Demoralized Mortgage Insurer Overlooked Challenge in Crisis

Federal Housing Administration Must Ramp Up, Despite Years of Neglect

By Mary Kane 1/29/09 2:56 PM

With credit remaining tight and banks continuing to restrict lending, it’s been up to the government to keep the mortgage markets moving. And a major player these days is the Federal Housing Administration, a Depression-era insurer of mortgage loans specifically tapped to take on a much larger role as savior of the housing sector and rescuer of homeowners facing foreclosure.

But with the FHA’s share of the mortgage market expected to grow to nearly 50 percent, the agency finds itself facing the same dilemma as its parent, the Department of Housing and Urban Development. Both were shunted aside during the Bush Administration. Like HUD, the FHA doesn’t have enough staff or even up-to-date technology to handle its expanded role. It lowered its loan standards to compete with private lenders during the subprime boom, and problems with fraud continue to plague it, just as it backs more loans than ever.