Since its origination in 1934, the Federal Housing Administration (FHA) has helped insure 34 million mortgages on properties throughout the United States and its territories. This makes it the largest insurer of mortgages in the world. The insurance provides lenders with security against any losses that may result when homeowners default on their mortgage loans. Despite its immense size and representation that it operates off of self-generated income and costs taxpayers nothing, the FHA is not truly that successful. The Senate Banking Committee has recently held a hearing to go over the Independent Foreclosure Review. The goal was to understand who received hardships because of mistakes made throughout the foreclosure process. You would think that it would be very hard for them to miss the FHA’s poor performance with foreclosures. The FHA has been unable to pay debts of at least $31 billion which can be correlated to the fact that it has been very inaccurate with its annual actuarial studies over the past 20 years. This can be largely accredited to many of their studies being based on guess work represented by interest rates, housing prices, and inflation rates that are made to look good rather than accurate. Other points to think about are that the FHA allows borrowers to have a higher debt-to-income ratio than the typical insurer. They also will still give out loans to individuals that have no credit history. This leaves a high risk for the FHA having to eat up costs for providing high risk loans. When borrowers do go delinquent on loans, this has a negative impact on credit scores which increases costs for borrowing in the future and can affect entire neighborhoods. In addition, the FHA initial loan terms were for 20 years. In the late 1970s they changed this, where the average loan term became 30 years. By having a mortgage spread out over a longer period of time borrowers have not been able to build up equity as quickly as they would with a 20 year loan. Typical defaults on loans do not occur until a couple of years down the road, so the faster a loan is able to be paid off the better. This can be represented by the 3.14 million foreclosures since 1975. These different faults within the FHA have helped result in their foreclosure rate of 1 in 8. These foreclosures are not specific to one area but instead range all throughout the country within 9,000 different zip codes. It may be time for the FHA to take a little step back and take an inside look at what is causing so many foreclosures. Putting into place some stricter rules and guidelines for borrowing may be a solid solution.
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