Professor Joseph (Joe) Gyourko responds to HUD's attack

As the US debt continues to grow, HUD officials still fail to own up to the massive liabilities on their books that could cost taxpayers mightily. In a point by point refutation, Wharton professor Joseph (Joe) Gyourko responds to HUD's attack of his recent AEI report. In his original study, Professor Gyourko had identified a $50-$100 billion bailout that will likely be needed to bail out the Federal Housing Administration (FHA). Professor Gyourko also provides a summary, copied below, which reveals a costly blindspot in the perspective of HUD’s leadership.

Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance, and Business & Public Policy at the Wharton School, University of Pennsylvania. He can be reached at

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Response to HUD’s defense of FHA insurance fund

HUD recently provided what I believe is its first official response to my report “Is FHA the Next Housing Bailout?” It was written by Dr. Raphael Bostic, the assistant secretary for research and policy development and is posted on HUD’s official blog, “The HUDdle.” I encourage you to read it, as it is provides important insight into the perspective of HUD’s leadership on the issue of the solvency of the FHA insurance fund.

While my full response is posted here, a brief summary follows:

In general, there was more heat than light generated by the assistant secretary’s response. On the issue of FHA’s overall risk, he noted a $400 million increase in total liquid assets, without commenting on how liabilities increased on the other side of the balance sheet. FHA issued just over $213 billion in new guarantees on single family mortgages in FY2011, so it grew its potential liabilities by well over $500 for every dollar increase in total liquid assets. Calculations detailed in my full response show that FHA’s leverage ratio, computed as total single family mortgage guarantees outstanding divided by total liquid assets, has increased from 16.6 in FY2005 to 35.8 in FY2011. There has been a sharp increase in FHA’s leverage to a level that is very high by any reasonable standard.

The most detailed response to my four critiques of how FHA underestimates future default risk was on the possibility that the $8,000 tax credit program inadvertently allowed purchasers to become owners without using much, if any, of their own personal funds for the down payment. He provided useful data indicating that relatively few households actually used assistance from affordable housing groups at closing. That is comforting, but it still does not answer the question of whether households figured out other ways to borrow against the tax credit refunds before closing. If so, there will be owners who FHA thinks used their own funds, but did not in reality. This issue is not yet settled, and much more work is needed to get to the bottom of it.

Two other of my primary critiques of FHA’s evaluation of default risk pertain to unobserved credit risk and the underestimation of negative equity. Both were summarily dismissed in a single sentence by the assistant secretary as non-issues. As my full response notes, I believe the assistant secretary to be mistaken in his conclusions that both of these factors are non-issues. They need to be taken much more seriously by HUD’s leadership.

My fourth critique about underestimating the risk associated with streamline refinanced mortgages, which is based on excellent work done by a team of researchers from the Federal Reserve Bank of New York and NYU, is only briefly mentioned, but not directly addressed in a substantive way. Hence, my full response has nothing to add on that issue beyond what is in previous research and my report.

In sum, the assistant secretary’s response does not lead me to change any of my conclusions regarding the current riskiness of FHA or its underestimation of default risk. However, the path forward in addressing each critique is reasonably clear, as my full response notes. There just needs to be a will to pursue them, and that must come from HUD’s and FHA’s leadership. Finally, there are some other noteworthy aspects of the HUD blog post dealing with the value of future books of business and the current levels of fees. They also are addressed in my full response.


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About the Author



  • Joseph Gyourko is the Martin Bucksbaum Professor of Real Estate, Finance and Business & Public Policy at The Wharton School of the University of Pennsylvania.  He also serves as Director of the Zell/Lurie Real Estate Center at Wharton and is Chair of the Real Estate Department.  Professor Gyourko received his B.A. from Duke University and a Ph.D. in economics from the University of Chicago.  His research interests include real estate finance and investments, urban economics, and housing markets.  Professor Gyourko is a Research Associate of the National Bureau of Economic Research (NBER) and is Co-Director of the NBER Project on Housing Markets and the Financial Crisis.  A former editor of Real Estate Economics, Professor Gyourko presently serves on various journal editorial boards.  Professor Gyourko is a past Trustee of the Urban Land Institute (ULI) and currently serves on the Board of Directors of the Pension Real Estate Association (PREA).  Finally, he consults and advises real estate various companies and investors.


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