Federal Reserve Support for Expanded FHA Mortgage Lending

In remarks made to the Boston Mortgage Banker Association, Boston Federal Reserve Bank President Eric Rosengren advocated the expansion of Federal Housing Administration (FHA) lending programs. His statement argued that stabilizing to the US housing market needs to start at the bottom.

Rosengren advocated opening up FHA lending programs to lower priced housing and borrowers that can support home payments, but have credit scores below current thresholds. Lending has dramatically slowed for borrower below 720--perfect credit. This trend is impairing housing recovery--preventing broader refinancing and constricting the number of potential new home buyers.

He made similar recommendations for Fannie Mae and Freddie Mac, suggesting that they fuel a secondary market for mortgages that reflects the declining cost of funds in the current credit markets.

The common question to statements like this is, "What moral hazards could this create?" Some would argue that it is policies like this that created the calamitous mortgage crisis we are currently battling.Rosengren defended his argument citing, "while any extension of direct government assistance to borrowers has potential 'moral hazard' problems, the mere potential for such problems should not automatically derail proposals that are likely to keep temporarily troubled borrowers in their homes."

There, of course, is growing empirical evidence to debunk the wisdom of this logic. Data reported from the Office of the Comptroller of the Currency (OCC) shows that homeowners receiving loan modifications to prevent foreclosure are re-defaulting at a rate of 55 percent within six months. The numbers may indicate we are simply protracting the inevitable.