Economists criticize mortgage insurer's risk
The federal government's mortgage-insurance agency is understating how much risk it has taken on, says a group of economists from the New York Federal Reserve and New York University, increasing the likelihood the agency may need taxpayer funds. The economists warn that the Federal Housing Administration—which has jumped to fill the void left by the collapse of the private mortgage market—is overlooking factors that signal higher losses, according to a working paper released Thursday. The economists warn that by underestimating the risks it faces, the FHA has increased the likelihood that it will have to ask Congress for money for the first time in its 75-year history. The study doesn't say how likely that now is, but "it's hard to imagine that they won't be returning to Congress several times," said Andrew Caplin, one of the authors and an economics professor at NYU. "It's just inconceivable that the loans ... will not cause very large losses." The FHA says it would need taxpayer money only in a worst-case housing-market scenario. The economists conclude in their study that the share of borrowers who owe more than their homes are worth may be much higher than the agency forecasts. The economists estimate that about 40% of mortgages insured by the FHA are worth more than the homes that secure them; as many as 14% of the loans may be for more than 115% of the home's value. The home-price measure used by the FHA puts the latter figure at 6%. Such underwater borrowers are generally more likely to default if they lose their jobs or have trouble meeting mortgage payments, because they can't easily sell their house. The economists' study also says the FHA should better account for a higher risk of default among borrowers in areas with high unemployment rates. "You look at the areas in which they're underwater, you look at the unemployment rate in [those] places, you look at how little was invested upfront, and you know that a lot of these mortgages aren't coming back," Caplin said.