What happens to the housing market if its lone lifeline turns out to need a rescue of its own?
Such is the case facing the Federal Housing Administration (FHA), essentially the only entity willing to take a risk on first-time homebuyers and other buyers of modest means.
A recent report says the FHA’s cash reserves have dropped so low there is an almost 50 percent chance it could run out of funds and may require a taxpayer bailout next year. An independent audit estimated that the value of the agency’s reserves were $2.6 billion at the end of September, down 45 percent from a year ago.
Should the FHA need any kind of public assistance in coming months and years in replenishing its capital reserves, options for those buyers with less than the prototypical 20 percent down payment – already slim – will fall to virtually nil.
And what’s more, those lucky enough to have already made the grade will be faced with increased expenses.
In the past, the FHA has avoided going to the public till to replenish its funds in part by raising FHA-backed borrowers’ mortgage insurance premiums. The agency has also incrementally strengthened its risk management – in other words, they’ve made it harder for their prime customers to qualify to do business with them in the first place.
The FHA now finds itself, ironically, in the same seat as those lenders it has supplanted in recent years. It is forced to tighten its own underwriting standards. It is forced to raise costs on those who can least afford it. And it may soon be forced to turn for help to a public that is already weary – and angry – after bailing out dozens of more traditional lenders.
If the FHA ends up a no better option than more conventional financing routes, where, then, does that leave the huge pool of good credit, modest means buyers out there that want to buy, but can’t find anyone willing to take a risk on them?
In short, the FHA, once seen as part of the solution, is simply morphing into another part of the bigger problem. As long as more potential buyers are forced to the sidelines by a growing paucity of low-cost financing, the housing market – such as it is – will continue to limp along, a mere shadow of its former self.
The only real solution involves an injection of confidence – in the form of capital, of course – into the agency.
But that likely won’t happen. Congress has made it clear that it will not tolerate a few million dollars to be spent on public radio broadcasts – let alone many billions, no matter how well spent, to help further prop up the housing market. And we all will suffer because of it. Our housing lifeline will instead become still one more anchor chain on this country’s economic growth.
In the absence of more money, then, what needs to be done is to simply remove the uncertainty surrounding housing finance.
One way or another, we need to tell potential buyers – of any means – that tools exist to help them achieve their goals, and we need to reassure them that those tools will remain in place.
Or, quite simply, we don’t. We instead make it clear that homeownership is solely the domain of the well-heeled. If you don’t have 20 percent down and perfect credit, you can’t buy a home.
We turn what has been a murky, gray financing wasteland into a simple black and white proposition – you can either do it, or you can’t.
It sounds harsh, and it is. But this is the choice our leaders have left us with. If there is no willingness to fix the system, then it must be cast off.
It’s a terrible reality for potential homeowners. But it’s a fine situation for their landlords.
