Proving Government is always the last to know, Washington decides housing is a good risk

No matter your political stripes, we can all agree that that no one is better at missing a trend than the folks in Washington.


If you've been following this space, you're well aware that the housing recovery started- locally and nationally - after a bottom somewhere around 2009 and 2010, depending on where you lived. Of course, Washington responded at that time by tightening credit (in response to the 2005-2009 housing collapse), largely through forcing banks to de-leverage, but also by imposing a gazillion new rules on lenders and the like (those things would have been excellent ideas in 2005). Rates went down, but credit requirements when up. The result was predictable, as millions of people - for many reasons - got locked out of the credit markets - and delayed the housing recovery. (It also had the affect of widening the income gap, which has been a persistent story for about a decade now).

Looking out for the little guy? Not really.


Now that things have been good for 4 years, Washington has decided to reduce the insurance premium it charges FHA buyers. The insurance premium isn't widely discussed, but it's a cost that insures against the loan going bad - moving the risk from the taxpayers to the insurer. (That's a good thing)  When the economy grows, the risk of default is low, but when the economy shrinks or contracts, the risk increases a lot, as FHA buyers are in general among the riskiest buyers of housing (they have the least to lose if they walk away from their house in a housing downturn). That's a long-winded way of saying the insurance premium should have been low in 2010, and now they should be raising it, as the risk of future housing appreciation gets greater. (The risk is not great, but I'll bet you a bag of donuts they won't raise the premium until well after the next downturn. Again.)


More taxpayer risk, to help out FHA buyers. Lousy solution.


So, will it work? Will more people now qualify for FHA loans?


Well, yes, but not because of the insurance change. It'll change because the job market is improving. Wage growth is still elusive, but household income is likely to increase, and may even be increasing already, as more people are entering the job market. Rising household incomes will help more people qualify for that first house, and that is whom uses FHA loans.


Was there a way to protect the consumer with insurance and still open up the credit market?


Yes, there are lots. One of the things they could do is simply adjust the credit standard guidelines. If you had a foreclosure or short-sale during the bad days, maybe that shouldn't hurt your eligibility the way it does today. Or just adjusting the credit scores levels in general would fix it. Yes, you're letting buyers with a history of default take another swing, but at least they are insured against another default. This solution doesn't do that.


At any rate, it's gotten a lot of press, but it's not a huge deal in New England. Many homes in our area our well-outside the FHA limits, and most buyers are trying to save a little more (5% vs. 3.5%)so they can qualify for a 95/5 loan, which is far less onerous than current FHA loans.


OK, off the soapbox.