA loan program has had big losses in the past few years. But the FHA mortgage program is not alone, and it surely did not originate the toxic loans which have driven down home values nationwide.

Besides, if big losses were a huge problem someone might notice the market value of the Wall Street Journal.

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This entry was posted on Monday, March 8th, 2010 at 5:39 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “New FHA Worries: Are They Justified?”

  1. rob aubrey Says:
    March 8th, 2010 at 6:57 am

    I’ve said it before and I’ll say it again. The down payment was not the real culprit, it was the stated income loan.

    Let’s face it you could’ve bought a property with a 50% down payment, if you do not make enough to make the payments, then you have a problem.

    If a borrower can prove their income and lives withing their means, no problem.

    FHA needs to get it’s head out of the sand and stop making new regulations, the old ones “when enforced” worked fine.

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