Schnare Stresses the Importance of Reform for a Growing Federal Housing Administration

August 22, 2008

Criterion special consultant Ann Schnare emphasizes the importance of reform within the Federal Housing Administration (FHA) as its role in a risky mortgage market grows in Reuters.

Now that subprime lending has all but ground to halt, the Federal Housing Administration (FHA) is riding to the rescue, helping thousands of aspiring, but risky homebuyers secure financing they wouldn't otherwise be able to get. As a result the FHA's share has swelled to 10 percent of all new loans, up from just 4 percent at the height of the housing boom. Moreover, the recent Housing Bill will expand the FHA's mandate significantly, permanently increasing the size of loans it is allowed to guarantee and creating a new program designed to help troubled subprime borrowers refinance into more affordable loans.

While FHA's policy goal -- providing low-income borrowers with affordable mortgages - is laudable, these developments should give taxpayers pause. The mortgage market, we now know, is risky business. And that goes equally for giants like Fannie and Freddie and with large, experienced staffs and Wall Street investment banks with complex computer models. With billions of taxpayer money at stake, is it really wise to ask the FHA -- chronically under-funded, buffeted by the whims of politicians, delegated too little authority -- to succeed where they have failed? The general consensus appears to be yes, as there are few, if any viable alternatives.  However, efforts to expand the role of FHA need to be accompanied with appropriate and meaningful reform, including greater autonomy and greater access to private sector tools and expertise.