One of the worst-kept secrets in town is that nearly all the federal housing programs, allegedly designed to give younger Americans an economic start in life, are priced too high for actual risk. This is true for conventional mortgages backed by Fannie Mae and Freddie Mac, FHA mortgages and VA mortgages for our veterans and active-duty personnel.
This means that despite Washington’s good intentions about helping the largest-ever cohort of people (“echo baby boomers,” also the most diverse cohort ever), actual results will always fall short. As economists know, no amount of program tailoring or tinkering will surmount the obstacle of needlessly-high pricing. Any insurance program with premiums higher than actual risk removes creditworthy families from opportunity — the door is unfairly shut in their faces.
Let’s start with the GSEs, in government limbo, but with a capital rule requiring higher premiums than any modeled risk, even in a severe downturn. (The FHFA’s
Then there’s the FHA. As of November 2020, HUD reported the reserve fund above 6%, a 13-year high, and the sixth year it has been above the statutorily-mandated 2%. Some analysts think the number is now north of 10%; the time to align risk premiums with actual risk, in a way that does not unfairly restrict credit to creditworthy families, has arrived.
The FHA program remains a vital tool to first-time homebuyers, especially minority families that have historically lagged in wealth creation. The paying down over time of a carefully underwritten mortgage remains the most essential and indisputable way for the average American family to build wealth over time. Most Americans do not own stocks and bonds — they rely on accumulated home equity over time to have meaningful assets.
If the FHA program's premiums remain elevated well above actuarial risks, the program simply heightens instead of removing societal inequity. But administration after administration hesitates to do the right thing, implying that there is some huge conceptual risk right around the corner.
The VA mortgage program is part of our thanks to those men and women who sign up to their nation’s defense and agree to risk all. They earn a key benefit to obtain a home for no money down, yet the program has historically been the nation’s safest as measured by the lowest default rate in a major downturn. The actuarily correct risk premium is a fraction to what is charged today, mainly because Congress has historically used this program as a “pay-for” for other veterans’ programs. While past excess premiums won’t be rolled back due to congressional budget rules and the politically difficulty, it’s certainly time to stop piling on. Veterans don’t need to pay excess fees to obtain what they already earned in blood and sweat.
Even today, there seems no end in excess premiums. In the current bipartisan infrastructure bill, Congress balked at raising user fees on drivers, but enthusiastically increased user fees on young homebuyers — even those not owning cars. And it gets worse: because the fees are applied to Fannie and Freddie mortgages only, which have mortgage limits, wealthy families taking out the largest mortgages will pay nothing. Now, the baby boomers running the government and most sectors of America today have their comfortable homes already. They have plenty of built-up home equity and have refinanced many times over the years to have ultralow mortgage coupons as well. Most don’t have need today of Fannie, Freddie, FHA, or VA mortgages — if they need a mortgage at all.
Therefore it’s a sad state of current affairs that the wealthy, and well-positioned, leaders of this country insist on pricing up the homes for the younger generation. Washington says one thing — we want to help these families with modest wealth just starting out — but then does the opposite, time and time again. How will this ever end? One possible way: Someday a savvy national mortgage lender or two, ones with state-of-the-art data and social media presence, and likely originator-heavy shops instead of a refi ones, will stitch together a powerful grassroots political presence of younger homebuyer-voters who finally say “enough” to their wealth-laden elders.
Until that day, don’t believe it when Washington says it cares about helping young families get a leg up. The dollars signs are flowing exactly the wrong way.
