Housing bailout redux.

• Author: Suderman, Peter
• Position: Follow-Up

Not long after the savings and loan bailouts of the 1980s, reason's Rick Henderson caught wind of another potential bailout in the making--this time of the Federal Housing Administration (FHA), a Depression-era agency that guarantees private home loans against default. In the January 1990 issue he warned that "recent real estate crashes in the Southwest and elsewhere have depleted the agency's insurance funds." As a result, the FHA was stuck with an excess of housing stock that could be sold only at a loss. "Unless the economy rebounds dramatically in those regions," Henderson wrote, "the FHA may need a taxpayer bailout totaling hundreds of billions of dollars."

That bailout never arrived. But now experts and agency watchdogs are warning once again that taxpayers may be on the hook for billions in losses thanks to the program.

In a November paper for the American Enterprise Institute, Joseph Goyourko, an economist at the University of Pennsylvania's Wharton School, warned that the FHA is headed for losses in the range of $50 billion to $100 billion unless the economy makes an unusually swift recovery. According to Gyourko, the agency has "systematically overestimated the value of its main insurance fund" by, among other things, assuming without evidence that the increased credit risks that appeared following the...