Alphonso Jackson, the Secretary of the Department of Housing and Urban Development wrote an interesting response to an editorial in the Wall Street Journal this week. Here is the the letter:
John Berlau’s Oct. 15 commentary opposing FHA modernization (”The Subprime FHA”) is incorrect when he tries to pin the “worst excesses” of subprime loans — such as unverified income levels — on the Federal Housing Administration. The FHA requires lenders to underwrite all loans and borrowers to document their credit history and income. Short-term “flipping” of homes is also prohibited, contrary to his claims.
Mr. Berlau conveniently omitted that the FHA, despite considerable opposition from special interests, has closed the loophole allowing seller-funded downpayment assistance. We agree that such loans have been a drag on the FHA’s portfolio for years. They are a financial shell game where the seller wins and too many homebuyers lose. Our rule puts an end to this type of self-serving, circular-financing arrangement and its harmful effects on homeowners and the housing market. By closing this loophole, the FHA will help prevent more people from being steered into a situation where they don’t understand the fine print and end up being foreclosed upon.
A healthy FHA is good medicine for the ailing housing market. It is self-sustaining, costing taxpayers nothing, not “subsidized,” as Mr. Berlau claims. It is safe, with a foreclosure rate half that of risky subprime mortgages. And it is sound, free of costly gimmicks such as “teaser” interest rates or prepayment penalties. It also offers mandatory loss mitigation, meaning that we will work with homebuyers if they get in trouble.
But the FHA must be updated for the 21st century. Outdated loan and downpayment limits have priced the FHA out of high-cost markets such as California, which — not coincidentally — has been one of the states hardest-hit by the housing crunch.
That’s why the House and the Senate Banking Committee each voted overwhelmingly to modernize the FHA. And it’s why President Bush recently launched FHASecure, which will expand the pool of homeowners able to choose a safe, affordable FHA loan into which they can refinance.
The time to modernize the FHA is now. Low- and moderate-income borrowers desperately need an alternative to the riskier and more expensive subprime loans. A new FHA would also increase liquidity in the market place and help stem the overall credit crisis.
The subprime market share explosion, from 8.5% in 2003 to 20% in 2005, was a major cause of the housing bubble. The FHA is part of the solution.
Alphonso Jackson
Secretary
Department of Housing and Urban Development
Washington
