FHA Insures Luxury Condos

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The Treasury Department and Department of Housing and Urban Development held a high-profile conference this week on the “Future of Mortgage Finance.” The federal government is currently backing more than 90 percent of new mortgages through Fannie Mae, Freddie Mac, and the Federal Housing Administration. 

Symbolic of this unprecedented federal intervention into the housing market is news that the FHA is insuring mortgages on luxury condos in Manhattan.
 
The New York Post reports
Intended to spur low-to-moderate-income home ownership, relaxed regulations by the Federal Housing Administration have buildings in TriBeCa, Midtown, Battery Park and on the Upper East and West sides turning to the agency for help selling their swanky condos. 
The FHA has been insuring mortgages for apartments at the 98-unit Tempo development in Gramercy Park since March, Bloomberg News reported. 
The development features an outdoor movie theater, panoramic city views, apartments valued between $820,000 and $3 million – and, thanks to the government, the ability to land a mortgage with less than a $100,000 deposit. 
The FHA will insure mortgage loans at the building for up to $729,750 – which means that if a homebuyer defaults on a mortgage, the agency will pay for it, spurring banks to sign off on mortgages they likely would not have otherwise, given the current financial climate. 
It also benefits the well-to-do who might have had problems getting into deluxe properties for the very well-to-do. “It’s a government seal of approval,” Tempo marketing chief Whitney Gollinger told Bloomberg News. 
The upper limit on mortgages that the FHA will insure was “temporarily” increased to $729,750 in the 2008 stimulus bill signed into law by President Bush, which demonstrates the bipartisan nature of the federal government’s housing overreach.
 
Mark Calabria attended the mortgage finance conference and found it to be a virtual echo-chamber of special interests calling for the government to maintain its imposing presence: 
Maybe about 80 percent of the attendees were blindly and violently attached to the status quo. Most offensive to those us who fight for free markets was that the industry representatives were the most vocal advocates for the status quo. To even suggest that lenders should bear the risk of loans they make was crazy to this group. It was a clear reminder that being pro-market and pro-business are generally two very different things. 
What is the future of mortgage finance in the U.S.? Based on Mark’s observations, taxpayers and limited government devotees have little cause for optimism: 
If the Administration was hoping that this group was going to come up with answers, then they must have been sorely disappointed. If Obama is serious about taking the taxpayer off the hook for risk in the mortgage market, then he is going to have to take on the special interests. My fear is that the event was just the beginning of how health care reform played out: cut a deal with the industry, pay off the Democratic base, and screw the taxpayer. Let’s hope we actually see some change on this one. 
See this Cato essay for more on problems with the federal government’s role in housing finance.