The Federal Housing Administration’s (FHA) losses over the next 30 years could be much higher than originally projected, according to the findings of a congressional committee. The dismal forecast has some bracing for another taxpayer-financed bailout.
The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) is reporting that a worst-case scenario stress test conducted last year estimated the FHA could suffer losses as high as $115 billion.
FHA was created as a part of the National Housing Act of 1934 with the goal of improving housing affordability. The agency does not lend money to borrowers but insures lenders against losses on loans that meet certain standards, making lenders more willing to extend credit.
So don’t call them losses. Call them wealth redistribution and social justice.
The primary cause of the FHA’s troubles is the plague of underwater mortgages that has struck the housing sector in recent years. During the late housing bubble, the FHA lost market share as more private lenders sold “subprime” loans to home buyers. But with the collapse of the housing market in 2007-08, much of that business returned to the FHA. While the agency has played a major role in propping up home prices, it has also been overwhelmed by defaults.
Critics say the FHA is not helping anybody by easing credit to borrowers. “Insofar as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner,” Dean Baker, co-director of the Center for Economic and Policy Research, told the Wall Street Journal.
In addition, a decision whether to draw against the U.S. Treasury will not be taken until September in the hopes an improving housing market will allow the agency to avoid a bailout.
Sure. Everything will be better in September.