Housing: We Never Learn

Back in the early 1990s lots of liberals I knew argued that the S&L fiasco showed the need for “re-regulation.”  And so we re-regulated banking.  I argued that the fix would not work, as it didn’t address the core issue—moral hazard.  I suggested that Fannie and Freddie were time bombs waiting to go off.

You’ll have to take my word for all that.  But not for my 2009 prediction that Obama’s policy of pumping up FHA was another time bomb waiting to go off.  His solution to the financial crisis caused by reckless sub-prime lending was to try to use government levers to inflate another sub-prime bubble.  The bubble has not arrived yet, but three years later even the New York Times is worried about FHA:

DO we have another Fannie or Freddie on our hands — another mortgage giant headed for a rescue?

Like Fannie Mae and Freddie Mac before it, the Federal Housing Administration is suffering in a mortgage hell of its own making. F.H.A. officials say they won’t need taxpayers’ help, but we’ve heard that kind of line before.

The F.H.A. backs $1.1 trillion of American mortgages and, by the look of things, it’s in deep trouble. Last year, its mortgage insurance fund was valued at $1.2 billion. Today that fund is valued at negative $13.48 billion.

Granted, that figure, reported by F.H.A.’s auditor, doesn’t represent actual losses. It’s an estimate of the difference between future mortgage insurance premiums that the F.H.A. will collect and the expected losses on the mortgages that the agency is obligated to cover over time, combined with the agency’s existing capital resources.

But the upshot is this: If the F.H.A. were to stop insuring new home loans today, it wouldn’t have the money it needs to cover its expected losses in the coming years.

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