COMMENTARY: Bailout Proves US Housing Policy Needs Fixing

Even though “bailout” has become a dirty word in Washington, another one happened just before the government shutdown began.

The recipient was the Federal Housing Administration, which had never needed taxpayer help in its 79-year history. The FHA took a “mandatory appropriation” of $1.7 billion on Sept. 30 to cover losses in its mortgage portfolio.

It shouldn’t have been a surprise. FHA borrowers make down payments as small as 3.5 percent, so the agency was especially vulnerable when housing prices started falling nationwide. Yet the FHA predicted as recently as last December that it wouldn’t need a bailout.

By April, President Barack Obama’s budget was estimating the need for a $942 million capital injection. Six months later, the agency needed nearly twice as much.

What happened? For one thing, the FHA says it suffered big losses in a poorly designed reverse-mortgage program, which lets elderly people borrow against their homes to pay living expenses. Also, the FHA’s loan volume fell as interest rates rose. Under the agency’s unusual accounting procedures, the future payment stream from each new mortgage counts as a source of capital.

The Treasury was required to fork over the $1.7 billion, but the FHA says this should be a one-time-only request. The official line is that the agency’s finances are improving and it will be just fine without any more cash.

Ed Pinto, a resident fellow at the American Enterprise Institute and longtime FHA critic, is skeptical.

The FHA’s rosy scenario is built on optimistic projections, he said – for instance, it assumes that the economy won’t lapse into recession for at least four more years.

“If there were to be a modest, normal-size recession anytime in the next three years, FHA would be in a world of hurt,” Pinto said. “They would be looking at losses in the tens of billions of dollars.”

As of a year ago, the FHA’s official books showed a net worth of negative $16 billion. Pinto said that if the agency used generally accepted accounting principles, the number would be closer to negative $27 billion.

The reverse mortgages accounted for about $5 billion in losses. The FHA made a lot of them just before the financial crisis, and it lost money as the senior citizens’ houses fell in value. Pinto said it’s just the latest in a series of problems that have all been based on poor underwriting standards.

“They’re always saying ‘the dog ate my homework,’ and it’s always a different dog,” he said.

As deep as the FHA’s problems are, they haven’t risen very high on Congress’s fix-it list. House and Senate committees have both passed bills that would tighten lending standards, but neither has made its way to the floor.

The House bill is by far the tougher of the two. It would focus the FHA’s mission on serving low-income and first-time buyers, and would force private lenders to share half of the risk on FHA loans. The Senate bill calls for increasing the FHA’s reserve requirement and tweaking the reverse-mortgage program.

People in both chambers and both parties agree, then, that housing policy is broken. Any compromise that takes a few ideas from Column A and a few from Column B is bound to improve the situation.

Unfortunately, compromise is also a dirty word in Washington these days. And because Republicans and Democrats disagree on so many other things, they’re hardly even talking about the sorry state of the FHA.