Tom Kelly: Relief plan does not achieve long-term goal

While the two steps outlined yesterday in President Obama’s housing relief plan look great on the surface, one of them does nothing toward accomplishing the long-term goal of decreasing the federal government’s role in housing.

In a capsule, the fact sheet announced new steps to help homeowners – reduce refinance fees on FHA loans, and provide relief to service members and veterans who were wrongfully foreclosed upon or denied a lower rate.

Making FHA loans cheaper to refinance for ALL borrowers increases the role the government plays in mortgage finance. FHA was founded to make loans to a select number of people based on need and income. It has gone to funding three percent of all mortgages in 2006 to more than 40 percent today.

Bottom line – the road has become jam-packed with people who were never supposed to be on it.

More loans mean more delinquencies and the Department of Housing and Urban Development (the agency that oversees FHA) now has its capital reserve ratio below the level that Congress mandates.

In a recent report, the George Washington University’s Center for Real Estate and Urban Analysis found that . . . “in the wake of significant declines in home prices, we believe FHA could reduce its loan limits by approximately 50 percent and still almost entirely satisfy its target market. That would reduce its current large market share, which is difficult for FHA to manage.”

The authors of the George Washington University study suggest the FHA market share should return to 10 to 15 percent by reducing the loan amounts on FHA loans. While exceptions could be made for cash-strapped seniors and reverse mortgages, wealthy borrowers were never on the FHA landscape.

FHA should return to its role of helping a select few, not the general population. It was founded on those principals. Making FHA loans cheaper to refinance does not help us get there.