New Obama Housing Plan Puts Troubled Government Agency Even Further in the Hole
On Tuesday, President Obama announced yet another initiative to try to shore up the struggling housing sector. Unfortunately, this time around his meddling will not only continue to distort the haywire housing market, but it will also put more financial pressure on an already-troubled government housing agency that some have said is in danger of needing a big taxpayer bailout.
For months the administration has been scrambling for some response to falling home prices – price declines which have eaten into families’ savings and, in cases where a borrower is underwater on their home, created obstacles for people trying to resolve financial troubles. Yet despite repeated doses of new government housing stimulus, the headlines only continue to get worse: the latest reports show that house prices have dipped to their lowest level since 2002.
Given that over 60 percent of Americans are homeowners, it’s no wonder the President has made this such a priority, but the latest push looks no better than his previous efforts. The key player this time around is the Federal Housing Administration (FHA), an agency that provides taxpayer-backed mortgage insurance to help homeowners get loans with low down payments.
In the past, FHA loans primarily helped a small niche of low-income and first-time homebuyers, but since the financial crisis the agency has massively broadened the scope of its operations, now backing a quarter of all new mortgages in the country. The FHA funds its operations through insurance premiums that are charged to borrowers, and these premiums ultimately go into reserves to pay for losses on any loans that default.
The President’s new plan will cut annual premiums in half and all but eliminate the up-front premium for those who refinance, a move the White House claims will directly save homeowners only about $100 per month on average.
The problem is that, with its rapid growth in recent years, the FHA has become financially overburdened and is already in bad shape. The American Enterprise Institute’s Ed Pinto has explained all the gory details in his new monthly FHA Watch report, which this month revealed that the agency is already $15 billion in the hole based on private-sector accounting standards. University of Pennsylvania professor Joseph Gyourko has likewise written that the FHA is in much worse shape than its official reports would suggest and that it will need a taxpayer bailout on the order of $50-100 billion in the coming years.
It seems even the President’s own Cabinet would advise against his new approach: Shaun Donovan, Secretary of Housing and Urban Development, recently expressed concerns about the FHA’s growing risks in testimony before Congress and called for increased insurance premiums to shore up the agency’s reserve fund. If instead the FHA takes in an arbitrarily lower amount of premiums from homeowners, that would only make the problem worse. The lower payments may marginally help some homeowners, but in reality it just shifts an even bigger burden onto the taxpayers standing behind these government mortgage guarantees. That’s bad policy.
In the end, this is yet another example of how this administration’s housing response has been entirely backwards. The housing sector’s collapse was driven by (among other things) the government’s overly-aggressive efforts to make it easier for more and more Americans to own a home. Yet instead of winding down the government’s out-sized role in mortgage finance through the taxpayer-backed trio of Fannie Mae, Freddie Mac, and the FHA, this administration has preferred to roll out new programs and tweak existing programs with the hope that one of these times they’ll finally get it right.
The path forward needs to involve private capital and free markets taking back much more responsibility for providing housing finance in this country. Until that happens, and as long as the President believes that more government is the answer, homeowners will see little relief and taxpayers will continue to be left footing the bill.