Or at least, that’s the conclusion of a real-estate expert in a new study that says the Federal Housing Authority has gotten so far off track that U.S. taxpayers are staring down the barrel of a bailout of the agency costing between $50 billion and $100 billion, rivaling the bailouts of GM and Chrysler.
Joseph Gyourko, a professor of real estate at the University of Pennsylvania’s Wharton school of business, based that calculation on the fact that: a) The FHA has tripled the value of the mortgages it insures, to a total of $1 trillion, in the last four years, and is already under-capitalized to the tune of $12 billion-plus; b) more than half of the homeowners insured by FHA have negative equity; and c) the unemployment rate remains stubbornly high.
This combination of increasing leverage at the entity level (i.e., FHA having far less capital per dollar of insurance guarantees) and among the homeowners being insured (many with negative equity in their homes) has made FHA a very risky proposition for taxpayers, who bear the downside risk if its expansion strategy does not work out. That it will not work out is highly likely because 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. … 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.
(H/t: Jim Pethokoukis)
Just in case you thought our housing-related liabilities were limited to Fannie Mae and Freddie Mac.
– By Kyle Wingfield