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.