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WSJ: Could FHA Go Broke?

Is the Federal Housing Administration on the verge of going broke? A Wall Street Journal article this week raised concerns about the financial situation for FHA, indicating that the future is less-than bright for the giant housing agency. In fact, WSJ notes the risk is rising that FHA could require a tax bailout for the first time in its 77-year history, “if the economy doesn’t recover soon.”

Citing the work of a University of Pennsylvania real estate and finance professor, WSJ points out that FHA could face a $50 billion shortfall in the coming years. It has gone from backing 5% of new mortgages for home purchases in 2006 to about a third today.

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Source: WSJ, FHA

According to the study, the losses will be spread over many years and are unlikely to bankrupt the agency this year or next, but “FHA‘s present state is precarious,” it states. “For the past two years, it has been in violation of its most important capital reserve regulation, under which it is supposed to hold sufficient reserves against unexpected future losses on its existing insurance-in-force.”

The combination of increasing leverage at the entity level and among homeowners being insured has made FHA a risky proposition for taxpayers, the study states.

Bloomberg News posed a similar question in July in a report titled “FHA May Be Next in Line for Huge Bailout.”

Read the Wall Street Journal article.

Written by Elizabeth Ecker

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