FHA mortgages for high-income folks? Think again


NEW YORK -- If the real estate industry has its way, more Americans will be eligible for home mortgages backed by the Federal Housing Administration. Legislation before Congress, strongly supported by Realtors and mortgage bankers, would let the FHA insure larger loans, for higher-income people, than it does today.

Obviously, it's an election year. A Congress that pretends to want smaller government is preparing to compete with private mortgage insurers, in order to pass out even more goodies to the middle class. Every legislator should think again.

In the FHA program, private lenders make the loans; the government pays them off in full if the borrower defaults. This program offers two big advantages over a conventional mortgage: You can buy a house with a lower down payment; and the FHA will OK many loans that private mortgage insurers reject.

FHA loans do wonders for creditworthy people of moderate means who couldn't otherwise become homeowners. But why should this program be extended to people who can afford larger mortgages? Such borrowers generally have access to privately insured loans -- including the special low down payment loans being offered today by many banks and S&Ls.;

The bill now in the House of Representatives would let the FHA insure loans up to $172,678 in counties where house prices are the highest (principally in California, the Chicago area and the Northeast corridor from Boston to Washington.) That's up from a maximum of $151,725 today.

Even in the lowest-cost areas, mortgage loans could reach $101,575 -- a big jump from the current limit of $67,500.

About half the country currently falls under the $67,500 limit. So in those areas, this bill effectively lets the government back mortgages even on the expensive homes.

The bill in the Senate isn't as generous. It would hold the largest loans to $152,363 this year and raise the cap in low-cost areas to $77,197.

But both bills would index the FHA maximums to the size of mortgages in the conventional market. This floating ceiling (which never goes down) has been proposed before, unsuccessfully. If it passes this time, it will bring higher-income people into the FHA program and keep them there.

In one other significant proposal, the FHA would be allowed to join with state housing agencies to insure even larger mortgages in the highest-cost sections of the country. These special loans could go up to $203,150, and even more in future years.

Even in high-cost California, I doubt that it's the government's mission to solve the affordability problem for people buying $200,000 houses and condominiums. The Senate bill, incidentally, would saddle the taxpayers with any losses from this special program.

There are three more reasons for restricting the expansion of government-guaranteed mortgages:

* 1. For the past three years, the FHA has been struggling back from the brink of insolvency and hasn't solved all its problems yet. Despite some reforms, it still insures many loans that equal ,, the property's value (because, within limits, borrowers can finance their closing costs and the cost of their mortgage insurance). Such zero-equity loans are strong candidates for default. Why add even more liabilities to the taxpayers' books?

* 2. Because of budget restrictions, the FHA lacks the manpower to salvage and sell, on a timely basis, the defaulted properties it holds now. Expanding the program would make the management problem worse.

* 3. Homebuyers who don't qualify for conventional mortgages are increasingly being helped by low down payment loans backed by private insurance. For example, about 900 lenders nationwide make loans to acceptable credit risks who have lower incomes or who can't make a 5 percent down payment without help from relatives or public agencies. This program is led by the Federal National Mortgage Association. For a free list of the participating lenders in your part of the country, call 1-800-7-FANNIE.

Stephen Dreisler of the National Association of Realtors backs a bigger FHA as a way of getting loans for the people that private insurers turn down. But it's not always a virtue to make high-risk loans, even in socially useful programs. During the bust in the oil-producing states, the FHA kept pouring out the mortgages while the private insurers were tightening their standards. That did help people who wanted to buy. But the subsequent defaults led to the FHA's near-collapse.

About 90 percent of households earning $50,000 or more already own their own homes, says Suzanne Hutchinson of the Mortgage Insurance Companies of America. An expanded FHA would be helping those who need it the least. We can't afford that any more.

Next week: The private low down payment programs.

Jane Bryant Quinn is a syndicated columnist. Write to her at Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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