The F.H.A.’s Countercyclical Contribution

New York Times
(12/16/2013 8:26 AM, Jared Bernstein)

Let’s talk about countercyclicality and let’s do so from the perspective of the Federal Housing Administration, a little-known agency within the Department of Housing and Urban Development whose mission since 1934 has been to help home buyers take out affordable loans to purchase low- and moderately-priced homes.

One of the more unfortunate aspects of the political response to the Great Recession has been willful ignorance about the need for policy interventions to ramp up in response to the downturn. When people become seriously ill, we tend not to jump all over them for going to the hospital. Yet opponents of government intervention continue to object to precisely that dynamic whether it’s safety net programs like food stamps or unemployment benefits, or the F.H.A.’s temporary expansion of its footprint in the housing market.

A bit of background: The Federal Housing Administration doesn’t make loans directly to home buyers. It insures their mortgages so that they can get loans that lenders would otherwise not make. Hold your fire — the agency caused neither the housing bubble nor the subprime boom. In fact, since the Great Depression, it has insured the mortgages of over 30 million low-wealth borrowers.

And while the agency caused neither the housing bubble nor bust, it did significantly ramp up to help offset the worst of the damage, sharply expanding its market share. For example, as the bubble burst, far too many homeowners faced exploding adjustable-rate mortgages and other forms of steeply increasing teaser rates. The housing agency stepped in and allowed them to refinance from conventional loans into F.H.A.-backed loans with far more sustainable payment terms. It also maintained access to credit for many first-time buyers who were shut out of the private market as lenders flipped from reckless underwriting to prohibitive standards in the wake of the crisis.

So yes, F.H.A. loan volumes grew quickly over these years, and in doing so helped stave off more foreclosures and even sharper declines in home prices. Without the F.H.A.’s actions, according to estimates by Moody’s Analytics, home prices would have fallen another 25 percent nationally.