NCPA - National Center for Policy Analysis

The Federal Housing Administration Is Going for Broke

January 24, 2012

The Federal Housing Administration's (FHA) lax accounting standards obscure the fact that it is deeply insolvent with a capital shortfall of tens of billions of dollars.  This represents a danger to American taxpayers, who will almost certainly be left on the hook for a bailout of the lending giant when its dubious accounting measures are recognized and its excessive risk positions discovered, say Peter J. Wallison and Edward J. Pinto of the American Enterprise Institute.

  • The FHA's accounting system shows that it has roughly $1.2 billion in intangible capital supporting loan guarantees of over $1 trillion.
  • This ratio of 0.12 percent is far below the statutory rate for the agency of 2 percent and far below the private-sector counterpart of 4 percent.
  • Additionally, the rate of the agency's losses is disturbing as well: as recently as 2006, the FHA's capital ratio was 7.38 percent.

The choice by the FHA to increasingly leverage its lending follows a line of thinking that poor performance by risky positions in the past can be recovered by augmented risk in the present.  This pray-for-a-miracle strategy has left the agency overextended and far below statutory limits.  Furthermore, the capital that the agency does have is not real in the technical sense, but is actually based on overly optimistic future projections.  This accounting method allows the FHA to claim as present capital expected future gains.

Finally, regulators should examine more closely the delinquency rate for FHA loans and recognize that the current capital set aside for future losses is almost certainly insufficient.

  • As of December 30, 2011, 12.1 percent of the FHA's insured loans (889,602 loans) were 60 days or more past due.
  • This number is up substantially from the 10.55 percent (749,204 loans) that were delinquent as of June 30, 2011.
  • The FHA has an estimated total capital shortfall of $35 billion under the FHA's current capital requirement.

Amazingly, it is in this context that Congress decided to increase the conforming loan limits for FHA insurance from $625,750 to $729,750.  This not only ignores the realities of the FHA's fiscal nightmare, but encourages further risk-taking.

Source: Peter J. Wallison and Edward J. Pinto, "Bet the House: Why the FHA Is Going (for) Broke," American Enterprise Institute, January 19, 2012.

For text:


Browse more articles on Economic Issues