Recent Attacks on FHA Are Wrongheaded

The Federal Housing Administration has been getting a lot of undeserved bad press lately.

The onslaught began last month after the agency released a sobering financial report, then accelerated last week when the New York Times reported on an alleged "pattern of risky lending" in the agency's mortgage insurance program.

The Times piece, penned by columnist Gretchen Morgenson, relays the findings of a controversial new report from Edward Pinto of the conservative American Enterprise Institute. Pinto's study takes on an important issue—the performance of FHA-insured home loans—but draws conclusions based on ideology rather than a cold appraisal of the facts. By relying entirely on one man's misleading data and unfounded opinions, Morgenson has done a grave disservice to a critical federal program.

The report in question argues that the FHA is "financing failure" for working-class families by peddling high-risk loans to unworthy borrowers, based on an analysis of loans insured in 2009 and 2010. Pinto concludes that the agency's basic business model—insuring long-term, low-down-payment loans to borrowers with less-than-perfect credit—puts homeowners at an unacceptably high risk of default with negative consequences for communities.

Nothing could be further from the truth.

Since the 1960s, the FHA has promoted sustainable homeownership for creditworthy low-wealth families by backing loans with a down payment of as little as 3.5% and a term of up to 30 years. In the wake of the worst housing crisis since the Great Depression, the agency is facing significant losses on loans made between 2006 and early 2009—but the FHA business model is not to blame.

Here are the facts. According to the Mortgage Bankers Association, roughly 9% of FHA-backed loans are "seriously delinquent" today, meaning the borrower has missed at least three consecutive payments or is in foreclosure. That number is slightly higher than the rate for prime loans (5%) but less than half the rate for subprime loans (22%).

The agency's recent loans are performing especially well, thanks to protections put in place by Congress and the Obama administration. Just 6% of FHA-backed loans made in 2010 and 3% of those made in 2011 are seriously delinquent today. The agency's 2010, 2011, and 2012 books of business are expected to be its most profitable ever, bolstering the insurance fund by a combined $22.7 billion, according to independent auditors.

Roughly 70% of these well-performing loans had a down payment of less than 5%, more than 90% had a 30-year term, and about two-thirds of borrowers had a FICO credit score of less than 680, according to FHA data. So much for the agency's flawed business model.

Pinto's study pays special attention to the impact of FHA lending on low- and moderate-income communities. He finds that 44% of all FHA loans are in lower-income zip codes with higher-than-average default rates, implying that the agency is overly-concentrated in high-risk neighborhoods. By allowing roughly one-in-ten borrowers to fail, he concludes, the FHA is doing more harm than good in these communities, and therefore should tighten its credit box to pull back lending. (He presents no hard evidence that a one-in-ten failure rate is a reasonable benchmark.)