FHA: Helping the affluent buy housing

The Federal Housing Administration exists in part to make housing more affordable for low-income families. However, with the advent of the financial crisis the FHA has experienced mission creep. The first of its new missions is to help prop up housing prices, thus preventing housing from becoming affordable. The second of its new missions is to help high-income Americans buy homes. Since the FHA is currently on financially shaky ground, these new missions could end up coming at taxpayer expense.

The Washington Post explains the latter of these new missions:

CREATED DURING the depths of the Great Depression, the Federal Housing Administration has a long history of supporting homeownership in the United States. In recent decades, its mission has been to enable lower-income Americans to tap otherwise inaccessible mortgage credit. ...

What must be debated, and indeed challenged, is the stepped-up use of the FHA to boost demand for, and hence the price of, houses in the current crisis. This is true not only because of the fiscal implications; the FHA's reserves are currently below the statutory minimum, raising the specter of an eventual taxpayer rescue. It is true also because of the regressive distributional implications; the FHA is increasingly helping people who are decidedly not poor to buy houses that are anything but modest. ...

Even some fairly fancy condo buildings are now trumpeting FHA financing. As the New York Times reported recently, among those buying property with little or no money down, thanks to FHA, are investors and well-off people who could have come up with more equity. ...Whatever the additional risk may be, the federal government is assuming it in a way that facilitates the upward transfer of wealth.

When adopted last year, the higher FHA loan limits were billed as a temporary fillip to the housing market. But temporary subsidies have a way of enduring. ... This might help build a floor under the still-shaky housing market, as intended. But it would also complete the mission creep of the agency from one dedicated to upward mobility to one that also produces middle- and upper-middle-class enrichment.

The Wall Street Journal explains that Congressmen of both parties want these new missions to become permanent:

Lawmakers from high-cost housing districts, for example, want to ensure that the FHA doesn’t disappear from their neighborhoods. They’ve introduced a bill that would make permanent the higher loan limits that Congress temporarily expanded last year. ... [Barney] Frank said he thinks limits should be increased to around $800,000. ... Other lawmakers, meanwhile, want to bring back programs that allowed borrowers to receive FHA-backed loans without making down payments.

A traditional rule of thumb is that the price of the house you buy should be roughly three times your annual income. (Many of the homeowners who ended up underwater recently ignored this rule of thumb, looking only at their monthly payments instead.) Using this 3X annual income ratio, an $800,000 FHA loan would allow people earning up to $266,667 per year to qualify. Using a far more generous 4X annual income ratio, people earning up to $200,000 would qualify. These income levels are way above the U.S. median. Even in America's three wealthiest counties as of 2008—Fairfax County, Virginia, Loudoun County, Virginia, and Howard County, Maryland—these income levels are at least double the median household income.

So here's a question for readers: Since the FHA is knowingly offering huge mortgages with very little down payment (3.5%), and knows that such behavior led to massive defaults when banks recently did the same thing, is it morally ethically acceptable for a borrower to walk away from an FHA loan—leaving taxpayers with the bill—if he ends up underwater on his home?