FHA-insured loans are, in turn, packaged and sold as securities that are backed by the Government National Mortgage Association. This arrangement has encouraged financial institutions to lend to low- and moderate-income households that do not qualify for “prime” mortgages but that can meet the FHA’s less-stringent borrowing requirements.
The FHA is one reason that America’s homeownership rate grew from 40 percent of households at the time of the agency’s inception to 68 percent today. But in recent years the FHA has become known as a sluggish and decreasingly relevant bureaucracy. While it insisted on 3 percent down payments; cumbersome appraisals; strict documentation of income; and 30-year, fixed-rate loans, subprime lenders were stealing the FHA’s market share with loans that featured no down payments, adjustable rates and no-documentation or “no-doc” income verification. Between 1996 and 2005, FHA-insured lenders’ share of the mortgage market fell from 19 percent to 6 percent; subprime lenders’ market share grew from 2 percent to 15 percent. And those who still borrowed through the FHA were not only fewer in number but less and less credit worthy.
Now that the subprime market has collapsed, Washington has rediscovered the FHA. FHA-backed refinancing of defaulted subprime loans is the centerpiece of President Bush’s plan to deal with the crisis, and the president is calling for a broader “modernization” of the FHA. House and Senate Democratic leaders also are promising an overhaul. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) says it is one of his priorities this fall. The administration, House and Senate proposals differ in their particulars, but they share at least two goals: to reduce or eliminate the FHA’s down-payment requirement and to allow the FHA to insure larger loans, especially in expensive housing markets. A House bill that passed the Financial Services Committee in June would also permit the FHA to charge borrowers based on their credit scores, an idea that the administration supports but that Mr. Dodd does not.
The risk, of course, is that these proposals would put the government into the subprime lending business now that the private-sector version has failed. But even though the proposals would allow the FHA to compete with subprime lenders by slashing down-payment requirements, they would not allow the FHA to adopt the most suspect and dangerous practices of that troubled industry, such as no-doc lending. If prudently designed and administered, FHA modernization would permit the agency to play a useful role in the post-subprime housing market. Congress should approve a bill as soon as possible.
From: TheWashingtonPost.com September 8, 2007 p.A14
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