Kick The Can: FHA Needs Bailout Now Too

Just when you thought the worst of the government bailouts were over, now comes the next iteration of taxpayer funded market management.  From Newsday we read:

The cash-strapped Federal Housing Administration may need a $943 million taxpayer bailout to cover expected losses from loans it insured as the U.S. housing bubble was deflating, the Obama administration said April 10.

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 The agency provides liquidity to the housing market by insuring lenders against losses on loans. Currently, it backs $1.1 trillion of loans and is a primary source of funding for first-time home buyers and those with modest incomes.

In November, an independent audit found that the FHA faces projected losses of $16.3 billion and was at risk of depleting its cash reserves.

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Since then, the FHA has a taken a number of steps to shore up its books, including charging borrowers higher premiums. In addition, housing prices have continued to recovery, further helping to strengthen the agency’s balance sheet.    

This is our big government system at work.  FHA acted as a white knight in the housing market as it insured loans to guarantee against losses during very troubling times back in 2008-2010.  FHA is still the preferred lending method (via Fannie and Freddie) and makes up over 90% of the market.

Recently, we hear that since times are good again at Fannie and Freddie they are reconsidering their exit from the mortgage market.  This hesitancy to exit also creates a problem for private mortgage lenders who want to enter the market on competitive terms.

The bottom line is when you have taxpayer subsidized lending and all risk of losses are insured by the ability of the government to tax the people to pay for the losses, we have a system that defies natural market forces.    It's time for Uncle Sam to get out of the market.