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Home Publications Blogs Beat the Press The First-Time Homebuyers Tax Credit Helped Sink the FHA

The First-Time Homebuyers Tax Credit Helped Sink the FHA

Friday, 14 December 2012 16:30

The NYT had an article on a new study by Edward Pinto at the American Enterprise Institute which found that a high percentage of the loans the FHA insured in 2009-2010 were high risk loans that are likely to end in foreclosure. Based on its findings, the study criticized FHA lending practices. It argued that they were both leading to large losses for the program and resulting in large numbers of homes in foreclosure, which is devastating both to the homeowners and the communities in which they live.

Remarkably, the study does not take into account the impact of the first-time homebuyers tax credit. This credit had the effect of temporarily inflating house prices, especially in the bottom end of the market where FHA loans were concentrated. It was 100 percent predictable that a large percentage of these loans would end in default since house prices were certain to fall once the tax credit ended.

It is misleading to generalize from this experience that the FHA has been reckless in its lending policies. In fact, at the peak of the bubble in 2002-2006 the FHA's market share plummeted as low and moderate income borrowers found that they could get much more lenient conditions from private lenders. While many of the points in the study are well-taken (it does not make sense to encourage people to leverage themselves heavily to buy a home where they will have great difficulty meeting the payments) the FHA does not have the history of recklessness that the piece implies.

Comments (4)Add Comment
written by PeonInChief, December 14, 2012 5:18
Well, you did point out (in the April '12 paper) that the losses would be transferred to the government. Right again, although when I'm right about something like that, I tend to whine, "why couldn't it be six good numbers?"
I wonder
written by EMichael, December 15, 2012 6:58
How many foreclosures on FHA loans during the bubble were caused by the original loan, and how many were caused by the seconds and thirds offered(and stupidly accepted) by various investment banks?

I also wonder what the loss ratio of FHA loans are compared to those "other loans", as FHA loans are priced much higher.

Nothing wrong with "risky" if they are priced correctly. The problem lies in "risky" loans that are priced like AAA loans.
written by E. Pinto, December 15, 2012 4:21
Mission misfire: 50 years of failure at the FHA

1962: FHA’s mounting foreclosures pointed out by Time magazine--"Because it underwrites low-cost housing for high-risk groups, the FHA’s problems are particularly acute."
1973: Cities Destroyed for Cash: The FHA Scandal at HUD authored by Brian D. Boyer
1998: Statement by the late-Gale Cincotta (a long-time community activist) made before the House Subcommittee on Housing and Community Opportunity, April 1, 1998--"We have been fighting abuse, fraud, and neglect of the FHA program that has destroyed too many neighborhoods and too many families’ dreams of home ownership for more than 25 years."
2012: Publication of my paper entitled: How the FHA Hurts Working Class-Neighborhoods and Communities--for the 1st time the full and precise extent of FHA's mission misfire is document.
Mr. Pinto
written by EMIchael, December 16, 2012 8:49
One wonders where this article was in 2003 when the investment banks did exactly the same thing and priced the loans lower? Y'know, the cause of the housing bubble?

One also wonders about your mortgage insurance claims on Page 17. In my experience I have not seen this kind of pricing. Do you have any links to this?

And a nice touch bringing in a quote from Mr. Mozilo. Of course no mention is made of the percentage of FHA loans Countrywide did(insignificant), but the implication is clear.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.