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, 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.