Categorized | Finance and Mortgage

FHA Could Be the Next Recipient of a Major Bailout

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As the U.S. housing market continues its steady decline, and the government has taken over the role of guaranteeing the majority of mortgages, it is a real possibility that the Federal Housing Administration, or FHA, may require the assistance of a bailout.

The reasons why the FHA may need to be bailed out may actually stem from the troubles that have haunted the housing market over the past few years. Because private loan options have, for the most part, faded into oblivion, the FHA has had to assume their role in many cases. They provide private lenders with a 100 percent guarantee against defaults, and also accept borrowers with very small down payments.

Because they are now one of the only options available, they have seen an exponential increase in the number of borrowers. Thus, as the housing market has dramatically decline, so too has their capital reserves. If mortgage loans continue to default at the current level, they will be unable to support their guarantees by the end of the year.

Little has been said, however, about the causes of this potential bailout due to budgetary illusions set in place by government policy. The truth is that, due to the Federal Credit Reform Act, the costs of market risk are excluded from budgetary analysis, regardless of the dismal state of the housing market.

Although some will argue that the worries regarding the FHA’s troubles are much ado about nothing, it should be noted that if the trend continues, the taxpayers might be called upon to repay many of the defaults on FHA loans.

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About Drew Wilson

Drew focuses on the Commercial and Mortgage/Finance categories.

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