During a time when the Federal Housing Administration could require its first-ever bailout, the pressure is mounting on the agency’s fate as home prices begin to make a comeback, write housing Progressive Policy Institute experts in a brief published last week.
Stemming from rapid expansion as a result of the housing crisis, the FHA finds itself confronting “the most severe delinquency and default rates in the agency’s history,” write PPI’s Jason Gold and Andrew Winkler. As home prices begin a slow recovery, the pressure is rising on what to do about FHA, they say.
In order to combat FHA’s capital problem and a potential $16.3 billion shortfall in economic value, policymakers should take certain measures and have already begun to take others, Gold and Winkler write.
“Ensuring the FHA has sufficient capital should be the most paramount concern when considering an agency overhaul. It is both the best way of minimizing taxpayer losses and making certain FHA will be able to continue to serve its mission,” they write. “While many policymakers and think tanks reject the notion that the FHA is desperately in need of funds, its consistent underestimation of risk and future losses is worrisome. Any legislative action must put in place a
more transparent reporting system to show the FHA is returning to its congressionally mandated capital requirement.”
One mechanism for helping FHA in the short term, the think tank advises, is limiting FHA’s participation in housing finance to helping first time homebuyers only, and limiting those borrowers to low- to middle-income families.
“While legislation should immediately address costs and risks borne by taxpayers and ensure the sustained fiscal solvency of FHA, it should also move to confine FHA lending strictly to helping first-time homebuyers from low-to-middle income families achieve the dream of homeownership,” the brief states. “Moving towards a system of income-based borrower requirements in place of loan limits would help the FHA support borrowers with a demonstrated need and enhance the role of the private market, especially in the origination of higher-priced loans.”
There has been significant legislation as well as regulatory changes introduced to address some of FHA’s problems, including the moratorium on the agency’s fixed rate standard reverse mortgage product, and FHA Fiscal Solvency Act, the brief notes.
“Yet much remains to be done. Conservatives and liberals have proposed a host of potential reforms to guarantee the fiscal soundness of FHA. The FHA is empowered to make some changes without legislative action, though the task of ensuring a more targeted and financially sound FHA in the future will likely require Congress.”
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