CAP Credits FHA for Its Useful Ignorance, Allowing Mortgage Fraud to Continue
I don’t really know what to make of this analysis from the Center for American Progress, alleging that the Federal Housing Administration “saved” the housing market during the downturn.
First, a word on what the FHA does. They’re basically a government-run mortgage insurer, backstopping loan losses for private lenders for a nominal fee that borrowers eventually pay. FHA loans typically allow first-time homebuyers and families of more modest means, who otherwise may not get loans, to secure them from private lenders. But in the post-bubble period, FHA has insured more and more loans outside their narrow focus. As long as the lenders guarantee that the loans conform to FHA’s underwriting standards, FHA will insure them. FHA pays for itself through the insurance fees charged to lenders.
FHA’s balance sheet is currently in a precarious position, but CAP argues that the expansion of that balance sheet, which now totals $1.1 trillion, helped keep credit flowing since the collapse of the bubble. “Home prices would have plummeted even further, households would have lost much more wealth than they already did during the crisis, and even more families would have lost their homes to foreclosure,” the paper claims. CAP further alleges that FHA will not require a sustained injection of public funds to keep going (through a standing line of credit it holds with the US Treasury but has never tapped), as the mortgages it insured in recent years look to be profitable. And even if FHA did need to pull funds from the line of credit, that would represent a solid investment for taxpayers, given the support that FHA provided the economy.
This is all generally correct. But the timing of this paper is nothing short of incredible. It comes in the same week that the US government sued Wells Fargo for violations of the False Claims Act. The suit alleges that Wells simply lied about the quality of the loans they wrote when they applied for FHA mortgage insurance. And FHA accepted those loans for over a decade. That this is ultimately a small-potatoes lawsuit does not erase the fact that lying to the FHA appeared to be a standard industry practice for years.
It would be one thing if Wells Fargo were the only perpetrator here. But the Wells suit is one of six that the government has issued against mortgage originators who lied to the FHA. And for all we know, they’re still doing it.
You would think that, at some point, the FHA would have noticed the bad originations on practically all the loans they insured going back to 2001. But FHA did nothing, because the particular program that Wells Fargo and the other issuers used, the Direct Endorsement Lending program, allowed for self-reporting. FHA never once acted to monitor and stop the industry-wide faulty lending taking place; they simply issued their insurance on loans that did not meet their underwriting standards.
Why exactly should we be lauding a federal agency that facilitated the fraudulent lending that precipitated the housing crash and the financial crisis? FHA appears to have operated on auto-pilot, at a time when blowing the whistle could have slowed down the go-go lending of the bubble years. If FHA had done their job then, they wouldn’t be in the position to have a massive balance sheet that may cause them to tap the Treasury line of credit. And the economy would be far more stable.
So forgive me if I don’t heap praise on the FHA, another asleep-at-the-wheel regulator who helped bring us this Great Recession in which so many Americans suffer today.