FHA is also too big to fail

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Steve Chiotakis: A government agency credited with preventing an even deeper housing bust now faces a bust of its own. The Wall Street Journal reports today that if its mortgage losses get any worse the Federal Housing Agency, the FHA, may soon need a taxpayer bailout. Marketplace’s Sam Eaton reports.

Sam Eaton: The Federal Housing Agency insures private lenders against defaults on certain types of mortgages. And as more lenders require insurance for buyers who can’t make big down payments, the FHA’s share of the mortgage market has swelled to nearly a quarter.

But so has the default rate on those loans, and that’s beginning to eat into the agency’s financial cushion, bringing it dangerously close to the government mandated minimum. That’s a cash reserve equal to 2 percent of the FHA’s total loan values. If it falls below that mark, the agency will have to either pull back its lending or ask Congress for a bailout.

Agency officials say that’s unlikely, but the FHA’s critical role in stabilizing the housing market may give Congress little choice.

I’m Sam Eaton for Marketplace.