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View related content: Housing Finance
The Federal Housing Administration’s (FHA) annual report to Congress is due tomorrow, but the reality is likely worse than the FHA will report.
Wharton School professor Joseph Gyourko explains in a new research paper, Is FHA the Next Housing Bailout?, that the FHA will need a massive $50 to $100 billion bailout unless the economy makes a swift recovery.
Gyourko’s key points, explained in this blog post and copied below, are that the FHA has become bigger and riskier, is undercapitalized, overestimates the value of its insurance fund, and needs to be reformed.
Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance, and Business & Public Policy at the Wharton School, University of Pennsylvania. He can be reached at [email protected].
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The FHA could be the next housing bailout
The Federal Housing Administration (FHA) is in deep trouble. After tripling the size of its insurance to $1 trillion in the past four years, it’s now balancing an extremely leveraged portfolio with a dangerously small cash cushion. Unless the economy makes a swift recovery, my research shows that FHA will need a massive taxpayer bailout–between $50 and $100 billion. If the economy turns down for any reason, even more funds would be needed.
Here are the key findings from my report, “Is FHA the Next Housing Bailout?“
FHA has become much bigger and riskier: FHA insures borrowers who typically make less than a 5 percent down payment on their home purchase. Its expansion occurred during a time of falling house prices and rising unemployment. Well over half of its insurance portfolio is based on mortgages taken out by borrowers with negative equity in their homes.
FHA is seriously undercapitalized for the risks it is taking on: FHA has not increased its reserves proportionally and has violated its capital reserve guidelines established by the National Affordable Housing Act of 1990 for the past two years.
FHA systematically overestimates the value of its main insurance fund, the Mutual Mortgage Insurance Fund: In doing so, it makes four types of mistakes that underestimate future losses by at least $50 billion.
Given that FHA’s total liquid capital resources are only about $30 billion, its main insurance fund is effectively broke.
Reevaluating housing policy. The high costs of FHA’s expansion beg the question of how far the government should attempt to increase homeownership rates. This is more than a question of costs to taxpayers. We should also consider whether households truly are better off is they have to make 30-to-1 leveraged bets on a home, and have to use their lifetime savings to do so.
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