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The FHA goes upmarket

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Monday, November 30, 2009

CREATED DURING the depths of the Great Depression, the Federal Housing Administration has a long history of supporting homeownership in the United States. In recent decades, its mission has been to enable lower-income Americans to tap otherwise inaccessible mortgage credit. Purchasers who meet certain qualifications can get a house with a lower-than-usual down payment -- as little as 3.5 percent, currently -- and the FHA compensates the lenders for the added risk by agreeing to pay off defaulted loans. The money comes from buyers' insurance premiums, not tax revenue, but these deals are possible only because, in the final analysis, they're backed by the U.S. government.

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One may debate the costs and benefits of the FHA's historical role. At relatively low upfront taxpayer cost, it has helped expand homeownership, even though many loans went sour over the years. But what must be debated, and indeed challenged, is the stepped-up use of the FHA to boost demand for, and hence the price of, houses in the current crisis. This is true not only because of the fiscal implications; the FHA's reserves are currently below the statutory minimum, raising the specter of an eventual taxpayer rescue. It is true also because of the regressive distributional implications; the FHA is increasingly helping people who are decidedly not poor to buy houses that are anything but modest.

Legislation last year nearly doubled the maximum mortgage the FHA could insure, to $729,750 for single-unit properties and almost $1 million for multi-unit ones. As a result, the FHA is moving into expensive markets, especially on the West Coast, in which it previously had little or no role. Even some fairly fancy condo buildings are now trumpeting FHA financing. As the New York Times reported recently, among those buying property with little or no money down, thanks to FHA, are investors and well-off people who could have come up with more equity. Larger loans represent a greater burden on the agency if they ultimately default. On the other hand, it's also possible that bigger loans are less likely to default, since richer people tend to take them out in the first place. Our point here is that, whatever the additional risk may be, the federal government is assuming it in a way that facilitates the upward transfer of wealth.

When adopted last year, the higher FHA loan limits were billed as a temporary fillip to the housing market. But temporary subsidies have a way of enduring. Congress has already extended the higher limits once, and House Financial Services Committee Chairman Barney Frank (D-Mass.) has spoken of making both ceilings $100,000 larger and permanent.

This might help build a floor under the still-shaky housing market, as intended. But it would also complete the mission creep of the agency from one dedicated to upward mobility to one that also produces middle- and upper-middle-class enrichment. Since when is that a job for the federal government?


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