If you thought the housing crisis was over, think again. According to a groundbreaking analysis of the Federal Housing Administration by Edward Pinto, resident fellow at the American Enterprise Institute, FHA's economic value was minus $15 billion last month. And instead of fulfilling its purported mission to help local residents achieve the American Dream, FHA's misguided policies "are destroying wealth in low-wealth neighborhoods" -- including those in and around Washington.
"Nightmare at FHA" is a devastating critique of a federal agency that abandoned the sound underwriting policies it developed when it was founded in 1934, during the Great Depression. FHA's foreclosure rate shot up in the '60s when it started relying on compound leverage, low down payments and unearned equity to qualify borrowers. Pinto found that an estimated 40 percent of all FHA loans now contain at least one or two subprime components: "a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012)."
Such "abusive lending policies" still encourage low- and moderate-income families with low credit scores or high debt burdens to buy homes with low down payments, leaving them just "one car repair or one lost work shift" away from default.
Although the Washington region escaped the worst of the Great Recession, projected foreclosure rates higher than 10 percent are concentrated in suburban Maryland -- especially Prince George's County. For example, the borrowers in 44 percent of the 976 FHA-insured loans in Upper Marlboro have FICO scores of less than 660; 17 percent are expected to default. In Waldorf, the projected foreclosure rate on FHA loans is 16 percent.
"In spite of historic affordability, low credit quality as indicated by FICO results in excessive foreclosure rates in zip codes with modestly priced homes," Pinto found. The high number of FHA foreclosures depresses property values for all nearby homeowners, even those without FHA loans, who "may be denied the opportunity to build equity, provide security for their family, and have the down payment for their next home as their family grows."
Nor do the negative effects stop there. "Foreclosures also result in increased blight and crime and the larger community suffers from a reduced tax base and higher costs for providing municipal services," Pinto writes. When a government agency harms the people it's supposed to be helping, it's time to revisit its mission or else pull the plug.