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Taking Up the Slack Taking Up the Slack
Joseph Gyourko, chair of the real estate department at the University of Pennsylvania’s Wharton School, raised similar issues in a November paper titled “Is FHA the Next Housing Bailout?” The FHA is underestimating default rates, Gyourko wrote, and therefore underpricing the insurance it sells. That’s “exactly what Fannie and Freddie did,” says Gyourko in an interview. He calculates that the agency will need $50 billion to $100 billion in federal funds to stay solvent. “Some misinterpret my analysis,” he says. “It’s not a call to kill the FHA. It’s a call to recognize the real costs and losses.”
The FHA plays down the prospect of a bailout. “It would take very significant declines of home prices in 2012 to create a situation in which the current portfolio would require any kind of additional support,” Carol Galante, acting FHA commissioner, said during a November conference call with reporters. Asked for comment, a HUD spokesman pointed to a November blog post by HUD Assistant Secretary for Policy and Development Research Raphael Bostic responding to Gyourko’s paper. Citing the auditor’s report, Bostic said the FHA’s mortgage insurance programs “are sound.”
Any resolution may have to wait until after the elections. “Lawmakers want to make sure that FHA is adequately but not overfunded until after the 2012 elections and the more fundamental policy questions can be addressed,” says Terry Haines, a financial policy analyst with Potomac Research. “The best anyone will do until then is slap Band-Aids on existing programs.”
The bottom line: The FHA has paid out $37 billion in claims over the past three years. It may need a $50 billion to $100 billion bailout.
Benson is a reporter for Bloomberg News. Woellert is a reporter for Bloomberg News. Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.
