February 3, 2010
The Federal Housing Administration has been one of the government’s main instruments for propping up the housing market in the wake of the housing bust. But as has been widely reported, the FHA is in danger of needing a taxpayer bailout because of rising defaults on mortgages it insures.
FHA-insured loans originated in 2007 and 2008 – when Bush administration housing officials were mainly concerned with “winning back our share of the market” – are defaulting at higher rates as this graphic from the Washington Post shows:
FHA officials are optimistic a bailout won’t be needed, but the Post reports that not everyone shares this optimism:
The audit, released in November, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53 percent of the value of all FHA single-family-home loans – far lower than the 2 percent required by Congress.
But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.
To avoid a bailout, the FHA recently proposed more stringent standards, which would include raising the premiums it charges to cover losses. However, even if a bailout isn’t needed and the FHA continues to “make money,” that would only call into question the need for the FHA to begin with. Why can’t the private sector provide all mortgage insurance?
The answer is that the mortgage lending industry likes knowing it can originate mortgages that the government will cover in the event of a default. Heads they win, tails Uncle Sam loses. The president’s new budget makes this clear in addressing concerns about the FHA’s currently low reserves:
However, it is important to note that a low capital ratio does not threaten FHA’s operations, either for its existing portfolio or for new books of business. Unlike private lenders, the guarantee on FHA and other federal loans is backed by the full faith and credit of the Federal Government, and is not dependent on capital reserves — FHA can never “run out” of money.
That’s right – the federal government can simply tax, borrow, or fire up the printing presses.
The government has been propping up the housing market with taxpayer subsidies in the wake of a housing boom and bust it helped create. If policymakers continue to keep the housing market on artificial life support, taxpayer will remain on the hook. If it pulls the plug and the market takes another downward spiral, Washington will probably rush in with more bailouts. It appears taxpayers can’t win.
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