Tags: fha | fund | nearly | broke

Another Government Housing Fund Broke

By Dan Weil   |   Tuesday, 17 Nov 2009 01:15 PM

The Federal Housing Administration’s reserves are shrinking rapidly, creating a big problem for the housing market.

That’s because the agency has played a huge role in buoying that market. It insured lenders against mortgage defaults on 20 percent of homes bought in the last year.

The FHA’s capital reserve fund plunged 72 percent in the year ended Sept. 30. That means reserves have dwindled to virtually zero on the $685 billion in loans insured by the agency.

“There is a real risk. Nobody has a crystal ball,” Shaun Donovan, secretary of Housing and Urban Development, told The New York Times.

“We recognize there is a possibility that the reserves go below zero and stay there.”

He says the agency won’t require a direct taxpayer bailout. But it may well require an indirect one in the form of a loan from the Treasury.

An FHA audit shows that in its worst-case scenario, an extended recession, the agency’s reserves would hit zero in 2011, and it would need $1.6 billion from the Treasury.

The FHA sees the most likely outcome as a housing slump during the next nine months followed by a rebound. Under that forecast reserves would bounce back quickly.

But many experts are pessimistic.

“If it were private, it would need a substantial capital infusion now, period,” housing economist Thomas Lawler told The Wall Street Journal.

“(It) has just gone through the worst housing environment since the Great Depression.”

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The Federal Housing Administration’s reserves are shrinking rapidly, creating a big problem for the housing market.That’s because the agency has played a huge role in buoying that market. It insured lenders against mortgage defaults on 20 percent of homes bought in the last...
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