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Friday’s Wall Street Journal features an article outlining concerns over the Federal Housing Administration’s (FHA) financial viability. The article points out that FHA currently insures 23 percent of the loans in the housing market up from 2.7 percent in 2006. 7.8 percent of FHA loans at the end of the second quarter were 90 days late or more or in default. Federal law says the FHA must maintain reserves equal to 2 percent of the loans insured and the ratio has fallen to 3 percent last year down from 6.4 percent in 2007.
The FHA is part of the government intervention in the housing market that contributed to the bubble and resulting financial crisis. The FHA continues to prop up or increase the prices of homes by unnaturally facilitating purchases by cheaply insuring loans against default. Continued intervention in the housing market will only prolong the suffering of a slow recovery. Government should step aside to let prices fall and markets recover on their own.