No matter how many times people debunk the notion that government policy created the housing bubble, it doesn't die. It's part of what the blogger Barry Ritholtz has called the "big lie" of the financial crisis. Now, we are having another argument about whether the government is creating a new housing disaster for taxpayers.
The target this time: the Federal Housing Administration, the government's mortgage insurer mostly for low-to-moderate income and minority borrowers. Late last year, the F.H.A. issued its annual report to Congress. According to estimates, over its lifetime, the agency would have to pay more out on the mortgages it has insured than it has taken in. The report estimated the potential shortfall at $16 billion, which is a lot in absolute terms, but minuscule in relation to the federal budget and the $1.1 trillion F.H.A. portfolio.
Despite these modest numbers (more on that below), the same crew that assailed the government's role in the housing bubble is now rending its garments about the F.H.A. Critics, like Edward J. Pinto of the American Enterprise Institute, argue that the agency has not only failed to help low-income communities, but is actually destroying them with reckless loans.
Next month, we may end up doing it all again, when the Office of Management and Budget issues its analysis of the agency's finances, using a different methodology.
So is the F.H.A. in trouble and in need of an imminent bailout?
Not really. According to the actuarial analysis, if the agency stopped backing mortgages right now, it would have a deficit after 30 years. But even by that analysis, it has enough cash for many years. And it will not stop insuring mortgages. In fact, it's backing what are probably going to be very safe and profitable home loans right now, so even if it drew money from the United States Treasury, it would almost certainly be able to pay it back eventually.
And if there is a Treasury infusion, taxpayers should consider it a bargain. The agency has been a rare bright spot in the Obama administration's otherwise dismal record on housing.
In both the boom and bust, the F.H.A. functioned as one would hope a government lending operation would. As the bubble grew and private lenders went nuts, its market share dwindled. (Maybe this wasn't on purpose, but it's better to be lucky than smart.) When the market crashed, the F.H.A. stepped in.
Without the agency's lending, mortgage rates would have doubled and home prices would have dropped another 25 percent, estimates Mark Zandi, chief economist of Moody's Analytics.
John Griffith, a housing policy analyst for the liberal Center for American Progress, has produced several useful rejoinders to the F.H.A.'s critics. He points out that compared with the private sector, the agency is doing quite well. Yes, the agency faces a high rate of delinquencies, but they pale when compared with private sector subprime loans.
At their peak in the fourth quarter of 2009, 9.4 percent of the F.H.A. loans were seriously delinquent, compared with 30.6 percent of subprime loans, according to the Mortgage Bankers Association.
"To go this far without significant problems after the worst housing crisis since the Great Depression is remarkable," Mr. Griffith said.
The F.H.A. hasn't been perfect. Far from it. The agency was too aggressive with its lending. When it stepped in as the market was collapsing, it should have had more careful lending standards. Now, it has tightened them up and raised its fees, which will put the agency in much better shape.
And its history isn't pure. One of its more disastrous policies was to allow something called seller-financed loans, where a nonprofit organization would broker a deal for a low-income borrower. In truth, someone else, like a developer, would front the costs and this would inflate the cost of house itself. Low-income borrowers could find themselves underwater almost immediately.
"A phenomenal mistake," Mr. Griffith said. The F.H.A. considered banning such loans. But the private sector lobbied for them, and with a push from Congress, the loans continued until 2009.
Yet, the criticism of F.H.A. from Mr. Pinto of the American Enterprise Institute, who in the late 1980s was the chief credit officer of Fannie Mae, goes far beyond that. Mr. Pinto says the F.H.A. has a record of 60 years of "mission failure" and that it's getting worse. Its lending standards have been eroding for years, and now it has an unacceptably high failure rate, he says. His work, including a study late last year, aims to show the F.H.A. has actually hurt the low-income and minority communities it purports to serve.
Mr. Pinto's study cites high rates of delinquencies in many neighborhoods, but that's no surprise. The housing market crashed in many cities. To have high default rates in those areas is hardly a sign of out-of-control government lending.
"I respect Ed, but he's dead wrong," Mr. Zandi of Moody's said. "He's got it absolutely backward." The private sector, not government, led us into the bubble.
Mr. Pinto has beenrepeatedlycriticized for exaggerating the role of Fannie Mae and Freddie Mac in the mortgage crisis. The Financial Crisis Inquiry Commission took a long hard look at them, because Peter J. Wallison, a major proponent of the theory that the government created the housing bubble, sat on the commission. The commission found that the Pinto analysis was flawed.
Mr. Pinto is undaunted. He told me he believes that "federal housing policy was the cause of the housing boom and bust. That was what got us into this mess. People want to deny it."
That is what is known, as the Freudians tell us, as projection.
The debate has important consequences. If the F.H.A. does turn out to be a disaster, it undermines the idea that the government can serve a valuable role in financing loans to deserving and responsible people who can't afford traditional mortgages.