Will the FHA Need a Taxpayer Bailout?

The Federal Housing Administration may be the next recipient of a taxpayer-funded bailout, as the struggling housing market continues to eat away at the agency’s cash reserves. The FHA insured one in seven residential mortgages issued in 2011.

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The FHA’s cash reserves fell by $2.1 billion this year to just $2.6 billion. Reserves are not supposed to be below 2% of projected losses, but have dropped to 0.24% in 2011, down from an already seriously low level of 0.5% last year, according to a government audit.

Under the report’s baseline projection for housing prices, which assumes they will drop 5.6% in 2011 before rebounding to grow 1.3% next year, the FHA would not need a bailout. In fact, according to the report, the reserve fund would return to its mandated 2% level by 2014.

“It would take very significant declines in home prices in 2012 to create a situation in which the current portfolio would require any kind of additional support,” said acting FHA Commissioner Carol Galante.

However, a report by an independent actuary found that if home prices should continue to decline next year, the FHA would probably need a bailout, the size of which would depend on how much housing prices drop. And the FHA need a bailout, it does not have to seek the approval of Congress or the White House, as the agency has existing authority to tap the U.S. Treasury for funds.

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Created during the Great Depression to revive a devastated housing market, the FHA has never required taxpayer assistance. However, its reserves are now dwindling because of losses on insurance for loans guaranteed before early 2009, many of which were subprime mortgages.