FHA: 60 Years of Mission Failure

In "Recent Attacks on FHA Are Wrongheaded" (Dec. 19), John Griffith of the Center for American Progress blindly repeats the FHA’s idealized and sanitized version of its history.  

This hagiography ignores 60 years of wrongheaded policies perpetuating mission failure—the selling the American dream of homeownership, but delivering despair. 

In 1992 former HUD attorney and senior analyst Irving Welfeld summed up the Federal Housing Administration’s history when he wrote in his book HUD Scandals: "Mention the Department of Housing and Urban Development and the word scandal comes to mind." He is in good company. Outlined below are a few examples of reporters, authors, and commentators across the political spectrum who have pointed out how the FHA’s poorly designed underwriting policies have resulted in financing failure for working-class families and a plague of foreclosures for working-class communities.

In 1954, as documented by Welfeld, FHA was targeted by the FBI for involvement in fraudulent home improvement schemes.

In 1962 the FHA’s mounting foreclosures were noted by Time magazine when it observed "Homeowners of a new and unattractive breed are plaguing the Federal Housing Administration these days. Known as ‘the walkaways,'they are people who find themselves unable to meet their mortgage payments—and to solve the problem simply move out their belongings at night, drop their house key in the mailbox and disappear. … Because it underwrites low-cost housing for high-risk groups, the FHA’s problems are particularly acute."

In 1973 Brian D. Boyer chronicled "how the FHA Scandal worked on a day-to-day basis [to destroy whole neighborhoods] in the big cities of the United States" in Cities Destroyed for Cash: The FHA Scandal at HUD.

In 1986 The New York Times noted the similarities of yet another round of FHA scandals to the horrors experienced during the 1960s and 1970s in Brooklyn and other cities: "That scandal – as with others at the time that affected such cities as Newark, Philadelphia and Detroit – was remarkably similar to a pattern of fraud that Federal investigators said last month that they had found in several cities, including Camden, N.J.; Houston, Seattle and Milwaukee. … The results have been huge numbers of defaults."

In 1998, the late Gale Cincotta, a long-time community activist, in testimony before a subcommittee of the House Financial Services Committee, told the subcommittee that FHA had not changed its abusive lending practices: "We have been fighting abuse, fraud, and neglect of the FHA program that has destroyed too many neighborhoods and too many families'dreams of homeownership for more than 25 years. . . . The FHA program has a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times. In addition, the FHA program is hemorrhaging money."

In 2009 Beryl Satter observed in the NAACP’s The Defenders Online "The 1970s FHA-HUD Scandal… bore well over the lion’s share of responsibility for the decayed buildings and vacant lots that scar urban minority communities."

In 2012, I reviewed some 2.4 million loans to better understand the effect of FHA policies in specific ZIP codes across America. This groundbreaking level of granularity revealed the concentrated pain agency policies are causing in working-class communities. The results were recently published along with an associated web project entitled "How the FHA Hurts Working Class-Neighborhoods and Communities." 

Few would disagree that the FHA’s mission is to be a targeted provider of mortgage credit for low- and moderate-income Americans and first-time home buyers in support of homeownership success and neighborhood stability.  My paper documents FHA’s practices, which result in a high proportion of low- and moderate-income families losing their homes. Based an analysis of the FHA’s fiscal 2009 and 2010 books of business, the agency’s lending practices are inconsistent with its mission and represent a disservice to American working-class families and communities. For 2009-10, the average foreclosure rate on FHA-backed loans was just 10%, but that average masks concentrated pain among working-class families and the communities they live in. By straying from its mission and insuring loans to higher-income borrowers, it is able to generate revenue that it uses to cover the foreclosures on working-class families who were pushed into loans with failure rates of 10%, 20%, and even 30%. Since these families live in low- and moderate-income communities, the FHA’s financing of failure condemns many of these communities to shocking levels of foreclosure. In Chicago, the five highest-foreclosure ZIP codes had projected failure rates of 35% to 73%.

Meanwhile, the five lowest ZIP codes in Chicago ranged from 0% to 4%. As Welfeld pointed out two decades ago, "Averaging out is not a defense."

After 60 years, it is time for the FHA and its supporters to put the interest of working-class families ahead of real estate agents and other interest groups who want to expand its abusive lending practices to even more marginal borrowers.

Edward Pinto is a resident fellow at the American Enterprise Institute.