The Federal Housing Administration, which backs more than $1 trillion worth of mortgages, looks ready to report that it's not in great fiscal shape, reports The New York Times:
The Federal Housing Administration’s annual report is expected to show a sharp deterioration in the agency’s financial condition, including a shortfall in reserves, the result of escalating losses on the $1.1 trillion in mortgages that it insures, according to people with knowledge of the entity’s operations.
The F.H.A., the Department of Housing and Urban Development unit that insures home mortgages, reports on its capital reserves at the end of each fiscal year and makes projections for its financial position in the coming year. If the report, due later this week, showed that the F.H.A.’s capital reserves had fallen deep into negative territory, it would be a stark reversal from projections last year that it would show a positive economic value of $9.4 billion in 2012.
Capital reserves are kept to cover future losses. Outsiders have questioned whether the agency would some day need an infusion from Treasury if its reserves are insufficient.
Who could have possibly seen this coming? How about...everyone? The FHA kept insisting that its balance sheet was sound. But independent analysts like University of Pennsylvania's Joseph Gyourko have been warning for a while that the F.H.A.'s projections were based on faulty, overly optimistic assumptions about the economy. Economists at New York University warned that "recent actuarial reviews have systematically underestimated the ensuing degradation in the FHA insurance fund." The Wall Street Journal has noted concerns about FHA's finances. So has The New York Times.
The FHA's optimistic projections have been used to attempt to conceal the fact that the agency is heading for potentially huge losses that could cost taxpayers as much as $50-100 billion. The number may not be that high. But it seems inevitable. Indeed, for several decades now it's been more a question of when, rather than if, the FHA's finances would finally fall apart: Reason's Rick Henderson warned about the potential for FHA bailouts all the way back in 1990.