Federal Housing Subsidies Are Insane

A New York Times report on the Federal Housing Administration’s subsidies for higher-priced real estate reveals the insanity of federal housing policies. The 2008 stimulus package signed by President Bush temporarily doubled the maximum loan the FHA insured to $729,750 on single-family homes. Coverage on multi-family units can exceed $1 million.

The article starts in San Francisco in early 2009:

In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston. A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary. ‘It was kind of crazy we could get this big a loan,’ said Mr. Rowland, 27. ‘If a government official came out here, I would slap him a high-five.’

If you’re thinking to yourself that this is the sort of government-induced behavior that helped create the housing bubble, go to the head of the class.

With government finances already under great strain, the policy expansions are creating new risks for American taxpayers. The Internal Revenue Service is giving tax rebates to first-time buyers, and soon to move-up buyers, in a program beset by accusations of fraud. And the government agency that issues mortgage insurance, the Federal Housing Administration, is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling. On Thursday, the Mortgage Bankers Association said more than one in six FHA borrowers was behind on payments.

It has been widely reported that the FHA might need a taxpayer bailout as a result of its head-first dive into riskier mortgages. HUD’s inspector general says the higher loan limits add additional risk to the FHA’s already dicey situation. But the FHA’s commissioner, David H. Stevens, says he isn’t worried because these mortgages “are for shelter. They aren’t speculative-type investments.”

Mr. Stevens is willfully ignoring the fact that the FHA’s ridiculously low minimum downpayment requirements mean homebuyers have little skin in the game. In a down housing market this increases the chances of homeowners being “underwater” on their mortgages, which can lead to them walking away and sticking FHA with the bill.

And as Richard Pozen pointed out in a Wall Street Journal op-ed yesterday, the $8,000 homebuyer tax credit can mean no downpayment at all:

Here's how the credit allows buyers to avoid putting their own money at risk. Suppose a couple making $60,000 annually buys a home worth $200,000. They can get an FHA-insured loan if they put down 3.5% of the purchase price, about $7,000. The couple will also need to come up with another $1,000 in closing costs, for a total of $8,000. The couple can either dip into savings or borrow that money from relatives or somewhere else on a temporary basis. After closing, the couple can quickly obtain the $8,000 refundable tax credit to pay off their temporary loan (or replenish their savings). In effect, they will have bought a home without putting any of their own money at risk. Owners who don't sink their own money into a house are much more likely to default on the mortgage.

So will Congress be bringing this insanity to a halt anytime soon?  Not according to the Times:

A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum FHA loan by $100,000, to $839,750. His bill would make the new limits permanent.

I guess being Barney Frank means never having to say you’re sorry.