The Federal Housing Administration, which guarantees around a third of U.S. mortgages, faces dwindling cash reserves and could require a taxpayer bailout, according to a forthcoming study by Joseph Gyourko, a professor at the Wharton School.
The Wall Street Journal reported that the study predicts that the FHA will lose $50 billion over the next few years, and while the agency is unlikely to go bankrupt this year or next, continued economic woes could lead to substantial losses for American taxpayers. The American Enterprise Institute, a conservative think tank, commissioned the paper, according to the Journal.
Created during the Great Depression, the FHA ramped up its loan guartees shortly before the 2008 economic crisis, as Freddie Mac and Fannie Mae reduced their presence. And while that effort helped stabilize the housing market by offering loans with small downpayments, the FHA now faces deteriorating home prices, with over half of the homes it guarantees now worth less than their mortgages.
In 2009, the organization was hit hard by continued mortgage defaults, and its reserves fell to 0.53 percent of its total portfolio, below the 2 percent mandated by Congress. But it recovered somewhat, and in its 2010 financial report, the FHA said it had $33 billion in liquid assets, with another $6 billion in additional security planned in the next year. Its capital reserves increased to $4.7 billion, up from $3.6 billion in 2009, but still below the two percent mandated by Congress. It was expected to reach that ratio by 2014 and surpass it in 2015. Still, a 2010 New York University study questioned the agency's solvency, saying that the FHA faced risks by underestimating the number of underwater mortgages, improperly measured house values and understated other risk.
The agency also oversees Ginnie Mae, which surpassed Freddie Mac as the second-largest issuer of mortgage bonds this year. It reported net income of almost $1.2 billion for the fiscal year ending Sept. 30, a new record, in contrast to Fannie and Freddie's continued losses.
The FHA will release its 2011 annual financial report next week.