Will U.S. Taxpayers Need to Bailout the Federal Housing Administration?

June 14, 2013

The conventional mortgage market has tightened lending standards in the past few years and, consequently, witnessed a decline in delinquency rates, says John L. Ligon, a senior policy analyst at the Heritage Foundation.

While delinquency rates have recently decreased in most of the conventional mortgage market, the delinquency rate in the Federal Housing Administration (FHA) portfolio remains high. Indeed, more than 16 percent of FHA loans have been delinquent 30 days or more over the past two years; over 11 percent were delinquent 60 days or more. The high rate of delinquency and default on loans seriously impacts the financial solvency of the FHA book of loans.

  • The FHA backs a total loan portfolio of over $1 trillion -- even though it has a little more than $1 billion (or 0.1 percent) in capital, leaving it with a forward capital shortfall (portfolio insolvency) in the range of $20 billion per year.
  • The losses in the FHA insurance fund are likely to continue and could ultimately necessitate a substantial taxpayer bailout.

The conforming loan limit in FHA's book of loans is 16 percent higher than the conforming limit in the conventional mortgage market. The Housing and Economic Recovery Act of 2008 (HERA) increased the maximum conforming loan limit for mortgages in the FHA and other government-sponsored enterprises (GSEs) to $729,750 for loans held in their respective books of business.

Small yet prudent actions are necessary and urgent to decrease the credit risk in the FHA book of loans, reduce its share of the mortgage market by lowering its maximum loan limits, and establish proper incentives with lenders.

  • Reduce market share by decreasing the FHA conforming loan limit.
  • Establish responsible credit requirements for borrowers.
  • Increase risk sharing from FHA lenders.

The FHA needs to properly align incentives for borrowers and lenders and return to a smaller, more targeted role in the mortgage market.

Source: John L. Ligon, "Will FHA Require the Next Round of Housing Bailouts from the Taxpayer?" Heritage Foundation, June 6, 2013.

 

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