Let's not repeat the same mistakes that led to the housing bubble

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Article Highlights

  • America's homeowners have already experienced the horrific impact of the government's successful effort to loosen underwriting standards.

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  • Since 1975, one in eight families getting an FHA insured loan suffered from a foreclosure from their 30-year, fixed-rate mortgages with a small down payment.

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  • FHA reform can end the nightmare at FHA.

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A recent New York Times article entitled “Down Payment Rules Are at Heart of Mortgage Debate” reported that “lenders and consumer advocates — rarely on the same side of the issue — are now cautioning against down payment requirements.” Cited as justification was a study by the Center for Community Capital at the University of North Carolina at Chapel Hill. It found that only 2,500 borrowers had suffered a foreclosure out of 46,000 low-income homeowners who received traditional 30-year, fixed-rate mortgages with a small down payment. I‘ll call those 2,500 borrowers and raise 3.1 million families. Since 1975, one in eight of the 25 million families getting an FHA insured loan suffered a foreclosure from their 30-year, fixed-rate mortgages with a small down payment. The dashed American dreams of these families trumps the 2,500 in the UNC study. America’s homeowners have already experienced the horrific impact of the government’s successful effort to loosen underwriting standards that drove the boom that went bust. Let’s not repeat the same mistake.

Based on FHA’s 80 years of experience with tens of millions of loans, the solution is clear. Balance the size of down payment with a loan term ranging from 15- to 30-years along with a borrower’s willingness and ability to pay. Combine with best practices like risk sharing by originator/servicers and the nightmare at FHA can be put behind us.


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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.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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