Mission misfire: 50 years of failure at the FHA
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.