Eye on Washington

When the housing markets tank and banks collapse, FHA is not supposed to run for the hills and hide. The Federal Housing Administration's job is to hold down the fort, continue making mortgage credit available and cover the retreat of Fannie Mae, Freddie Mac and private mortgage insurance companies. It is FHA’s mission to counterpunch a credit crunch.The fact that FHA single-family originations tripled to $170 billion in fiscal year 2008 is a testament to problems facing the mortgage industry and the void left by private sources of mortgage capital. Yet, FHA is doing what it always does — insuring mortgages that meet its old-fashioned credit underwriting standards.But suddenly everyone seems to be worried about FHA. Some are concerned that subprime lenders have infiltrated the ranks of FHA-approved lenders.Others point to a default rate (loans 90 days or more past due) that is creeping up, declining loan loss reserves and capital. Even Fannie and Freddie are continuing to deteriorate as wards of the government. Is FHA going to be the next shoe to drop in the mortgage debacle?“FHA poses significant risks to taxpayers and therefore requires diligent oversight,” Sen. Richard Shelby, R-Ala., said recently.FHA has always served less creditworthy borrowers. It was into subprime lending before subprime was cool.In the run-up to the housing and foreclosure crisis, the Wall Street conduits stole FHA’s traditional customers with fast and easy credit while Fannie and Freddie creamed off FHA’s best customers.In 2005, FHA had a mere 4% market share. Few lenders even bothered to keep their FHA lending operations going. Now FHA is the rage and everyone is piling back in.Yes, it is risky to insure mortgages when house prices are falling and half a million people are losing their jobs every month.Fannie and Freddie have responded by increasing their loan fees, tightening their credit standards, like the private mortgage insurers. It’s really a double tax on borrowers who can still quality for a conventional mortgage to refinance or purchase a home. But FHA continues to provide credit at a reasonable price.FHA has outlived many recessions and financial crises since it was created in 1934. It weathered the S&L crisis when hundreds of banks and thrifts failed between 1989 and 1992.Back then, Congress became alarmed that FHA might tank also. So the lawmakers passed a FHA reform bill that forced the agency to raise its insurance premiums in 1991, which made FHA less competitive.In the aftermath of those reforms, the FHA’s market share slowly declined, particularly refinancings, and the private subprime market took off.So beware of the FHA critics that call more oversight.What FHA really needs is more funding to increase its staff, pay its best people competitive salaries and update its infrastructure and information systems.While excess FHA revenue goes to the U.S. Treasury to pay for food stamps and Army Humvees, House and Senate appropriators have shortchanged FHA’s operating budget for decades.Each year, appropriations barons Sens. Shelby and Christopher Bond, R-Mo., seem to make a special effort to keep FHA at the back of the budget line.Continuing to starve FHA makes no sense when it is fulfilling its mission and the federal government is throwing billions of dollars at banks just to get them to lend again.Yes, FHA may end up in the red. It may need government assistance for the first time in its history if the housing market doesn’t stabilize by the end of this year. But the losses would be chump change compared to the bailouts Fannie and Freddie are getting.And unlike Fannie and Freddie, there is a good chance FHA can pay it back and reimburse the U.S. Treasury.At a time when mortgage credit is contracting, forcing FHA to throttle back isn’t going to help anyone. It's only going to make things worse.