As the lines of battle form in the debate over the future of the Federal Housing Administration, it is important to distinguish between the concept of a federal mortgage insurance program and the FHA itself. The FHA is a delivery system. There is plenty of room to reform and reengineer it. It is the federal insurance product that is critical. Sixty years of history show us that a federal mortgage insurance program is viable, and that the product is needed.
The debate over the future of FHA forces us to do something we should do more often - go back to first principles and ask, What is the role of government in housing? What should be the role of government in housing?
We at MBA believe, when it comes to homeownership, there is a role for the federal government.
In this new political environment - conservative, private-sector oriented, pro entrepreneurship and self-reliance - if government is going to have any role at all in the housing sector, it should be to promote homeownership: to promote the concept of private property, a stake in the community, and family and civic responsibility.
The future of federal mortgage insurance can be argued on three different fronts: First, the political dimension; second, the social policy issues; and third, the pure financial interests of private market participants and the government itself.
What we are hearing in the press and in Washington today are the political arguments. There are fundamental, philosophical differences of opinion over the role of government in our private lives.
From Newt Gingrich, Jim Leach, Rick Lazio, and John Kasich in the House, and from Phil Gramm, Al D'Amato, and others in the Senate, we hear the fervent cry to get government out of our lives. There is a firm belief that government is excessively intrusive, that there is too much regulatory burden through all sectors of our economy, and that when it comes to running financial enterprises, the private sector, by definition, can always do it better.
The FHA is viewed as an anachronism from the New Deal era, a financial dinosaur.
The Clinton administration, for its part, seems to agree. The soon-to- be-announced budget, while seeking to retain the Department of Housing and Urban Development, will propose converting FHA into a wholly owned government corporation, with considerably more autonomy than it currently has.
There is little doubt that the administration's proposals merely will be the starting point for restructuring federal housing programs when they reach Congress.
Everyone there is keenly aware that Alice Rivlin, head of the administration's Office of Management and Budget, both in her book three years ago and in OMB's own proposals this year, argued for turning the mortgage insurance administration function over to Fannie Mae and Freddie Mac and to rely entirely on some vague forms of risk sharing or pool insurance, rather than loan-by-loan federal backing.
Since at this stage no one is arguing to maintain the status quo, one thing for certain is that the delivery system for federal mortgage insurance will change. I am here to support structural changes in the delivery system while preserving a program of full mortgage insurance on a loan-by-loan basis.
The more important debate - the one on substance - will be the debate in the weeks ahead over what the social policy mission of a federal homeownership program, if any, should be.
FHA insures an average of 850,000 home mortgages a year. It seems generally agreed that something like a third of those - let's say 200,000 to 300,000 - are loans that simply would not be made if there is no longer a full federal insurance program.
Leaders in the private mortgage insurance industry themselves have agreed that some 200,000 to 300,000 loans would not be made.
There are those who believe that any federal homeownership program should be targeted just to those 200,000 to 300,000 families who would otherwise not be served by the MIs and by Fannie Mae and Freddie Mac.
Such a program would not work. A program targeted only to the most needy would require a mortgage insurance premium too high to be afforded, or a subsidy that Congress and the administration itself would be unwilling to fund.
So, if there is to be a federal mortgage insurance program to promote homeownership, it has to be broadly based, it has to have a cross-subsidy provision to make it workable.
Some would argue that FHA should simply be privatized. That's nonsense. We already have a very successful private mortgage insurance industry; why create another one?
But now to the serious question. What do we as a nation lose if we don't pave the road to homeownership for those quarter of a million households each year who would not otherwise be able to buy a house without a full federal insurance program?
Who are these people? They are, very disproportionately, blacks. They are, very disproportionately, Hispanics. They are, very disproportionately, modest-income people - white, black, Hispanic, and Asian. They are, very disproportionately, people who would buy homes in the inner city, and other older properties. They are, overwhelmingly, first-time homebuyers.
Some remarkable facts: 35% of all home purchase loans made to blacks last year were FHA loans; 36% of all home purchase loans made to Hispanics last year were FHA loans; 30% of all home purchase loans made to low-income households were FHA loans. Over 30% of all loans to first-time homebuyers last year were FHA loans.
FHA last year insured two and a half times as many loans to blacks as all the private mortgage insurance companies put together.
It's reasonable to assume that the great majority of those FHA loans would not otherwise be made if a federal safety net was not there. We hear time and again how inefficient, how time-consuming, how costly, how bureaucratic, the FHA program is. Why would anyone go there if they had another choice?
A private survey, using actual FHA loans, bears out the point. Using actual FHA cases, where loans have actually been made, the files were submitted in a blind test to private mortgage insurance underwriters. The majority were turned down. They are loans that would not have been made were it not for federal mortgage insurance.
The mortgage insurers do what they do very well. But they simply can't do it all. They've had nearly 40 years to show what they can do, and in many ways they're tremendously successful. But they simply don't match the low cash requirements, the underwriting standards, and the willingness to stay in all regions through times of economic distress that FHA has demonstrated.
What will we lose as a nation if we lose 200,000 to 300,000 new homeowning families a year?
First, the numbers over time will grow geometrically. Many of those few hundred thousand households a year will never reach the second rung on the ladder of homeownership, where they would use private mortgage insurance and where their loans would be bought by Fannie Mae and Freddie Mac.
Those people will be "lifers" - they will always be renters. And each year we'll add another quarter of a million households. So by 2000 we will have perhaps a million households - some three million or more people - living as renters who otherwise could have been homeowners.
As a nation, we lose a lot more than a few percentage points in the overall homeownership rate. Homeownership goes hand-in-hand with family responsibility and self-sufficiency. It gives people personal housing choices and promotes economic opportunity and community stability.
People who own homes take care of them, and send their children to school. Children of homeowners are more likely to graduate from high school, less likely to commit crimes, and less likely to themselves have children before they become adults.
People who own homes take pride in their private property, take pride in their neighborhoods, and take pride in sharing in America's traditional values.
As a downright practical matter, whether we continue to have a federal home mortgage insurance program may have a lot more to do with practical business issues, practical financial issues, than with social policy. So let me turn to the business issues.
In the private marketplace, Realtors, mortgage lenders, homebuilders, and others should ask: What would the absence of federal insurance mean for our businesses? If indeed it means a quarter of a million fewer homebuyers a year, year after year, there's definitely an impact. Realtors will sell fewer homes. Lenders will close fewer loans. Builders will sell fewer homes, and jobs will be lost in construction and related industries.
The floor under house values will sink. If loans aren't made at the lower-priced end of the market, who will buy the homes from move-up families looking for their second home, their third home, and so forth? If that demand isn't there, the buyers for your home and mine aren't there. If that demand isn't there, it weakens the floor under the collateral for $3 trillion worth of outstanding mortgages. That's not just FHA loans. That's a weakening of values underlying all mortgage collateral - all those insured by the private mortgage insurers, all those held and guaranteed by Fannie Mae and Freddie Mac and by some 14,000 banks and thrifts throughout the country.
Next: Business, culture, and mortgage insurance
