Forget Greece and Italy; we’re headed for a housing bailout costing tens of billions of dollars

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.

He concludes:

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

Find me on Facebook or follow me on Twitter

110 comments Add your comment

gunga din

November 14th, 2011
3:10 pm

would rather bail out US homeowners than send our money over seas to build homes, schools and roads for the Arabs and Jews who hate our guts !!!

DublDog

November 14th, 2011
3:15 pm

I’d rather bail out no one and not send the money to enemies overseas. Let the market handle it and it will eventually run its course. It will get better if we get rid of Zero, break open energy and thereby get a grip on inflation and create more discretionary income, and repeal ZeroCare to remove the pall on hiring.

JH

November 14th, 2011
3:20 pm

What about bailing out those of us with excellent credit scores and that pay ALL our bills every month. We are the ones that are ALWAYS paying for everyone’s screw ups. If these deadbeat homeowners get bailed out and don’t have to pay back their $$ then ALL HELL will break loose.

By the way, the overwhelming majority of banks PAID BACK their TARP bailout money back, including INTEREST.

Chief

November 14th, 2011
3:20 pm

gunga din. Ok break out the anti-semitism.

Jimmy62

November 14th, 2011
3:21 pm

If we made responsible decisions several years ago rather than just bailing everyone out, a lot of this mess would have worked itself out of the system already.

As I said over and over again in 2008 (and many times since): We had the choice between some pain then or a whole lot more pain later. We chose later and now later is rapidly approaching, and it will likely be far worse than the worst predictions of what would have happened in 2008 if we hadn’t done TARP and then followed it up with trillions more in free money for everyone who screwed up.

catlady

November 14th, 2011
3:25 pm

Hey, ya’ll, I made 4 dozens pints of applebutter at the cannery Thursday. Very good on biscuits. MJG, I will bring you some when I see you again!

Alrak

November 14th, 2011
3:26 pm

I agree with JH. People who got their FHA loan after July 2001, don’t have to pay MIP after they had their loan for 7 years. But those of use before July 2001 are still paying it and will continue for the life of the loan. I bet the foreclosures are from the group that only had to pay MIP for 7 years. Yelp! People that pay their bill every month and on time get ‘No Love’.

JKL2

November 14th, 2011
3:28 pm

Banks are evil. It’s all their fault for giving people money and then having the nerve to expect payments in return.

Not to worry as we’ll just get more money from China as soon as they “grow up” and start behaving like the smartest man in world thinks they should.

Precisely

November 14th, 2011
3:29 pm

Bumboclaaaaaaaat!!, that’s all I can say.

Tammy

November 14th, 2011
3:38 pm

I agree with JH, where is the help for those of us that have been responsible, didn’t buy mansions that we couldn’t afford and have paid our bills on time. I want a bail out too! Then maybe I could go on trips, etc.like the irresponsible people that WILL be bailed out!

diddy

November 14th, 2011
3:38 pm

You have to have good credit, down payment, and stable employment to get an FHA loan so I wouldn’t consider those securities a risk.

Tammy

November 14th, 2011
3:40 pm

JKL2, don’t blame it on the banks. Let us do something different and let people be responsible for their own decisions. Just because a bank tells you that you can afford something does not make it so. I know what I can afford and not afford and live within those parameters.

tar and feathers party

November 14th, 2011
3:43 pm

Hide your wealth, the have nots will be coming to steal it, with the help of uncle stupid. No bail outs for anyone! The solution to bad debts is indentured servitude, make em work like a dog for minimum wage, half of which goes automatically to pay off their debts. Indentured servants are not eligible for any government benefits, no food stamps, nothing. They work till the debt is paid off in full, including interest. Abolish bankruptcy, just impose indentured servitude in its place.

tar and feathers party

November 14th, 2011
3:44 pm

Remember, the greatest innovation in labor-management relations is the CAT OF NINE TAILS!

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
3:48 pm

Another failed federal government program that hardworking American taxpayers (and Democrats too) will have to bail out.

Thanks, Big Government.

Bad Pres.

November 14th, 2011
3:48 pm

bailout? Is everyone looking for an easy way out? Try working harder—I am tired of this administration throwing my money around like it is endless—-vote republican in 2012

JH

November 14th, 2011
3:48 pm

I wish one of those evil banks would have held a gun to my head and made me get an ARM with no money down back by the feds!. What a loser I am for putting 20 percent down on a home on a 30 year fixed rate!

JF McNamara

November 14th, 2011
3:51 pm

He’s right, but the solution is not a bail out. The solution is to allow foreclosures, have the government take ownership, tear down the homes, and hold the property as govenment lands.

We could group the homes together so that we don’t have random empty lots, but in order to get things right, we need fewer homes. The imbalance in supply and demand is what is causing the problem. As the government reduces the supply by tearing homes down, it will stabilize (and raise) the prices of surrounding homes. We’ll finally be able to get prices to rise again.

Since you can’t increase demand, raise prices by reducing supply. It makes too much sense, so It’ll never happen. We’ll just dump money on the problem and bail out rich people again.

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
3:52 pm

Why do you want to raise prices? If they are kept low, more people will be able to afford them.

Sister Sarah

November 14th, 2011
3:54 pm

@JK can you please do us all a favor and CAN the cluelessness please? It is not at all about banks simply lending money and expecting it back. It is about a CORRUPT SYSTEM that involves collusion between banks, Wall Street, real estate brokers, land developers, etc to knowingly sell an artificially inflated product to people so that they could essentially gamble with it. The house of cards come falling, so what! THEIR money has already been made and offshored. Leave the poor suckers holding the bag. I have had no problem making my mortgage payment since the outset of this disaster. I am however just a little pissed that my home is underwater by about $70000 as a result of mortgage roulette…and yes I’d like a little relief from the hard F’g I have been taking. I am a bit
raw.

BJOHNDAWG

November 14th, 2011
3:54 pm

JH,
You talk about the banks paid back their TARP money. Well here is a fact not mentioned.
Some did not even need TARP money, but took it anyway..Dont believe me… the exact words from James Dimon CEO of JP Morgan Chase. “As you know, we accepted TARP funding because we believed it was in the best interests of our financial system and our country, even though our company did not need the capital.”
Just Pure Greed! They took the money, used it to trade and make more profits, then gave it back.

Alrak

November 14th, 2011
3:57 pm

Watch the movie “Too Big to Fail”, great understanding of all of this mess.

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
3:58 pm

BS, BJOHNDAWG. The firms didn’t need it but took it anyway were forced to do so by the government. They didn’t want it as they knew it was going to give the government leverage over them.

Take your anti-American propoganda elsewhere because you’re going to get called on it here.

JF McNamara

November 14th, 2011
4:00 pm

Lil’ Barry Bailout (Unexpectedly Revised Downward),

I want to raise prices so that people who own their homes can sell them without taking a loss. This will allow those who rode out the storm with good credit to move up or take jobs in other cities. It increases mobility.

The low value of homes is also having a psychological effect on consumers. The responsible people, who have seen their home prices dwindle, are afraid to spend and saving in case they need to move. Its dampening the economy.

Finally, it will revitalize the housing industry. Fewer homes means that homes can be built profitably once we achieve balance, and we sustain a normal growth rate. We’ll be 10 years just meeting the current demand in the market, so a major part of our economy (housing) will continue to be in recession for the foreseeable future.

FED Up with the Feds

November 14th, 2011
4:02 pm

Heard this on Clark Howard: 1 in 3 people own their homes free and clear in the US. Of those homeowners who have mortgages, half have at least 25% equity. In addition, half of those people actually have more than 50% equity.

Only one in five are underwater. A few entitled wannabe homeowners have screwed things up for the rest of us BIG TIME.

getalife

November 14th, 2011
4:04 pm

6 banks control 66% of our gdp.

666.

Evil.

JH

November 14th, 2011
4:05 pm

BJOHNDAWG … “Some did not even need TARP money, but took it anyway”

The federal government told them they had to. Why do you think so many foreign banks left the US after the bailout, the feds were going to make them take money as well.

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
4:05 pm

Housing wouldn’t be in a recession for ten years if we allowed the markets to clear on their own. We’re trying to use government to help us avoid the pain of market discipline. If the price of your house dropped, that’s your problem and you need to deal with it like a big boy or girl. Once everyone gets over that and moves on, the housing market will be just fine.

Or we could just put folks to work digging ditches and then filling them back in. Makes about as much sense.

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
4:06 pm

47 percent pay 0 income tax.

470.

Slothful.

FYI

November 14th, 2011
4:06 pm

I wonder if Joseph Gyourko, considered the fact tha FHA Insurance Premiums have INCREASED DRAMATICALLY over the last 2 years. How does this change the numbers?

JF McNamara

November 14th, 2011
4:08 pm

“Only one in five are underwater. A few entitled wannabe homeowners have screwed things up for the rest of us BIG TIME.”

20% is a lot. Its not even necessarily the percentage, its who is caught. Most of those free and clear are older baby boomer, and most of those with equity bought more than 10 years ago. Just about every homeowner under 35 is taking it on the chin because they got caught in a bubble.

Boomers are sitting on their hands as they are retiring, so those are the responsible people who should be driving the economy because they are prime working age with kids and long careers ahead of them. Instead they are sitting on their hands.

getalife

November 14th, 2011
4:12 pm

cons bow down to the 1 %,

Good luck with that.

Oh yea right

November 14th, 2011
4:13 pm

To Sister Sarah

Re: I have had no problem making my mortgage payment since the outset of this disaster. I am however just a little pissed that my home is underwater by about $70000 as a result of mortgage roulette…and yes I’d like a little relief from the hard F’g I have been taking. I am a bit
raw.

I could not have said it better myself. God Bless.

deal me

November 14th, 2011
4:15 pm

any great deals on beach condos near st. augustine, fl.?

Ivory

November 14th, 2011
4:17 pm

Another Civil War is the only thing that will solve this mess!

JF McNamara

November 14th, 2011
4:17 pm

“If the price of your house dropped, that’s your problem and you need to deal with it like a big boy or girl.”

Indeed, and I am. My answer was to whether or not we should bail out again. We should not.

Bart Abel

November 14th, 2011
4:17 pm

If these deadbeat homeowners get bailed out and don’t have to pay back their $$ then ALL HELL will break loose.

FHA insurance benefits are paid to the lender, not the homeowner. In addition, if the FHA insurance fund is under-capitalized, taxpayer subsidies to pay FHA mortgage insurance claims would not be a bailout; they would be a legal obligation under the terms of the insurance provided.

The fact that FHA insured loans have increased dramatically in recent years is a natural side-effect of this recession since, with so many millions unemployed, many private mortgage insurers either ceased to exist after exhausting their claim funds or lost their ability cover new loans. As a result, FHA insured loans are frequently the only available option to people who want to buy (or sell) or refinance.

Mr. Gyourko’s calculations are interesting, but the Government Accountability Office and the FHA is already on the case: http://thehill.com/blogs/on-the-money/1091-housing/192205-watchdog-fhas-expanded-role-comes-with-expanded-risks

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
4:18 pm

The 1% is actually 53%.

Eat your peas, 47-percenters. You aren’t paying your fair share.

We’re all in this together.

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
4:18 pm

My answer was to whether or not we should bail out again. We should not.
——————

On that, we agree!

Lil' Barry Bailout (Unexpectedly Revised Downward)

November 14th, 2011
4:20 pm

if the FHA insurance fund is under-capitalized, taxpayer subsidies to pay FHA mortgage insurance claims would not be a bailout; they would be a legal obligation under the terms of the insurance provided
———————-

Thanks, Big Government. You’ve put Americans on the hook again for your political vote-buying programs.

Brad Steel

November 14th, 2011
4:20 pm

…..rivaling the bailouts of GM and Chrysler.

we’ll if they do bailout the FHA, i hope the bailouts will be as profitable for the government and as good to the workers and industry as these were.

Ivory

November 14th, 2011
4:21 pm

Obama will do the right thing!

MarkV

November 14th, 2011
4:23 pm

The best laugh line today so far: “Only one in five are underwater. A few entitled wannabe homeowners…” ( FED Up with the Feds @4:02 pm)

What is the big deal? Only 20%! Why do they even talk about 9% unemployment? Why, it is only one in 11!

carlosgvv

November 14th, 2011
4:29 pm

Do not forget Greece and Italy. Their financial antics are going to tidal wave to our shores with harsh effects. And. while we’re bailing out the housing industry, we will also be facing another financial crisis in student loan defaults. Merry Christmas and Happy New Year.

Scooter

November 14th, 2011
4:29 pm

I am a responsible person who purchased my first house in 2003 with a 30 year fixed mortgage. Unfortunately, I was unaware I was buying in a bubble market. Now I have about 50k in negative equity and am raising two small children in a gentrifying area (Hood), in a house with one bathroom.

it frustrates me to read elderly condescension towards young people like me, who are responsible, but weren’t privy enough to notice a bubble market when we bought our first home. Now, we are trapped in homes that don’t fit our needs but get no help if we remain responsible mortgagors. It certainly seems like those who helped create the bubble got bailout money and the rest got nothing but the bill.

Pat

November 14th, 2011
4:29 pm

Where is my bailout? I guess it was stupid of me to know how much I could afford on a 30yr fix and pay all of my bills on time. I guess I will know next time to buy something I cannot afford.

Pat

November 14th, 2011
4:30 pm

I am right there with you Scooter, but since we are responsible, we are stuck in our houses.

Kyle Wingfield

November 14th, 2011
4:33 pm

diddy @ 3:38: Yeah, a down payment of 3.5%. And how many of those people lost their jobs after getting the loan?

Welcome to the Occupation

November 14th, 2011
4:33 pm

Haha. Before I scrolled down in this post I thought to myself “what, no Pethokoukis quotes?” Ah impatient me! :)

Kyle Wingfield

November 14th, 2011
4:35 pm

JF @ 3:51: Fwiw, I don’t think he was necessarily advocating a bailout, more pointing out that FHA is under-capitalized by that amount and has to get the money from somewhere…and, absent some other arrangement, taxpayers are on the hook for it.

As for tearing down the houses…I have written before that it’s a solution I’d normally oppose, but we might not have a better option in this case.