Fannie and Freddie All Over Again? Auditor Says FHA May Require a Bailout

Earlier this week NTU blogged aboutCongress’ ridiculous decision to include an extension of the stimulus-era conformingloan limits for the Federal Housing Administration (FHA) in the “minibus”appropriations package set to receive a vote later this week. This provisionwould allow the FHA to insure mortgages of up to $729,750 – more than threetimes the average sales price for existing homes of $212,700.

If allowing the government to subsidize McMansions seemedlike a bad idea earlier this week, it has become completely indefensible giventoday’s revelation that the FHA may soon need a taxpayer bailout.

FoxNews reports:

The Federal Housing Administration's cash reserves have fallen solow that there is a "close to 50 percent" chance the agency could runout of money and require a taxpayer bailout in the next year, according to theannual independent audit of the FHA’s finances.

The audit, to be released Tuesday by the FHA, estimated that thevalue of the agency's reserves stood at $2.6 billion as of Sept. 30, down 45percent from an already low $4.7 billion last year. The drop reflects theimpact of rising home-loan defaults amid falling home prices, which togethergenerate greater losses on the sale of foreclosed homes.

The FHA's perilous state underscores one of the hidden costs of the U.S.government's extraordinary efforts to rescue the housing market. In the pastfour years, as private lenders have pulled back from the mortgage market, theFHA's market share has swollen. It backed one third of mortgages used tofinance home purchases last year, up from around 5 percent in 2006. The FHAdoesn't make loans but insures lenders against defaults on mortgages that meetits standards.

This comes on the heels of Fannie Mae’srequest for another $7.8billion in government assistance after posting a $5.1 billion loss in thethird quarter.

Given these depressing statistics,Congress should be looking for ways to slowly get the government out of thehousing market, not subsidize the 1 percent at the expense of the 99 percent.