How could FHA have contributed to the housing bust?


A sign announces an open house for a home for sale in Silver Spring, Maryland, May 23, 2010.

Article Highlights

  • In the race to the bottom, Quicken Loans advertised they were the first to offer FHA home mortgages nationally on the internet.

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  • Quicken Loans advertised that "FHA permits borrowers to have a higher debt-to-income ratio than most insurers.

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  • FHA was the arsonist in the Great Housing Conflagration of 2006-2011.

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This was a common refrain made by some members of the Financial Services Committees at the February 12 hearing featuring FHA Commissioner Carol Galante.  I won’t dwell on the obvious contributions of FHA/HUD, such as a decades’ long history of promoting ever-increasing borrower leverage or its role as affordable housing (AH) mandate regulator for Fannie Mae and Freddie Mac (the GSEs) or as the designer of the National Homeownership strategy, with its central plank of doing away with down payments, or as perpetrator of the ironically named “Best Practices Initiative” which had Angelo Mozilo’s Countrywide as the star pupil.

Instead, an enlightening window into FHA/HUD’s leadership in the race to the bottom is provided by a January 2000 press release by Quicken Loans. It came with this headline:

Quicken Loans First To Offer FHA Home Mortgages Nationally On The Internet

With HUD’s approval, Intuit expands home ownership nationwide, offering consumers widest variety of home loan options

The 2000 press release describes the state of FHA loan standards at a critical juncture in this orchestrated race to the bottom:

  •     FHA/HUD is now five years into the National Homeownership Strategy and its unprecedented national experiment in loose lending.
  •     FHA holds the Triple Crown of Loose Lending—lowest down payments, lowest credit history requirements, and highest total debt-to income ratios. As the first paragraph of the release below notes, FHA handily beats out private subprime lenders.
  •     The FHA/HUD race to the bottom was about to kick into high gear as FHA/HUD, Fannie, Freddie, private MBS, and banks were all now chasing the same credit, income, and down payment–challenged marginal buyers.
  •     FHA/HUD (compliments of then HUD Secretary Andrew Cuomo) had just announced an intention to increase the GSEs’ AH mandate from 42% to 50%.
  •     Months later, the GSEs’ would each announce no down payment loan programs.

We now also know that this policy-induced housing bubble was nearly 2 years on with another 6-plus years left to go.

Follow along as Quicken proudly describes FHA/HUD’s competitive advantages with such words as “minimal”, “little”, “flexible”, “no minimum”, “NO established credit”, “higher” and “even more”:

Borrowers can purchase with a minimum down payment. Without FHA insurance, many families can’t afford the homes they want because down payments are a major roadblock. FHA down payments range from 1.25% to 3% of the sale price and are significantly lower than the minimum that many lenders require for conventional or sub-prime loans.”

With FHA loans, borrowers need as little as 3% of the “total funds” required. In addition to the funds needed for the down payment, borrowers also have to pay closing costs, prepaid fees for insurance and interest, as well as escrow fees which include mortgage insurance, hazard insurance, and months’ worth of property taxes. A FHA-insured home loan can be structured so borrowers don’t pay more than 3% of the total out-of-pocket funds, including the down payment.”

The combined total of out-of-pocket funds can be a gift or loan from family members. FHA allows homebuyers to use gifts from family members and non-profit groups to cover their down payment and additional closing costs and fees. In fact, even a 100% gift or a personal loan from a relative is acceptable.”

FHA’s credit requirements are flexible. Compared to credit requirements established by many lenders for other types of home loans, FHA focuses only on a borrower’s last 12-24 month credit history. In addition, there is no minimum FICO score – mortgage bankers look at each application on a case-by-case basis. It is also perfectly acceptable for people with NO established credit to receive a loan with this program.”

FHA permits borrowers to have a higher debt-to-income ratio than most insurers typically allow. Conventional home loans allow borrowers to have 36% of their gross income attributed to their new monthly mortgage payment combined with existing debt. FHA program allows borrowers to carry 41%, and in some circumstances, even more.”

FHA/HUD was not an innocent bystander. It was the arsonist in the Great Housing Conflagration of 2006-2011, responsible for the greatest wealth destruction in modern history.

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About the Author


Edward J.
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
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    Phone: 202-419-5212

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