Congress is now deliberating the future of the Federal Housing Administration's home mortgage insurance program. Proposals have been floated to get the federal government out of the mortgage insurance business entirely.
The private mortgage insurance industry argues that the FHA should be restricted to lower-income, first-time homebuyers, an ill-conceived strategy that would sap the strength of the FHA program and possibly lead to its demise.
Eliminating or restricting the vital role that the federal government plays in providing mortgage insurance for American families would be bad housing policy, bad public finance policy, and bad actuarial policy.
The FHA's single-family program is basically sound and provides an invaluable public service, one that private industry cannot and will not provide. It would be folly to eliminate or limit a program that is so beneficial to the nation and has never cost American taxpayers a penny.
Here are just some of the reasons that the federal government should continue to operate a single-family-mortgage insurance program, and that the program should not be substantially altered:
The FHA is self-supporting.
The Mutual Mortgage Insurance Fund, which supports the FHA's single- family-mortgage insurance business, has never cost taxpayers a cent and is actuarially sound. Insurance premiums pay for all losses and the administration of the program, leaving sufficient reserves to pay future claims.
Mortgage insurance requires a federal backstop.
History has demonstrated that private mortgage insurance companies cannot withstand nationwide recessions or even severe regional economic collapses. The private mortgage insurance industry failed completely in the 1930s, and the federal government had to step in. It almost failed again in the early 1980s, and a few years later the private industry pulled out of poorly performing areas.
Fortunately, the FHA was able to step in and fill the void left by the private companies. The only reason that the FHA was able to do that was that it was backed by the full faith and credit of the government.
Mortgage insurance must be available throughout the nation, to spread risk and protect local economies.
Mortgage insurance must cover mortgages in all parts of the country to spread risk across all sectors of the economy. The consistent presence of federal mortgage insurance in ailing regions bolsters their economies and prevents property values from falling further.
FHA-insured mortgages serve the market better than products offered by the private sector.
The FHA allows higher loan-to-value ratios than privately insured mortgages, thereby addressing he single largest problem that most first- time homebuyers confront. The FHA also allows some closing costs to be financed, further reducing the amount of cash needed to purchase a home.
Furthermore, FHA borrowers are allowed to devote a bigger share of their incomes to monthly payments than privately insured borrowers.
The FHA serves a broad, diverse population.
Typically, the FHA serves borrowers who have lower incomes, who purchase lower-priced homes, and who are younger and more likely to live in central cities than the borrowers served by private insurance companies. The FHA has been more successful than the private mortgage insurance industry in serving minorities, and FHA borrowers are more likely to be first-time homebuyers.
The FHA provides an important alternative to an industry that is small and dominated by a handful of firms.
The private mortgage insurance industry is concentrated in an ever- smaller number of firms. Two companies control more than half of the privately insured business.
Shifting the FHA's responsibilities to the private market would disrupt markets and could cost the taxpayers money.
The private industry has demonstrated that it will not be present at all times in all places. Allowing the private industry to determine the sector of the market that the FHA serves will leave some borrowers without access to mortgage insurance.
If the FHA insures only the highest-risk borrowers that the private companies will not insure, it will be necessary to use tax dollars to subsidize a program that currently is self-funded.
The FHA provides indirect benefits to taxpayers and to the housing market.
FHA premium collections and reserves are available to the federal government as offsets to public borrowing. The FHA's cash receipts reduce the budget deficit and relieve the need to borrow funds through public debt.
The FHA is already targeted to moderate- and lower-income households by the maximum loan amount that can be insured.
The maximum mortgage for an FHA loan is $77,197. In certain high-cost areas, this amount can be increased, but only up to 95% of the median sales price of homes in that area. Nowhere can it exceed $152,362.
Mr. Irvine is president of the National Association of Home Builders.