Bankrupt Federal Housing Administration to Bail Out Bankrupt Mortgages

Another of the mortgage industry bailout plans proposed by Congress and the President has been to use the Federal Housing Administration (FHA) to guarantee loans for homeowners to avoid foreclosure. While this has been one of the lesser-discussed options to solve the housing crisis, it represents another plan by the government to take money from the general public in order to help out corporations and banks, and infringe on the civil liberties of Americans entering into this program.

The FHA plan involves the government securing new mortgages for nearly nine million homeowners having trouble making payments on loans that are larger than the values of their properties. Homeowners would be able to refinance into a mortgage backed by the FHA, and lenders be required to forgive part of the current loan. This plan would effectively force banks to offer short payoffs to homeowners in return for the opportunity to get these bad loans off of the bank's books.

What may be most disturbing about this proposal is that it would require the newly refinanced homeowners to live in the house for a period of time after obtaining the new loan. Whether this is some kind of prepayment penalty or a prohibition against selling the house, it is debatable if the government should be restricting the movement of homeowners and limiting their ability to sell or refinance their homes.

Even worse, the FHA is already on the brink of insolvency, and the Department of Housing and Urban Development (HUD) is considering having to ask Congress for direct subsidies to meet a $1.4 billion budget shortfall in 2009. For the first time in its 74-year history, the FHA will face a deficit due to its own exposure to the housing bubble and high rates of foreclosure and mortgage payment delinquency.

So, it seems that the FHA will be encouraged to take on more bad loans and allow struggling homeowners to refinance, but the agency itself is facing its own financial crisis. Thus, homeowners and the general public will have to subsidize the FHA so that the FHA will be able to subsidize mortgage companies and help them remove bad loans from their balance sheets.

These bad loans will be made slightly better, but an FHA that is already suffering from high foreclosure rates will be taking on underwater loans from homeowners who may end up walking away anyway if property values keep declining. But the FHA will come up with some part of the program that uses government force to require homeowners to remain in these homes for an unspecified period of time.