FHA must not abandon its mission

June 28, 2006|By STELLA ADAMS

For more than 70 years, the Federal Housing Administration and its programs have been a very important means of extending mortgage financing to low- and moderate-income and minority families. Today, it continues to be a vital part of the national effort to increase and expand homeownership to these populations.

When the FHA was created in 1934, the housing industry was facing dire straits: Millions of construction workers had lost their jobs, down-payment requirements were upward of 50 percent, and America was primarily a nation of renters. The times have changed, fortunately, but there is still much that needs to be done to put minority families into homes.

Congress should be applauded for taking action to modernize the FHA and some of its antiquated programs. While it is important that the FHA remain relevant in today's lending market, Congress must give careful consideration to any legislation and ensure that the original mission of the FHA - to help lower-income and credit-impaired Americans have access to affordable home financing - is preserved.

Over the past 72 years, the FHA has insured more than 33 million properties. It now has about 5 million single-family mortgages in its portfolio.

The FHA Modernization Act, which is gaining momentum in the House and will soon move to the Senate, contains provisions that are potentially disastrous and would effectively undermine its founding prerogative. The mission of the FHA is to serve low- and moderate-income families with affordable home loans. To fully appreciate the pitfalls of this legislation, it's important to understand the fundamentals of the current FHA model.

First, the FHA was not established to compete with the private marketplace, where there is no shortage of mortgages. Instead, the FHA offers fixed-fee mortgage insurance that allows little or no down payment for low-income applicants and those with impaired credit to access home financing.

The FHA helps to keep these homebuyers from falling victim to predatory mortgages in the sub-prime market, where they bear the greatest risk of defaulting on their home loans. This works in the FHA model because every applicant, regardless of credit score, pays the same flat fee for his mortgage insurance. The most significant benefit to this FHA "cross-subsidization" model is that it makes a low-down-payment mortgage affordable for all FHA customers.

If enacted, the FHA Modernization Act would replace this fixed-fee model with a pricing system that would cost many FHA homeowners more money. Under these changes, credit scores would decide how much FHA mortgages cost. This could make FHA home loans too expensive, driving more homebuyers to the predatory sub-prime market.

Advocates for risk-based pricing at FHA argue that this move would help the beleaguered agency make more money. But since the FHA doesn't cost taxpayers anything, making money should not be a concern of the FHA.

The FHA is not in the business of selling a product or outselling private marketplace competitors. It was designed to operate slightly ahead or break even from the premiums it charges on its home loans. Today, the FHA is concerned that it is coming too close to breaking even and that unless it attracts a swath of new customers, it might cost money for the government to operate.

So long as the FHA continues to help underserved families who cannot enjoy the many options middle- and upper-class families have when it comes to picking a mortgage, the agency is doing its job and fulfilling its mission.

If the FHA is looking for solutions, it should base its prices on the loan-to-value ratio of the mortgage, taking into consideration the size of a homebuyer's down payment. This system has helped private lenders price their mortgages accordingly, as statistics show homeowners who put at least some money down have lower rates of default.

With home foreclosures increasing across the country, this is not the time for the FHA or Congress to entertain ideas of moving toward a system that will push lower-income borrowers with impaired credit out of the FHA program.

Through a fixed-price system, the FHA found a way to keep its pricing competitive for all of its customers. Most important, it has kept people in homes. After 72 years, it makes sense to update some aspects of the FHA, but Congress should pause and ensure these changes are in the best interest of those whom the FHA was established to serve.

In its current form, the FHA Modernization Act does not achieve this goal.

Stella Adams is executive director of the North Carolina Fair Housing Center. Her e-mail is sadams7943@aol.com.

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