As Congress heads into the debate over a public health insurer, the history of a federal
agency that already competes head-on with private insurers is a sobering precedent.  It’s
an example of both taxpayer risk and mission creep, with most of the worst of this
coming from Republican decisions over the past eight years.  When we hear a senior
Bush Administration official boosting his program’s “market share,” it’s proof positive
that it isn’t ideology, but rather entrenched interests, that drive any federal insurer absent
bullet-proof controls.
 
The case we have in mind is the Federal Housing Administration (FHA).  It’s a
Depression-era program established for an array of purposes, one of which provides
mortgage insurance for low-downpayment loans on single-family residences.  Here, it
competes directly with private mortgage insurance (MI). When mortgage finance went
awry in the 1980s, the FHA stepped in, took a lot of risk it didn’t anticipate and required
a comprehensive overhaul enacted in 1990 legislation.  For a few years, the FHA
recovered and fulfilled its mission as the U.S. housing market improved in the early
1990s.  However, the FHA consistently failed to institute needed internal controls, as
ongoing reports from its Inspector General attest – and carried a skinny little capital
requirement that provided scant taxpayer protection.  Nevertheless, FHA trundled on into
the housing boom little-noticed by policy-makers and much-loved by mortgage
originators – who bear little risk because of FHA’s 100 percent guarantee.
 
In the boom, FHA got short shrift.  Despite its generous terms, it couldn’t match those
being offered in the private-label MBS market – who could, as we now know all too well
(and expensively).  Thus, FHA’s marketshare, as its Bush Administration commissioner
liked to call it – shrank.  Did FHA under GOP control crow about the return of the private
sector?  Far from it.  The FHA began a series of programs to boost its product right at the
worst time of the housing boom in some of the riskiest markets.  It also went to Congress
with a package of “reforms” designed to increase its marketshare, changes it took
Democratic Chairman Frank considerable effort to constrain.  This was, of course, a role
reversal – a staunch Republican pushing for a far larger role in the private sector and a
Democrat biting back based in large part on fears that, if a government program focused
on “market share,” it wouldn’t serve markets where no one else had a piece.
 
Now, FHA is fighting for its life.  The Obama Administration’s HUD secretary, Sean
Donovan, this week told Congress he hoped it was a “better than even” chance that the
FHA single-family program wouldn’t go bust this year because of all the risks it took to
get marketshare.  Getting the appropriation necessary to fund FHA so it could in fact
fulfill a mission the private market can’t meet will be tough going under current
conditions.  Thus, we’ve got the worst of both worlds in the FHA lesson:  a federal
insurance program that is on the brink of being unable to do what the private sector
legitimately can’t and shouldn’t do because its own ego got the better of its public
mission.
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