Government Meddling in the Housing Market Fails (Again)

For the first time in its 78-year history, the 100 percent taxpayer-backed Federal Housing Administration is projected to run out of its remaining $4.7 billion financial reserves and trigger an infusion of funds from the Treasury.

So says the Wall Street Journal:

The FHA has burned through its reserves over the past three years as defaults mount on loans it guaranteed as housing markets deteriorated. FHA-backed mortgages are an attractive option for borrowers because they can make down payments as low as 3.5%. But as home prices continue to fall, many of those borrowers have fallen underwater, where they owe more than their homes are worth and are at greater risk of default if they experience income shocks.

Given that the American Enterprise Institute’s “FHA Watch” estimates that the FHA has a current net worth of – $17 billion (that’snegative $17 billion) and an estimated capital shortfall of $35 billion to $53 billion, many are left to wonder how much longer the government can afford to meddle in the fledgling housing market.

“It’s no surprise that the fund is under some level of stress,” confessed the FHA’s Acting Commissioner Carol Galante.  Still, says Ms. Galante, “It’s highly unlikely that we’ll need any special assistance from the Treasury given the policy changes we’re making.”

But as Edward J. Pinto of the American Enterprise Institute reports, no amount of “policy changes” are likely to resurrect the New Deal-era agency:

The FHA continues to expand and crowd out the private sector. It is guaranteeing more high-risk loans than low-risk ones, has close to one million mortgages in its foreclosure pipeline, and is permitted to project its financial health using accounting rules based on rosy projections extending decades into the future, all the while ignoring that it is already insolvent and needs a bailout to the tune of tens of billions of dollars by any reasonable accounting standard.

The news comes on the heels of a proposal President Obama included in his State of the Union address that would allow millions of “responsible” but “underwater” borrowers who do not qualify for low-interest rates to refinance their mortgages through the FHA.   The plan, which is estimated to cost between $5 billion and $10 billion, would be paid for by–you guessed it–raising taxes on major lenders.

Mr. Obama’s earlier FHA schemes have proven an abysmal failure.  Indeed, according to the Heritage Foundation, roughly half of “those who received refinanced mortgages in earlier versions of the Obama mortgage refinancing program have ended up defaulting.”

Mr. Obama’s newest FHA refinancing gambit, says Heritage Foundation Senior Researcher David C. John, is a total nonstarter:

As with earlier versions, the newest Obama home refinancing plan is more hype than substance. This version also requires several features, including a new tax on financial institutions, that are bad policy and would do nothing to help revive housing. The fact remains that there is no magic government solution that will make the current housing mess go away. The industry will have to grow out of the current slump over time.

Over the last five years, Americans have seen four million homes lost to foreclosure.