Tags: Loss | FHA | Taxpayer | Support

Loss-ridden FHA Likely to Need Taxpayer Support

Thursday, 15 Nov 2012 08:57 PM

The Federal Housing Administration's capital is inadequate to cover expected losses, which would push it into a deficit of $13.5 billion, an independent audit has found, according to a U.S. housing official.

The findings likely mean the agency, which insures about one-third of all U.S. mortgages, will need taxpayer funding for the first time in its 78-year history. It also appears certain to fuel a long-standing debate on the government's role in supporting the housing market.

The findings, first reported by the Wall Street Journal, were due to be released on Friday.

An audit last year found the FHA, a primary source of funding for first-time home buyers and those with modest incomes, faced a nearly 50 percent chance of needing a bailout.

The FHA has never needed an infusion of funds from the U.S. Treasury because it has been able to take other actions, including raising insurance premiums, to stay solvent.

Those premiums help cover the costs related to defaulted mortgages, and it is possible the agency could raise them again to shore up its finances.

Earlier this year, it managed to avoid a bailout because it received an almost $1 billion payment from a U.S. settlement with mortgage servicers on claims of lending abuses.

But critics of the agency, which insures more than $1.1 trillion in mortgages, have warned that taxpayers could soon be on the hook if losses continued to mount. FHA's cash reserves fell to a record low of $2.6 billion last year.

The agency is legally required to keep a 2 percent capital ratio, which is a measure of its ability to withstand losses. It has failed to meet that target for three straight years.

The latest forecasts showed the FHA currently has reserves of $25.6 billion, but it will lose $39 billion on loans it has guaranteed, leading to the $13.5 billion deficit, the audit will show.

Republicans have worried the FHA could turn out to be a burden on taxpayers along the lines of Fannie Mae and Freddie Mac, the mortgage finance firms the government seized in 2008.

Those companies have soaked up almost $190 billion in taxpayer funds, although they are both now profitable.

"It's time for us to return to fundamentals in housing, recognizing that having the federal government making loans to people who can't pay them back isn't good for homeowners, communities, or the country," Senator Bob Corker, a Republican on the Senate Banking Committee, said in a statement.

Supporters of the FHA hail the role it has played keeping mortgage funds flowing since the housing bubble burst in 2006.

The agency does not make loans itself, but offers private lenders guarantees against homeowner default.

Its share of the home loan market has increased sharply since the housing bubble burst, with its loan portfolio more than tripling. In 2006, it only insured about 5 percent of U.S. mortgages.

© 2015 Thomson/Reuters. All rights reserved.

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