Article by Edward J. Pinto: Los Angeles Times,
December 27 2012
The agency's misguided policies are
disrupting the American dream for the families and neighborhoods they are
supposed to help.
Imagine that a federal agency wanted to
hurt America's working-class families on purpose. How would it inflict maximum
damage?
It
might start by aggressively marketing homeownership to marginal borrowers. It
would tell them that bad credit scores aren't a problem. It would push them
into homes they can't afford, saddle them with loans that barely build equity
and provide no incentives for fiscal discipline. And when many of these homes
go underwater and into foreclosure, it would leave families in financial ruin.
In short, such an agency would follow
the Federal Housing Administration playbook.
That's a shame, because Republicans and
Democrats alike rightly applaud the FHA's mission to provide responsible
mortgage credit to low- and moderate-income Americans and first-time homebuyers.
But all too often, the FHA turns the American dream into a nightmare; setting
up failure for the very families and neighborhoods its mission is to help.
This is not an isolated problem. A new
study I completed at the American Enterprise Institute identified no fewer than
9,000 lower-income ZIP Codes where the projected foreclosure rate on loans
insured by the FHA in fiscal years 2009 and 2010 is more than 10%. Overall, 1
in 7 families in these ZIP Codes stands to lose their home and their savings.
Many areas had failure rates of 20%, 30% and even higher.
FHA policies are creating a real-life
"tale of two cities," with the worst of times concentrated in
working-class neighborhoods. In Chicago, the five ZIP Codes with the highest
projected failure rate ranged from 35% to 73%, while the five lowest stood at
just 0% to 4%. The comparable figures for Los Angeles/Riverside/San Bernardino
are 13% to 17% for the five ZIP Codes with the highest failure rate, while the
five lowest were all at 0%.
Remember, these loans were written well
after the housing collapse. Today, the FHA's risky underwriting policies are
backfiring in dramatic fashion in cities across America. Even in 2012, 40% of
the FHA's loans are sub-prime — having a credit score below 660 or a
debt-to-income ratio of 50% or more. To put this in perspective, the median
FICO score for all individuals in the U.S. is 720, and the foreclosure risk on
FHA loans increases substantially once the debt ratio exceeds 35%. When
combined with minimal down payments and a 30-year term that builds equity
slowly, the result is mortgage malpractice.
The FHA doesn't need to give up its
mission. But it does need to acknowledge the harm its programs have caused. And
it needs to follow a few simple principles that will stop setting up working
families to fail.
First, end the practice of knowingly
lending to people who cannot afford to repay their loans. The FHA uses its
pricing advantages and lending policies to entice many low- and moderate-income
families to take out irresponsible loans. Congress and the FHA refuse to stop
this financing of failure because of special-interest groups. Start with the
National Assn. of Realtors, which always supports looser standards because each
marginal buyer represents another home sale, no matter how risky. Add community
advocacy groups that promote "flexible" lending standards, which
really mean risky loans with high default rates. Finally, the FHA focuses only
on national averages while ignoring that the sub-prime loans it guarantees
inevitably become highly concentrated in limited geographical areas.
