Federal Housing Administration May Need Costly Taxpayer Bailout -BYLN-

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Q. I heard an alarming report on the radio that said the federal government is planning to shut down the Federal Housing Administration. Is this true? My wife and I were planning to get an FHA loan this spring in order to buy our first home!

A. Don't worry. There currently are no plans to end the government's low-down-payment FHA mortgage program, but there's growing concern among lawmakers, regulators and economists alike that the venerable agency may need a massive taxpayer bailout to stay afloat.

The FHA does not make loans directly to buyers, but instead insures private-sector lenders against default. Because banks know that some or all of their losses will be covered if a loan turns sour, they're willing to issue FHA-backed mortgages to borrowers who make a down payment as small as 3.5 percent.

The system worked well for more than seven decades, but the wheels started coming off the cart when home prices began their long decline several years ago. The FHA's insurance payouts to lenders soared as foreclosures mounted, and has now pushed its ability to pay future claims to an all-time low.

The agency likely will need a taxpayer-funded bailout of at least $50 billion in the next three to five years, according to Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School and author of a new report titled "Is FHA the Next Big Housing Bailout?" More-conservative estimates suggest it would need about $20 billion to meet federally set requirements.

FHA officials believe no bailout will be needed unless home prices drop another 4 percent to 5 percent and defaults continue to rise. But while some economists note that prices in many areas are showing signs of stabilizing, others say values could fall 5 percent or even more than 10 percent during the next few years, before they start rising again. So, only time will tell if taxpayers will get stuck with another big bill. …