Housing Policy

The Next Housing Bailout

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Yet another report projects that the Federal Housing Administration is headed for insolvency. And guess who's expected to come to the rescue? If you said taxpayers, you win, at least until the next bailout. 

Via The Wall Street Journal:

Concerns are rising that the Federal Housing Administration could run out money if the economy doesn't recover soon, raising the risk the agency would seek a taxpayer bailout for the first time in its 77-year history.

Since the mortgage crisis erupted five years ago, the FHA has played a critical role in housing finance as private lenders retreated. It backs about a third of all new mortgages originated for home purchases, up from around 5% in 2006.

But, as the FHA prepares to release its annual financial report next week, a forthcoming study by Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania's Wharton School, estimates that the FHA faces around $50 billion in losses in the coming years.

…Last month, Paul Miller, an analyst with FBR Capital Markets, warned that the largest U.S. banks could face billions in losses if the FHA tries to push back defaulted mortgages onto the lenders that originated them. "Unless home prices rebound, I don't understand how they're able to avoid a restructuring and a Treasury infusion," he said.

The FHA has had money troubles for a while, and has been warned about its balance sheet problems before. But the problem isn't just that funds are running out; it's that they've fixed their own in-house numbers so that they can ignore the rocky fiscal situation. 

Last year, for example, economists at New York University published a paper noting that the FHA's "recent actuarial reviews have systematically underestimated the ensuing degradation in the FHA insurance fund" and noting a variety of problems with the agency's projections, including "a worst case analysis that appears overly optimistic, with home prices rising continuously from 2011 onwards." But maybe the folks running the show figure they don't really need to worry. After all, they've got a backstop: taxpayers. As the Journal points out, "if the FHA's reserve account were to run out of money, the agency has what is known as indefinite budget authority to draw on funds from the Treasury Department without a congressional appropriation."

Here's Rick Henderson warning about potential FHA bailouts back in Reason's January 1990 issue

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  1. It backs about a third of all new mortgages originated for home purchases, up from around 5% in 2006.

    Housing sucks…so lets sextupledown.

    1. It’s amazing that the reaction to this fact isn’t “boy, the government must be taking on enormous risk since the private lenders must not want to be involved for a reason” but rather “this proves why we need the FHA, since the private lenders refuse to lend.”

      The government war on math.

      1. Wait, don’t you know that refusing to lend to people with shitty credit and income is a “market failure?”

        1. On par with the market’s failure to provide low interest loans to 18-year-olds majoring in sociology.

  2. Jesus.

  3. Yep. Since 2008 FHA has been the subprime lender.

  4. “a worst case analysis that appears overly optimistic, with home prices rising continuously from 2011 onwards.”

    CARAMBA!

    “In the event of an emergency, place all tray tables in their upright, locked positions…..”

    1. “a worst case analysis that appears overly optimistic, with home prices rising continuously from 2011 onwards.”

      It’s turtles all the way up?

      1. It’s turtles in every direction. I think we’re about to be drowned in a turtle-shit tsunami.

  5. My home is literally underwater right now. (I wish it would stop raining.)

  6. Here in California, there are two main groups of home buyers: all-cash investors who think prices are low in comparison to the bubble, and FHA buyers who can’t afford a down payment and will be underwater immediately if housing prices dip further. The FHA requires only 3.5 percent down, and most buyers ask the seller to kick in 3 percent or so at closing.

  7. As the Journal points out, “if the FHA’s reserve account were to run out of money, the agency has what is known as indefinite budget authority to draw on funds from the Treasury Department without a congressional appropriation.”

    And there’s nothing your elected representatives can do about it.Sure.

  8. If the housing market crashed, we would only loose paper wealth. It’s not as if the actual houses would shrink. It just means that municipalities and states would college much less in property taxes. How are falling housing prices a bad thing?

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  11. I got a loan with a 3.5% downpayment and I am being charged regularly for PMI. Now that the PMI group has filed for bankruptcy they are unable to meet their obligations as my mortgage insurer. Has anyone demanded that PMI give them back their money? If so how did they go about it and what has PMI or the banks said in response? What happens if PMI fail in their bankruptcy filing quest? How does that affect everyone involved?

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