Regulations - Big Business v. Middle Class Families and the Case Of FHA Mortgage Insurance

Government insurance is not always bad, particularly whem the Democrats do it. Remember FHA insuranced loans for affordable housing programs. This was a very successful program that not only helped banks, but helped many Americans afford homes. Of course, the quid pro quo, is that FHA insured loans had to comply with fairly stringent governmental regulations for federal mortgage insurance. Yes, this may have increased transaction costs, but this reduced risk, and allowed the government to evaluate and manage risk. However, under the McCain model of deregulation, government takes a hands off approach, but is forced to jump in with taxpayer money when industry abuses cause widespread losses in the financial markets. Due to the lack of regulation, businesses can engage in riskier practices, and the government has no way to manage risk, because it is not planning on stepping in the event of failure.

WORSE, due to the lack of regulation, lenders can extend loans with onerous terms to homeowners, which increases the probability of defaults, and in the event of a bailout, the only people saved are entities that purchased the securitized debt.

http://en.wikipedia.org/wiki/Federal_Housing_Administration

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The creation of the Federal Housing Authority successfully increased the size of the housing market. By convincing banks to lend again, as well as changing and standardizing mortgage instruments and procedures, home ownership has increased from 40% in the 1930s to nearly 70% today. By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a twenty-five year, self amortizing, FHA-insured mortgage loan. After World War II, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multi-family homes. In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When the soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat. In the 1980s, when the economy didn’t support an increase in homeowners, the FHA helped to steady falling prices, making it possible for potential homeowners to finance when private mortgage insurers pulled out of oil producing states.<3>

The greatest effects of the Federal Housing Administration can be seen within minority populations and in cities. Nearly half of FHA’s metropolitan area business is located in central cities,<4> a percentage that is much higher than that of conventional loans. The FHA also lends to a higher percentage of African Americans and Hispanic Americans, as well as younger, credit constrained borrowers. Because some feel that these groups include riskier borrowers, it is believed that this is part of the reason for FHA’s contribution to the homeownership increase.

As the capital markets in the United States mature, FHA has had less and less of an impact on the US Housing market. In 2006, FHA made up less than 3% of all the loans originated in the US. This has some members of Congress wondering why the Government is still in the mortgage insurance business. A vocal minority of Congressional Leaders are now calling for the end of FHA. While many Members support reforming FHA in order to make it more competitive to the for-profit industry. Several analysts question whether the taxpayers should be on the hook for a government run "for-profit" business.

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