FHA loans are about one-third of U.S. mortgages

A 'sold' sign stands outside a home in Pasadena, Calif.

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Tess Vigeland: What if I told you that a trillion-dollar industry had been taken over by the government? That's basically what happened to the mortgage industry during the financial crisis. More than 95 percent of mortgages issued in the first half of this year are owned or backed by we the taxpayers. That happens through Fannie Mae, Freddie Mac and the FHA. And of course, there's the mortgage-interest tax deduction and that first-time home buyer credit that expired last spring. Home owners are huge beneficiaries of Uncle Sam.

Jeff Horwich looks at what that means.


Kate Lynne Snyder through speaker: Hey, come on up.

Jeff Horwich: When Kate Lynne Snyder and Chris Thomas bought a condo this spring, it didn't matter to them that the mortgage was courtesy of Uncle Sam.

SNYDER: It was the space we wanted, it was the neighborhood we wanted.

CHRIS THOMAS: We really did like the bay window. I mean granted, it's overlooking the lovely parking lot, but still!

Truth is, the U.S. taxpayer put them in this Minneapolis condo. No shame in it -- virtually everyone who bought a home since 2008 can arguably hang an American flag over the threshold. In Chris and Kate's case it was a Federal Housing Administration loan that made the deal possible.

SNYDER: When we were looking into it, we realized that the 3.5 percent down was going to be a lot more feasible for us than a 20 percent down.

THOMAS:I don't think we would have purchased at this time had it not been for those programs.

Before the crisis, FHA loans were a 5 percent sliver of the U.S. housing market -- designed as a helping hand for consumers on the fringes of good credit. But as private lenders shied away, FHA picked up the slack. Today FHA loans are about one-third of U.S. mortgages.

KEITH GUMBINGER: Without the federal government support right now it would be reasonable to say there would be almost no housing market.

Keith Gumbinger is vice president of mortgage research firm HSH. He says even home buyers with great credit and big down payments -- who land so-called "conventional loans" -- have the government to thank, too. Banks and brokers make those loans, because they know there are two government-sponsored behemoths waiting to scoop them up: Fannie Mae and Freddie Mac. Gumbinger says right now, they are the only ones who will.

GUMBINGER: The fact is that Fannie and Freddie are presently losing tens of billions of dollars -- have lost collectively almost $200 billion, I believe, was the last reckoning -- and are still on life support from the taxpayer. So at some point that needs to come to a close.

Financial reform left fixing Fannie, Freddie and the FHA for another day. It's not hard to see why: At the moment, those three fiscal time-bombs may be the last defense of American home-buying culture. And they may be buttressing entire neighborhoods in the country's most depressed housing markets, places like Las Vegas.

PJ PEREZ: This is the band rehearsal room/"man cave," I guess.

Last year, PJ Perez went from renting a small bungalow to owning a 2,300-square-foot, three-bedroom with ample skylights.

PEREZ: Definitely without the FHA loan we wouldn't have bought it at that time.

Perez says many friends did the same -- using government help to sweep in with low down payments, and pick up foreclosures and other neglected properties.

PEREZ: I mean, it's still bad -- neighborhoods are half-empty, and there's a lot of people that I know who are getting foreclosed upon, who are walking away from their houses, 'cause they've lost so much value. But I would think that the federal assistance has at least somewhat offset that.

Officials meeting in D.C. this month will start brainstorming the future of Fannie and Freddie. As for the FHA, it's already begun trying to make itself less appealing. Its capital reserves fell well below the legally mandated level last year. So Congress said the FHA can hike mortgage insurance premiums and down payments.

So things are happening. But for mortgage bankers like Charles Dailey, in the Twin Cities, they could be moving too fast.

CHARLES DAILEY: I hope that the decision-makers are patient, and they understand that in order to reform an institution like this, they're going to have to do it very carefully, very slowly if they don't want to shock the system.

Dailey worries hasty moves on Fannie and Freddie could trigger a nationwide drop in housing prices. He says right now they -- and the FHA -- are the only institutions out there willing to take on the risk of supporting the American Dream.

I'm Jeff Horwich for Marketplace Money.

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