Lisa Simpson
Nov 17,2009
In: Finance

Questions Being Raised About the Blundering of FHA

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Questions are being raised about the blundering activities of FHA. Soon after declaring bankruptcy Bernadine Shimon began to nurse plans of buying another house and in all probability lose this one also to foreclosures. Who and what made her think along these lines? It is the taxpayer who emboldened her.

The FHA or Federal Housing Administration is ready to guarantee a mortgage amounting to over $125,000 for this school teacher from Denver because her repeated dreams about owning a house was not being realized. Shimon had to make a modest down payment of 3.5%. To do so she had to withdraw all her retirement savings. Her instance was mentioned in an article in the New York Times referring to the flounderings of FHA.

No prudent private lender would dream of taking such a risk. But FHA is playing around with taxpayer’s funds that are not available to the private lender.

The private companies advance loans. The FHA purchases the mortgages and then bundles these into Ginnie Mae Mortgage Backed Securities. The latter is sold globally as bonds that are considered to solid investments because they carry guarantees from the taxpayer – the guarantee is explicit, loud and clear. The guarantee provided by Fannie Mae and Freddie Mac is implicit although for real purposes these too are explicit.

Thus the blame for the housing bubble – a good share of it, can be placed on these government agencies. The private agencies are permitted to grant mortgage loans sans proper supervision and yet these are promptly guaranteed. These loans have pushed down the capital reserve of FHA below the mandated level of 2%. It means that the tax payer will soon be called upon to bail them out.

A former executive of Fannie Mae, Edward Pinto, forecasts that the taxpayers will soon be bailing out the FHA within two or three years.

The FHA was set up primarily to help those with middle income to become house owners. The objective is fine but should not the down payment have been more realistic? The proposal by a Republican to raise the down payment to 5% seems more down to earth – particularly when private lenders are asking for 10% and sometimes even 20%.

The Inspector General of HUD (Housing and Urban Development) said, “What does the FHA think it is doing by asking only 3.5 percent?” About one fourth of the loans that have been insured by FHA during the last two years are in troubled waters.