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November 18, 2011

FHA Next In Line for Govt. Bailout?
According to sources familiar with its finances, the Federal Housing Administration may soon follow in the footsteps of Fannie Mae and Freddie Mac by requiring an infusion of taxpayer bailout funds to remain solvent. If its does, it will be the first time in the agency's 77-year history it has needed a direct infusion of capital from the government. Since the mortgage crisis began about five years ago, the FHA has played a vital role in US housing finance as the private mortgage market has all but dried up. The agency now backs about a third of all US mortgages, compared to just 5 percent in 2006.

As the agency readies its annual financial report, a study conducted by the University of Pennsylvania Wharton School's Joseph Gyourko estimates that the agency may face losses as steep as $50 billion over the next few years. According to the study, the only thing that would allow the FHA to avoid these substantial losses is a quick and significant recovery both in the housing market and the overall economy.

The study did point out that the losses will be spread out over a number of years, so it's unlikely to bankrupt the agency this year or next, but the scope of the potential losses makes it a near certainty that the agency will require a taxpayer bailout at some point. The study isn't the first to predict a dire situation for the FHA, but such studies and predictions are becoming more common. As a result, analysts have begun to ask the question when, rather than if, the agency will require a massive bailout for the first time in its history.

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