Yes, you've heard right: a U.S. Federal Housing Administration (FHA) bailout could be on the way, making the group the latest casualty of the 21st century housing bubble.
An audit released yesterday (Thursday) showed that the FHA, which was set up in 1934 to insure mortgages taken out by low income borrowers during the Depression, has only $2.6 billion in cash reserves to support a mortgage loan guarantee program servicing $1.1 trillion in loans.
"As was the case last year, the new actuarial study shows that FHA is expected to sustain significant losses from loans insured prior to 2009, and thus its capital reserve remains below the congressionally mandated threshold of two percent of total insurance-in-force," a HUD press release stated. "However, the actuaries' report concludes that, barring a further significant downturn in home prices, the MMI Fund will start to rebuild capital in 2012, and return to a level of two percent by 2014 – outpacing last year's prediction."
But critics of the report say that the FHA is underestimating the amount of risk in its loan guarantee portfolio.
Joseph Gyourko, Professor of Real Estate, Finance, and Business & Public Policy at the Wharton School, wrote in a report produced for the American Enterprise Institute, "…the risk of future defaults, and the losses associated with them, is being systematically underestimated. This makes the projections of FHA's main insurance fund value look far rosier than really is the case."
Gyourko continued, "This leaves a quick and substantial economic and housing market recovery as the primary way for FHA to avoid generating substantial losses for American taxpayers…FHA's main insurance program is materially undercapitalized, with the likely amount of capital infusion required being in the $50 billion-$100 billion range, even if there is no unexpected deterioration in housing markets."