Housing Bailout Redux

Not long after the savings and loan bailouts of the 1980s, reason's Rick Henderson caught wind of another potential bailout in the making—this time of the Federal Housing Administration (FHA), a Depression-era agency that guarantees private home loans against default. In the January 1990 issue he warned that "recent real estate crashes in the Southwest and elsewhere have depleted the agency's insurance funds." As a result, the FHA was stuck with an excess of housing stock that could be sold only at a loss. "Unless the economy rebounds dramatically in those regions," Henderson wrote, "the FHA may need a taxpayer bailout totaling hundreds of billions of dollars."

That bailout never arrived. But now experts and agency watchdogs are warning once again that taxpayers may be on the hook for billions in losses thanks to the program. 

In a November paper for the American Enterprise Institute, Joseph Gyourko, an economist at the University of Pennsylvania's Wharton School, warned that the FHA is headed for losses in the range of $50 billion to $100 billion unless the economy makes an unusually swift recovery. According to Gyourko, the agency has "systematically overestimated the value of its main insurance fund" by, among other things, assuming without evidence that the increased credit risks that appeared following the real estate collapse in 2006 and 2007 will somehow disappear in 2014. Furthermore, Gyourko notes that the FHA has become substantially larger and riskier in recent years, with an insurance portfolio dominated by borrowers whose homes are worth less than they owe. 

Gyourko is not the only academic worried about the agency's precarious finances. In 2010 economists at New York University published a paper 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." 

If a bailout were necessary, the 77-year-old agency wouldn't need congressional approval. It has "indefinite budget authority" essentially amounting to direct access to Treasury funds. How likely is a bailout in the near future? The FHA says it sees no evidence housing prices will drop low enough for one to be required. But according to the agency's independent auditor, the chance that it will need additional taxpayer aid in 2012 is roughly 50 percent.