Thursday, April 10, 2008

FHA is at the center of many plans to fix the housing market. A program designed during the “New Deal” Era of the FDR days, whose purpose was to help people with little down payment money or weak credit obtain a home is now expected to once again bailout the mortgage and housing market.

The question is, is the agency up to the task? Currently FHA backs $385 Billion in mortgage loans. Current proposals could see the agency doubling that amount in the not so distant future.

Lets look at what we are asking of an agency who last year made up 7% of the mortgage lending market. With the new and recently passed FHA Secure program we saw an increase in FHA’s funding in the amount of 150,000 borrowers over 6 months. One could logically assume that number to be 300,000 over a full year. This increase is being asked of an agency that annually funds 400,000 borrowers. In essence we have already doubled the size of FHA.

To this point FHA has been a self sustaining agency. What happens if that can no longer be accomplished based on the sheer size the agency will have to grow to? Can you say major tax burden for the tax payers? Who else is going to bail out the FHA? What’s the alternative? Letting home values continue to slide? How much trouble will lending institutions be in then? Does anyone think the FHA, lending institutions or our government would be able to write a check to bail us out of a $385 billion dollar equity loss?

The problem as I see it is that the FHA does not even know if they are up to the task. They have taken on additional risk with FHA Secure and have helped 150,000 borrowers. They will soon be asked to take on a great deal more, as they continue to fill the gaps left by the sub prime market and as a primary source in the purchase money market for many borrowers. How much risk is too much?