Paul McMorrow

FHA hits triple-deckers

By Paul McMorrow
June 18, 2010

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THE FEDERAL Housing Administration has been busy lately, propping up the housing market. The FHA’s outsized role in real estate has earned it intense scrutiny on Capitol Hill, where legislators are already choking on the staggering tab Fannie Mae and Freddie Mac are sticking them with. To its credit, the agency is moving decisively to repair its balance sheet and avoid a government bailout.

But in Boston, one recent FHA move is sowing some unintended consequences: It’s threatening to wall off entire neighborhoods in the city and close-in suburbs from the working-class homebuyers the FHA serves. These buyers are running into trouble because of a quirk in Boston’s development history that has left a permanent imprint on the city’s geography.

Last month, FHA commissioner David Stevens told a group of bankers that the FHA’s staggering loan volume – it was responsible for nearly half of all new mortgages written between January and March – meant American real estate is “a market purely on life support, sustained by the federal government.”

The agency’s reserve fund has also been hammered by loan defaults, and Stevens has responded by broadening the FHA’s revenue streams and tightening its credit standards. Part of that tightening has involved stress-testing condominium associations. The agency is refusing to touch loans in condo buildings it hasn’t pre-screened. The new policy was meant to sidestep trouble in states like Florida, Nevada, and Arizona, which are rotten with doomed condo projects.

Boston isn’t overrun with the kinds of empty towers the new policy targets, though. It’s the city’s unique triple-deckers getting hit.

Scores of double- and triple-deckers have been chopped up into condos over the past decade. In large tracts of Dorchester, Hyde Park, Jamaica Plain, Cambridge, Somerville, and Everett, there are few single-family homes, and even fewer buildings with condo associations that have cared to submit themselves to FHA scrutiny. People would rather not wade through a thicket of red tape, if it can be avoided.

So, essentially, huge portions of Greater Boston are off limits to homebuyers. That’s because, for working-class home buyers, an FHA loan is all there is.

The FHA doesn’t own any mortgages. It insures mortgages. Federal backing makes the loans safer for underwriters, who are then able to take lower down payments from homebuyers.

The FHA was a New Deal creation, and it has reshaped the American landscape more than any other federal agency FDR dreamed up. FHA guarantees fueled the boom in home ownership that followed World War II. And fine print regarding what types of buildings the postwar FHA wouldn’t touch helped drive huge swaths of the middle class out of the old, crowded cities, and into the newly-developed suburbs. A nation’s landscape, and living patterns, were irreversibly altered in less than a generation – with the help of a little federal insurance.

Today, the FHA operates with a mandate to expand working-class home ownership. When bad loans were fueling record Wall Street profits, the FHA’s market share fell to just two percent. But with blind securitization history and banks suddenly wary of risk, the FHA has become virtually the only game in town for homebuyers who have a decent credit score but lack a sizable cash down payment. The agency backstopped 1.8 million mortgages last year, and is on pace to match that mark again, having insured nearly half of all new mortgages written between January and March.

These new regulations came down at the worst possible time for prospective buyers and sellers – in the months immediately before the expiration of the first-time homebuyer tax credit. Approvals on buildings are starting to trickle in, now that sales are falling back near their 2008 lows, but they missed the big pre-April 30 push.

Boston’s future as a vital and diverse organism lies with post-grads and young families – groups that would gladly take the city over the suburbs, if only someone would give them a mortgage. The longer urban neighborhoods remain closed to them, the more we invite a lifeless fractured split along class lines, with the rich on one side, the poor on another, and everybody else stuck waiting on the commuter rail.

Paul McMorrow is a staff writer for Banker and Tradesman. His column appears regularly in the Globe.

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