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The FHA Questions Congress Is Afraid To Ask

Your government is at work again. The House Committee on Financial Services — which could be balancing the budget or helping the Postal Service — is instead asking about “The Role of the Federal Housing Administration in Housing Finance.”

The purpose, of course, is to make the FHA less competitive by raising rates and looping off programs. This is a grave concern for no one except profit-making lenders. In 2011, as an example, one industry leader told Congress that lenders were deeply worried because the FHA might be “over-utilized.”

This is like the San Francisco 49ers arguing the Baltimore Ravens had an unfair advantage at the Super Bowl because their players were allowed to wear helmets.

The Republican-run committee will wonder about the FHA’s current finances but you can bet that few if any words will be mentioned regarding the period from 2000 through 2009 — the Bush-Administration period when the FHA ran up the massive losses that it must make up today. Nothing will be said about the enormous annual profits which have been generated by the FHA since 2009.

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The FHA, of course, did not fix the LIBOR rate, but why have a hearing about that? The FHA never allowed new mortgages to be underwritten with no-doc loan applications. But hey, let’s not look into that issue.  The FHA didn’t overcharge borrowers so why would Congress want to examine why millions of owners lost their homes with foreclosures and short sales?


(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).

No one will want to know why it’s perfectly fine to bail out large banks but somehow immoral to assist the FHA. 

Most importantly, no one will ask why lenders who make FHA loans are provided with 100 percent protection against any losses.

How To End Losses

After all, the surest way to cut FHA losses would be to reduce potential claims. Who is making the claims? Not borrowers. FHA insurance is used to compensate lenders in the event of loss. If the potential compensation was reduced by 3.5 percent — merely the required down-payment amount for most FHA borrowers — then surely claims again the FHA would decline AND lenders might underwrite more carefully.

Underwriting more carefully might mean fewer claims against lenders for dumping substandard products into the FHA program, thus increasing FHA losses. Fewer claims against lenders might also result in reduced legal costs, fewer buy-back demands, greater profits and larger shareholder returns — things which used to be as important as executive bonuses.

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