FHA Can't Defy Housing Market's Warnings: The Ticker

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By George Anders

Get ready for the prospect of another federal housing agency needing to raise billions of dollars, most likely through extra taxpayer support.

The Federal Housing Administration, in its annual report to Congress yesterday, said independent actuaries give the agency 50-50 odds of having to raise money in the next few years because its net worth is close to zero. The FHA since the 1930s has been providing government guarantees on mortgages for low- and moderate-income homebuyers.

Until a few years ago, the FHA was a minor part of the housing market. Now, it guarantees more than $1 trillion in home loans. Its willingness to stay busy during the current housing slump has been a boon to homebuyers and builders, but all those guarantees aren't adding up to anyone's idea of a strong portfolio.

The FHA's actuaries calculated the economic value of the agency's mortgage insurance fund at just $1.19 billion as of Sept. 30, down 77 percent from a year ago. Housing Secretary Shaun Donovan called the FHA "actuarially sound," but acknowledged "significant near-term economic risks." 

Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania's Wharton School, estimates that the FHA will need a $50 billion to $100 billion infusion of taxpayer money to shore up its finances. He also believes the agency should gradually shrink its role in the housing market and tighten up underwriting standards so that it doesn't get caught with so many bad loans.

The near collapse of Fannie Mae and Freddie Mac in 2008 showed how costly and futile it can be for the U.S., even indirectly in the case of the two government-sponsored enterprises, to guarantee loans to risky borrowers.

Buried deep within the FHA's filings yesterday was the disclosure that when home loans go sour, the agency's guarantees cost it 63.7 percent of unpaid principal. Homes get foreclosed; banks sell them at a huge loss, and the FHA must make good on mortgage obligations that vastly exceed market valuations. In such situations, prudence demands that the FHA slow down, or set higher underwriting standards.

(George Anders is a member of the Bloomberg View editorial board.)

-0- Nov/16/2011 16:33 GMT