Too Many Americans Are in Homes They Can’t Afford

Recently, the Federal Housing Administration (FHA) said it needs $1.7 billion to cover losses, the first taxpayer-funded bailout in the organization’s 79-year history. To put that in perspective, if FHA were held to the same standards as private mortgage insurers, it would be insolvent to the tune of $25 billion, says Edward Pinto, a resident fellow at the American Enterprise Institute.

While this is bad news for the taxpayers, FHA has an even more troubling problem. For decades FHA’s underwriting practices have put families into homes they can’t afford. By financing failure, FHA has made foreclosures commonplace.

– One in eight families getting an FHA loan from 1975 to 2011 has already been or will end up in foreclosure. That’s over 3 million families.

– Today, families in low- and moderate-income zip codes have a 40 percent higher expected foreclosure rate than those in zip codes with a median income greater than 110 percent of the metro area median.

– Families living in metro area zip codes where the minority percentage is 80 percent or more have a projected foreclosure rate 60 percent higher than zip codes where the minority percentage is 20 percent or less.

FHA must stop inflicting these high rates of default and foreclosure on lower income and minority borrowers. FHA should be providing responsible mortgage credit by balancing down payment, loan term, FICO credit score and debt-to-income level. It should assure that borrowers are not taking on obligations in excess of one’s reasonable ability to pay and result in a strong probability that the debt will be paid off in accordance with its terms. FHA should also advise each consumer as to his or her foreclosure risk based on an applicant’s risk profile, and ask Congress for authority to hold lenders more responsible by reducing its insurance coverage from 100 percent to 50 percent.

These common sense reforms will provide these families with the opportunity to achieve meaningful equity and be mutually advantageous to lenders and the FHA.

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