The alarm bells are now ringing for the Federal Housing Administration, with delinquencies increasing.  The immediate and pressing issue is the safety and soundness of FHA today and the risk it poses to the taxpayer.  

The fat years of the housing bubble lasted from 1999 to 2006 - seven years. The bubble was deflating by the beginning of 2007 and collapsed into the panics of 2007-09. Since then we have been struggling in its deflated wake. If we get the Biblical sum of seven lean years, the housing and related debt markets will bottom in 2013 - not a bad forecast. 

Under the Dodd-Frank financial-reform law, large nonbank firms may be declared systemically important because their failure will cause a systemic breakdown. In effect, this amounts to a government statement that these firms are too big to fail.

Longstanding policies that were intended to promote confidence in the independence of regulatory decision-making have now been wiped away by the Dodd-Frank act, which has in effect placed all the financial regulators under the direction of the Treasury secretary.

The housing market is in straits, and many members of Congress are looking to Fannie Mae and Freddie Mac to step in and help. But the two government-sponsored enterprises (GSEs) have troubles of their own. Freddie Mac announced a substantial quarterly loss in late November, following Fannie’s somewhat smaller loss...

Last week, the Administration released its eagerly awaited report on reforming the housing finance market. The Dodd-Frank Act had omitted consideration of the government sponsored enterprises (Fannie Mae and Freddie Mac) because they were perceived to be sufficiently important to warrant separate consideration.

Reform focused on sustainable lending would have FHA target a projected average claim rate of 5 per 100 insured loans under normal circumstances and 10 per 100 insured loans under stress circumstances.  This rate is about five times the normal default level for prime loans and about half the FHA's traditional default level under normal circumstances.

For any housing finance reform plan to be credible, it must do much more than wind down the GSEs. Because of the Dodd-Frank Act a number of formidable legal obstacles now exist that must be cleared away before a private securitization market will come back. If the administration is serious, its plan must address all these issues.