Newspaper article International Herald Tribune

A New Target for Housing Bubble Blame

Newspaper article International Herald Tribune

A New Target for Housing Bubble Blame

Article excerpt

Critics, like Edward J. Pinto of the American Enterprise Institute, argue that the Federal Housing Administration is actually destroying low-income communities with reckless loans.

No matter how many times people debunk the notion that government policy created the U.S. housing bubble, it does not die. It is part of what the blogger Barry Ritholtz has called the "big lie" of the financial crisis. Now people are having another argument about whether the U.S. government is creating a new disaster for taxpayers.

The target this time: the Federal Housing Administration, the government mortgage insurer, mostly for low- to moderate-income and minority borrowers. Late last year, the F.H.A. issued its annual report to Congress. According to estimates, over its lifetime the agency will have to pay more out on the mortgages it has insured than it has taken in. The report estimated the potential shortfall at $16 billion, which is a lot in absolute terms, but minuscule in relation to the U.S. budget and the $1.1 trillion F.H.A. portfolio.

Despite these modest numbers (more on that below), the same crew that assailed the government's role in the housing bubble is now rending its garments about the F.H.A. Critics, like Edward J. Pinto of the American Enterprise Institute, argue that the agency has not only failed to help low-income communities, but is actually destroying them with reckless loans.

Next month, we may end up doing it all again, when the Office of Management and Budget issues its analysis of the agency's finances, using a different methodology.

So is the F.H.A. in trouble and in need of an imminent bailout?

Not really. According to the actuarial analysis, if the agency stopped backing mortgages right now, it would have a deficit after 30 years. But even by that analysis, it has enough cash for many years. And it will not stop insuring mortgages. In fact, it is backing what are probably going to be very safe and profitable home loans right now, so even if it drew money from the U.S. Treasury, it would almost certainly be able to pay it back eventually.

And if there is a Treasury infusion, taxpayers should consider it a bargain. The agency has been a rare bright spot in the Obama administration's otherwise dismal record on housing.

In both the boom and bust, the F.H.A. functioned as one would hope a government lending operation would. As the bubble grew and private lenders went crazy, its market share dwindled. Maybe that was not on purpose, but it is better to be lucky than smart. When the market crashed, the F.H.A. stepped in.

Without the agency's lending, mortgage rates would have doubled and home prices would have dropped another 25 percent, estimates Mark Zandi, chief economist at Moody's Analytics.

John Griffith, a housing policy analyst for the liberal Center for American Progress, has produced several useful rejoinders to the F.H.A.'s critics. He points out that compared with the private sector, the agency is doing quite well. Yes, the agency faces a high rate of delinquencies, but that pales when compared with private- sector subprime loans. …

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