January 20, 2015
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The Federal Housing Administration’s risky move to lower premiums
By The Washington Post Editorial Board
January 16
Contrary to many confident predictions by its leadership, the Federal Housing Administration needed a $1.7 billion federal bailout in September 2013, the first time in its history that the agency, which insures mortgages for low-income homebuyers, had to seek taxpayer help covering losses in its book of business. In the months after that embarrassing disaster, which was brought on by the FHA’s overly aggressive policies prior to the “Great Recession,” FHA officials assured Congress and the public that it would focus on rebuilding its capital cushion to at least the legal minimum of 2 percent of its portfolio.
Housing lobbies howled about the damage a more cautious policy would do to home sales and mortgage originations — which is to say, their profits. Still, as recently as Nov. 18, the FHA’s acting director, Biniam Gebre, seemed to be resisting the pressure, boasting that the agency’s capital ratio had rebounded to 0.41 percent and saying that “it will continue to build the necessary capital so that it is well-positioned for the future.” Mr. Gebre noted, accurately, that a key factor in the FHA’s return to a semblance of solvency was its having significantly increased the premiums it charged borrowers, “in recognition that the long term viability of the FHA program requires appropriately pricing for expected losses.”
Well, that was then. Now, the Obama administration is back in populist help-the-homebuyer mode, and the president himself last week announced a significant cut in FHA premiums — large enough, Mr. Obama said, to save a typical homebuyer $900 per year. Mortgage bankers and real estate agents welcomed the news, and Housing and Urban Development Secretary Julian Castro answered concerns that the move might be premature by asserting that it will delay an eventual return to the statutory minimum capital ratio only by a few months. “So now is the right time,” he declared.
No doubt the relatively small slice of the homebuying public — HUD estimates 800,000 borrowers annually, including 100,000 to 200,000 refinancings — that benefits would agree, as would the bankers and real estate agents who profit from FHA-backed business. The policy change certainly addresses the competitive disadvantage for the FHA that was created last year when the administration allowed Fannie Mae and Freddie Mac to back more of the very same low-money-down mortgages the FHA specializes in.
Taxpayers might legitimately wonder, however, why it’s necessary to take on this additional risk so soon after the FHA’s bailout, before the capital cushion is even halfway rebuilt — and at a time when homebuyers are already enjoying record-low interest rates, plus a windfall from cheaper gasoline. The president’s own estimate of the cash savings from the premium cut implies that it would pump less than $1 billion a year of consumer cash into an economy that is already recovering well without it. The premium reduction takes effect Jan. 26, so the administration can still reconsider, which is what it will do if it has really learned a key lesson of the Great Recession: Finance in general, and mortgage finance in particular, is riskier than it sometimes seems, and the best protection against those risks is a solid core of capital.
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