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FHA: The Next Round of Housing Bailouts?
Posted By John Ligon On October 1, 2013 @ 10:32 am In Capitol Hill,Economics | Comments Disabled
Despite some efforts  this year to improve its financial position, the Federal Housing Administration (FHA) will reportedly  seek a bailout from the federal government to cover losses on mortgage loans it insures. The FHA will ask  taxpayers for a $1.7 billion cash infusion (more than double estimates earlier in the year) by the end of September.
The FHA insures an incredibly weak book of loans , so it should come as no surprise that the agency would need a bailout. The agency, after all, offers  100 percent insurance on an alarmingly high level of subprime loans.
In fact, earlier this year a Government Accountability Office report  highlighted several factors that would lead to a bailout in the FHA insurance program:
Also, American Enterprise Institute scholar Joseph Gyourko noted  that the FHA does not account for unemployment in the model it uses to estimate default risk. This approach very likely underestimates the forecasted losses on its insurance fund. The substantial deterioration in the financial solvency of its insurance fund calls into question the FHA’s ability to operate an insurance program in a safe and prudent manner.
It is simply unacceptable for the federal government to continue supporting a program that encourages a high frequency of subprime lending while offering 100 percent insurance on loan losses. Even the Veterans Administration mortgage program will not offer insurance for more than 50 percent of losses on approved loans.
The FHA needs to properly align incentives  for borrowers and lenders and return to a smaller, more targeted role in the mortgage market. Thus, the FHA should end its current practice of supporting homeownership among high-income individuals  and setting lending standards that undermine sustainable homeownership for creditworthy low-income, moderate-income, and first-time homebuyers.
Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2013/10/01/fha-the-next-round-of-housing-bailouts/
URLs in this post:
 Image: http://blog.heritage.org/wp-content/uploads/home-white-picket-fence-house.jpg
 efforts: http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2013/HUDNo.13-010
 reportedly: http://online.wsj.com/article/SB10001424052702303342104579097372933456390.html
 ask: http://www.washingtonpost.com/business/economy/fha-needs-17-billion-taxpayer-subsidy/2013/09/27/dd70ef90-276b-11e3-b3e9-d97fb087acd6_story.html
 book of loans: http://www.gao.gov/assets/660/652829.pdf
 offers: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/actr/actrmenu
 noted: http://www.aei.org/files/2013/04/24/-unfounded-optimism-the-danger-of-fhas-mispriced-unemployment-risk_122326666163.pdf
 incentives: http://www.heritage.org/research/reports/2013/06/will-fha-require-the-next-round-of-housing-bailouts-from-the-taxpayer
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