FHA, Housing's Hero, is Under Fire

According to the New York Times, Republican lawmakers are worried that the rapid growth of FHA loans may necessitate a government bailout, akin to those that were necessary to keep Fannie Mae and Freddie Mac afloat. However, David H. Stevens, the FHA commissioner, told lawmakers that his agency will not need a bailout of any kind.

Currently, the FHA has backed close to 2 million mortgages with an aggregate value of more than $328 billion. With its 3.5% down payment requirement that allows first time home buyers to get into a market badly that needs their dollars, the FHA currently insures slightly over 21% of all mortgages that were issued last year. Two years ago, when Fannie Mae and Freddie Mac led the mortgage pack, the FHA was the little kid on the block, backing fewer than 6% of all loans.

Now, however, new buyers depend on the power of the FHA, and so does the real estate market. Because of the real estate bust, housing prices have come down to manageable levels. As a result, people with lower and middle incomes can once again afford to purchase a home of their own. However, without the ready access to capital that the FHA provides to these fledgling buyers, the housing market would be in even worse condition that it is now.

Despite Congressional protestations about the FHAs low down payments requirements for home buyers, these FHA funds are not so easy to come by. Without a credit rating of at least 620, and thick stacks of paperwork that prove income and employment, the FHA does not dispense any money. However, according to Ben Bernanke, who spoke at the hearings, while the FHA is helping to support the housing market, these low down payments may provide for a greater risk of loss. Ultimately, he suggested, the FHA loan process is a trade off.

It is interesting to note that the FHA was created by President Roosevelt during the Great Depression in order to resuscitate a real estate market that was in the doldrums. In the ensuing years, the agency helped people with low incomes who could not afford the larger down payments that used to be customary.

That was before housing prices moved up faster than the rate of inflation. Now, the FHA once again is serving the same purpose it did when it was first founded. It is helping to revive a housing market that has managed to unhinge our nation’s, as well as much of the world’s, economy.

Representative Scott Garrett (R-New Jersey), suggested that FHA down payments should be moved up to at least 5%. Such statements can only come from people who have never watched first time home buyers scramble to find an additional $200 dollars to fund a surprise, last minute closing cost.

Fortunately Mr. Stevens countered that suggestion with the observation that an increase in down payment would eviscerate the housing recovery. He also said that FHA mandates only 30 year, fixed mortgages. There’s nothing fancy going on, so the agency is easily audited. He also said that the FHA would regain its 2% capital reserve ratio within the next 2 to 3 years. So the agency will not require taxpayer assistance of any kind.

Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com / 561 / 213 – 6139
www.MarcJablonHomes.com
Exclusive to Huliq.com