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Wharton Professor Cautions FHA May Need A Bailout

STEVE INSKEEP, HOST:

Some other news. The Federal Housing Administration will make its annual report to Congress today. The government agency has come to play a huge role in the nation's mortgage market, and that makes some experts nervous. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: The FHA makes home loans to people who can't afford a big down payment. Before the housing bubble burst, FHA-backed loans were a very small part of the market. But that's changed. Banks are now more cautious and if you're a first time homebuyer with only, say, $5,000 saved up, the FHA is the only game in town.

JOSEPH GYOURKO: They are the only game in town if you want a mortgage with that low a down payment.

ARNOLD: That's Joseph Gyourko, a professor of real estate at the University of Pennsylvania's Wharton School. He's watched as the FHA has grown rapidly. Today it guarantees a full third of home purchases.

GYOURKO: They guarantee a little over a trillion dollars in outstanding mortgage balances. Over half of that, over 500 billion, is underwater.

ARNOLD: In other words, the FHA makes loans to people with down payments as low as three and a half percent. And so since house prices have been falling lately, Gyourko estimates that half of those people now owe more than their house is worth. And with unemployment still very high, Gyourko says that's a recipe for a lot more losses on foreclosures.

GYOURKO: If something goes wrong in that pool, and I fear it will go wrong, it's going to be a big cost to the tax-payers.

ARNOLD: Gyourko says if the economy doesn't improve, the FHA will need a bailout that could run as high as $50 billion. Other experts though, are not predicting that kind of financial disaster for the FHA. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.
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