WSJ: Could FHA Go Broke?

Is the Federal Housing Administration on the verge of going broke? A Wall Street Journal article this week raised concerns about the financial situation for FHA, indicating that the future is less-than bright for the giant housing agency. In fact, WSJ notes the risk is rising that FHA could require a tax bailout for the first time in its 77-year history, “if the economy doesn’t recover soon.”

Citing the work of a University of Pennsylvania real estate and finance professor, WSJ points out that FHA could face a $50 billion shortfall in the coming years. It has gone from backing 5% of new mortgages for home purchases in 2006 to about a third today.



Source: WSJ, FHA

According to the study, the losses will be spread over many years and are unlikely to bankrupt the agency this year or next, but “FHA‘s present state is precarious,” it states. “For the past two years, it has been in violation of its most important capital reserve regulation, under which it is supposed to hold sufficient reserves against unexpected future losses on its existing insurance-in-force.”

The combination of increasing leverage at the entity level and among homeowners being insured has made FHA a risky proposition for taxpayers, the study states.

Bloomberg News posed a similar question in July in a report titled “FHA May Be Next in Line for Huge Bailout.”

Read the Wall Street Journal article.

Written by Elizabeth Ecker

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  • When Presidents lose control on domestic policy they turn to foreign policy.  When President Nixon was enmeshed with Watergate he turned to opening up China and ending the War in Vietnam.  This President who talked about bringing hope has when it comes to achieving the foreign policy objectives of former Vice President Cheney.  As to homes and the domestic economy, he is a dream come true for Republicans.

    Unfortunately, the policies of this President have strengthened the greatest housing depression the country has ever seen.  The continued loss in values is not helping anyone but the unity of Republican presidential candidates in their debates.  Soon even Vice President Biden and Secretary of State Clinton may oppose the housing policies of this Administration.

    Loss in home appreciation is a double edged sword for FHA.  Not only are home values not going up as assumed in the structure of its programs but home values in many states are still in decline with no signs of letting up.

    While HUD/FHA is not in a negative position with Treasury, will it need committed funding based on legal requirements?  Absolutely, if the trend in home values do not turn around in many areas of the country.  The problem for FHA is that it must absorb losses but does not share in home appreciation above the balances due on the credit it guarantees.

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