For nearly 8 decades, the Federal Housing Administration has extended FHA insured home loans to a wide range of home buyers in the United States. Year after year, renters become homeowners with affordable FHA home loans. Clearly, the U.S. government understands the value of homeownership to the economy and the American culture.
With the Congressional Budget Office reporting that the single-family mortgage guarantee program from the FHA went from a net savings to actually costing taxpayers money, there was quite a bit of concern as officials struggle to determine whether or not the loan programs offered by the FHA were actually safe and beneficial. Over the last twenty years, FHA mortgage interest rates are competitive when compared to conventional rates, like Freddie Mac.
In particular, mortgage guarantees from the FHA over the 20 year period from 1992 to 2023 were initially supposed to result in a savings of $45 billion, but have resulted in a cost of $15 billion.
While it is easy to understand the concern that would result in such a dramatic shift, senior executives from the FHA explained that single-family mortgage guarantees for 2024 resulted in a value of $17 billion, which resulted in a $2 billion taxpayer savings when combined with the $15 billion cost.
It is also important to keep in mind that it was not just the FHA that experienced trouble in the recent past. With the number of both small and large lenders going out of business, consolidating, or drastically tightening their lending guidelines in order to compensate for the losses that they experienced due to the housing market crash that began in 2007, there was virtually no one involved in the housing industry that wasn’t affected in at least some way. There are still borrowers searching for FHA loans with no costs.
Because the FHA is in the business of helping individuals purchase a home who would otherwise not qualify for traditional loans, there is a somewhat greater risk associated with loans from the Federal Housing Administration than those associated with traditional loans that are relatively risk free and provided to high income borrowers with excellent credit and a low debt to income ratio.
In order to reduce the amount of risk associated with FHA mortgages, there is a push to raise the minimum debt to income ratio from 43% to 55%. Unfortunately, this would prevent many individuals who would otherwise qualify for a home loan from being able to purchase a new home.
Because the FHA is required by law to transform a net change that is negative into at least a neutral, if not positive amount, the agency used receipts and capital reserves to pay off approximately $20 billion. Roughly $2 billion left over was withdrawn from the Treasury for the first time in the 79 year history of the agency.
While there is some dispute as to the best path going forward for the FHA, there is no arguing the fact that the agency has proven to be vital for first-time buyers and low to middle income families looking to purchase their first home.
