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Report Finds FHA Needs Replacement More Than Reform

Reform won’t be enough to fix the Federal Housing Administration’s (FHA) failings, according to a business and economics scholar who argues in a recent paper that the agency needs to be phased out and replaced, but omits mention of the Home Equity Conversion Mortgage program.

“The twin financial and policy failures raise obvious questions of whether FHA should be allowed to continue, and if so, how to reform the agency,” writes Joseph Gyourko, a professor of real estate, finance, and business economics and public policy at the Wharton School of the University of Pennsylvania, where he chairs the real estate department and is director of the Zell/Lurie Real Estate Center. 

FHA had a net deficit of $13.5 billion by the end of fiscal year 2012, according to its latest actuarial report, and has been in violation of the federally-mandated 2% capital reserve requirement since 2009. 

In recent years, reform suggestions have included risked-based mortgage insurance premium pricing and tightened underwriting standards. But while these recommendations make sense and could help strengthen the FHA, Gyourko—fearing that the agency cannot successfully be reformed—has more radical ideas.

“I recommend that FHA be phased out completely over some well-defined period (for example, three to five years) and replaced with a new subsidy program that would help first-time homebuyers and other specially targeted groups amass a 10 percent down payment that would then allow them to obtain financing at market rates from a private market lender,” he proposes, going on to outline how such a system could work. 

The FHA should shift gears by focusing homeownership policy on increasing equity through a subsidized savings program.

“There is no better time to fundamentally rethink a program than right after it has failed,” he concludes, “and there is no doubt that FHA has done so.” 

 The paper leaves out all mention of reverse mortgages or how they would fit into the refigured FHA. The HECM program accounted for about $2.8 billion of the agency’s overall $16.3 billion shortfall, according to the 2012 actuarial report. 

Read “Rethinking the FHA” here.

Written by Alyssa Gerace