Froma Harrop

Agency continues ruinous home handouts

Exactly who made Bernadine Shimon think that she could buy a new house shortly after declaring bankruptcy and losing another home to foreclosure? The American taxpayer, that's who.

Without a Federal Housing Administration willing to guarantee a $125,000-plus mortgage, this Denver-area school teacher's recurring "dream of homeownership" could not come to pass. Shimon's down payment was 3.5 percent.

This single mother is so strapped that she had to cash in her retirement savings to come up with the 3.5 percent. Her case was cited in a New York Times article about the sad shape the FHA finds itself in.

No sane private lender would take on such risk without a sucker-of-first resort, again the taxpayer. It happens like this: Private companies make their loans. The FHA buys the mortgages and then rolls them into Ginnie Mae mortgage-backed securities. These bonds are rock-solid investments because they carry an "explicit" taxpayer guarantee. Fannie Mae and Freddie Mac securities came with an "implicit" guarantee (though those are for all intents and purposes "explicit").

Much of the blame for the housing bubble-then-bust goes to these government agencies: They let private lenders make mortgages without adult supervision, then guaranteed them. Such loans helped push the FHA's capital reserve fund down toward its mandated 2-percent minimum. Edward Pinto, a former Fannie Mae executive, predicts that the taxpayers will be bailing out the FHA within the next two to three years.

The FHA was created in 1934 to help people of modest means buy homes. Fine, but shouldn't they have more skin in the game than a 3.5 percent of the purchase price? A Republican proposal to raise the minimum down payment to 5 percent seems rather reasonable, especially when private lenders are insisting on 10 percent or even 20 percent.

Kenneth Donohue, inspector general of the Housing and Urban Development Department, seemed to be shaking his head. "What does the FHA think it is doing by asking only 3.5 percent?" he asked. (FHA is part of HUD.)

With nearly a quarter of FHA loans insured in the last two years now in trouble, you'd think that Democrats running the House Financial Services Committee would be more upset over the way the FHA still hands out taxpayer guarantees.

But committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to "keep prices from falling too fast." Thing is, we can't support real-estate values with shabby lending practices. That's what got us into trouble.

Another good idea is to demand that banks take a hit for the first 10 percent of losses on the mortgages they originate. That would put their skin in the game.

There was good news on the FHA front. The agency was ready to tighten rules for mortgages on condominiums. The new rules made real-estate interests unhappy, however, so they are on hold.

We appreciate that the FHA had to step in and maintain the housing market's pulse, but can't it show better judgment?

Froma Harrop writes for the Providence Journal. Her column is distributed by Creators Syndicate.