John Berlau of the Competitive Enterprise Institute explains in the Wall Street Journal how the Federal Housing Administration has hindered the effective functioning of the housing market - and how Congress and the White House want to make the problem even worse:
Both Mr. Frank and President Bush support major increases in the limits on the value of loans the agency can make, which are contained in a bill that passed the House of Representatives last month. Only 72 Republicans, mostly members of the conservative Republican Study Committee, voted against the bill. A similar bill cleared the Senate Banking Committee 20-1. But before the FHA’s loan spigots are opened up, a little due diligence by the political sector is in order. The FHA’s recent credit history shows it is far from the prudent institution it is said to be. By its own estimate, next year the agency expects to be in the red, paying out more for defaulted loans than borrowers pay to it in insurance premiums. …The agency poses more than just a threat to taxpayers. The collapse of whole segments of the housing market can be traced to FHA-subsidized mortgage products. Despite its decreasing market share, the FHA appears to have played a significant role in the current mortgage “meltdown” attributed to subprime loans. For the past three years, delinquency rates on the oh-so-safe mortgages insured by the FHA have consistently been higher than even those of the dreaded subprime mortgages. …FHA-insured loans have also been at the center of some of the worst excesses of the housing boom, including mortgage fraud, loans made without income verification, and property “flipping” with inflated appraisals. …In both the Clinton and Bush administrations, the FHA’s response to private alternatives for low-income borrowers was to aggressively compete with them – by making the agency’s own lending standards even more “subprime” than those of the private sector. Since its inception in 1934, the FHA has required a down payment – originally 20%, but gradually whittled down to 3% – for a home loan. …Despite these trends, HUD Secretary Jackson’s biggest concern has appeared to be not the FHA’s solvency, but the government agency’s loss of business to the private sector. “I am absolutely emphatic about winning back our share of the market,” he told the Washington Post in 2005. Looking at the agency’s dismal performance over the past few years, we can predict that, if the FHA racks up more “wins,” taxpayers and low-income home buyers will likely be suffering the losses.