The mortgage market is finally showing signs of stabilization, but the Federal Housing Authority is starring down the barrel of $16.3 billion in losses and taxpayers could be on hook for a bailout.
The 78-year-old agency filled the gap in mortgage liquidity after the 2008 financial crisis that froze the credit markets and tightened lending standards, and is a key source of funding for low-income and first-time homeowners.
The FHA increased market share in the low down payment market has played a role in its bleeding balance sheet. “In 2008 the FHA made less than 5% of the low down payment market, now its share is about 25-30%,” said Van Order.
The agency is counting on the less-risky securitized loans it made after 2009 to help boost its balance sheet…but Gyourko isn’t convinced. “If you read the fine print, they think the next seven years will be worth $65 billion, so the FHA grows itself out for the problem, but in the last four years, the agency overestimated the value of next year. It’s a highly leveraged operation and they don’t have a good track record.”