A Coming Bailout for the Federal Housing Authority?

By Daniel Indiviglio

The era of bailouts is over, right? Actually, we may not even have managed to hit the "pause" button. The Federal Housing Authority may soon run out of cash to cover its losses, according to a recent Bloomberg View article. Like Fannie Mae and Freddie Mac, the FHA guarantees mortgages. And although Fannie and Freddie backed plenty of subprime mortgages, loans with little or no down payment to low- and middle-income Americans constitute the FHA's entire business. The difference, however, is that the FHA kept a little bit thicker of a cushion for losses, but it is beginning to wear thin as defaults continue to mount.

Jason Delisle and Christopher Papagianis report that the FHA's $22 billion in capital reserves has declined to just $3.5 billion over the past few years. Through its unusual accounting methodology that ignores the cost of market risk, if the housing sector and broader economy continue to struggle, then the federal government will have to step in to rescue the agency. The authors explain what a more standardized accounting treatment shows:

Some lawmakers understand this and are working to change the government's accounting rules to include market risk. At the request of Representative Paul Ryan, a Republican from Wisconsin, the Congressional Budget Office recently took the official budget estimate for new FHA loans and added in the cost of market risk that taxpayers bear in guaranteeing the mortgages.

Under this more comprehensive methodology, the CBO determined that FHA loans would swing to a loss of $3.5 billion from a projected profit of $4.4 billion next year. In a 10-year budget window, this could mean a difference of $50 billion to $70 billion, depending on market conditions.

What the U.S. government doesn't need right now: unforeseen costs of ten of billions of dollars from another bailout. And this one wouldn't require much debate. The FHA is explicitly backed by taxpayers.

Read the full story at Bloomberg View.

This article available online at:

http://www.theatlantic.com/business/archive/2011/08/a-coming-bailout-for-the-federal-housing-authority/243025/