The FHA: A home wrecker
Imagine that a federal agency wanted to hurt America's working-class families on purpose. How would it inflict maximum damage?
It might start by aggressively marketing homeownership to marginal borrowers. It would tell them that bad credit scores aren't a problem. It would push them into homes they can't afford, saddle them with loans that barely build equity and provide no incentives for fiscal discipline. And when many of these homes go into foreclosure, it would leave families in financial ruin.
In short, such an agency would follow the Federal Housing Administration playbook.
That's a shame, because Republicans and Democrats alike rightly applaud the FHA's mission to provide responsible mortgage credit to low- and moderate-income Americans and first-time home buyers. But all too often, the FHA turns the American dream into a nightmare, setting up failure for the very families and neighborhoods its mission is to help.
This is not an isolated problem. A new study I completed at the American Enterprise Institute identified no fewer than 9,000 lower-income ZIP codes where the projected foreclosure rate on loans insured by the FHA in fiscal years 2009 and 2010 is more than 10 percent. Overall, one in seven families in these ZIP codes stands to lose their home and their savings. Many areas had failure rates of 20 percent, 30 percent and even higher.
Remember, these loans were written well after the housing collapse. Even in 2012, 40 percent of the FHA's loans are subprime — having a credit score below 660 or a debt-to-income ratio of 50 percent or more. When combined with minimal down payments and a 30-year term that builds equity slowly, the result is mortgage malpractice.
The FHA doesn't need to give up its mission. But it does need to acknowledge the harm its programs have caused.
First, end the practice of knowingly lending to people who cannot afford to repay their loans. The FHA uses its pricing advantages and lending policies to entice many low- and moderate-income families to take out irresponsible loans.
Second, help borrowers become owners, not debtors. The FHA nudges families onto a tightrope with no safety net, leaving them a broken water heater away from failure. Helping more borrowers take on 20-year, instead of 30-year, loans could cut their chance of losing a home 40 percent.
Third, concentrate on families that truly need help purchasing their first home. In recent years, the FHA has strayed far from its original mission, instead serving wealthier and wealthier home buyers as it quadrupled its insurance portfolio to $1.1 trillion. Since the FHA's mission is to help low- and moderate-income home buyers, the homes it finances should cost less than the area's median house price.
Fourth, step back from markets that can be better served by private lenders and insurers.
The same government mortgage complex that precipitated the crisis is still distorting the market. Pursuing the American dream starts with a reality check. When Americans are given honest information about prices and risks, we make smart choices. But when the government tries to convince us that price and risk don't apply, hope turns to hopelessness.
Edward J. Pinto, an executive vice president and chief credit officer for Fannie Mae in the 1980s, is a resident fellow at the American Enterprise Institute.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Kittanning News carries latest books by Boarts and Creel
- Steelers notebook: Linebacker Timmons hoping for contract extension
- Steelers plan to use smart pass rush against Seattle QB Wilson
- Penguins 4th line is showing promise
- School lunch group hopes to revise rules it calls impractical, too restrictive
- Small Business Saturday events set in Connellsville
- Western Pa. students bristle at changing menu choices
- Despite injuries, Penn State’s Nelson ‘thankful’
- Four helicopters respond to Route 51 crash in Rostraver
- Kennywood Holiday Lights festival returns for 5th year
- Western Pa. dairies get creative to ensure eggnog supply