Fallout: The Financial Crisis

FHA may need a bailout of its own

Jeff Tyler Nov 10, 2009
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Fallout: The Financial Crisis

FHA may need a bailout of its own

Jeff Tyler Nov 10, 2009
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TEXT OF STORY

Kai Ryssdal: As long as we’re talking about banks and the Federal Reserve, the next group in line for a government bailout could be a branch of the government itself. The Federal Housing Administration is said to be running out of money. The FHA has been an important part of the housing market. It’s been making loans long after financing from the private sector has dried up. We asked Marketplace’s Jeff Tyler what a broke FHA would mean for a just recovering real-estate industry.


JEFF TYLER: The Federal Housing Administration isn’t inspiring tons of confidence these days. A Washington Post story says the FHA has less money in its reserve fund than is required by law. Also, the government lender recently delayed the release of an independent audit of its finances. Budget analysts speculate FHA may need to tap Treasury funding to the tune of $20 billion. Still, some believe FHA is a good bet for a bailout.

Dean Baker is co-director of the Center for Economic and Policy Research.

DEAN Baker: In principle, this could be made up in the future. The FHA had basically been run at a profit for most of its existence and presumably will be again once we’re through this housing crisis.

When times are good, profits generated by FHA flow back to the Treasury. And FHA plays an important role in the housing market right now. Since banks have cut back on their mortgage lending, Baker says FHA has picked up the slack, now handling almost a quarter of the new mortgages being issued.

In response to FHA’s financial problems, Congress may force it to adopt stricter standards.

Douglas Elliot with Brookings Institution says anything that reduces new FHA loans would be a mistake.

DOUGLAS Elliot: They are acting in a public purpose. We really want the housing market to stabilize. And if we were instead to have the FHA pull back, it would be one more thing knocking housing prices down.

FHA officials declined to comment for this story. But they will break their silence on Thursday when the FHA will release the results of the delayed independent financial audit.

I’m Jeff Tyler for Marketplace.

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