The FHA needs more authority in crisis

Glenn Hubbard

TEXT OF STORY

TESS VIGELAND: Zillow addicts beware. If you type in your address, you may not like what you see. Americans have seen the percentage of equity in their homes fall below 50 percent for the first time since the Second World War. That number out today from the Fed.

Commentator and economist Glenn Hubbard says if we want to get serious about attacking the housing mess, we need to let the Federal Housing Authority do its job.


GLENN HUBBARD: Congress quickly enacted a stimulus package that should offer modest, though needed, relief for the economy. But the plan will do little to address our pressing housing crisis.

Most of the housing discussion in Washington has focused on how to avoid another subprime mess. Granted, the Fed needs to rethink some of its supervisory and regulatory procedures.

But what can we do to solve today's problems?

Congress should temporarily expand the Federal Housing Administration's authority in the near term: The FHA should be able to make larger loans to homeowners who live in their own homes. Why? Many creditworthy homeowners got trapped in adjustable-rate mortgages and couldn't refinance. Any borrower who can document their income and afford the mortgage without a reset should be able to refinance. With the FHA's new loans, they'll be able to.

We need to get to the heart of the credit problem: These homeowners should not have to face foreclosure because they couldn't refinance an adjustable-rate mortgage. Especially one that was never intended to be long-term financing.

This change will offer immediate relief to the housing market. Once these lousy ARMs have been cleared out, refinanced, or sold, new loans can be re-underwritten properly. This would make sure that borrowers are fully capable of making payments. And security holders can get cash today for loans that were made to good borrowers. Bad loans can default promptly.

Still, more forceful actions may sound good, but beware the unintended consequences. Proposals to extend loans or halt foreclosures put us on a precarious path. Because if we change the rules after the fact, we could chill new lending.

A strong temporary government presence for homeowners -- not a bailout of investors -- will help de-lever the financial system. High leverage helped bring us this crisis. And moving homeowners to more stable mortgage financing will help end it. The temporary FHA expansion will increase taxpayer risk. But that risk looks better than the credit meltdown we're courting.

VIGELAND: Glenn Hubbard is the dean of the business school at Columbia University. He used to run the Council of Economic Advisors for President Bush.

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