You can’t put a price on the change in consumer and business confidence that has come about because property prices have arrested their decline. The imploding financial system, the collapsing consumer economy, the creeping blight of many neighbourhoods across the US ? the FHA has been a key piece of all of these.
The agency was set up in the depths of the Great Depression to sell cheap mortgage insurance to people, such as first-time buyers, who cannot rustle up a down-payment of more than 3 per cent. These days it is a supposedly self-financing outpost of the Department of Housing and Urban Development.
The FHA’s finances are in a much worse state than previously thought, we discovered this week. Congress mandated that it must always maintain cash reserves of 2 per cent of the mortgages it insures, but these have fallen to 0.53 per cent. Meanwhile, the percentage of loans seriously in arrears has risen to 17.9 per cent.
Reversing its previous position, the agency said that, if the economic recovery goes into reverse, it might well have to increase the line of credit it has with the US Treasury, perhaps by $1.6bn in 2011. It says that this would only be a problem in a serious double-dip recession, but we know from the Fannie Mae and Freddie Mac debacle that the government’s housing market experts are prone to crunching the numbers optimistically.
Why have things deteriorated so fast? The reason is that the FHA has been ramping up its activities in the past two years. As the private sub-prime mortgage market collapsed, the agency stepped in to provide financing options for the “good” sub-prime borrowers who at least could prove their income. From insuring less than 2 per cent of the market in 2006, the FHA now puts its effective government guarantee behind one in four new US mortgages.
The higher-than-expected delinquencies are the inevitable consequence of the spike in unemployment, which has gone higher, faster than the FHA or anyone would have predicted before the financial panic triggered by Lehman Brothers’ fall last summer.
Few of the schemes to keep Americans in their homes, lower the cost of borrowing and support house prices are working without flaws. Mortgage lenders, getting subsidies to help borrowers refinance, are acting too slowly. The tax credit for first-time buyers is having to be extended. And Fannie Mae and Freddie Mac, the nationalised mortgage finance firms, are still basket cases. But the flaws do not change the imperative for government to keep up its support for the housing market until we are out of the woods.
Undeniably, if the sparks of economic recovery fail to catch light and unemployment does not start to come down, then the consequences for the FHA will be dire. On the other hand, if that is the scenario that unfolds next year, there will be plenty bigger financial disasters to worry about, too, not least at the semi-nationalised Citigroup or with the state of the US public finances.
The most likely outcome continues to be a return to sustainable, if sluggish, growth, with house prices bouncing around the bottom and a gradual rebuilding of confidence.
One thing that will certainly derail recovery: withdrawing all these special assistance programmes too soon. The FHA must hold the line against the do-nothing, intervene-never politicians who are trying to crimp its activities. Yes, eat through the rest of the capital cushion. Eat through all of the capital, and hell, borrow from the Treasury, too. Shout about it proudly. By keeping people in their homes and keeping an economy moving, the FHA is doing precisely the job it was set up to do 75 years ago.
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