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Federal Housing Administration Low on Reserves

Posted by Steve Markowitz on November 14, 2012

Now that the presidential election is over, the media has focused its attention on the so-called “Fiscal Cliff”.  This event is artificial, a creation of President Obama and the Congress when they could not agree to a budget in the previous year.  Obama and the Democrats wanted tax increases.  The Congress, Republicans, wanted spending cuts.  With neither side being willing to compromise, they did what politicians nearly always do: kicked the can down the road.

A “super-committee” of Republican and Democrat Congressman and Senators was created and given the task of creating a budget that would cut the deficit.  They failed in the matter was punted back to the Congress and President with a restriction: if a budget was not agreed to by the end of 2012, significant spending cuts would automatically occur throughout the federal government and taxes would increase significantly for many.

So there we have it, another crisis created by government.  Look for both sides to take the Country to the brink and then miraculously save us by once again by kicking the can down the road even further.

The various economic challenges facing the Country are the result of orgy-like spending since the early 1980s, both in the private and public sectors.  Now, even with trillion dollar deficits the economy remains weak.  The problem in the United States, and in most Western countries, is excessive debt.  Significant economic growth cannot occur without reducing the debt, but reducing the debt will hurt the economy even more in the short run.

On a nearly daily basis it is reported that some state, municipality or other government agency/organization is in trouble.  The Wall Street Journal added the Federal Housing Administration (FHA) to the list.  According to the Journal, for the first time in its 70 year history, the FHA will need a taxpayer bailout.  This would be in addition to the nearly $140 billion of taxpayer money already given to Fannie Mae and Freddie Mac for mortgage related problems.

The FHA was created during Franklin Roosevelt’s Administration to promote homeownership for first-time buyers.  This agency acted as an insurer of mortgages for mortgage providers.   It remained solvent even through last decade’s housing bubble because it maintained sound lending practices.  However, as the housing market took a nosedive after the bubble popped, the FHA relaxed its lending rules in another failed governmental attempt to prop up the housing market.

Currently, about 25% of the FHA’s mortgages guaranteed in 2007 and 2008 are delinquent.  Over 700,000 of its loans are more than 90 days past due or in foreclosure.  Should these mortgages fail, the FHA (taxpayers) could be on the hook for over $100 billion.  However, its current reserve are only slightly more than $1 billion.  Remarkably, because of the FHA’s status of having “permanent and indefinite” budget authority, these funds would automatically come from the U.S. Treasury if needed and would not require Congressional approval.

The FHA’s insolvent financial condition is emblematic of the public sectors debt problems.  It is also an example of how politicians irresponsibly spend the peoples’ money.  Finally, it is an example of how governmental policies often start with good intentions only to be corrupted by political influences and interference.  The FHA had been one of the better run government agencies requiring over eight decades to become insolvent.

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