Talk in Washington is again turning to another potential bailout tied to the housing market, casting a shadow over recent hopeful news about stabilizing and rising home prices.
The worry is about the Federal Housing Administration, a force in the mortgage market. An impending audit may show real problems there. Renewed attention to the FHA highlights a program that’s often misunderstood.
The FHA is not Fannie Mae or Freddie Mac. Those entities buy up existing mortgages. The FHA is essentially in the insurance business, designed to encourage lending to riskier home buyers, those who have lower credit scores or don’t have the savings needed to put up a large enough down payment.
“FHA has historically been an entrée for a bunch of first time homebuyers to get access into home ownership,” says Raphael Bostic, a USC public policy professor and former HUD assistant secretary.
Bostic adds that the program with roots in the Great Depression has been especially important for minority home buyers.
When banks are hesitant to lend, the FHA can step in. Homeowners pay premiums to the FHA in return for its backing. The FHA pays lenders when home loans go bad. And many have recently. The fear is the FHA doesn’t have enough stashed away.
“Do they in fact have enough reserves to meet future needs when a certain number of these mortgages will in fact go belly up and the lender comes to them for potential losses?” asks Christopher Thornberg of Beacon Economics.
Thornberg is skeptical of government programs to boost home ownership. But owning a home is a cherished concept with bipartisan support, so there could be political momentum to help FHA if it’s drowning.
Eric Belsky, managing director of Harvard’s Joint Center for Housing Studies, believes a weakened FHA would affect the housing recovery.
“This would I think take some steam out of it,” Belsky says. “Some borrowers that would otherwise have been able to get a loan wouldn’t be able to.”
If the FHA audit is as bad as some fear, it may mean still another bailout tied to the housing crisis.