From the WSJ:
Before the 2007 housing bust, financial analysts who raised questions about Fannie Mae and Freddie Mac’s shaky finances were dismissed as cranks. So it’s worrying to see a thoughtful critique of another taxpayer-backed monolith—the Federal Housing Administration—receive a similar brush-off.
The flap centers around an American Enterprise Institute paper “Is FHA the Next Housing Bubble?” by Wharton real-estate finance professor Joseph Gyourko earlier this month. Mr. Gyourko notes that while the FHA’s loan exposure has grown to more than $1 trillion this fiscal year from $305 billion at the end of 2007, the agency hasn’t “increased its capital reserves commensurately.” Sure enough, the Department of Housing and Urban Development recently reported that the FHA’s capital reserves are 0.24%, a far cry from the 2% statutory minimum.
If the FHA were a private entity, these revelations would alarm investors exposed to the risk and force management to adjust. But the FHA is a bureaucracy, so its instinct is the opposite. In a blog post titled “The Continued Strength of the FHA,” Assistant Secretary for Research and Policy Development Raphael Bostic dismisses Mr. Gyouko’s “outrageous claims” and says the FHA’s books are “sound.” His arguments are worth mulling for what they reveal about what passes for FHA thinking.
Mr. Bostic focuses on the FHA’s expansion and recent reforms. Although the agency expects “record” payouts next year as borrowers default, it forecasts $9 billion of new business over the same period. FHA credit scores have improved markedly: At the end of 2007, 47% of borrowers had a credit score of less than 620, but today that figure is 3.5% and the average credit score tops 700. The Obama Administration has increased FHA premiums three times, made “reforms to credit policy, risk management, lender enforcement, and consumer protections,” and “total liquid assets are at their highest point ever,” Mr. Bostic notes.
In other words, the FHA wants to grow its way out of its problems by shedding subprime borrowers and expanding into prime loans, an area historically served by private insurers. Mr. Bostic makes this argument explicit, arguing that the FHA’s market dominance—the agency now backs nearly one-third of all new single-family mortgages—is “essential” to a housing-market recovery, adding: “Providing access to credit for homebuyers of all income ranges and in all communities, and stabilizing our housing market, has been FHA’s mission for nearly eight decades.”
And here we thought its mission was to make housing affordable for lower-income earners. But if the FHA now wants to dominate America’s housing market with taxpayer monies, that’s even more reason to examine the risks, not ignore them.