By Peter Ricci
The American Enterprise Institute strikes again! After being one of the first major research firms to call the Federal Housing Administration’s (FHA) finances into question, the Institute has published another analysis of the FHA’s books, and like before, it has come to some stark conclusions.
According to the analysis of Edward Pinto, a resident fellow with the American Enterprise Institute, “risky lending” from the FHA has resulted in an increasingly red balance sheet for the agency, and it could suffer $20 billion in losses and require taxpayer support.
FHA’s Finances Flirting with Disaster?
Pinto based his research on the foreclosure estimates of the FHA’s auditor, along with specific loan data such as the ZIP codes and credit scores of the borrowers. His findings included:
- Though borrowers with FHA-guaranteed loans are required to have credit scores of at least 580, a 3.5 percent downpayment and a monthly housing debt payment of roughly 30 percent of their income, Pinto’s study found that 40 percent of the FHA’s 2010 loans were made to borrowers with debt payments higher than 50 percent and credit scores lower than 660.
- Pinto also argued that the FHA does not adjust its guarantee fees based on the credit risk of the borrow; thus, a borrower with a 3.5 percent downpayment, a 580 credit score and 50 percent debt payment level would be charged the same fee as a borrower who put down 20 percent with a 720 credit score and 25 percent debt-to-income.
- Finally, Pinto said the FHA’s loans were concentrated in lower-income areas with higher foreclosure rates, which will create further costs for the agency.
- The FHA has been defiant in the past when responding to critics, and that trend continued with Pinto’s study, with George Gonzalez, a spokesman for the agency, charging that Pinto used “selective use” of the FHA’s data in his study to paint its finances in a poor light.
We should add, the FHA has taken steps to bring its fiscal house in order the last 12 months, with varying success. It raised its mortgage insurance premium fees earlier in the year, and is planning on raising them again in the first quarter of 2013; also, it embarked on a series of heavily controversial reforms to its policies on condominiums and credit requirements, which sparked widespread opposition that influenced pullback from the agency on both accounts.
The Future of the FHA
Of course, this all leads back to a question we first asked more than a year ago – what does the future hold for the FHA? And should the FHA’s financial troubles contribute to further alterations of its lending programs, what would that mean for housing?
Mark W. Levin, a Realtor with Keller Williams Realty in Houston, said that the FHA does play an important role in today’s housing market, particularly with first-time homebuyers.
“FHA loans are very common in today’s real estate market,” he said. “Many first time buyers are unable to qualify for regular conventional [mortgages], and the FHA allows them the opportunity to purchase a home that they would not be able to with a conventional loan … [overall], FHA loans provide a great opportunity for buyers, especially first-time buyers.”