Housing Access and Risk Management: Competing Directives in the Federal Housing Administration

By Smith, Brent C. | Journal of Housing Research, July 1, 2014 | Go to article overview

Housing Access and Risk Management: Competing Directives in the Federal Housing Administration


Smith, Brent C., Journal of Housing Research


Abstract

The Federal Housing Administration (FHA) in the United States was originally established to stabilize a crippled mortgage market in the early days of the Great Depression. Seventy-five years later the agency again serves as a backstop in the most recent downturn during the financial crisis and subsequent recession in the housing market. Since inception, providing insurance to mortgage lenders and investors against loss from default has been, and continues to be, the primary instrument in the implementation of its charge. The FHA insures lenders and investors of mortgages against the risk that the borrowers of those funds default. As an agency within the U.S. Department of Housing and Urban Development (HUD), the FHA is also indirectly charged with contributing to HUD's overriding objective of providing access to affordable housing. This policy dichotomy, coupled with the recent trough in the housing cycle, threatens the future solvency and capacity of the FHA.

(ProQuest: ... denotes formulae omitted.)

The Federal Housing Administration's (FHA's) two overriding policy directives, access to housing and stability of residential mortgage markets, are not in direct correlation. Since the collapse of the high-risk mortgage market, the FHA's share of purchase mortgage loans has increased from 4% of the market in 2005 to over 23% in June 2010 (HUD, 2010a, b).1 The FHA's return to prominence, coupled with targeted lending, carries with it increased exposure to default risk, specifically threatening to the Mutual Mortgage Insurance (MMI) Fund. The proceeds from the mortgage insurance paid by borrowers capitalize the MMI Fund, which provides operating funds for FHA programs (HUD, 2006). If the FHA targets lending to neighborhoods and borrowers that face the highest hurdles to home ownership, then it is also likely that the FHA loan pool is concentrated in high-risk mortgages. The current array of threats calls into question the direction in public policy and market reliance on the FHA as a central figure in maintaining liquidity and volume in the cyclical housing market.

The FHA is the only government agency chartered to operate "entirely" from its self-generated income. The FHA operates more than a dozen different lending programs divided into three subsets: single-family, multi-family, and health care (Kephart, 2005).2 The most popular program offered by the FHA (known as Section 203(b)), and the impetus for its origination in 1934, provides insurance on 15- and 30-year fixed-rate mortgages for single-family dwellings. Given that the program is designed to provide access to underserved or targeted populations, FHA-insured loans often go to low or moderate income borrowers and those with insufficient or poor credit to qualify for prime loans. The advantages for low wealth borrowers of FHA-insured mortgages over prime rate conventional loans with private mortgage insurance is that the credit qualifying criteria for a borrower are not as stringent as conventional loan financing and the down payment or equity requirement is often significantly lower as well.

Since its inception, the FHA has insured over 40 million mortgages on single-family homes. The bulk of these mortgages, more than 7.5 million outstanding as of July, 2012, have been insured under the MMI Fund; FHA's largest fund comprising approximately 89% of FHA's insurance-in-force, or $674 billion. The MMI insures mortgages on single-family homes consisting primarily of single-family detached houses and townhouses (Herzog, 2010).3 The FHA maintains liquidity in its insurance programs primarily by generating premium, fee, and interest income, but also through Congressional appropriations and borrowing from the U.S. Treasury. Although insuring mortgages has been the dominant role of the FHA since the program was established (Monroe, 2001), Weicher (1995) offers a different perspective, suggesting the original and continuing primary purpose of the FHA is to promote homeownership on the grounds that homeowners are better citizens because they have a stake in the larger society. …

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