Risk Rises for Housing Agency (projected losses of $50 bil for FHA)

Wall Street Journal ^ | NOVEMBER 11, 2011 | NICK TIMIRAOS

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Concerns are rising that the Federal Housing Administration could run out money if the economy doesn't recover soon, raising the risk the agency would seek a taxpayer bailout for the first time in its 77-year history.

Since the mortgage crisis erupted five years ago, the FHA has played a critical role in housing finance as private lenders retreated. It backs about a third of all new mortgages originated for home purchases, up from around 5% in 2006.

But, as the FHA prepares to release its annual financial report next week, a forthcoming study by Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania's Wharton School, estimates that the FHA faces around $50 billion in losses in the coming years.

The study says only a "quick and substantial economic and housing market recovery" can avoid "substantial losses for American taxpayers." The paper was commissioned by the American Enterprise Institute, a conservative think tank.

The study says the losses will be spread over a period of many years and are unlikely to bankrupt the agency this year or next.

The study isn't the first to predict the FHA's insolvency. Last year, economists from New York University and the New York Federal Reserve issued a paper warning of the growing likelihood the agency would need to a taxpayer bailout. FHA officials disputed some of that report's findings.

Last month, Paul Miller, an analyst with FBR Capital Markets, warned that the largest U.S. banks could face billions in losses if the FHA tries to push back defaulted mortgages onto the lenders that originated them. "Unless home prices rebound, I don't understand how they're able to avoid a restructuring and a Treasury infusion," he said.

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Freddie, Fannie, FHA and Politicians: “sub-prime” and “toxic” to the health of the USA.