Tom Kelly: Revisiting the way our nation approaches housing

Should the government be involved in financing home loans?

Every few years, some members of Congress say they would like to see the functions of the Federal Housing Administration taken out of the Department of Housing and Urban Development and put into the private sector.

The historical HUD response has been that privatization would dramatically constrain the helpful programs that meet the needs of first-time homebuyers, low- and moderate-income families and minorities. The FHA’s reason for being is to make housing more available through loan guarantee and insurance programs.

A study presented by the American Enterprise Institute, or AEI, believes the U.S. housing system fails because government support of funding encourages overbuilding and speculation and relieves investors of risk through guarantees.

The study suggests there would be plenty of funding available without Fannie Mae and Freddie Mac if proper down payments were made and other criteria met to ensure credit risk. It calls for FHA-type financing to stop being a clearinghouse for all loans and go back to serving the needs of first-time homebuyers, low- and moderate-income families and minorities.

Historically, when government accepted responsibility for providing low-income housing, it was at the local level, particularly by county government. With the collapse of the banking system in 1929, the federal government was forced to produce solutions to what quickly became a national housing crisis. Most home loans then were short-term, non-amortizing deals financed by local investors or local banks. Most of these loans forced homebuyers to refinance their homes every few years at the prevailing interest rate.

The Roosevelt administration began a number of initiatives directed at stabilizing the nation’s housing stock, encouraging home construction and promoting home ownership. The first of these programs was the Federal Home Loan Bank System that established a complex system of government support for home mortgages.

The Housing Act of 1934 created the Federal Housing Administration, which served as a review committee for banks and other loan institutions to make loans to low-income families.

The study calls for FHA-type benefits to be limited to low-income borrowers who are demonstrably unable to meet prime lending standards. FHA insures loans so that if the borrower defaults, the lender is guaranteed to receive the outstanding mortgage amount. For 60 years, FHA had been the primary low-down payment option for homebuyers.

“It is important to ensure that the FHA is fulfilling its social policy purposes rather than becoming a backdoor way for people who could otherwise meet prime lending standards to obtain mortgages at government-backed rates” the AEI report states.

The depth of “social policy purposes” also needs to be explored. While any sweeping changes would take years to implement, the inclusion of special programs other than those for first-time and low-income buyers (FHA-type programs) need to be considered.

For example, FHA insures the nation’s most popular reverse mortgage program. While some private funds have been available in the past, most of those dried up during the recent crisis.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.

FHA also has a home-improvement loan program that has come in handy for folks who need cash and can’t get a home equity loan because of already high loan amounts or slumping home values. FHA Title 1 loans of up to $25,000 are available to owner occupants and investors who want to repair or improve their property. Up to $15,000 can be obtained regardless of home value.

We have nearly returned to a home finance system where most people who intend to buy a home have some “skin in the game” and have the means to afford a mortgage, taxes, insurance and monthly essentials. However, if the government was removed from home financing, special category loans would need to be included in any new system. We simply have to remember that special, by definition, means the minority, not the majority.