FHA May Be Setting Up a Repeat of Housing Bubble, Lawmakers Worry

Los Angeles Times
October 8, 2009
Puzzanghera, Jim

The collapse of the subprime mortgage market and Congress' decision to raise the maximum loan limit to $729,750 in the priciest housing markets helped boost the Federal Housing Administration's share of the mortgage market. Following a jump in its market share to 21.5 percent in 2008 from less than 6 percent the prior year, the FHA has insured almost 2 million mortgages worth $328 billion already in 2009. However, as delinquencies on FHA-backed loans begin to rise and the agency's loan loss reserves continue to fall, there is concern about whether a repeat of the housing bubble and the subprime mortgage crisis is on the horizon. A congressional hearing on the reasons behind the agency's quickly depleting reserves was scheduled for Oct. 8, and some experts propose an increase in the minimum down payment on FHA-backed loans to 5 percent from 3.5 percent in order to give borrowers more of an incentive to avoid foreclosure. However, FHA Commissioner David Stevens worries that higher down payment requirements will put a damper on recovery; and he believes such changes as higher minimum credit scores would help reduce risk. Stevens also insists a taxpayer bailout will not be necessary. Meanwhile, observers say an increase in fraudulent appraisals by certain FHA-approved lenders and falling home prices leaving more borrowers underwater remain major concerns.

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