I Agree

It's not often that I find myself agreeing with a Wall Street Journal editorial.

While I find the news section to be an invaluable reference source -- we'll have to wait and see if that eventually changes now that Newscorp's Mr. Murdoch is in charge -- the opinion pages have often served as a forum for delusional economists and right-wing cheerleaders.

But not always. Occasionally, the editors offer up some razor-sharp -- and spot on -- criticism of government waste and ineptitude. Today's paper features one such example.

In "The FHA Time Bomb," the Journal highlights a disaster-in-the-making that kind of sums up everything that's wrong with the way that our "leaders" in Washington look after our nation's finances.

Well, this certainly is embarrassing. The Federal Housing Administration – the very agency the Bush Administration and Congress trumpet as the solution to the mortgage crisis – has announced that it suffered a $4.6 billion loss last year. This is one of the worst financial performances ever for the government's multibillion-dollar mortgage insurer.

We'd hope this news might cause Congress to reconsider its plans to turn over some $300 billion of troubled loans to an agency already in financial distress. No such luck. A bill passed by the House and now being debated on the Senate floor would expand the FHA portfolio to about 1.5 million mostly high-risk subprime mortgages. So at the very time private lenders and investors are fleeing subprime markets, Congress wants taxpayers to dive in.

The Senate has also folded into its housing bill a separate FHA "modernization" that would more than double the agency's loan limits while lowering downpayment requirements. Together these maneuvers could put taxpayers on the hook for tens of billions of dollars of additional mortgage losses.

One reason the FHA lost so much money was financial mismanagement. In 2000 in the final days of the Clinton Administration, HUD Secretary Andrew Cuomo tried to expand FHA's share of the mortgage insurance market by lowering its premiums by one-third, to 1.5% from 2.25%. The Bush Administration never reinstated the more prudent premiums. If it had, FHA's losses would have been zero or close to it.

The biggest reason the FHA lost so much money was a scam called the "downpayment assistance program." Under this program, builders or mortgage originators make a loan to low-income homebuyers, and then arrange for a third party to pay the downpayment, so the loan qualifies for FHA insurance. This means borrowers have no skin in the game, and in many cases have negative equity because the value of the homes are often inflated.

Borrowers could bet on the upside of the market at no cost to them. And thanks to the 100% FHA insurance against default, lenders were guaranteed full repayment whether or not the loan is ever repaid. Until recently, lenders even got a tax write-off for their "charitable contribution." Everyone won – except the taxpayer. Now even the FHA finally agrees that this program invites widespread fraud and wants to end it. But Barney Frank, who heads the House Financial Services Committee, is insisting that it continue.

One lesson from the debacle is what happens with low or zero downpayment FHA loans: They go bust. The Government Accountability Office finds that default rates are about three times higher than on conventional loans. So why in the world is Congress promoting a new FHA bill to lower downpayments to 3% and in some cases even to zero?

Here's another brain twister: Median home prices have fallen to $202,300 from $219,900 with more declines on the way. So why is Congress raising FHA mortgage limits to as high as $729,000 in some high-income areas? Mr. Frank's House bill would allow the FHA to guarantee a loan up to 125% of the average home price in any area. The FHA's mission is to help low- and moderate-income households become homeowners. Encouraging moderate-income families to buy $700,000 homes is how the subprime crisis began.

The most reckless provision now on the Senate floor would allow the FHA to take over risky subprime loans from private banks. When FHA Commissioner Brian Montgomery announced the agency's losses last week, he warned that Congress's subprime loan bailout could plunge FHA deeper into the red. Senate Banking staffers tell us that lenders have all but admitted that, if the bailout becomes law, they will dump their worst loans onto the FHA.

Among the likely dumpers: Countrywide Financial, which gave Senate Banking Chairman Chris Dodd a bargain mortgage. The Congressional Budget Office predicted this month that 35% of these loans could go sour.

Yet Congress is putting the political imperative of "doing something" about housing above the risks of tens of billions of dollars in taxpayer losses. The White House has waxed and waned in its support for this exercise, and late last week issued a statement saying President Bush might veto it. He could do worse than heed Kentucky Senator Jim Bunning, who warns: "As soon as we finish this bailout for banks and borrowers, the next taxpayer bailout will be of the FHA."

Comments

[Aaron Krowne]

Of course this thread of commentary only makes WSJ editorial because it's anti-housing-agency. Of course, I happen to agree with our right wing ideologue friends on that stance.

I've been complaining about this suicidal permission of 100% financing through FHA for a while now, as have a few others:

http://implode-explode.com/viewnews/2008-04-09_TaxpayersGetReadyToBailOutFHA.html

http://implode-explode.com/viewnews/2008-04-24_JubaksJournalAnewmortgageproblemFHA.html

Unfortunately nothing has been done. Nothing good, at least. I get email spams bragging about 100% financing through FHA with this scam.

[B.B.]

Not that there has to be a "right or left", but I had figured you for more of a conservative than liberal. Interesting read tonight.

[Rocky]

The Democrats have been pushing the Community Reinvestment Act since its passage in 1977. The Republicans have been pushing "home ownership" as an alternative to public housing for years. I guess the taxpayers will end up bailing out the FHA. Another reason for foreigners to stop buying US government and agency securities. I wonder if staffers at foreign central banks read blogs like this?

[roger]

yes I also agree but lets not forget this is a Government by big corporations for big corporations and the people are getting the shaft

[Speculator]

A lot of the American finanacial companies are having problems because of loose lending. The next shoes to fall are Fannie and Freddie. High oil is hurting more and more homeowners. but gas is still cheap, I will tell you why @
www.theinvestingspeculator.com

[weinerdog43]

Like the boy who cried 'wolf', I'm completely uninterested in what the Wall St. Journal editorial page has to say.

Another old saying goes: "Even a blind squirrel finds an acorn sometimes."

[Frank]

The housing bailout currently being proposed in Congress sickens me. I am outraged at the selective socialism being perpetrated upon the American people. It seems that the primary beneficiary will once again be the banks. As they have recently been on the recieving end of fed charity as well, one can only postulate that we are operating in a quasi-socialist system whose primary beneficiaries are made up of banking elites and the liesure class. Indeed fannie and freddie will recieve more power, they will soak up many of the toxic loans these banks are so desperate to dump. At the critical juncture where such weight becomes even too much for fannie and freddie to bear they will fail. We the taxpayers will pay for it in the end. Perhaps in the end congress will own these houses.
Of further interest has anyone noticed the new online commerce monitoring which has been subtly slipped into this new housing bailout bill. Welcome to the new millenium folks

http://freedomworks.org/newsroom/press_template.php?press_id=2571&_kk=&_kt=9ee2a527-a338-4072-b724-74acddf7dbb2