WSJ: A Good Time for Housing Reform
Posted by on January 06, 2014

WSJ Editorial | January 5, 2014

The prospects for progress on Capitol Hill this year are few, but one possibility is reform of federal housing policy. With home prices rising and the economy growing, now is a good time to pare back the government support that has too often led to unsustainable housing booms and taxpayer busts.

Consider the Obama Administration's latest report to Congress on the Federal Housing Administration. The Department of Housing and Urban Development noted last month that the FHA has a negative $1.3 billion net worth, and that's after a $1.7 billion Treasury capital infusion in September to offset losses. FHA insures more than $1 trillion in loans and has now missed its federally mandated 2% minimum capital standard for five years.

This is hard to do amid a housing recovery, even for the government. FHA wasn't caught up in the subprime hurricane as Fannie Mae or Freddie Mac were in the pre-2007 boom years. Instead, FHA expanded its high-risk book of business right as everyone else was getting out.

As HUD Secretary Shaun Donovan euphemistically put it, "the substantial role FHA was forced to play" to keep housing credit flowing during the bust inflicted "considerable stress." Uh huh. Delinquency rates on FHA's 2007, 2008 and 2009 books stand at 26%, 26% and 19%. Taxpayers will now have to pay for those homeowners who were induced in part by FHA subsidies to buy more home than they could afford.

The Obama Administration's response to FHA's troubles has been to pile higher fees on new borrowers. Along with rising housing prices and the quiet shuttering of FHA's reverse-mortgage business, this has helped FHA's finances improve from awful to merely rotten, but it may not be enough to right the books soon.

It's hard to know how deep the FHA's red ink goes. The agency's fiscal health is an estimate based on 30-year forecasts of mortgage prepayment rates, unemployment rates, house prices and inflation rates that no private insurer would use. Do you know what unemployment will be in 2044?

Even the actuaries disagree on the scope of the problem. FHA's go-to firm, Integrated Financial Engineering Inc., thinks the agency's single-family home insurance program is worth negative $7.9 billion but could make money by the end of the fiscal year. Summit Consulting and Milliman Inc., more conservative outfits, think the right number is negative $10.6 billion and the business will remain in the red next year, adding that forecasts are "subject to significant variability."

Whatever the real number, the main goal should be not to repeat the mistake. The underlying problem is that the FHA's woes derive from a policy of public risk and private profit, which is what blew up Fannie Mae and Freddie Mac.

In a better world, Congress would slowly work off the FHA's portfolio and get out of the housing subsidy business. Short of that, Texas Republican Jeb Hensarling has a proposal to spin off FHA from the Department of Housing and Urban Development, make it a stand-alone agency, focus its mission on low-income and first-time home buyers, and subject it to the same accounting rules that private lenders have to meet. How about starting there?

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