Friday's announcement that the Federal Housing Administration may soon need taxpayer support for the first time in its 78-year history is sure to energize critics of the government-run mortgage insurer.
It will be months before we know the final tab, but even the $16.3 billion estimate released today is a small price to pay for the agency's efforts to rescue the housing market.
Without the agency's help in recent years, it would have been much more difficult for middle-class families to access mortgage credit since the housing crisis began. As private capital fled the mortgage market, FHA insurance propped up demand for homes, preventing housing construction and sales from plummeting even further than they did.
According to Moody's Analytics, the agency's actions prevented home prices from dropping an additional 25%, which in turn saved 3 million jobs and half a trillion dollars in economic output.
Still, critics will be quick to make hay of the news, stoking public outrage over billion-dollar "bailouts," gross mismanagement of taxpayer risk, and imminent insolvency at the agency, which backs $1.1 trillion in home loans.
Don't buy any of it.
First, the agency's current financial troubles are not the result of a weak business model or the financial incompetence of federal bureaucrats, but of a "hundred-year flood" of foreclosures during the worst housing crisis since the Great Depression, plus a couple of poor policy decisions.
The bulk of the agency's losses come from loans originated between 2007 and early 2009, during the peak of the housing bubble and just after it burst. A large percentage of those loans included so-called "seller-financed down payment assistance," an admittedly bad idea that cost the agency direly. In these transactions, sellers covered the required down payment at the time of purchase, but often fraudulently inflated the purchase price to make the transaction worthwhile.
The FHA tried to eliminate seller-financed loans from its programs for years, but met strong opposition from lobbyists and lawmakers. Congress finally banned them from FHA insurance programs in 2008 (the ban officially took effect in the second fiscal quarter of 2009) but significant damage was already done. If such a ban had been in place from the start, the agency could have avoided $15 billion in losses and likely would not need taxpayer support today, according to the actuarial report.
Meanwhile, the agency's more recent years of business are likely to be some of its most profitable ever, due in part to higher fees and new protections put in place by the Obama administration. It's worth noting that roughly 70% of loans made since 2010 - the "profitable" books - had a down payment of less than 5%, so the agency's basic business model still appears to work.
Second, Friday's announcement does not signal an imminent financial emergency at FHA; it's the byproduct of prudent budgeting.
FHA is not running out of money any time soon. The agency still has $30.4 billion in its coffers to settle insurance claims as they come in. But according to federal budget rules, FHA must hold enough capital to cover all expected claims over the next 30 years, which would require about $46.7 billion, according to FHA's actuaries.