Concerns are rising that the Federal Housing Administration could run out [of] 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.While reports from partisan think tanks should always be taken with a grain of salt, I have long worried that the federal government's attempts to prop up housing prices could be causing it to under-price the risk of government-insured loans.
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 study says only a "quick and substantial economic and housing market recovery" can avoid "substantial losses for American taxpayers." The paper was commissioned by the American Enterprise Institute, a conservative think tank.
The study says the losses will be spread over a period of many years and are unlikely to bankrupt the agency this year or next.
The study isn't the first to predict the FHA's insolvency.
The theory is simple: In the first half of the last decade, midsize banks like Countrywide Financial, Washington Mutual, and IndyMac supported a bubble by making bad mortgage loans. After the bubble burst and the financial crisis began, the federal government stepped in to prop up housing prices by... making bad mortgage loans.
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