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Bloomberg: Will FHA Be the Next Government Bailout?

The FHA could be on the verge of requiring a bailout, says a Bloomberg News column published this week. With a “vacuum” in the U.S. mortgage market and private financing for home loans nearly halting, policymakers must focus on what the column calls the “third leg of the housing-support stool: the Federal Housing Administration,” the column argues.

Left unchanged, the FHA’s accounting problems have the potential to require a cash infusion for FHA and a stress on taxpayers. If policymakers are more transparent about risks involved in guaranteeing mortgages, the column notes, these outcomes can be avoided. While Fannie Mae and Freddie Mac have received much of the focus, FHA is deserving of attention as well. With its capital reserves at $3.5 billion and outstanding mortgage guarantees projected to exceed $1 trillion in 2011, the administration’s accounting structure is troublesome, the column notes.

“The credit quality of FHA lending can be improved with better underwriting standards, such as requiring higher down payments and premiums,” the column argues.

“The growth in FHA lending has turned a seemingly small problem into a large taxpayer vulnerability,” it continues. “The current accounting rules will also make it harder politically to shift some of the housing market back to the private sector.

Taxpayers end up bearing the brunt of the guaranteed mortgages, the column ultimately argues.

“The last time Congress delayed action in this area, taxpayers got stuck bailing out Fannie and Freddie — at a cost of more than $160 billion and rising,” it says.

Read the column on Bloomberg News.

Written by Elizabeth Ecker

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