Rethink Real Estate: Reform the Federal Housing Administration’s Single Family Home Program

HUD Headquarters in Washington, DC
The U.S. Department of Housing and Urban Development headquarters in Washington DC. Photo by Ryan Orr via Flickr.

This is the second in a series of posts discussing recommendations from our new platform Federal Investment in Real Estate: A Call for Action. The series highlights what is lacking in current federal real estate policy and how our recommended improvements could generate better returns for families, communities and taxpayers.

The Federal Housing Administration (FHA) has helped millions of families purchase their homes, and ensures mortgages are widely available during times of economic distress when banks and other financial institutions tighten lending standards. As the housing market rebounds, however, it’s time to refocus this program on its original mission.

Congress created the FHA in 1934 to promote new home construction and homeownership. At that time, the housing market was struggling, and only four in ten households owned their homes. In 1965 the agency became a program of the U.S. Department of Housing and Urban Development and today, FHA insures over 4.8 million single-family mortgages and 13,000 multifamily homes as part of its portfolio.

FHA’s share of the mortgage market has increased significantly in the past few years. This is due in part to Congress expanding the program’s reach to a historically high level of mortgages valued up to $729,000. This and other measures have put the FHA’s fiscal health at risk: for the first time in its history, FHA may need to borrow funds from the Treasury, and a stress test showed the agency could need as much as $115 billion in the event of another significant downturn.

As the housing market rebounds, it is time to improve FHA’s financial health and refocus its mission. Smart Growth America recommends lowering the FHA’s loan limit from its current, high level to a more traditional level. We recommend FHA’s programs once again focus on low- to moderate-income households. And we also recommend increasing guarantee fees and allowing FHA to seek indemnification from problem lenders, with the purpose of ensuring mortgage security. In addition, FHA should do a thorough analysis of losses and delinquencies to determine if their creditworthiness standards are appropriate and fulfill FHA’s goals.

We estimate that these reforms could save the FHA $2.5 billion between 2011 and 2015. They would stabilize the program financially and return its focus to its original intent of insuring loans for creditworthy borrowers who otherwise could not become homeowners in the private market, ultimately helping more Americans reach the middle class.

Reforming the FHA’s single-family home program is one of seven recommendations included in our recent report, Federal Involvement in Real Estate: A Call for Action. Taken together, these reforms could save the federal government an estimated $33 billion per year while updating outdated programs to achieve better outcomes for households, communities and taxpayers.

If you support reforming the FHA, speak out: Ask Congress to consider our recommendations for reform.