A Well-Earned Bailout

On Wednesday, April 10, 2013, the release of the federal budget elicited cries of outrage. One of the many reasons, and one that hits particularly hard as the sting of the bank bailouts is still fresh on America’s cheek, is a $943 million bailout slated for the Federal Housing Administration (Puzzanghera and Reckard). Bailouts have never been popular among taxpayers, but one directed at a federal agency has attracted even more angry attention than most of the recent past. An article in the Financial Times discussed the reaction to the Bank of America bailout. While anger might be an understandable knee-jerk reaction, the situation should be looked at more closely. If any organization has ever been deserving of a bailout, it is the FHA.

The FHA is an essential part of the federal government’s already limited controls of the national economy. Since it was established by the Housing Act of 1934, the FHA has been providing mortgage insurance and acting as a stabilizing force on the United States housing market (Pennington-Cross and Yezer 357). Without its influence, many key economic periods in the U.S. may not have gone as smoothly as they did. The FHA played an essential part in the recovery from the Great Depression by re-establishing trustworthy mortgage lending; it helped provide financial support to the government during World War II and helped provide veterans with housing after the war’s end; and the FHA has served as a model for private lending and insurance organizations for nearly 80 years (Pennington-Cross and Yezer 358-359). Though it has not been perfect by any means, the FHA has done its part in strengthening the U.S. economy and adapting to suit the needs of the nation.

Just as it did in the past, the FHA served a vital role in the recent recession. After the subprime mortgage bubble burst, the FHA stopped the plummeting real estate market and set it on a path to recovery (Puzzanghera and Reckard). So much could not be said of the many financial institutions that received bailouts on the tail end of causing so much damage to the economy with no positive action to show for it. It is important to note that the budget item is not even guaranteed to be disbursed, “Obama administration officials said it was not certain the agency would need any taxpayer money because policy changes at the FHA, including higher premiums, have helped improve the outlook from just a few months ago” (Puzzanghera and Reckard). The FHA has demonstrated responsibility for their financial condition and is making considerable strides toward correcting it. When the FHA first identified a shortfall in their reserve coverage at the end of the last fiscal year, it was a difference of $16.3 billion, now reduced to $943 million (Puzzanghera and Reckard). That’s the kind of math that citizens concerned with reducing the national deficit should be supporting, not criticizing.

Not everyone is so optimistic about the FHA’s recovery. Edward J. Pinto, formerly a chief credit officer at Fannie Mae, argued that the FHA is in much worse shape and pointed to the massive investments in mortgages made by the FHA that could cause their shortfall to grow catastrophically, if the economy stops recovery (Puzzanghera and Reckard). Though this kind of risk cannot and should not be ignored, it must be weighed against the effects that those investments had. The FHA’s support arrested the fall of the housing market and saved both Fannie Mae and Freddie Mac from complete collapse. The recovery that began after the FHA’s intervention stabilized the housing market made it possible for Fannie and Freddie to recover and begin paying back their bailouts (Puzzanghera and Reckard). Beyond some miracle solution that costs no additional time or money, the part of the FHA in reversing the collapse of the housing market seems to justify the risk they’ve taken in their investments.

Some kind of intervention was essential, that was clear even before the subprime bubble burst. In 2005, it was predicted that the mortgage market would require bailouts after the collapse of the housing market (Baker 3). Even before the crisis began in 2007, it was clear to experts that real estate was on a road to ruin. By the time the 2007 collapse occurred, nobody was asking if it could be stopped, the only question was just how bad it would get. When the government began talking bailouts, it angered everyone then as this bailout for the FHA is doing now, but at the time the only alternative was to let the entire economy collapse (Weiner). At the time, real estate had grown to such a significant part of the economy that if the FHA had not stepped in, it would have been even worse than it already was. The size of the housing bubble regions and the amount of money invested in real estate means that they have significant influence over the national economy (Baker 2). By not making the massive investments it did, the same investments that may now require a bailout, the FHA would have been allowing the housing market and the corresponding economy fall to pieces the same as if the government had not bailed out the major banks like JP Morgan Chase.

A bailout will always be received negatively by taxpayers because it means their money is being used to correct someone else’s mistake. In the case of the FHA, however, the bailout is correcting a risky choice that was definitely the lesser of two evils. The FHA quite literally saved the U.S. housing market by taking the chances it did and, though it is now doing all it can to correct its instability on its own, a price must be paid for the force it took to shore up the collapsing economy. The FHA has a history of usefulness and helpful contributions to national stability as well as the advantage of being the hero in this particular instance. It is an organization worthy of saving and this is the kind of bailout the taxpayers should be happy to pay.

Works Cited

Baker, Dean. "The Housing Bubble Fact Sheet." Center for Economic and Policy Research Issue Brief n.v. (2005): 1-5. CEPR. 11 Apr. 2013.

Pennington-Cross, Anthony, and Anthony M Yezer. "The Federal Housing Administration in the New Millennium." Journal of Housing Research 11.2 (2000): 357-372. Knowledge Plex. 11 Apr. 2013.

Puzzanghera, Jim, and E. Scott Reckard. "FHA may need $943-million bailout." The Los Angeles Times. N.p., 10 Apr. 2013. 11 Apr. 2013. http://www.latimes.com/business/la-fi-0411-fha-bailout-20130411,0,6815608.story.

Weiner, Eric. "Subprime Bailout: Good Idea or 'Moral Hazard?" NPR. N.p., 29 Nov. 2007. 11 Apr. 2013. http://www.npr.org/templates/story/story.php?storyId=16734629.