The House Financial Services Committee voted last week to risk the solvency of the FHA mortgage insurance program and tax moderate-income homebuyers in order to spend the money on new subsidized rental housing program layered on top of the several that already exist.
The Committee voted for Rep. Bernie Sanders' National Housing Trust, which will take some of the "reserves" - which are essentially an actuarial artifice -- from the Federal Housing Administration (FHA) home mortgage insurance program and spend them elsewhere. These reserves have been gradually built up over the last decade, since Congress reformed the program and brought it back from the edge of fiscal insolvency in the early 1990s. These reserves are needed to pay losses when borrowers default on their FHA-insured mortgages, and FHA pays off the lender.
Congress earlier established a minimum capital requirement at 2.0 percent, figuring that was enough to protect FHA against a typical recession. FHA's reserves are now greater than 2 percent. But both GAO and CBO have concluded that this level does not provide protection against several possible economic problems, including a repeat of the last real estate recession in the early 1990s.
In actual fact, this proposal wants to spend money that's not there! FHA's "reserves" are partly cash and partly not. They are calculated as the present value of the insurance premiums that FHA expects to collect over the life of the loans it insures, minus the present value of the losses it expects when it pays claims. An economic downturn can easily change that calculation and wipe out much of FHA's bookkeeping measure of net worth.
If Congress decides that FHA has enough capital - which it has not - the best use would be to give refunds to the homebuyers who have been paying the premiums for the insurance. That's actually what Congress said it wanted FHA to do when it reformed FHA with the Cranston-Gonzalez National Affordable Housing Act in 1990. That would help hard-pressed middle-income families meet their monthly mortgage payment.
Another option is to cut the premium for families that buy in the future. Because FHA disproportionately serves entry level, minority homebuyers, such a cut would help achieve the goal of creating 5.5 million more minority homeowners in the next ten years. About 40 percent of FHA homebuyers are members of minority groups - far more than for any other type of mortgage finance institution. Most are in the bottom half of the income distribution. That's typical for FHA since President Roosevelt created it in the 1930s, to help young families buy their first home. Over 80 percent of FHA homebuyers are buying their first home. If FHA becomes insolvent again, these families will be the first ones hurt.
Another important issue is whether the Nation needs to adopt a proposal like Rep. Sanders' National Housing Trust, which plans to build subsidized rental housing, similar to public housing and Section 8 projects throughout the country. According to a recent GAO study, such projects will cost over $100,000 per apartment unit when they're built and thousands more every year afterwards. Besides being expensive, they're unnecessary. Right now, the United States has the highest rental housing vacancy rate in history - 9.1 percent. That means one out of every 11 apartments in America is vacant, over 3.5 million units. Well over 2 million of these rent for less than the current Fair Market Rent in their community, and therefor could be made available to low-income families through HUD's voucher program.
Clearly, there is no national shortage of decent affordable housing in America. There are problems in a number of communities where local zoning, building codes, and government red tape drive up costs and discourage developers from building. Indeed, evidence is beginning to mount suggesting that some popular "smart growth" proposals that are being implemented in many communities are raising the cost of housing and discouraging homeownership among modest income households.
Even the Millennial Housing Commission, a strong supporter of more government spending for housing, declined to endorse the National Housing Trust in its final report last month. Congress should not put homeownership at risk to fund an unneeded subsidy program that will benefit real estate developers as much as it will benefit subsidized tenants.
Ronald D. Utt,
Ph.D. is the Herbert and Joyce Morgan Senior Research
Fellow at the Heritage Foundation.