FHA Banks Multi-Billion Profits, Seeks Less Success

First we learn that HUD will raise borrower costs and then we find out that the FHA program is already a multi-billion profit center for the federal government.

On February 14th HUD announced that it is raising the annual mortgage insurance premium for new borrowers by .25 percent. That’s an increase of about $30 a month or $360 a year.

The very same day, HUD also released it’s proposed budget for 2012. And what do we find there?

For the Mutual Mortgage Insurance fund we discover that it increased by $2.65 billion in fiscal 2010, that it’s expected to grow by $9.76 billion in fiscal 2011 and for 2012 HUD projects that an additional $5.01 billion will be added to the account.

You can’t, of course, increase reserves without program profits. The billions of dollars that HUD is stashing away are profits, evidence of a well run-federal program and a reality that HUD now wants to ignore so that private lenders can get a subsidy.

“It is critical, however, that we pave the way toward a robust private mortgage market,” says HUD. “To that end, the FHA will raise premiums pursuant to authority granted by Congress last year.”

Really? It’s HUD’s job to create a more robust private sector by making FHA loans artificially less attractive?

Instead of a back-door subsidy to lenders, why isn’t it the job of mortgage brokers and mortgage bankers, of banks and S&Ls and credit unions, to be more competitive? Instead of raising rates for FHA mortgage products, why don’t private lenders reduce the fees and charges they demand?

And it is a subsidy that will lead to higher mortgage costs. As Fitch Ratings points out: “At the heart of U.S. housing reform efforts sits a fundamental tradeoff between increased privatization, which would reduce mortgage availability and raise borrower costs, and continued government support, in which taxpayers subsidize mortgage lending and ultimately bear significant risks.” (Emphasis mine.)

Let’s be fair:

  • It wasn’t the FHA which drove the mortgage marketplace into the ground by offering toxic loans such as option ARMs.
  • It wasn’t the FHA which originated loans with no doc mortgage applications.
  • It wasn’t the FHA which overcharged million of borrowers.(According to the Wall Street Journal, 55 percent of all subprime borrowers qualified for better financing in 2005, a figure which rose to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007).

Unlike the private sector, no one at the FHA gets an executive bonus for millions of dollars even though the FHA program is stable, secure and well run. No one at the FHA has HUD stock options.

The folks at HUD have done a terrific job in the midst of the greatest financial failure of our time. As HUD points out:

Since 2009, the “FHA has helped over 2 million families buy a home – 80 percent of whom were first-time buyers. FHA also has helped nearly 1.5 million existing homeowners refinance into stable, affordable products, with monthly savings exceeding $100 in most cases. FHA financing was used by 38 percent of all homebuyers, insuring, along with the VA and federal farm programs, 81 percent of loans to African Americans and 73 percent for Hispanics in 2009. It is a vital financing source for first-time homeowners, roughly 30 percent of whom use FHA insured financing.”

It’s hard to look at these numbers and not think that the unneeded and unnecessary decision to raise the annual FHA mortgage insurance premium will have a disparate — and substantially negative — impact on minority home buyers and first-time purchasers in general.

For fiscal 2012 HUD wants to set aside $72 million for “fair housing and equal opportunity.” Perhaps some of the money can be used to investigate, well, HUD.

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Posted in: Mortgages

1 Comment on "FHA Banks Multi-Billion Profits, Seeks Less Success"

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  1. Jon Berry says:

    At the very time we should be making it less expensive and easier for people to qualify to buy homes, FHA goes and does this. I understand the concept of higher risk brings higher return, and that we don’t want to go back to making overly risky mortgages, but the pendulum has swung too far.

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