HUD Saved Us from a Depression

An article in today's New York Times concerns the Federal Housing Administration. FHA provides insurance for homebuyers who don't meet traditional criteria for conventional loans. In othe words, the FHA is part of the government support and encouragement of homeownership. During the subprime craze, many buyers bypassed the FHA, but in the last year or so the FHA has backed a lot of mortgages. Their reserves are low--0.53 percent of the total porfolio, and some think that the FHA will need a bailout before too long. Yet, they also had faced pressure from Congress to open their doors to a broader group of applicants, i.e., applicants with lower down payments and poorer credit ratings. Brian Montgomery, a former head of the FHA, said that even if a bailout is needed, people should still feel gratitude. The article ends with a quote form Mr. Montgomery, "They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression."

So, government subsidization and pressure on lenders to encourage broader homeownership led to the run up in housing prices. When the housing bubble burst, we entered a severe recession. The FHA has continued to prop up housing markets, evidently saving us from a depression. But the collapse in prices that followed the run-up in prices is due, to a considerable extent, to government policy. Does that make sense?