Push Is On for Reforms to Save Troubled FHA
In 1960, long before the days of multimillion-dollar sports contracts, a young pro football quarterback named Jack Kemp bought a $15,000 home in San Diego with a $500 down payment and a loan guaranteed by the Federal Housing Administration.
Today, as secretary of housing and urban development, Kemp is struggling to prevent the financial collapse of the FHA, which insures the mortgages of 6.5 million Americans of modest means.
A decade of troubles--recession, collapse of the oil-states economy, mismanagement and thievery--has bled the FHA insurance fund. The balance has plummeted to $2.6 billion--down from $8 billion in 1979--and operating losses are piling up at the rate of $200 million a year. If the fund eventually goes broke, federal taxpayers would be liable for making good on $250 billion in mortgages guaranteed by the FHA.
Kemp is pushing a reform package to restore the FHA’s health and its key role in helping first-time buyers get into the housing market. But FHA loans won’t be quite such a bargain anymore: Prospective buyers will have to come up with more cash for their new homes. Kemp wants them to have a bigger financial stake so they won’t just walk away from the home--and the obligation--if a recession hits.
“A healthy FHA will provide long-term support for home buyers and housing markets across the United States,” Kemp told a Senate hearing the other day. And Congress, with the glaring example of the financial disaster and federal bailout in the savings and loan industry, seems certain to enact a program that will put the FHA fund in better financial shape so taxpayers will be protected from future losses.
The FHA dates back to the Great Depression, having been created in 1934 to dispel the economic gloom that terrified bankers and kept them from offering mortgages. Before that, people bought homes with five-year notes, culminating in giant balloon payments.
By offering federal guarantees, the new agency made it safe for bankers to offer long-term mortgages. The FHA pioneered the concept of the 30-year home loan. The goal was simple: Make it easier for low- and moderate-income people to get private mortgage loans. If homeowners fail to make the monthly payments, perhaps because they have lost their jobs, the bank forecloses. The federal government, which has guaranteed the mortgage, pays off the loan and takes the house.
FHA mortgages have very low down payments, typically 5% or less, compared to the 20% required for a conventional loan. A buyer’s down payment is 3% of the first $25,000 and 5% of the rest. On a $100,000 loan, the down payment would be $4,500.
The loan limit is $124,875 for high-cost areas such as Los Angeles and New York. But the average FHA mortgage loan last year was a much more modest $67,000.
The FHA also collects a mortgage insurance premium totaling 3.8% of the loan. The money, collected as part of the monthly payment, goes into the fund that guarantees the mortgages.
About 690,000 homes were bought last year with FHA guarantees, and 450,000 of the customers were purchasing their first homes.
The program brings people into the market who might well be turned down by many lenders, because they don’t have enough income or an adequate credit record. The median income--half make less and half more--was $36,000 for an FHA customer last year, compared to $50,000 for buyers using conventional loans, according to figures compiled by the National Assn. of Realtors.
The dark side of the FHA program is the mounting financial loss. The agency has an inventory of 80,000 homes acquired after loans went into default. The losses on the properties run $500 million a year, representing the difference between the size of the loans and the amount the FHA recovers when it resells the properties.
The FHA has thousands of homes in Texas, Oklahoma and Colorado, hard hit by the drop in the price of oil in the mid-1980s. Also, some sections of the industrial Midwest never recovered fully from the 1981-82 recession, leaving a trail of foreclosed properties.
And the widespread mismanagement and corruption in HUD during the 1980s exacerbated the problems created by slumping local economies. Some real estate agents hired to dispose of FHA properties simply pocketed the money.
The General Accounting Office, responsible for auditing the agency’s books, found the records “fouled up with lousy accounting systems and incomplete information,” said Cleve Corlett, a GAO spokesman.
“We couldn’t even guarantee that our opinion was correct, because of the uncertainty over ongoing investigations and the generally sad state of accounting,” he said.
The FHA was badly managed, backing excessively risky loans, Kemp told Congress this week.
He wants Congress to reduce the dangers to the fund by making buyers pay two-thirds of the closing costs in cash when they buy a home. Currently, the expense involved in the closing costs can be included in the loan itself.
For example, the down payment on a $60,000 home is $2,500, and typical closing costs are $1,200. Requiring the buyer to provide the $1,200 from his own funds would offer the FHA an additional “cushion” on the transaction, according to John Weicher, HUD assistant secretary for policy. Buyers are less likely to let the loans go bad when more of their own money is at stake.
“With this change, every home buyer would have at least 2% real equity in their home, which will reduce defaults,” Kemp said.
