AS THE S&L losses swell, people are anxiously looking into all the other programs in which the government underwrites private borrowing. Most of the big ones involve housing. The Federal Housing Administration's mortgage insurance fund has been losing money for some time, and its managers apprehensively hired Price Waterhouse, the accounting firm, to do an audit. In a report last month the accountants declared it still solvent but on a course that by the late 1990s would put it in bankruptcy. That has set off a frantic last-minute attempt to patch FHA reforms into the housing bill that is now close to passage.
At the urging of the Bush administration the Senate has added a provision that would strengthen the mortgage insurance fund. But it would raise significantly the amount of cash in hand that you need to buy a house with an FHA loan. That has generated a sharp reaction in the House, where the housing bill is about to come to the floor. Furious negotiations are underway this week to try to work out a compromise.
The guiding purpose of FHA lending has been to help people buy homes, and particularly young people who have adequate incomes but very little ready cash. Because FHA loans currently can cover most of the closing costs of the sale, they can easily equal the full market value of the house -- or a little more. That invites defaults, and there has been an epidemic of them in recent years.
The administration is pressing for two major changes. It would cut the coverage of closing costs, to ensure that new owners have at least a few dollars of equity in their property. And the administration would base its mortgage insurance premiums, for the first time, on risk. The smaller the down payment, the higher the mortgage insurance premium. One effect would be to raise the cash required at settlement -- from $3,100 to $4,400, the administration says, for a loan of $70,000. That's not a large increase, but it's large enough to put a mortgage beyond the reach of at least some potential buyers.
The demands for financial safety are cutting across the social purpose of the FHA and the belief -- widely held in Congress and throughout the country -- that it's in the public interest to encourage as many people as possible to own their homes. Any tightening of lending has an impact on the real estate and construction industries, and on the whole economy.
It's important to keep the possibility of home ownership open to as many families as possible. But the S&L disaster suggests two firm principles. It's dangerous to lend more on a property than its market value. And it's double dangerous to run a government-backed insurance fund by rules under which it steadily loses money.