Economics, U.S. Economy

Mission misfire: 50 years of failure at the FHA

Image credit: Kevin Shorter (Flickr) (CC BY-SA 2.0)

Image credit: Kevin Shorter (Flickr) (CC BY-SA 2.0)

Since 1962, the FHA has been selling the American Dream of home ownership, but delivering despair. For fifty years, commentators have pointed out how FHA’s poorly designed underwriting policies result in financing failure for working-class families and a plague of foreclosures for working-class communities.

1962: FHA’s mounting foreclosures pointed out by Time magazine.

Homeowners of a new and unattractive breed are plaguing the Federal Housing Administration these days. Known as “the walkaways,” they are people who find themselves unable to meet their mortgage  payments—and to solve the problem simply move out their belongings at night, drop their house key in the mailbox and disappear. In West Texas, largely because of walkaways, the Federal Government currently has 1,800 repossessed houses on its hands. In seven South Florida counties, walkaways have abandoned 3,000 FHA-guaranteed homes in the past twelve months. Because it underwrites low-cost housing for high-risk groups, the FHA’s problems are particularly acute.

1973: Cities Destroyed for Cash: The FHA Scandal at HUD authored by Brian D. Boyer

Author Brian D. Boyer’s book, Cities Destroyed for Cash: The FHA Scandal at HUD, chronicled “how the FHA Scandal worked on a day-to-day basis [to destroy whole neighborhoods] in the big-cities of the United States.”

1998: Statement by the late-Gale Cincotta (a long-time community activist) made before the House Subcommittee on Housing and Community Opportunity, April 1, 1998

We have been fighting abuse, fraud, and neglect of the FHA program that has destroyed too many neighborhoods and too many families’ dreams of homeownership for more than 25 years….The FHA program has a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times. In addition, the FHA program is hemorrhaging money….

2012: Publication of my paper entitled: How the FHA Hurts Working Class-Neighborhoods and Communities

While FHA’s mission is to be a targeted provider of mortgage credit for low- and moderate-income Americans and first-time home buyers in support of homeownership success and neighborhood stability, a close examination of its history reveals fifty years of failure in meeting this mission.  This paper documents FHA’s practices which result in a high proportion of low- and moderate-income families losing their homes. Based an analysis of the FHA’s FY 2009 and 2010 books of business, the FHA’s lending practices are inconsistent with its mission and represent a disservice to American working-class families and communities.  For 2009–10, the average foreclosure rate on FHA-backed loans is just 10 percent, but that average masks concentrated pain among working-class families and the communities they live in. By straying from its mission and insuring loans to higher-income borrowers, it is able to generate revenue that it uses to cover the foreclosures on working-class families who were pushed into loans with failure rates of 10, 20, and even 30 percent. Since these families live in low- and moderate-income communities, the FHA’s financing of failure condemns many of these communities to shocking levels of foreclosure. In Chicago, the five highest-foreclosure zip codes had projected failure rates of 35 to 73 percent. The five lowest, meanwhile, ranged from just 0 to 4 percent.

It is time for the FHA to put the interest of working-class families ahead of real estate agents and other interest groups who want to expand risky lending to even more marginal borrowers.

8 thoughts on “Mission misfire: 50 years of failure at the FHA

  1. So, just what has been “accomplished’? Folks have lost BILLIONS of dollars on down payments to the banks and the banks have made TRILLIONS by working the system, foreclosing on homes, selling them as package deals through Hedge Fund scams, and getting “bailed out” from money WE PAY in taxes.

  2. “It is time for the FHA to put the interest of working-class families ahead of real estate agents and other interest groups who want to expand risky lending to even more marginal borrowers.”

    Excuse me, Mr. Pinto, but the FHA tries to do just that, and that is what their IG is supposed to be doing. However, it IS kind of tough when crappy organizations submit phony W-2s and falsify information. This can be rife in some neighborhoods- I know, because I’ve heard of competitors being raided and shut down.

    But the criminality is not promoted by the FHA.

  3. The level of risk reported in the study suggests AEI should be focused on higher priority items. To suggest that this is the Institute’s lead economics study at the moment is not inspiring especially when the issues and stakes are so enormous.

  4. Mr. Plank:

    In accounting there is a procedure called AUDITING! After all these years, perhaps, just maybe, someone working in that under-worked and overpaid FHA bureaucracy should do some checking on the efficacy of the agency’s effect upon the market.

    But surely you must understand that real estate people routinely check for the best rates and terms when helping buyers to secure loans – as do 3rd party mortgage companies. Contrary to popular belief among liberals, most of these real estate agents honestly follow the rules.

    As for banks, they push honest paperwork up and FHA says “Yeah, Baby, we will back that mortgage.” Case closed – because the taxpayer is now on the hook. Understand that given a choice, no business will keep risk in a transaction that can readily be passed on.

    Time to shut down the entitlement giveaway. Abolish the Federal Housing Administration and the horse it rode in on.

  5. These programs have increased home ownership in USA, at a very high price. Many tried to reign in the excess, but thanks largely to Barney Frank, the programs were extended even more, soliciting for votes.

    Pity, but gov’t is just not likely to overcome the greed of politicians like Frank, et al

  6. These programs increased home ownership at a very high price. Thanks largely to Barney Frank the programs were extended, soliciting for votes. Gov’t is not likely to overcome the greed of politicians like Frank, et al

  7. Why is this a surprise to anyone. The level of government programs that proclaim victory are through the roof, yet those failing are apparently none.

    Democrats have sold lie after lie to the American people in the name of “fighting for the poor and middle class”. If you believe that, then throw away your future as your rely on them…

    Even CBO had a paper out that examined the Food Stamp program. They projected between 20 and 35 % is corrupted money given to those NOT in need…

    Go figure. This is what happens when the social justice crowd believes in spending more regardless of outcomes…

    Enjoy the ride. Your dependent future is bleak…

  8. Let’s not forget this number 27 million. That’s the number of shitty mortgages that were in the financial system prior to the collapse. And guess what, 2/3 of these shitty loans are on the books where… that’s right… on the books on the good ole fed – and guess who’s footing that bill – the tax payer as usual.

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