The Government’s Next Housing Bubble

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Is the next housing bubble already on the horizon? And is the federal government the one inflating it?

That’s what lawmakers in Washington fear, the Los Angeles Times reports. As private mortgage insurers fall by the wayside in this dismal, bottomed-out housing market, the Federal Housing Administration—the government’s mortgage insurance company—has stepped in to maintain lending to homeowners. Reports the Times, the FHA insured 21.5 percent of all new mortgages in 2008, (up from less than 6 percent in 2007), including nearly 2 million mortgages worth at least $328 billion. This year, the agency essentially backstopped the housing market.

But is the FHA doing too much to prop up the market by lending to people who could be at risk for default and foreclosure? The catch with FHA loans is that little payment is required up front to get the loan—which means borrowers who face hardship, job losses, or a plunge in home values, are more likely to walk away from their homes. Then the FHA is stuck with worthless mortgages, eating millions in losses. (Sound familiar?)

The Times goes on to report:

Some lawmakers…worry that the FHA may be doing its job too well—enabling too many people with shaky finances to get loans, and in effect setting up a potential repeat of the housing bubble fueled in part by no-questions-asked subprime loans.

Recent numbers appear to underscore those concerns. The percentage of FHA loans that are delinquent or in foreclosure climbed to nearly 8% at the end of June, from about 5.5% in early 2006, according to the Mortgage Bankers Assn. And in the weeks ahead, its reserves for loan losses are projected to slip below federally mandated limits.

Indeed, the FHA might need its own bailout if its reserves continue to plummet due to losses. Meanwhile, lawmakers are looking at ways to tighten up the agency’s standards and shore up its reserves. Hopefully the federal government’s institutional memory is not so short as to forget how the last housing meltdown happened.

HERE ARE THE FACTS:

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