The most prominent of these risky agencies is the Federal Housing Administration (FHA). The FHA currently backs an activity portfolio of over $1 trillion. With an economic value of only $2.6 billion, representing a capital ratio of 0.24 percent, relatively small changes in the performance of the FHA’s portfolio could result in significant losses to the taxpayer. As the taxpayer is, by law, obligated for any losses above the FHA’s current capital reserves, these are not losses that can be avoided. Reasonably foreseeable changes to the FHA’s performance could easily cost the taxpayer tens of billions of dollars, surpassing the ultimate cost of the Troubled Asset Relief Program (TARP) bank bailouts.
To protect the taxpayer and the broader economy, the FHA should be scaled back immediately, and an emphasis should be placed on improving its credit quality. At the same time, the agency should be placed on a path to ultimately be eliminated, with its risk-taking being transferred back to the private sector.
The Cato Institute
February 6, 2012