How Robin Kelly can ease Illinois' pain


A man works on a new home being built by developer Azeem Kahn in Chicago April 21, 2011.

Article Highlights

  • The FHA tolerates a failure rate that is nothing short of shocking.

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  • Over the past 37 years, the FHA has or expects to see more than 3.1 million families lose their home.

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  • Now is the time for Democrats and Republicans to join together and end the nightmare at FHA.

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In a plague of gun violence, 25 shootings were reported over Easter weekend in Chicago. There's stubbornly high unemployment, well above 10 percent in some neighborhoods. And the high school dropout rate is nearly 40 percent.

For Illinois' newest member of Congress, Robin Kelly, who won the April 9 election to replace Jesse Jackson Jr., these three issues will weigh heavily on her work in Washington.

But now that the campaign is over, it's time for a reality check: sweeping bills to limit gun violence, create jobs and keep students in school aren't likely to be resolved in this Congress. If Rep. Kelly wants to champion an issue that will make an immediate difference for her constituents, she should consider a bipartisan cause: reform the Federal Housing Administration so that it stops hurting the poor and wasting money.

The FHA exists to help first-time and low-income homebuyers achieve responsible homeownership. Sadly, the federal agency has strayed far from its historic mission and instead is setting families up to fail and saddling thousands of neighborhoods across America with high rates of home foreclosures.

Particularly hard hit are ZIP codes in Kelly's district. A recent study I completed on loans from the FHA's 2009 and 2010 insurance books shows the discriminatory concentration of foreclosure pain. In more than 9,000 working-class ZIP codes, the projected foreclosure rate exceeded 10 percent, with the average rate at 15 percent. The Chicago area had 276 of these ZIP codes. Across Kelly's district, 36 ZIP codes projected foreclosure rates exceeding 10 percent, with ZIP codes 60422 (Flossmoor), 60426 (Harvey), 60427 (Riverdale) and 60428 (Markham) all exceeding 30 percent.

At a 1998 hearing before a congressional committee, then-Rep. Jackson correctly observed: "Because of the quandary FHA's foreclosures present, the people who truly lose the most are the first-time homeowners. At the end of this process, they have nothing to show except a seven-year negative credit report with a foreclosed property. Mortgage bankers and brokers collect their fees, and lenders' loan losses are covered by the guarantee insurance they purchased from the FHA."

Jackson's statement is still true: The FHA has become a federal agency that routinely finances failure by nudging families onto a homeownership tightrope with no safety net, meaning they are a broken water heater away from losing their home, their savings and their good credit.

The FHA tolerates a failure rate that is nothing short of shocking. Over the past 37 years, it has or expects to see more than 3.1 million families lose their homes. That's 1 in 8 families who got an FHA loan. The damage to families and neighborhoods continues as the FHA actively encourages lenders to provide loans that have a 15, 20, even 25 percent chance of foreclosure.

It doesn't have to be this way. And ending this nightmare doesn't require a radical makeover. It simply means restoring the FHA to its vital mission with common-sense reforms. They include three pillars:

•End mortgage loan practices that put families in over their heads by helping homebuyers accumulate meaningful equity.

•Return the FHA to its mission of helping working-class and minority homebuyers achieve sustainable homeownership.

•Revive the private sector's presence in the higher-credit loan market by scaling back the FHA's substantial footprint in the market of loans to borrowers with credit scores above 680.

Implementing these guideposts would be a game-changer for families in Kelly's district. Imagine the FHA moving from a policy of max debtorship to max homeownership. Such a shift would empower families financially, leaving them and their communities less vulnerable to economic hardship. By itself, FHA reform won't be a panacea, but by laying a stronger foundation for homeownership it will give a real lift to hard-hit areas.

The late Gale Cincotta — a Chicago native who spent years trying to reform the FHA — rightly pointed out in 1998: "The FHA is liberals' nightmare of corporate welfare and profiteering that preys on minority and working-class people — since mortgage bankers can't lose with the FHA's 100 percent guaranteed loan program" and it is the "conservatives' poster child of a bloated government program." No one wins in this national disgrace except the housing lobby, which perennially cries, "Now is not the time for reform."

The people of Robin Kelly's district know better. Now is the time for Democrats and Republicans to join together to end the nightmare at FHA.

Edward J. Pinto, a former executive vice president and chief credit officer for Fannie Mae, is a resident fellow at the American Enterprise Institute.

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About the Author


Edward J.
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

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