Let Federal Housing Loans Expire

August 12th, 2011 at 10:56 am | 4 Comments |

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October 1st–the date that higher Federal Housing Administration (FHA) loan limits expire–would be a good time for Congress to continue doing what it has done almost all year: nothing. If it wants to return a modicum of normalcy to the housing market, look Congress would do well to sit on its hands and let the higher limits lapse.

Doing so would improve America’s balance sheet, return the FHA to its rightful place, and even help the housing market.

Some background first: the FHA is a New Deal “alphabet soup” agency created in 1934 to promote homeownership for lower-income Americans. It doesn’t directly make loans itself but, instead, provides private lenders with a guarantee on the loans that they make. Since FHA is a government agency unlike the once-nominally private Fannie Mae and Freddie Mac, taxpayers ultimately bear the full risk of this guarantee.  Because it tends to grow in bad economic times, the FHA’s impact on the housing market to tends to shrink as homeownership rises. When Jimmy Carter’s stagflation forced homeownership down in the late 1970s, FHA had a market share of nearly 20 percent. At the all-time homeownership peak (nearly 70 percent) in 2005, FHA underwrote only 3 out of 100 mortgages. In 2008, trying to do something about a severe housing downturn: Congress increased FHA loan limits from a reasonably healthy $362,790 to a sky-high $729,750. (In the second quarter of 2011, the median home in the United States sold for $185,000). The increase, coupled with a general withdrawal of purely private credit, increased FHA’s market share to nearly 30 percent and, like most growth in the FHA, correlated with a decline in homeownership.  (The rate just dropped below 60 percent.)

Whatever the merits of a bigger FHA, in fact, the agency clearly poses a risk taxpayers shouldn’t have to bear. It currently holds more than $1 trillion in loans and has failed to meet its statutory capital requirements. Getting its books into order should be a priority. Particularly given that a George Washington University report shows that the new higher-value loans have a higher default rate than the lower-limit ones ones, stopping them altogether would be a step towards making sure it doesn’t ever need a bailout.

Furthermore, reducing the loan limits is simply a matter of common sense: the current policies provide implicit government subsidies for people who buy luxury homes. In Fairfax County, Virginia—America’s wealthiest large jurisdiction—the FHA maximum will help provide taxpayer financing for at least 300 homes now on the market that have five or more bedrooms and at least 20 that boast swimming polls. One that I found in a particularly desirable school district (asking price, $719,000), is a five bedroom, 3.5 bathroom house with granite countertops, stainless steel appliances, and a second kitchen in the basement.  Insofar as the government helps citizens afford homes, it should focus on people with lower incomes—not those who want stainless steel appliances and extra kitchens.

In any case, reducing the FHA limits will help America’s housing market return to normal. The FHA’s current huge footprint places burdens on the taxpayer that private lenders should be taking on themselves. Banks are currently flush with cash and could make by themselves many of the loans the FHA now gaurentees. In fact, even the American Bankers Association, whose members get nearly-riskless profits from FHA lending, has said it agrees with the Obama administration’s desire to let the higher limits expire.

America’s housing market is and will remain a mess. Letting the higher FHA loan limits expire would be a step in the right direction.

Recent Posts by Eli Lehrer

4 Comments so far ↓

  • JohnMcC

    Even allowing for the low expectations one has for Mr Lehrer, this is an astonishingly bad essay. Even allowing for the need to brush quickly by the housing downturn of the ’70s it is simply stupid to toss out the phrase ‘Jimmy Carter’s stagflation’ and then go hurtling on as if one had demonstrated any knowledge of the events he’s describing shows a great ignorance. I was there — selling lumber and building supplies. This is what happened: The VietNam War, conducted by Mr Nixon @ that point, drove up federal spending (LBJ had fought the war on the cheap, BTW; the FY 69 budget actually came into balance. Nixon blew way past that.) Then in Oct ’73 came the YomKippur war and the Arab oil embargo. Falling on top of an already over-heated (virtually full employment) economy, petroleum doubled in price instantly. Nixon responded by clamping down WWII style wage and price controls, in effect putting a tight lid on a rapidly boiling kettle. By ’74 inflation was running @12%. This caused a profound recession. The ‘stagnation’ part of that neologism was provided by the Republican administration (and our ‘allies’ in Saudi Arabia). It was in ’79 when Mr Volcker was made Chairman of the Fed with the charge to stop inflation that painful steps were taken to correct the economy. (The Ford administration had hoped that WIN buttons worn on enough empty suits would work; google ‘WIN button’ to see the ineffectual efforts the GOP touted.)

    Interest rates hit 18% before that Republican disaster was wrung out of our economy like dirty water from a washrag. And it was a miserable time. I ended up living with wife & baby in my mother-in-law’s back bedroom. And Ronald Reagan won the election in ’80 with his ‘misery index’ and 50.7% of the popular vote. He took over a government that had the smallest deficit since Hoover. And ever since that turning points Republicans have governed as if “deficits don’t matter” (as a certain Vice President said not too long ago). Until they discovered deficits anew in 2009. After wrecking the economy a 2d time in my life.

    And Mr Lehrer, you seem incensed that a 5 bedroom house in Fairfax can be quaranteed by an FHA loan. Why do you hate the rich? Please — give up this class warfare. Use your head and become a Democrat.

  • think4yourself

    In 2008 the FHA expanded to $729,750 because many homes were of the “jumbo” size and conventional financing was unavailable. While I agree that the merits of government guarantees of mortgages for mortgages of this size are a problem, what would be the result if you ended the program cold turkey?

    Houses in high real estate cost areas (San Fransisco, Hawaii, NorthEastern Seaboard) would plummet even below what they are today. Arguably you could set back a real estate recovery a couple of years. Also the reasons FHA has grown to such a large percentage of all mortgages is much more complex than a one sentence explanation that implies that the decline in home ownership is the fault of the increased guaranty.

    This is a great idea if you want to stick it to the Liberal coasts and win points in the midwest where real estate values are less. Not so good if you are concerned about recovery of the real estate and construction market.

    If you want to lower the dollar amounts, perhaps a better suggestion would be a gradual easing (say 10% per year until you reach an agreed upon national standard or perhaps the average for a particular region – for example the median sales price in Hawaii last week was $522K).

  • Frumplestiltskin

    think4yourself, I agree it should be rated by area. Unless Lehrers goal is to make sure that NJ is nothing more than a bedroom community for Wall Street there has to be some consideration for Cost of living with regard to setting rates, however I am also not sure how much these guarantees run up the costs of housing, we seem to be trying to lock in the gains for those who have made a great deal of money from appreciation. No guarantees and those costs in NJ will become more affordable. My mother paid $7,000 for her house and now is valued at over $200,000 (not sure how much it will sell for today, however) based on nothing but inflation it should cost $59,000.

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