The bad news for the housing market sometimes seems like it will never end. In the latest round of housing data, home prices continued to drop as did the number of home sales. Foreclosures remain a major weight dragging down everything, and then there’s the massive shadow inventory of distressed homes that will create more supply overflow as they are brought onto the market. Add up all of that, and suggesting now is a good time to buy a home is probably less popular than supporting Anthony Weiner. But along with all the bad news are in fact some compelling reasons for getting serious about buying right now. For example, home prices have come down so far in many markets it now makes the cost of buying a better financial deal than renting.

Crazy or Crazy Smart?

Of course, given what is still unfolding, waiting on the sidelines to make your move after the last of the ugliness is played out seems like a pretty smart strategy. But while you’re laser focused on the idea that home prices will be lower in the coming months — which you may well be right about –  the question is how much lower they are going, and what other important home-buying factors are going to be as advantageous a month or year from now.

Below are seven reasons why anyone who is pondering a home purchase might want to consider making a move sooner than later. Potential first-timers certainly have far easier logistics than current homeowners who need to sell to make a move. If you’re underwater on your loan, trading up might not be feasible. But there are indeed plenty of current homeowners sitting on ample equity. For them, and for potential first timers, here are seven reasons why now just might be a smart time to make your move.

1. Renting isn’t such a great deal. This is all about Econ 101: Demand for rentals the past few years has increased  — a function of foreclosures and fewer existing renters making the decision to buy  –  and supply hasn’t kept up as there has been little new construction since the financial crisis hit. That’s pushing up rental prices. Mark Zandi, Moody’s Analytics chief economist expects rents to rise an average of about 5 percent over the next year.  Real estate firm Reis Inc. forecast 2011 rental hikes of more than 5 percent in markets including Fort Lauderdale, Fl.,  Fort Worth, TX, Washington, D.C.,  and Seattle.

That’s likely going to exacerbate an already interesting trend playing out in many markets. In a recent analysis by Trulia.com, the ratio of sales prices to rental prices means buying a home today makes more financial sense than renting in about 80 percent of regional markets included in the study. No surprise, Las Vegas and Phoenix, where home prices have cratered, offer the best buy-vs.-rent tradeoff.  But even in more stable housing markets such as Dallas, Philadelphia and Atlanta, buying offers strong relative value compared to renting. The needle will likely tilt even more toward home ownership in the coming year given the expectation that rental rates are heading higher in many areas, while home prices aren’t.

2. The worst of the price declines is likely over. From the market peak in 2006, the S&P/Case-Shiller index of 20 housing markets is down 32 percent. Ugly indeed. But what’s important is what comes next, not what we’ve just come through. And no one is suggesting we have another 30 percent to go. Zandi recently said that another 5 percent slide in home prices might be on tap. To be clear, no one is suggesting roaring price gains are on the horizon either. The takeaway is that we’re potentially at an important pivot point where we’re moving from steeply falling home prices to an extended period of stabilizing prices.

3. Mortgage rates are at historic lows. Right now the 4.6 percent interest rate on a 30-year fixed rate mortgage is beyond fire-sale cheap, as is the 3.78 percent interest rate for a 15-year mortgage. Assuming rates will stay where they are at, or even fall some more, seems a risky bet. Fannie Mae expects the 30-year fixed rate will hover around 5.2 percent by the fourth quarter of this year, then rise slightly throughout 2012 to 5.4 percent or so. The 2012 forecast is 5.7 percent, more than a full percentage point above where we’re at today.

If you take out a $300,000 30-year fixed rate loan today at 4.6 percent your monthly tab will be $1,537. But let’s say you instead decide to wait another year or more on the theory prices are heading lower. If during your wait the 30-year fixed rate rises to 5.7 percent you would need home prices to fall nearly 12 percent to come in at the same monthly mortgage cost as what you can get now. That’s more than double the price decline most market watchers are expecting.

4.  Mortgages for pricey homes are heading higher. Even if mortgage rates don’t budge between now and the fall, mortgages for expensive homes are still going to cost more. Right now lenders can write mortgages for as much as $729,750 in certain high-cost areas and still have that mortgage qualify as a “conforming” Fannie Mae or Freddie Mac loan. That’s a big deal to lenders who are typically eager to sell off their loans into the secondary market — and right now Fannie and Freddie are the secondary market. But come Oct. 1, the maximum loan amount for a conforming mortgage will fall back to $625,500. If you intend to borrow more than that you will be shut out of the conforming loan market, and will have to opt for a jumbo loan. Jumbos typically carry higher down payments and the mortgage rate can be 0.50 percent higher than the conforming loan rate.

5. Qualifying for a mortgage is likely to get harder, not easier. The goal of Washington in the coming years is to shift more of the mortgage market out of the hands of Fannie Mae and Freddie Mac and into the hands of the private market. It is admittedly too early to know when and what that transition might look like. But whether the government backing is scaled down or disappears all together, that means higher borrowing costs. Moreover, there’s already a new regulation being considered that would require banks that want to keep selling 100 percent of their mortgages to Fannie and Freddie to hold borrowers to tougher lending standards.

6. Scary national statistics are especially deceptive right now. RealtyTrac reported that 28 percent of home sales in the first quarter of 2011 were foreclosures, and the average foreclosure sale price was 27 percent less than what a non-distressed home went for. But peel back from that ominous headline statistic and there is a more nuanced story playing out that goes to the heart of the old maxim: All real estate is local.

While foreclosures dominate the hardest hit states of Nevada (53 percent of first quarter sales), Arizona (45 percent) and California (45 percent) at the other end of the seesaw are the likes of New York (7 percent), Texas (12 percent) and Pennsylvania (14 percent). If you live in a state (or neighborhood) teeming with foreclosures, I would be the last to tell you that this is the perfect time to buy. There’s likely a long slog ahead as your market works through its backlog in inventory. But if you’re in a market that is in fact a lot healthier, don’t let the broad national story scare you off right now. Foreclosures in Nevada are irrelevant if you’re thinking of buying in Texas.

7. Less competition. There may be plenty of lookey-loos at open houses these days, but the anemic sales pace is proof that there are fewer serious buyers looking to make a deal. That makes it less likely you’ll find yourself in a bidding war today. It also means you can negotiate more effectively with eager sellers.  Wait to dive in and you could find yourself in a more crowded pool of buyers. It’s just common sense that once there are clear signals of recovery, demand will pick up. Being a little early/ahead of the curve gives buyers more elbow room.

We’ve all seen on the news that large portions of the country have been devastated by tornados and floods. Unfortunately, homeowners are not always fully insured — or insured at all — against losses due to such events. Fortunately, the Internal Revenue Service can help because uninsured casualty losses are tax deductible.

What is a casualty?

A “casualty” is damage, destruction, or loss of property due to an event that is sudden, unexpected, or unusual. Deductible casualty losses can result from many different causes, including, but not limited to:

Earthquakes, Fires, Floods, Government-ordered demolition or relocation of a building that is unsafe to use because of a disaster, Landslides, Sonic booms, Storms, including hurricanes and tornadoes, Terrorist attacks,
Vandalism, including vandalism to rental property by tenants, and Volcanic eruptions.

One thing all the events in the list above have in common is that they are sudden — they happen quickly. Suddenness is the hallmark of a casualty loss. Thus, loss of property due to slow, progressive deterioration is not deductible as a casualty loss.

For example, the steady weakening or deterioration of a building due to normal wind and weather conditions is not a deductible casualty loss.

When casualty losses are deductible.  In the case of a home used solely for personal purposes, a casualty loss may be deducted only if:

You itemize deductions, each casualty loss exceeds $100, and the total of all casualties suffered during the year exceeds 10 percent of your adjusted gross income after subtracting $100 from each loss suffered.

Losses to business property are not subject to the above limitations.

Amount of casualty loss deduction

How much you may deduct depends on whether the property involved is completely destroyed or partially destroyed, and whether the loss was covered by insurance. If more than one item is damaged or destroyed, you must figure your deduction separately for each.

If your property is personal-use property or is not completely destroyed, the amount of your casualty or theft loss is the lesser of:

Your property’s adjusted basis (usually its cost, increased or decreased by improvements and/or depreciation), or the decrease in fair market value of your property due to the casualty.

If your property is business or income-producing property, such as rental property, and is completely destroyed, and the fair market value of the property before the casualty is less than the adjusted basis of the property, then the amount of your loss is your adjusted basis.

The role of insurance

You may take a deduction for casualty losses to your property only if — and only to the extent that — the loss is not covered by insurance. If the loss is fully covered, you get no deduction. You can’t avoid this rule by not filing an insurance claim.

If you have insurance coverage, you must timely file a claim, even if it will result in cancellation of your policy or an increase in your premiums. If you don’t file an insurance claim, you cannot obtain a casualty loss deduction.

You must reduce the amount of your claimed casualty loss by any insurance recovery you receive or reasonably expect to receive, even if it hasn’t yet been paid. If it later turns out that you receive less insurance than you expected, you can deduct the amount the following year.

If you receive more than you expected and claimed as a casualty loss, the extra amount is included as income for the year it is received.

Disaster areas

Casualty losses are generally deductible in the year the casualty occurs. However, if you suffer a deductible casualty loss in an area that is declared a federal disaster by the president, you may elect to deduct the loss for your taxes for the previous year.

This will provide you with a quick tax refund since you’ll get back part of the tax you paid for the prior year. If you have already filed your return for the prior year, you can claim a disaster loss against that year’s income by filing an amended return.

You can determine if an area has been declared a disaster area by checking the Federal Emergency Management Administration (FEMA) website at http://www.fema.gov/news/disasters.fema.

A great deal more useful information about deducting casualty losses may be found at the IRS website at www.irs.gov.

Republicans on the House Financial Services Committee have drafted legislation that would raise the minimum down payment for FHA mortgages to 5 percent, cut FHA loan limits in most markets, and move the Agriculture Department’s rural housing program to FHA’s parent agency, HUD.

Though the draft bill has not been introduced, titled or assigned a number, it is expected to be the main subject of a hearing Wednesday before the Subcommittee on Insurance, Housing and Community Opportunity, chaired by Rep. Judy Biggert, R-Ill. After that, the bill is likely to be formally introduced and sped through subcommittee and committee votes and head for action by the full House.

The text of the draft bill appears to be a partial answer from House Republicans to the Obama administration’s call earlier this year for a smaller federal government footprint in housing.

By lowering maximum FHA loan limits in large numbers of local areas — well below even the limits that are already scheduled to kick in Oct. 1 — the bill would squeeze down FHA loan volume across the country, cutting a resource for some home purchasers who can’t obtain a conventional mortgage.

Here are some examples of current FHA loan ceilings, how they’re scheduled to adjust in October, and where they’d end up under the Republican plan:

In Los Angeles County, the present high-cost area maximum is $729,750, which was set by the federal economic stimulus legislation passed by Congress following the financial crisis of 2008. That ceiling is scheduled to drop to $625,500 Oct. 1. Under the new bill, however, the maximum FHA-insured loan amount allowed in Los Angeles would be $412,500 — a $317,250 plunge from the current limit and $213,000 below the scheduled reduction this fall.

Other counties in high-cost California would experience even sharper declines, such as Monterey, where the maximum would decline by $436,000 and Contra Costa, where the drop would be $379,750. Every county in California — from big urban communities to rural areas — would be on the losing end of the new FHA equation, and most reductions would be in the six figures.

The lower limits would be significant in other states as well. Monroe County, Fla., would see maximum FHA loan limits go from $729,750 to $425,000. Under the scheduled Oct. 1 statutory decrease, the county — which comprises the Florida Keys — would have a $529,000 maximum. Sarasota, Fla., would see a $261,250 drop under the bill, Miami-Dade a decrease of $161,250, and Orange County (Orlando) limits would decline by $128,750.

Large counties in the high-cost areas around Washington D.C. would see FHA limits drop by anywhere from $398,500 (Prince George’s, Md.) to $366,250 in Baltimore. Most New England and mid-Atlantic states would end up with lower loan ceilings along with major markets in the Midwest and the Rocky Mountain states.

The FHA loan limit formula would be revised to 125 percent of the median home sale price in the local county under the bill, and the current $271,050 floor for loan limits nationwide would disappear.

Though major housing, real estate and lending groups had no comments pending the Wednesday hearing, they are likely to oppose the sharp cuts in loan limits.

Mortgage industry consultant Brian Chappelle, head of Potomac Partners in Washington, D.C., is scheduled to testify at the hearing and told Inman News that the higher loan ceilings are a bad idea.

Audits of FHA loan performance, Chappelle said, repeatedly have shown that higher-balance mortgages default and trigger claims against FHA’s insurance funds at lower rates than smaller-balance loans.

“FHA is essentially an insurance company,” he said, “and you need those (higher-balance) loans to spread the risk,” just as private sector insurers do.

The Republican bill’s call for a 5 percent minimum down payment on FHA loans also is likely to draw criticism from industry groups.

The National Association of Realtors and the National Association of Home Builders have opposed such a move in the past, arguing that there is no statistical evidence that adding 1.5 percent onto the current 3.5 percent minimum would significantly affect default probabilities of new FHA loans.

However, the higher down payments, along with the bill’s prohibition of financing of closing costs, would make home purchases more difficult for substantial numbers of consumers.

Chappelle estimates that “40 percent of FHA borrowers would fall out” — unable to afford the transaction  — “if they go to 5 percent down.”

The bill also proposes shifting the Agriculture Department’s rural housing program to the U.S. Department of Housing and Urban Development. A Republican staff member said “HUD has the housing responsibility and the expertise,” so the change is logical.

However, proponents of the rural housing programs may not want to risk being swallowed up in an urban-oriented agency, nor is the Agriculture Department likely to want to lose a chunk of its traditional turf.

Where’s the bill headed? Republicans say they are merely seeking to move the agenda they share with the Obama administration — the smaller footprint concept — which is, in turn, part of a larger agenda to phase out Fannie Mae and Freddie Mac.

Passage of the bill by the full House appears to be a real possibility, as Republicans are in control on that side of Capitol Hill.

But all bets are off in the Senate, where Democratic support for continuing FHA’s role in the market is far stronger, and where dramatic cuts in loan limits in places like California, New York, Massachusetts and the East Coast’s expensive markets likely won’t fly.

While sales activity in the second-home market has been dinged by the loss of home equity in primary residences, leaders involved in second-home finance say the real problem lies elsewhere.

Bob Waun, managing director of Americor Mortgage/Vacation Finance and a board member of the Condo Coalition, an advocacy group for homeowners associations, said financing — not demand — is the reason vacation property sales are in the doldrums.

“Absorption has been exasperated by the lack of financing for echo boomers and baby boomers who wish to (buy) but cannot without significant cash outlays,” Waun said. “If we can fix the condo rules, we can fix the entire market. And it will cost taxpayers absolutely nothing. All we need is some air cover.”

Lenders have increased their guidelines regarding second-home loans. Many now require a minimum down payment of 35 percent of the purchase price and are discounting the portion of rental income produced by potential renters. In addition, most lenders require that at least 70 percent of a condominium’s units be owner-occupied.

One of the biggest gripes voiced by salespersons at the National Association of Realtors’ annual convention was the additional restriction involving condo association dues. In order to get a Fedeal Housing Administration-insured loan in a specific building, no more than 15 percent of the owners in the complex can be behind on their dues.

“Stricter FHA and GSE underwriting rules eliminate many buyers with credit scores as high as 750, and lenders are imposing credit overlays of their own, restricting the availability of credit,” said Vicki Cox Golder, NAR’s past president.

The GSEs, or government-sponsored entities, include Fannie Mae and Freddie Mac. Analysts believe the investors who buy Fannie and Freddie loans have increased their restrictions, or “overlays,” to a point where they shoulder no risk in making a loan.

The result? Mortgage money that was once too easy to get is now far too difficult.

“There is a lot of money out there,” said John Tuccillo, former NAR chief economist and now a national housing consultant. “The Fed has put $1 trillion into liquid reserves in banks. But for some reason, the money is not getting out. It is hard to get financing for real estate. The banks are uncertain about regulations and what is a good loan and a bad loan. There is a lot of disconnect in the liquidity of the system and interest rates, and the level of financing.”

Stephen Roulac, chief executive of Roulac Global Places, a San Rafael, Calif.-based consulting firm that advises senior management and investors in real estate affairs, said there is still a small group of individuals who are not swayed by the availability of mortgage money.

“There’s really no direct correlation at all,” Roulac said. “Most of the people who can afford a second home outside the United States are either going to be paying cash or have a variety of places they can get funding. The financing situation is not a factor for these people.”

Most housing officials are quick to point out that the cash buyer is an insulated segment of all housing — especially second homes.

“There’s an enormous link between home equity in a person’s primary residence and the second-home market,” said Adam McAbee, senior manager and a second-home specialist for Irvine, Calif.-based John Burns Real Estate Consulting. “If a person’s home was worth $300,000 and the market value is now $200,000, there’s no equity left to even consider a second home.”

David Collins, chairman of Active Living International, a company specializing in the research and development of active-adult communities, is an expert in predicting where snowbirds prefer to land. He once said that an attractive development in the sun near the water, with great access to an airport and priced at $400,000 would sell easily.

“Airlift is critical,” McAbee said. “But if the benchmark in 2007 was $400,000, it’s probably in the $200,000s now. I think it’s safe to say things have changed that much.”

Tuccillo said that overseas economies and housing appreciation — especially in China — are bringing more foreign buyers to American markets, even though length of stay is an issue.

“Domestically, I think we are saving more,” Tuccillo said. “Spending habits have changed from spending and consuming, to saving. That could mean a reduction in the demand for second homes. I am not saying it is fact. It is a theory. But there is evidence that it is happening.”

With home prices threatening to double-dip nationwide, most consumers don’t expect a housing recovery in the near term, according to a survey from property search and marketing site Trulia and foreclosure data site RealtyTrac.

Market research firm Harris Interactive conducted an online survey on behalf of the sites from April 15-19, 2011. The survey garnered 2,018 responses from U.S. adults — 1,257 were homeowners, 704 were renters, and 57 identified themselves as neither.

More than half of respondents, 54 percent, believe the housing market won’t recover until 2014 or later, up from 34 percent in a similar survey in November 2010.

While many experts predicted an improvement in the housing market this year, “We’re actually backtracking,” said Pete Flint, Trulia’s CEO.

“Foreclosures still continue to be a major part of the housing market, and as a result housing prices continue to drop. Even with mortgage rates still below 5 percent, the fact is, against a backdrop of joblessness, (even high affordability has) made consumers more skeptical where the housing market is concerned.”

For instance, renters who were interested in buying a home said they would wait two years before doing so, Flint said.

He predicted it would be another 18 months before home prices begin to stabilize.

“I expect the rest of 2011 to continue to be volatile,” he said. “Buyers can anticipate a big summer clearance on real estate,” he added.

Rick Sharga, senior vice president of RealtyTrac, expects prices to bottom this year.

“We’re not expecting a bounce off that bottom. (Prices will) flat-line there for the next couple of years and (we won’t see) prices increasing in any real manner until, best-case scenario, 2014,” Sharga said.

While most survey respondents also chose 2014 as the light at the end of the tunnel for the housing market, 24 percent of respondents — the same share as in the November survey — believe the market will recover in 2013. Some 15 percent of respondents say the market will recover in 2012, down from 27 percent six months ago.

Three percent think the market will recover at the end of this year, down from 10 percent six months ago. The same share, 5 percent, thought the market had already recovered.

Neither Flint nor Sharga believed the possibility that the mortgage interest deduction would be eliminated was keeping buyers away from the market.

Nevertheless, about 40 percent of surveyed renters said they won’t ever buy a home. “That suggests that it’s really a bad time to take away the incentives for people to buy homes,” Sharga said.

While there has been considerable debate at the national level surrounding the Obama administration’s Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives Program (HAFA), the survey results indicate that nearly half (45 percent) of Americans want the government to do more to prevent foreclosures.

Of the respondents, 17 percent said too much was being done, while 16 percent the right amount was being done. More than one-fifth of respondents, 22 percent, were not sure.

“Many of these programs have been nothing more than a Band-Aid on a hatchet wound,” Flint said.

The prevalence of foreclosures in the market is likely a major factor in negative sentiment toward the government, the survey report said.

“Almost one-third (30 percent) of homeowners self-reported that they have or know someone who has applied for or received a loan modification, stopped paying their mortgage, foreclosed, walked away or … sold their home (in a short sale),” the report said.

Interest in foreclosures remains high. Among renters, 56 percent said they are at least somewhat likely to purchase a foreclosed home. Among homeowners, 47 percent said they are.

On average, respondents expected to pay 38 percent less for a foreclosed home compared to a similar, nondistressed home. That discount is fairly realistic — the average discount on an REO (bank-owned) home in 2010 was 36 percent, according to RealtyTrac.

However, “that interest isn’t quite high enough to burn through the inventory that’s out there,” Sharga said.

“Even if banks weren’t to foreclose on a single property this year, we have a nearly two-year supply of REOs before we burn through the inventory.”

“At the moment, there are over 900,000 properties on the banks’ books, but less than 30 percent are listed for sale. So there’s a 600,000 backlog. There is plenty of distressed inventory on the market with a boatload yet to come,” he added.

Sharga said he doesn’t see banks flooding the market with REO properties.

“(That) would cause another double dip in home prices and conceivably cause another wave of foreclosures as home prices (decline). They will put them on the market probably only as fast as they can sell them,” he said.

Foreclosure activity has fallen year-over-year for the past seven months, he said, largely due to controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings.

Lenders have had to refile tens of thousands of foreclosure proceedings, and those proceedings have received far more scrutiny in judicial foreclosure states, Sharga said. Law firms that used to handle such proceedings have also gone out of business or been ordered to stop handling them, so other firms have had to be trained to handle foreclosures, he added.

“I believe most of these things will be nailed by the end of the second quarter and we’ll start to see foreclosure activity where it should be sometime in the third quarter,” Sharga said.

The document the administration recently sent to Congress outlining its game plan for housing finance has both scale-down and ramp-up thrusts. The scale-down thrust, comprising most of the report, involves shrinking the federal government’s involvement in the market.

The ramp-up thrust would create a new federal program designed to support the private market. This article is about the scale-down.

Backdrop

The point of departure for this proposal is a post-crisis housing finance system in which only about 10 percent of all new home loans are strictly private. The remaining 90 percent are either acquired by Fannie Mae or Freddie Mac, or insured by the Federal Housing Administration (FHA).

Further, qualification requirements set by the strictly private market are far more restrictive than they were before the crisis, which is the reason their market share is now so low. Before the crisis, risk-based pricing was widely practiced, making loans available over a wide range of risks.

Today, only a sliver of risk-based pricing remains. For the most part, risk-based pricing has been replaced by risk cutoffs. At many lenders, borrowers with a credit score of 800 have to put 20 percent down, and borrowers who put 40 percent down still need a 700 score to qualify. Some lenders will go to 10 percent at 680, but limit the loan size.

Fannie Mae and Freddie Mac have tightened their requirements, but by much less than the strictly private sector. The agencies today will accept a credit score of 620 at 20 percent down, and 680 at 5 percent down. However, risk-based pricing is extensive and many borrowers with mediocre credit, small down payments or both, choose to opt out.

The average down payment on new loans is about 35 percent, and the average FICO is about 765. The agencies have also tightened their documentation and appraisal requirements significantly.

FHA has the most liberal requirements, which are little changed from what they were before the crisis. FHA accepts 3 percent down with a credit score of 580, though many lenders require higher scores so that they won’t be tarred with originating too many loans that default. FHA has also increased its insurance premiums.

What scale-down means

The crux of the Obama administration’s scale-down plan is a gradual phaseout of Fannie Mae and Freddie Mac, combined with a reduction in the scope of FHA operations. The ultimate goal seems to be a system in which the strictly private market would account for about 85 percent of the traffic, and FHA would have about 15 percent.

The report suggests a number of ways of accomplishing this, including reductions in the maximum qualifying loan size at all three agencies, and increases in insurance charges. The first reduces the number of borrowers who qualify, while the second forces price increases by the agencies that would make the strictly private market more price-competitive.

Implications and consequences

The volume of risky loans, already down sharply from the post-crisis tightening of qualification requirements, will shrink further as the scale-down proceeds. Because a large proportion of risky mortgages are generated by disadvantaged groups, this approach constitutes a reversal of what had been public policy for at least four decades, which was to encourage homeownership among such groups.

Sometime this year, the regulatory agencies will promulgate new rules implementing provisions of the Dodd-Frank bill that require them to define “qualified residential mortgage” (QRM).

These are low-risk loans that exempt originators from having to assume 5 percent of the risk of loss. The split in the market following implementation of this rule will further disadvantage weaker borrowers, since non-QRM loans will carry a higher price if they are available at all.

Softening the blow

The report recognizes the need to go slow and cautiously, but offers no concrete ideas on how to soften the blow. Here are two.

1. The administration ought to set up a task force to determine whether the existing regulatory structure, including the bank examination process, is unduly constraining the strictly private market. If government wants lenders to expand into the space vacated by Fannie, Freddie and FHA, government ought to make sure that it has not itself constructed roadblocks to such expansion.

2. FHA should extend its tentative steps toward risk-based pricing to a comprehensive system in which the insurance premium on every loan reflects the risk of loss to FHA of that loan. This will help keep FHA financially sound, reduce concerns if FHA is pressed to expand into some of the space vacated by Fannie and Freddie, and neutralize political pressures to liberalize terms unduly.