Federal Housing Administration: the Next Housing Bailout

December 6, 2012

The Federal Housing Administration (FHA) recently released its 2012 fiscal year actuarial review of the single family mortgage insurance fund and concluded it was insolvent. It is likely that the FHA will be the next government bailout for the housing industry, says Joe Gyourko, the Martin Bucksbaum professor of Real Estate, Finance and Business & Public Policy at the Wharton School of Business.

  • The value of the fund is measured by looking at the difference between the expected revenues of the insurance program and expected costs associated with the defaults of underlying mortgages.
  • This year, the value was reported to be negative $13.48 billion.
  • As a result, it would need $50 billion to $100 billion for the program to be solvent.

Even more troubling is that a recent Federal Reserve policy that keeps interest rates lower for a longer period by FHA's actuarial reviewer will result in greater losses for the FHA mortgage insurance portfolio.

Critics of the program long argued that important risks were being undervalued. Even with improvements to the model used to predict default and claims, it does not capture all the risks.

Currently, potential liabilities are 41 times the total capital reserves. No major entity operates, or should operate, with its core capital reserves so highly leveraged (a measure of the concentration of debt usage for private companies).

For the past several years, the FHA has expected future insurance proceeds to cover past losses, only to be disappointed. The FHA argues that it will grow out of insolvency based on estimates of net worth of the next seven years of mortgage insurance that the FHA is expected to write. However, it is based on mortgages that have not been taken out by borrowers yet.

Source: Joe Gyourko, "FHA, the Next Housing Bailout: Update and Evaluation," American Enterprise Institute, November 19, 2012.

 

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