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Federal Housing Administration to Run Out of Reserves in 2012

Posted by Steve Markowitz on February 14, 2012

The Wall Street Journal reported that the Federal Housing Administration (FHA) will run out of reserves this year for the first time in its 78 year history.  Since the FHA has budget authority, it can go directly to the U.S. Treasury for funds without making a request of the Congress.  This is another example of government spending of the People’s money without Constitutional authority.

The FHA was established by the US government during the 1930’s to help facilitate homeownership in America.  This agency does not make housing loans, but instead insures lenders who make them.  Since the housing meltdown, the FHA has had its charter substantially expanded, insuring borrowers who only can afford down payments of even less than 5%.  While this type of intervention may have initially propped up the housing market in recent years, its easy and risky mortgages is cajoling buyers into making an economic decisions.  Specifically, it offers incentives to low-income buyers to purchase homes that are likely to continue depreciating some years.  This not only puts at risk the FHA’s (the People’s) money, but the underwater houses are a long-term financial burden for buyers.

Instead of recognizing the growing problem at  the FHA, President Obama is again attempting to expanded its charter.  Earlier this year the President proposed allowing underwater homeowners to refinance their mortgages through the FHA.  This will place additional risks on the taxpayers since many of the refinanced homes will continue dropping in value with their mortgages ultimately becoming the responsibility of the U.S. Treasury.

People who cannot afford to pay their mortgages and whose home values are significantly underwater need to get out from under this financial burden and that will only occur by walking away from the homes, as distasteful as this is.  The banks and government agencies that made the inappropriate loans need to eat those losses now so that the housing market can bottom and a true recovery can began.  These losses to the banks and government agencies will also be a strong incentive to not repeat similar errors in the future.  It also ensures that those that made the bad loans pay the price, not the bulk of Americans who stayed clear of imprudent financial behavior.

The problem with the housing market is an imbalance between supply and demand.  Any government intervention merely prolongs the downturn as they do not address the imbalances.  In fact they end up creating even more imbalances.  Adding insult to injury, the FHA has become an important player in the mortgage and housing markets in recent years.  When this agency ultimately retrenches in the housing market, as it ultimately must, its negative consequences on the economy will be huge, likely requiring an even large bailouts.

The FHA is another example of a failing governmental agency.  While many private companies run into economic challenges and some even fail, their failure should be viewed as the market’s cleansing of inefficiency.  While such occurrences are unhappy for the failed companies’ owners and employees, it is a healthy process for the overall economy.  This reality was understood by Americans until we started down the slippery slope of bailouts that began before the Obama came to power.  With these bailouts increasing in frequency and scope, it is easy to see that the path is unsustainable.  However, like an addictive drug, stopping the juice is a painful process and politicians are willing to offer the medicine.  The patient will have to get a lot sicker before appropriate treatment will be implemented.  That day of reckoning is coming.

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