FHA Is Bankrupt; So Is U.S. Housing Policy; Agency Says It Won't Need Bailout, but Assurance Is Questionable

Article excerpt

If you thought the era of big financial bailouts was over, take a good look at the books of Uncle Sam's mortgage insurance company.

Last month, a report by government actuaries revealed that the Federal Housing Administration has a net worth of negative $16.3 billion.

That figure should set off alarm bells, but the agency's overseers see nothing to worry about. The report presents a rosy picture of the FHA's ability to make money, and says there's only a 5 percent chance that it will need to be bailed out by the Treasury.

The trouble is, FHA officials have a history of papering over problems. One year ago, the official line was that the agency's portfolio was already improving and that it would experience "rapid growth in capital" during fiscal 2012. Instead, the delinquency rate on FHA-insured loans rose to 9.6 percent at the end of September from 8.7 percent a year earlier.

The FHA is a critical part of the nation's housing finance system; it insured nearly 16 percent of home purchases last year. Its premiums are supposed to cover any losses, and the 78-year-old agency has never needed taxpayer funds.

Whether that will change will be determined in February, when President Barack Obama releases a proposed budget based on a different set of assumptions than those used in the actuarial report. A final decision on a cash infusion will be made in September, the Department of Housing and Urban Development says.

Ed Pinto, a fellow at the American Enterprise Institute, wouldn't bet against a bailout. "The ticking is getting very loud," he said.

HUD's forecast, he says, is based on questionable assumptions.

For example, the report assumes that 30-year mortgage rates will jump to 6.5 percent by mid-2014, from 3.3 percent today. …