Tags: Loss | FHA | Cash | Infusion

Reuters: Loss-riddled FHA Will Need First-ever Cash Infusion

Wednesday, 25 Sep 2013 04:23 PM

The Federal Housing Administration, weighed down by losses on souring loans, will likely need a cash infusion from the U.S. Treasury for the first time in its nearly 80-year history when the current budget year ends, according to sources familiar with the matter.

The agency, which offers private mortgage lenders guarantees against homeowner default, has nearly exhausted its reserves for the mortgages it backs, making it necessary for the government agency to turn to the Treasury Department for a cash injection.

The FHA has never needed to tap the Treasury before because it has been able to take other actions, including raising insurance premiums, to stay solvent. The government mortgage insurer plays a key role in helping those with low and modest incomes obtain access to credit to purchase a home.

The White House projected in April that the FHA would face a shortfall of $943 million for the fiscal year that ends on Monday, but the agency said it would wait until the end of the budget year to make a final decision on whether to draw Treasury aid.

The agency has struggled to manage the growing glut of delinquencies on home mortgages it insured during the housing crisis, and loans made from 2005-2008 have eaten away at its cash reserves. Some analysts say profit on loans guaranteed over the past three years may not be enough to make up for those losses.

While the agency enjoys automatic access to Treasury funds once it depletes reserves, Republicans are likely to cry foul. They worry the FHA could become like Fannie Mae and Freddie Mac, the mortgage finance companies the government rescued in 2008 that have absorbed nearly $190 billion in taxpayer funds.

Consumer advocates maintain the support the agency has given to low-income borrowers and the housing market as a whole has been worthwhile.

The agency has not only raised premiums it charges borrowers to insure their mortgages, but it has tightened underwriting standards after an independent actuary predicted in November that it would require $16.3 billion from the Treasury to cover losses.

The FHA insures about $1.1 trillion in mortgages and supports 15 percent of all U.S. mortgages, up from about 5 percent in 2006.

It is legally required to keep a 2 percent capital ratio, which is a measure of the fund's ability to withstand losses. It has failed to meet that threshold for a number of years.

A representative for the Department of Housing and Urban Development, which oversees the FHA, did not respond immediately to a request for comment.

© 2015 Thomson/Reuters. All rights reserved.

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