Tag: Housing and Economic Recovery Act

FHA Is Next

Oh, come on. Admit it. You’re not surprised:

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.

The FHA could potentially push these loses back to the originators of the loans. And frankly, I wouldn’t mind if they did, since the banks have so far suffered little in the way or moral hazard. But this was as predictable as it was inevitable. When the housing industry collapsed, FHA stepped in to try keep the loans flowing. They massively expanded their portfolio and everyone who wasn’t a media idiot knew thy were taking on too much.

We may have no choice about bailing them out but we should do what we should have done with Fannie and Freddie: use it as an excuse to ditch the agency.