Another Housing Agency Collapse on the Way

The Federal Housing Agency appears to be the next housing related agency that will be supplied with some type of bailout.

How big a bailout are we talking?

FHA-backed loans outstanding, which totaled $429 billion in fiscal 2008, are projected to hit $627 billion this year. FHA market share rose from 2.7% in 2006 to 23% last quarter.

John Carney writes:

The FHA will insure loans with down payments as little as 3.5% of a home’s price, and until last year it guaranteed down payment assistance programs that basically let borrowers buy houses with no money down. Many of those borrowers soon had negative equity in their homes when housing prices dropped. Its programs have helped keep the percent of borrowers who buy with less than 10% down steady, despite many lenders returning to a more traditional 20% down payment requirement.

The expansion of the FHA’s role in the housing market was supposed to have no cost to taxpayers, according to lawmakers like Barney Frank who backed the expansion.

So what went wrong?

It’s a story familiar to anyone who has watched our financial institutions fall apart. Basically, home-price declines have exceeded those used to model their expected losses. It now seems likely that losses will diminish reserves beyond the required 2% level. If that happens, Congress will either have to allow the FHA to operate with thinner reserves, order the FHA to raise fees on home buyers or bailout the agency with additional taxpayer dollars

Put another way, it's Ground Hog Day all over again as far as the government is concerned when it comes to sponsoring financially unsound mortgages. One wonders if FHA execs were in Guantanamo over the last 18 months and subjected to sensory deprivation. How else could they possibly have missed what happened to the housing market, in part because of the same type of absurd loans, often made with the encouragement of Fannie Mae and Sallie Mae?

What's really going on though is the same old story. A government agency is acting in the best interests of its political benefactors and the internal engine of bureaucracies which causes them to always seek to expand.

The coming bailout will probably be done on the sneak, if they can get away with it.

Carney writes:

One alternative may be to have the Treasury or the Fed wrap the FHA guarantee with an additional guarantee. A guarantee squared. This would eliminate the FHA credit risk without immediately requiring taxpayer money. It would, in short, be the same “no cost to taxpayer” promise that was made when the FHA first expanded its portfolio.

What it will do immediately, of course, is further crowd out private sector borrowing.