Bailout for FHA?

September 4, 2009

For the past couple of years the Department of Housing & Urban Development’s Federal Housing Administration (FHA) has been doing its best to re-inflate the housing bubble.

With private subprime lenders having reduced FHA’s share of the housing market to 3.3 percent in 2004, then-HUD Secretary Alphonso Jackson boldly stated that he was “absolutely emphatic about winning back our share of the market.” Well the bubble burst, and FHA is now picking up the subprime slack—and currently insures one in three new mortgages—a precarious situation for taxpayers going forward.

Now the Wall Street Journal is reporting that FHA’s bewildering leap into the “junk” mortgage market could soon cost taxpayers in the form of yet another bailout:

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout. The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.

The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers… Before the boom, the FHA wasn’t a big player in the housing business because it didn’t follow private lenders in loosening its standards.

Federal manipulation of the housing market was a prime factor in fostering the housing bubble and subsequent burst, which helped spark the current recession. The same government apologists who have been tripping over themselves to blame greedy private lenders for the housing meltdown are now lauding FHA’s for bringing “stability” to the housing market. But these apologists, which range from homebuilding and realtor lobbyists to left-wing “affordable housing” activists, are the real beneficiaries of HUD’s largess.

For more on why the federal government should get out of the housing markets, and HUD dismantled, see here and here.

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