FHA May Soon Need $50B in Bailout Funds: Study

The GSEs remain a mainstay in debates over the role of the government in housing, but some now say the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory (FHA) may take a turn as the next agency in need of bailout funds.

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A ""new study"":http://real-estate.wharton.upenn.edu/documents/research/FHA-AEI_11%2010_for%20posting-final_jgedits.pdf by ""Joseph Gyourko"":http://real-estate.wharton.upenn.edu/people/faculty.cfm?id=805, a University of Pennsylvania real estate and finance professor, highlights future peril for the agency, predicting that it may need as much as $50 billion in federal funds over the next several years just to stay solvent.

He describes the FHA's financial forecasts as overoptimistic, and faults a growth strategy undertaken by officials during the financial crisis for a ""precarious"" position that may well now lead it to insolvency.

He wrote that the ""FHA has become a much riskier organization"" as a result of the very insurance-in-force policies that grew the organization to cover more than 7 million mortgages ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô all told worth about $1 trillion ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô by August this year.

Add to a growing list of delinquencies the push by lawmakers to restore upper limits for conforming loans, which expired in early October, some say, and an agency historically accustomed to reaping funds for federal coffers may soon find itself in need of them.

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The FHA is ""building up a very large book that has a lot of assumptions,"" ""Edward Pinto"":http://www.aei.org/scholar/100080, a resident fellow with the ""American Enterprise Institute"":http://www.aei.org/home, tells _MReport_. ""If anything happens ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô if the FHA's projections are based on inaccuracy, or the circumstances change ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô they'll go into the red and the taxpayers will be on the hook.""

He says that a bill recently passed by lawmakers to again raise the threshold for conforming loans to $729,750 would further dent a progressively weakened capital position for the FHA.

Recent figures from the agency reveal that it carried more than 600,000 seriously delinquent single-family loans by August 2011 ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô a staggering figure for an organization once known for raking in revenue for the federal government.

By September, ""HUD"":HUD reported that the numbers for delinquencies had increased to about 635,000, roughly 8.7 percent of all loans backed by the FHA.

Gyourko said that a few wider problems in the market could lead to a FHA bailout, explaining that declining home prices could crimp the agency by substantively increasing negative equity by household across the country.

He also wrote that a housing recession that sees more homeowners default on their loans would force lenders to call in for their federal insurance.

A HUD spokesperson could not be immediately reached by e-mail for comment.

Paul Miller, a financial analyst with ""FBR Capital Markets"":http://www.fbr.com/, dismisses concerns over a FHA bailout.

├â┬ó├óÔÇÜ┬¼├àÔÇ£The real concern is that political pressure [from Congress] will mean higher costs for FHA borrowers,├â┬ó├óÔÇÜ┬¼├é┬Ø he says. ├â┬ó├óÔÇÜ┬¼├àÔÇ£It would limit the availability of credit for the housing market, and that├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós going to have negative implications for the housing market at a time of limited credit and liquidity.├â┬ó├óÔÇÜ┬¼├é┬Ø