The Johnson-Crapo Solvency Act is one of three housing reform bills before Congress. It’s a much-needed attempt to reform the Federal Housing Administration, but according to AEI’s Edward J. Pinto, “it is deeply flawed and does not address the need for common-sense reform of the FHA.”
This is unfortunate. Like Detroit, the FHA is insolvent, and like Detroit, some of the poorest people are suffering as a consequence of incompetent or corrupt leadership.
Anyone who doubts this can simply look at the data. Right now, the American Enterprise Institute (AEI) is building a pretty cool map which demonstrates the likelihood of foreclosures for families with FHA-backed loans fall within certain “working class” zip codes.
According to the data, the highest projected foreclosure rates also tend to occur in zip codes with “the most modestly priced homes.”
Verbiage surrounding the AEI map notes that “loans with a high risk of foreclosure are much more likely to be concentrated in working-class communities.”
This, of course, is a polite way of saying that minority neighborhoods are disproportionally affected (not a complete surprise.)
Count the FHA as yet another example of seemingly well-intended programs that ironically harm the very people they were ostensibly created to help.
The problem is that lenders have every incentive to take big risks when the taxpayers pick up the tab when they bet wrong. Here’s hoping for real reform that addresses this fundamental flaw.