Should We Shut Down the FHA?

*Should We Shut Down the FHA?*
**By Phil Hall**

new-PhilH***Back in January, Rep. Jeb Hensarling, R-Texas, made a statement that few people took seriously. “The FHA is broke – bailout broke,” said Hensarling, who is chairman of the House Financial Services Committee. “The FHA’s dire financial condition and dominance of our housing finance system are a clear and present danger to every taxpayer who is now at great risk of having to fund yet another Washington bailout. Without serious reform, FHA may become the next Fannie Mae and Freddie Mac.”

****The source of Hensarling’s warning was a November 2012 actuarial report by the U.S. Department of Housing and Urban Development, which noted that the FHA’s single-family insurance fund had a negative economic value of $16.3 billion. However, the FHA and its apologists sneered at Hensarling’s warning, claiming that everything was copacetic.

****I think you know what happened next. Hensarling’s warning was quietly confirmed by the Obama Administration, which announced in April that the FHA was projecting a $943 million shortfall for fiscal year 2013, which ended on September 30. But that projection was absurdly off the mark: the FHA is now requiring a $1.7 billion bailout from the U.S. Department of the Treasury in order to stay afloat.

****But anyone who thinks that a mere $1.7 billion will be enough to put the FHA back on its feet is a fool. Edward Pinto, a former Fannie Mae executive and a senior fellow at the American Enterprise Institute, recently told Investors Business Daily that approximately 40% of the newer FHA-backed loans were in the subprime class and that delinquencies on FHA loans are at the 17% range. Pinto estimates the agency will need at least $25 billion to remain operational.

****“The FHA is woefully insolvent,” Pinto said.

****My two-cent deposit in regard to the $1.7 billion bailout request: shut down the FHA completely. I am not suggesting that the closure should be temporary, with the goal of rectifying the problems at hand. I believe that the nation could do very well without this mismanaged mess of an agency.

****The FHA bailout offers yet another piece of evidence about the federal government’s failure to run the national housing finance system with any degree of competence. In the years prior to the 2008 crash, federal regulators utterly abdicated their monitoring responsibilities while elected officials of both parties pushed for unrealistic and unsustainable housing goals that were driven by political steam rather than economic intelligence. Since the 2008 crash, Washington has created a series of rules and regulations that punish the financial institutions that were not responsible for the crash while giving the too-big-to-fail monsters and their well-heeled executives the proverbial get-out-of-jail card that allows them to carry on with their reckless and stupid behavior.

****Even worse, the federal government has spent the past five years steering the housing finance system away from a free-market capitalist environment into a socialist set-up where Uncle Sam uses taxpayer money to cover the entire process, from homeowner education through the sale of mortgage-backed securities. Some idiots like to crow that everything is under control because Fannie Mae and Freddie Mac are making huge profits today. Well, yeah, that’s not difficult when you have no competition whatsoever! And the Federal Reserve’s policy of printing endless amounts of money keeps the madness in motion.

****Of course, we just can’t shut down the FHA overnight. As with the long-delayed question of reforming the government-sponsored enterprises, there will have to be a period of transition from the nanny state to the private-label market. There will be savvy financial institutions that will seek to absorb the FHA’s intelligent operations, while the reckless and risky aspects of the FHA’s outreach could fade away unless someone figures out a smart way to do that kind of business (and not with taxpayer money, too!).

****It will take time, but it will ultimately prove to be time well-spent. But the nation needs to get moving in that direction – too much time and money has already been wasted.

****Sadly, too many people will not admit that. Rep. Maxine Waters, D-Calif., defines the state of complete denial when she defends the viability of the FHA.

****“It’s important to note that FHA is far from bankrupt,” she said after the $1.7 billion bailout request became public. “[The FHA is] holding over $30 billion in reserves and [is] continuing to generate revenue.”

****Maxine, your reality check has bounced!