Thursday, October 29, 2009
Exactly who made Bernadine Shimon think that she could buy a new house shortly after declaring bankruptcy and losing another home to foreclosure? The American taxpayer, that's who.
Without a Federal Housing Administration willing to guarantee a $125,000-plus mortgage, this Denver-area schoolteacher's recurring "dream of homeownership" could not come to pass. Shimon's down payment was a tiny 3.5 percent.
This single mother is so strapped that she had to cash in her retirement savings to come up with the 3.5 percent. Her case was cited in a New York Times article about, not surprisingly, the sad shape the FHA finds itself in.
Of course, no sane private lender would take on such risk without a sucker-of-first resort, again the taxpayer. It happens like this: Private companies make their loans. The FHA buys the mortgages, and then rolls them into Ginnie Mae Mortgage Backed Securities. Sold around the world, these bonds are rock-solid investments because they carry an "explicit" taxpayer guarantee. Fannie Mae and Freddie Mac securities came with only an "implicit" guarantee (though as we saw in the recent bailouts, those "implicit" guarantees are for all intents and purposes "explicit").
Much of the blame for the housing bubble-then-bust goes to these government agencies: They let private lenders make mortgages without adult supervision, then guaranteed them. Such loans helped push the FHA's capital reserve fund down toward (and possibly now under) its mandated 2-percent minimum. That means the suckers may soon be called upon in a big way. Edward Pinto, a former Fannie Mae executive, predicts that the taxpayers will be bailing out the FHA within the next two to three years.
The FHA was created in 1934 to help people of modest means buy homes. Fine, but shouldn't they have more skin in the game than a 3.5 percent of the purchase price? A Republican proposal to raise the minimum down payment to 5 percent seems rather reasonable, especially when private lenders are insisting on 10 percent or even 20 percent.
Kenneth Donohue, inspector general of the Housing and Urban Development Department, seemed to be shaking his head. "What does the FHA think it is doing by asking only 3.5 percent?" he asked. (FHA is part of HUD.)
With nearly a quarter of FHA loans insured in the last two years now in trouble, you'd think that the agency would show more discretion in deciding which homebuyers to help. And you'd think that Democrats running the House Financial Services Committee would be more upset over the way the FHA still hands out taxpayer guarantees.
But committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to "keep prices from falling too fast." Thing is, we can't support real-estate values with shabby lending practices. That's what got us into trouble.
Another good idea is to demand that banks take a hit for the first 10 percent of losses on the mortgages they originate. That would put (SET ITAL) their (END ITAL) skin in the game. It would spur them to engage in responsible lending practices -- and not just collect a bunch of fees upfront, then unload the risk onto the taxpayers.
There (SET ITAL) was (END ITAL) good news on the FHA front. The agency was ready to tighten rules for mortgages on condominiums. This would have curbed developers' ability to fill their big empty buildings on the back of taxpayer guarantees. These new rules made real-estate interests unhappy, however, and now they are on hold.
We appreciate that the FHA had to step in and maintain the housing market's pulse, but can't it show better judgment? It's not too much to ask that the FHA stop backing the loans of people fresh out of economic ruin.
COPYRIGHT 2009 THE PROVIDENCE JOURNAL CO.
DISTRIBUTED BY CREATORS.COM
See Other Political Commentary.
See Other Commentaries by Froma Harrop
Views expressed in this column are those of the author, not those of Rasmussen Reports.
Rasmussen Reports is a media company specializing in the collection, publication and distribution of public opinion information.
We conduct public opinion polls on a variety of topics to inform our audience on events in the news and other topics of interest. To ensure editorial control and independence, we pay for the polls ourselves and generate revenue through the sale of subscriptions, sponsorships, and advertising. Nightly polling on politics, business and lifestyle topics provides the content to update the Rasmussen Reports web site many times each day. If it's in the news, it's in our polls. Additionally, the data drives a daily update newsletter and various media outlets across the country.
Some information, including the Rasmussen Reports daily Presidential Tracking Poll and commentaries are available for free to the general public. Subscriptions are available for $3.95 a month or 34.95 a year that provide subscribers with exclusive access to more than 20 stories per week on upcoming elections, consumer confidence, and issues that affect us all. For those who are really into the numbers, Platinum Members can review demographic crosstabs and a full history of our data.
To learn more about our methodology, click here.