Todd Genger - Federal Housing Administration Loan May Be the Next Bailout

It looks like the federal government has figured out a way out of the home finance mess exacerbated by Fannie Mae and Freddie Mac’s lax lending standards. The proposed solution to support the moribund financing market by increasing the percentage of mortgages backed by the Federal Housing Administration (FHA). The FHA does not make loans, but it insures lenders against mortgage defaults for mortgages that meet their strict lending standards.

Back in 2006, when housing prices were flying high and speculators were flipping houses like pancakes, the FHA backed approximately 5% of mortgages used to purchase a home. As private lenders retreated from the market, the FHA took up the slack. Now, over 30% of all mortgages are backed by the FHA. Mired in one of the most dramatic and sustained periods of home price declines in history, FHA reserves are down to $2.6 billion, a historic low – down 45% since last year, shares todd genger.

If housing prices continue to decline, a not unlikely scenario given current unemployment and growth prospects, the FHA can seek a bailout from the U.S. Treasury Department. Say what you want about Washington politics, but the typical federal bailout requires Congressional approval and some level of accountability. Because the agency has been granted “permanent and indefinite” budget authority, the FHA can bypass Congress and go directly to the Treasury, shares todd genger. A recent FHA report estimates that a 9% decline in home prices would require a $13 billion bailout. A decline of 16% to 20% would require a bailout of somewhere between $29 billion to $43 billion. If housing prices do not recover soon, the American dream will keep getting more expensive for American taxpayers.

After several high profile financial company meltdowns during the recent recession, consumers are concerned about the safety and security of assets held at banks and other financial institutions.

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the US government. The FDIC protects consumers against the loss of their banking deposits if an FDIC-insured bank or savings association fails. The FDIC was created in 1933 and FDIC insurance is backed by the full faith and credit of the United States government.

Checking accounts, savings accounts, money market deposit accounts and certificates of deposit (CDs) are insured by the FDIC up to the legal limit of $250,000, shares todd genger. However, many common financial products, like mutual funds, annuities, life insurance, stocks and bonds are not insured by the FDIC.

FDIC insurance should not be confused with protection offered by the Securities Investor Protection Corporation (SIPC). SIPC replaces missing cash, stocks, bonds and other securities when a brokerage firm fails.