An exhaustive study of the subject by the American Enterprise Institute's Edward Pinto reveals some shocking statistics:
An estimated 40 percent of the FHA’s business consists of loans with either one or two subprime attributes—a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012). The FHA’s underwriting policies encourage low- and moderate-income families with low credit scores or high debt burdens to make risky financing decisions—combining a low credit score and/or a high debt ratio with a 30-year loan term and a low down payment. A substantial portion of these loans have an expected failure rate exceeding 10 percent.Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent.These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips.
The full AEI study is a must-read. It's not merely that the FHA is exposing taxpayers to inordinate risk, it's that their entire model is predatory upon low- and middle-income American families:
The resulting reduced or declining home values impact FHA and non-FHA low- and moderate-income families diligently making their payments. These families may be denied the opportunity to build equity, provide security for their family, and have the down payment for their next home as their family grows. Foreclosures also result in increased blight and crime and the larger community suffers from a reduced tax base and higher costs for providing municipal services.
Writing in the Wall Street Journal, Nick Timiraos reports that the FHA will be facing a $16.3 billion shortfall at the end of September, forcing the government to direct taxpayer money to the agency. The FHA backs over $1 trillion in U.S. home loans.
The FHA has been attempting reforms recently to try to avoid succumbing to a taxpayer bailout, but it is yet to be seen if this becomes successful. Further reporting from Timiraos is that the agency will be suspending its most popular reverse-mortgage program.
The federal government itself, despite the home bubble collapse in 2008, has added fuel to the fire.
In 2009, as home values plunged, Congress boosted the maximum home value that seniors could borrow against, fueling more demand for reverse mortgages. Private offerings of reverse mortgages disappeared as the housing bust deepened.
Reforms must be made to the FHA, especially in light of the vulnerabilities that the agency has shown in the wake of 2008's massive decrease in home values. It's not just that they expose taxpayers to an inordinate amount of risk, it's that FHA policy actively harms the quality of life for middle- and lower-income Americans. Reforms are needed sooner rather than later, as the clock is ticking on the FHA's bankruptcy.
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