The Government Fails on Housing…Again
By Jason Hughey
Several months ago, I wrote that, “The first rule of government intervention in housing is that government should stop intervening in housing.”
News broke at the end of last week that further confirmed the soundness of this rule. On Thursday, the Federal Housing Administration (FHA) released its 2012 actuarial report that revealed what some housing policy experts have been predicting for months: FHA is, for all intents and purposes, insolvent. Although the report (and certain Obama administration officials) tried to naively argue that the future is still bright for the FHA, the room for sugarcoating this news is increasingly small.
The FHA is legally supposed to keep a capital buffer of 2% of its outstanding loans. In simple terms, for every $100 dollars that the FHA loans out to borrowers, it is supposed to have at least $2 in actual cash. That’s an extremely low number, leaving the FHA little margin for error if it has a few bad years in a row.
Before last week’s report, it was already known that FHA had much less than the 2% requirement in its capital buffer, holding only 24 cents for every $100 in loans at the end of 2011. As dangerously low as that sounds, it’s better than being in the negative, which is where the FHA stands after the release of the actuarial report last week. The value of the FHA’s capital reserve has fallen to negative 1.44 percent (which comes out to roughly a $16.3 billion deficit).
If that math doesn’t add up to you, don’t feel bad. It doesn’t add up to anyone else either. Essentially, it means that the FHA is broke. In the words of Edward Pinto of the American Enterprise Institute, “If (FHA) were a private company, it would be shut down.”
For right now, the FHA is trying to save face in the hopes that some rather rosy assumptions come true in the next few months, including a rise in interest rates and a prolonged improvement in the overall housing market. Even then, many of the financial fundamentals underlying FHA are in such bad shape that it is unlikely that their balance sheet will return to the positive anytime soon.
The biggest problem that will face Americans now is that dedicated interventionists will continue to defend the FHA’s involvement in the housing market until the point of a bailout becomes “financially necessary.” When that happens, these interventionists will demand that taxpayers again be fleeced to bailout yet another wasteful government intervention in the housing market.
Of course, if FHA does end up receiving a bailout, it will likely come straight from the Treasury without any measure of congressional action. Regardless, taxpayers will be stuck with the bill just as we were several years ago when Fannie Mae and Freddie Mac received their bailout from the Treasury.
After the past decade of government-created distortions, subsidies, and bailouts of the housing market, it could not be clearer that government fails when it tries to play the role of a financial institution. It’s time to let failures like the FHA, Fannie Mae, and Freddie Mac, run their course instead of continually propping up the problems that created this mess in the first place.