FHA: The Next Round of Housing Bailouts?
John Ligon / Norbert Michel /
Newscom
Despite some efforts this year to improve its financial position, the Federal Housing Administration (FHA) will reportedly seek a bailout from the federal government to cover losses on mortgage loans it insures. The FHA will ask taxpayers for a $1.7 billion cash infusion (more than double estimates earlier in the year) by the end of September.
The FHA insures an incredibly weak book of loans, so it should come as no surprise that the agency would need a bailout. The agency, after all, offers 100 percent insurance on an alarmingly high level of subprime loans.
In fact, earlier this year a Government Accountability Office report highlighted several factors that would lead to a bailout in the FHA insurance program:
- Subprime books of business prior to 2010—the expected losses on the 2007 and 2008 loans are $13.2 billion and $6.4 billion, respectively;
- Changes to the estimation on the value to both defaulted loans and reverse mortgages;
- Estimates for home prices used to project the value of the FHA insurance fund; and
- Lower interest rates reducing the amount of revenue collected on mortgages.
Also, American Enterprise Institute scholar Joseph Gyourko noted that the FHA does not account for unemployment in the model it uses to estimate default risk. This approach very likely underestimates the forecasted losses on its insurance fund. The substantial deterioration in the financial solvency of its insurance fund calls into question the FHA’s ability to operate an insurance program in a safe and prudent manner.
It is simply unacceptable for the federal government to continue supporting a program that encourages a high frequency of subprime lending while offering 100 percent insurance on loan losses. Even the Veterans Administration mortgage program will not offer insurance for more than 50 percent of losses on approved loans.
The FHA needs to properly align incentives for borrowers and lenders and return to a smaller, more targeted role in the mortgage market. Thus, the FHA should end its current practice of supporting homeownership among high-income individuals and setting lending standards that undermine sustainable homeownership for creditworthy low-income, moderate-income, and first-time homebuyers.