FHA hits brakes on housing recovery with budget cuts

, Bloomberg

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Shaun Donovan
Shaun Donovan

U.S. spending cuts scheduled to kick in today will constrain the availability of Federal Housing Administration mortgages that account for about a quarter of originations, threatening its role in the year-long housing recovery.

Department of Housing and Urban Development cuts will force staff reductions that could slow FHA loan approvals and curtail programs such as foreclosure counseling, according to HUD Secretary Shaun Donovan. If FHA lending drops by the same rate as HUD's budget, it could shave about 2 percent off U.S. home sales this year.

The so-called sequestration, $1.2 trillion in automatic reductions in federal spending, would pare $42.7 billion from non-defense federal agency budgets this year, according to government estimates. For real-estate, the impact would be magnified because FHA's market share has grown to five times its 2006 level as it expanded its role during the property bust. Since 2008, the FHA has backed more than a quarter of U.S. mortgages, according to HUD data.

"The FHA has been a critical support to the housing market, for first-time buyers and purchases of homes in general," said Mark Willis, a professor at New York University's Furman Center for Real Estate and Urban Policy and a former economist at the Federal Reserve Bank of New York. "Any decrease in the rate the FHA is able to ensure mortgages will clearly hurt housing."

The housing recovery, engineered by the Federal Reserve's program of buying mortgage bonds to lower borrowing costs, has been successful enough that the central bank should reduce the pace of the acquisitions, Federal Reserve Bank of Dallas President Richard Fisher said Wednesday. This week, the average rate for a 30-year fixed mortgages is 3.51 percent, down from 4.95 percent two years ago, according to Freddie Mac.

Still, the budget cuts will trim half a percentage point from economic growth in 2013 and cause 1 million job losses, according to the Bipartisan Policy Center in Washington.

"Across-the-board, draconian cuts will hurt the housing recovery," said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. "Housing will still have momentum, but a lot less momentum."

The reductions will boost the unemployment rate, which was 7.9 percent in January, a quarter of a percentage point and keep it elevated for several years, Macroeconomic Advisers said in a Feb. 19 report.

"Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," Fed chairman Ben S. Bernanke said in congressional testimony this week. The cuts will have "effects on jobs and incomes," he said.

While deep budget cuts could bruise the real estate market, reducing federal debt will support housing demand in the long term by putting the economy on firmer ground, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.

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