“Recent research projects high default rates—between 15 and 30 percent—among borrowers whose mortgages FHA guaranteed since 2007. Hence, it is quite clear that very large numbers of program beneficiaries are not successful in becoming stable, long-term owners. FHA’s most recent actuarial review for fiscal year 2012 shows that its Single-Family Mutual Mortgage Insurance Fund is underwater. My own research suggests that even this sobering conclusion by FHA’s actuarial reviewer is too optimistic by tens of billions of dollars.”
“Both FHA and the borrowers whose mortgages it insures are leveraged by more than 30 to 1. This was always a financial accident waiting to happen: this leverage ratio is on par with those that were employed by Bear Stearns and Lehman Brothers just before their collapses. To be viable, such a highly leveraged business model requires that house values never fall. We have learned the hard way that actual market outcomes are not always so obliging.”
His paper reviews these claims in somewhat more detail, but I don't think there is any real disagreement that the FHA is insolvent, because its underwriting standards are looser and its loans thus have default rates much higher than any private sector lender could sustain. A typical FHA mortgage has only about a 3% downpayment. I don't see how the government is serving any public policy interest puttng households into that kind of leveraged position.
For that reason, I have been thinking along the same lines, that if the government has to be involved in supporting home ownership (which is a political reality after decades of such involvement, regardless of what little economic sense it makes), the best channel is not through the debt but the equity, exactly as Professor Gyourko proposes: give them money to build net worth, not debt that can destroy it. But giving people 100% of their down payment obviously isn't a sound policy, so the 100% match is a much better way to go. Or, if someone objects that it's still too hard for poor people to save anything to be matched, I could imagine a small fixed amount like $100 a month and a 100% match of anything above that. It's also important from an inflation-management perspective that the government subsidy is not freely available for spending generally but sits, outside the economy, in savings vehicles.
The whole paper is only 12 pages and very much worth reading.
Hat tip to Arnold Kling's "askblog" which is also always worth reading.