Housing is at the center of the economy. The Federal Housing Administration is at the center of housing. And there's a danger that it could require a historic bailout next year.
There's a growing consensus in America that the long-suffering housing market has reached bottom and is now mounting a recovery. Housing starts surged 15 percent in September to their highest level in four years. New home sales in the same month rose 5.7 percent to their highest level in two years. And the Zillow Home Price Index shows that home prices are up 3.4 percent from a year ago.
While these are welcome trends, figures released today from the Federal Housing Administration (FHA) throw a sobering splash of cold water. FHA's FY 2012 Actuarial Study for its main single family program shows that its capital position has turned negative, by $13.5 billion. That's a shift of $23 billion in economic value in a single year, and it puts the 78-year-old agency $34.5 billion short of its legal capital requirement.
If it were a private company, it would be shut down.
It's bad enough that FHA may be forced to seek a taxpayer bailout, just months after acting FHA Commissioner Carol Galante told Congress that "FHA is not broke." What's worse is that the agency's mounting fiscal problems portend deep trouble for the housing market and the American economy as a whole.
4 WAYS TO FIX THE FHA
The implosion of the government-sponsored enterprises Fannie Mae and Freddie Mac in 2008 did not end the government's massive -- and distorting -- role in the housing market. Instead, in the wake of their bailouts (taxpayers have forked over $180 billion and counting), much of the risk was simply shifted to the FHA. Indeed, FHA's insurance portfolio quadrupled in the past 5 years to $1.1 trillion today. The result is that FHA now guarantees 16 percent of all US mortgages, and 30 percent of all new home purchase mortgages. This is not an accidental trend: the FHA deliberately tried to "grow" its way out trouble, essentially betting the house on housing's recovery. Friday's numbers confirm that like Fannie and Freddie, it's easy to gamble when the taxpayer covers your losses.
This wasn't a surprise. Research published last fall by the American Enterprise Institute showed that the agency had become as overleveraged as Lehman Brothers and Bear Stearns before their fall. Barring a dramatic economic recovery, the report noted that the increasingly poor-quality loans the FHA absorbed to grow its portfolio would compel the agency to seek a multibillion dollar bailout. Since then, AEI's monthly "FHA Watch" has chronicled the agency's slide into insolvency.
In the short term, Congress has little choice but to recapitalize FHA to make sure it can fulfill its obligations. But fixing the FHA requires far more than plugging a fiscal hole. It requires four fundamental reforms.