The House recently passed legislation to reform the Federal Housing Administration, which is facing a potential taxpayer bailout thanks to all the bad mortgages that it has backed. When the housing bubble burst, the FHA rushed in to prop up the market and now insures approximately 30 percent of new mortgages. In 2006, the figure was just 3 percent.
A key “reform” in the bill would allow the FHA to increase the annual premium borrowers pay from 0.55 percent of the mortgage to as much as 1.5 percent. However, FHA officials only plan to raise the premium to 0.9 percent while decreasing the initial fee borrowers pay from 2.25 percent of the mortgage to 1 percent. On net, the changes would generate more money for the beleaguered agency, but this is hardly strong stuff.
Amendments offered by Republicans that were voted down reveal more evidence of the legislation’s weakness. One amendment would have raised the FHA’s minimum downpayment to 5 percent from 3.5 percent. Ridiculously low dowpayment requirements leave borrowers with little skin in the game, which means they’re more likely to default and foist the bum loan onto the FHA. That the House couldn’t go along with 5 percent – itself not ideal – indicates how unserious it is about reining in the FHA.
Two other failed amendments show a similar lack of regard for taxpayers. The first would have returned the FHA’s market share to 10 percent for all new mortgages by 2012. The second would have repealed the FHA’s temporary authority to insure loans as large as $720,000.
FHA defenders – particularly the politically-powerful housing lobby – insist that the agency is crucial to cushioning the housing market in the wake of the meltdown. But, as a Cato essay on housing finance
demonstrates, it was government interventions in the housing market that facilitated the housing boom and bust. The FHA doesn’t need to be reformed – it needs to be abolished.