The Federal Housing Administration (FHA) is sometimes maligned by critics as being “predatory.” I understand the private mortgage insurers (PMI) want to get back into the game and reduce the share of government mortgages insurers like the FHA, Fannie Mae and Freddie Mac. But calling the FHA predatory is downright bizarre.
How about a little history?
The FHA is a United States government agency created as part of the National Housing Act of 1934. In 1965 the Federal Housing Administration became part of the Department of Housing and Urban Development (HUD) where Julian Castro is currently the HUD Secretary.
The mission of the FHA has been to support first time-homebuyers and minority borrowers with limited accumulated equity for a down payment.
And it was the FHA that stepped in during the financial crisis. Its share of mortgage insurance went from 16% pre-financial crisis to 71% during and after the financial crisis. Recently, the FHA share has dropped below 50% (intentionally).
Are mortgages with FHA insurance more expensive? Actually since late 2011, FHA-insured mortgages have run 50 basis points less expensive than the average 30 year rate.
In terms of mortgage spreads, here is a chart of mortgage spreads since late 2011.
How about forgiveness of a mortgage distress? FHA/VA trump Fannie and Freddie.
But how have things been going since late 2011? House prices in Los Angeles and San Diego, for example, have been rising rapidly. So borrowers in Los Angeles in San Diego, particularly with a low down payment loan insured by the FHA, are doing quite well!!
So, with 50 basis points less in interest rates and house prices rising, there isn’t much justification for calling the FHA a predatory institution. True, their insurance costs are higher than Fannie Mae and Freddie Mac, but remember that the FHA’s market is first-time homebuyers and households with lower credit scores and income.
I ask you, is this the face of a predator? (Hint: it is HUD Secretary Julian Castro).