FHA Bailout May Be Needed, Report Says

FHA bailout
FHA bailout

For the first time in its 78-year history, the Federal Housing Administration may need a government bailout to stay in operation, The Wall Street Journal reports.

The FHA, which insures mortgage lenders against losses, is expected to report this week that it's close to exhausting its reserves and may need to turn to taxpayer funding. Mortgage delinquencies are the culprit, the Journal said Wednesday, noting that though the FHA doesn't back as many mortgages as Fannie Mae and Freddie Mac, it has "more seriously delinquent loans."

"The FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from one year ago," according to the Journal. "That represents around 9.6 percent of its $1.08 trillion in mortgage guarantees."

The FHA continued to back mortgages from 2007 to 2009, even as the housing crisis steadily worsened. Now about 25 percent of the loans that the FHA insured in 2007 and 2008 are seriously delinquent, the Journal said. That compares to a rate of 5 percent of loans that it backed in 2010.

According to the agency's audit last year, it estimated that it would have a buffer of $1.2 billion if it had to immediately pay off all claims on projected losses. That represents 0.12 percent of its loan guarantees, the Journal said, and federal law requires that the agency remain above 2 percent.

It won't be decided until February whether to offer a bailout -- and how much -- to the FHA, the Journal reported. That's when President Barack Obama plans to release his annual budget.

What would happen if we just let the FHA go under? "We would be talking about Great Depression II instead of the Great Recession," John Burns, the owner of a homebuilding consulting firm in Irvine, Calif., told the Journal. He added that the FHA didn't move quickly enough to raise insurance premiums on mortgages as the housing bust unfolded, contributing to the situation it is in today.

See also:
Obama's Housing Policy Wins and Losses
Is the Housing Market Better Off Than Four Years Ago? Survey Says No
Mortgage Lenders Get Boost From Obama's Housing Efforts

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