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FHA could need taxpayer bailout next year, report says

November 18th, 2011 9:41 AM by Lehel S.

FHA could need taxpayer bailout next year, report says

The federal agency that insures more than $1 trillion in mortgages may need as much as $43 billion from the U.S. Treasury to stay afloat if the housing market fails to rebound next year.

There might yet be another casualty in the real estate market: theFederal Housing Administration.

With home prices still seeking their bottom, the federal agency that insures more than $1 trillion in mortgages faces a nearly 50% chance that it could need a taxpayer bailout next year, according to a government report released Tuesday.

If the housing market fails to rebound next year, the FHA would need as much as $43 billion from the U.S. Treasury to stay afloat, the report said. That would add to the combined $150 billion already spent to rescue seized housing finance giants Fannie Mae and Freddie Mac.

The FHA's projected losses on loans made mostly before 2009 continue to increase, eating away its cash reserves. The agency is dangerously close to being in the same dire position as many homeowners — upside down on its housing finances.

"They have no margin for error right now," said Richard Green, director of the USC Lusk Center for Real Estate.

Home prices in major U.S. cities rose for five straight months through August, when they ticked up 0.2%, according to Standard & Poor's/Case-Schiller Index. But many analysts predict troubles ahead as foreclosure activity continues to rise, particularly in hard-hit regions such as Southern California.

The median sale price for Los Angeles and Orange counties was $270,000 in October, down 3.6% from September to the lowest level since January, San Diego real estate information service DataQuick reported Tuesday.

The drop was triggered by a decrease starting last month in the size of mortgages that are guaranteed by the FHA, Fannie Mae and Freddie Mac, part of an effort by Washington to start pulling back government support for the housing market.

But some lawmakers complained that the market in Los Angeles and some other high-priced areas remained too fragile to stand on its own. Pushed by a bipartisan group of California lawmakers, Congress is close to restoring the higher loan limit through 2013, but only for FHA-insured loans.

A provision to raise the limit back to $729,750 in high-cost markets from $625,500 is part of a budget deal the House and Senate probably will vote on before Thanksgiving. But Tuesday's report on the FHA makes approval of that provision less certain.

"In light of this bleak outlook for the FHA, it makes no sense to increase the size of loans the FHA can insure," said Rep.Scott Garrett (R-N.J.), chairman of the House subcommittee that oversees Fannie and Freddie.

The agency, created during the Great Depression to help revive a devastated housing market, has never required taxpayer assistance. It has been playing a major role in the housing market since the subprime housing bubble burst four years ago, and most of its losses have come from loans made before early 2009.

The FHA's annual independent actuarial study showed that the agency's cash reserves, which are not supposed to drop below 2% of projected loan losses, continued to plunge this year.

They are down to 0.24% from the already seriously low level of 0.5% last year as the FHA's cash reserves fell to $2.6 billion from $4.7 billion last year.

"The way the FHA is currently operating, I think there's a pretty high probability they will run out of reserves," said Anthony Yezer, an economics professor at George Washington University who has studied the FHA. "Their reserves are already pretty inadequate."

Under the report's primary projection for housing prices, which assumes they will drop 5.6% this year before rebounding to 1.2% growth next year, the FHA would not need any taxpayer money. The reserve fund would return to its mandated 2% level by 2014, slightly earlier than projected last year.

"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," acting FHA Commissioner Carol Galante said. She said the agency's reserve fund continues to be "actuarially sound."

But predicting the fate of the real estate market has proved to be difficult since the crash of the subprime housing bubble in 2006.

Last year, the FHA's actuarial report projected housing prices would fall less than 1% in 2012. Given the volatility of the market, this year's report warned that there is a "close to 50%" chance that a bailout would be needed next year.

Posted in:General
Posted by Lehel S. on November 18th, 2011 9:41 AM



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