I love biscuits.

For those of you who utilize British terminology, picture a scone.  Except they aren’t scones. They’re much better. For those who don’t live in the South, I’m not talking about the biscuits you have access to.

I’m talking about a proper Southern homemade biscuit. The type my grandmother used to make, and the kind I can depend on my aunts to make when I visit North Carolina.

The recipe is simple:

• • Self-rising flour
  • Lard
  • Buttermilk

I can’t share the quantities, because I’ve never gotten a straight answer, and there’s no point in telling you the best brand of flour unless your vacation plans bring you to Sampson County.

Still, it’s a simple recipe. Once you figure out how to get the right quantities of ingredient together, you’re going to get the perfect biscuit, suitable for everything from holding a sausage patty to dipping in molasses.

If only GSE reform were this easy.

There have been countless plans circulated about how to reform the GSEs, and they all include many of the same ingredients:

• • The existence of a cash window
  • Securities that can trade in the TBA market
  • A level playing field for lenders of various sizes
  • Credit risk transfer
  • A government guaranty of the MBS

All of this is intended to result in a mortgage market with great liquidity and strong access to credit, with minimal taxpayer risk. In short, taking what works in our housing finance system, and making it better.

Except there’s a missing ingredient:  FHA Reform.

So why is FHA Reform a missing ingredient? For the very simple reason that it’s part of the housing finance intersection between the public and private sector. Reforming the conventional market without addressing the government-insured market is like changing the amount of flour you’re using, without changing the quantities of any other ingredients. The final product might turn out fine, or it could be a failure – and you won’t know immediately.

What does FHA Reform look like? To answer that, we should look at the VA and the USDA’s Rural Housing Service.

If you ask anybody on the street what a VA mortgage is, their answer will be something along the lines of, “It’s a mortgage for veterans.” Setting aside pricing, guidelines, and everything else, the VA’s program has a clear-cut mission: serving our veterans.

Asking about a USDA’s Rural Housing Service mortgage will likely yield an answer that includes the word “rural”. While that’s only part of the equation, it’s an important one. The USDA’s RHS program facilitates rural homeownership, and it also has a clear-cut mission. You’re not going to get an RHS mortgage living in New York City.

What is the FHA’s mission?

I would argue that it doesn’t have one.

Consider what falls under the FHA’s scope of business:

• • A borrower in Fairfax County, Virginia can get an FHA-insured mortgage of $726,525
  • A borrower making a salary of $250,000 per year can get an FHA-insured mortgage
  • A borrower with a credit score of 720 can get an FHA-insured mortgage

All three of these borrowers are perfectly well served by private mortgage insurance. Why do they need the government’s assistance? Why should taxpayer funds be put at risk?

If we’re going to have a well-functioning housing finance system, it’s high time that we figure out what the FHA’s mission should be. My suggestion is this: “The FHA exists to ensure access to credit for low- and moderate-income borrowers who are underserved by the private market, enabling them to achieve sustainable homeownership.”

A good starting point to move the FHA towards its proper mission would be to reduce eligible loan amounts, introduce income limits, and define the credit score spectrum that needs government assistance. For example, a buyer that makes significantly more than the area median income (AMI) seeking to purchase a home that is also substantially above the area’s median home value should not receive government assistance.

From there, we can figure out what the right type of loan product would be, and perhaps figure out how to create a pipeline of future homeowners who are destined for success.

If we continue as we have been, with a lack of coordination between the conventional and government-insured markets, we run the risk of having a housing market that’s flat and doughy, instead of light and fluffy.

As we continue to discuss GSE Reform, let’s make sure that we are also having a conversation about FHA Reform.  I’ll bring the biscuits.