Analysts Fear FHA Shutdown in U.S. Default

With total U.S. debt soaring past $14 billion in May and ceiling-raise negotiations splintering at the highest levels, analysts worry that the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory (FHA) may shut down if the federal government defaults on August 2 ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a crisis scenario that would wreak havoc in still-brittle housing markets.

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David Min, associate director for financial markets policy at the ""Center for American Progress"":http://www.americanprogress.org/, aired the most recent concerns, warning in a June 20 ""paper"":http://www.americanprogress.org/issues/2011/06/debt_freeze_housing.html that ""[a] failure to increase the debt limit would force the federal government to shut down all government activities deemed ├â┬ó├óÔÇÜ┬¼├ï┼ônonessential'├â┬ó├óÔÇÜ┬¼├é┬ª including most administrative activities"" at the ""FHA"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory.

Min forecasted serious consequences, including a credit freeze that would force the housing markets to ""lock up"" and strand homebuyers from various demographics, such as African-American and Latino homeowners, 60 percent and 61 percent of whose purchases the ""FHA"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory backs.

The ""FHA"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory indeed plays a significant role in the housing markets, ""_The Christian Science Monitor_"":http://www.csmonitor.com/Business/Latest-News-Wires/2011/0408/Even-short-term-FHA-shutdown-will-hit-housing reports, with the federal agency accounting for 20 percent of purchased and refinanced mortgages and 40 percent of mortgage applications.

""Almost certainly, these would lead to large house price declines, which would have significant effects for millions of Americans,"" Min said. ""Those seeking to sell, purchase, or refinance a home during a debt ceiling impasse would be most directly affected, but all homeowners would suffer, some irreversibly, as falling home prices cause their home equity to decrease.""

Others dismissed the suggestion of a shutdown.

""It is typical in debates over budgets at the local, state and national levels to point to programs that would be suspended or eliminated if a particular budget proposal did not pass,"" said Jay Brinkmann, ""MBA's"":http://www.mbaa.org/default.htm chief economist and SVP. ""It is usually part of an effort to get particular constituent groups to rally behind the proposed budget.""

""HUD"":http://portal.hud.gov/portal/page/portal/HUD spokesperson Brian Sullivan declined to speculate about the possibilities of a ""FHA"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory shutdown, noting only the ""self-sustaining"" nature of the agency, which allows government-insured mortgage borrowers to file against their premiums in matters involving defaults.

House Republicans staunchly opposing a ceiling raise continue to disregard Treasury secretary Timothy Geithner, who warned in May that a default would damage the full faith and credit of the United States and halt any borrowing practices at the ""Treasury Department"":http://www.treasury.gov/Pages/default.aspx.

Adding to Min's forecast, his colleague, Christian Weller, wrote in an earlier paper that the ""U.S. housing market would most likely experience a severe double-dip contraction marked by much lower home sales and depressed house prices"" in the event that Congress fails to raise the debt ceiling.

Here, at least, analysts seem to agree, with Brinkmann saying, ""If... the debt ceiling is not raised and the [U.S.] defaults on [its] debt payments, we will have bigger problems and bigger impacts on the economy than what would be caused by a suspension of operations at ""FHA"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory and other government agencies deemed by the administration to be 'non-essential.'""