FHA: Understaffed, underfunded and overwhelmed?

-- In the current credit squeeze, if you have less than a 20% down payment, there's pretty much only one major source of mortgage financing available: FHA, the Depression-era home loan insurance agency that still offers 3% down, 30-year fixed-rate mortgages, even on jumbo loans.

But there is a potentially serious problem looming for the Federal Housing Administration. New-loan volume is exploding -- tripling in the last 12 months alone -- and Congress just handed the agency the responsibility for virtually all the government's efforts to keep distressed homeowners out of foreclosure by refinancing their current, unaffordable loans.

FHA says it needs to hire more staff and upgrade its technology to handle the crush but complains that Congress hasn't appropriated the necessary funds -- $65 million. Capitol Hill appropriations committee staff members dispute some of that, but the specifics of the arguments over dollar amounts aren't the issue.

The real question: Can a government agency whose market share dropped below 3% during the heyday of the subprime boom now properly handle explosive volume that's multiplying its market share to 10 times its low point?

Mortgage and real estate experts worry about the consequences of quickly shifting a heavy share of the mortgage market to an agency that may be inadequately staffed or funded. Howard Glaser, who served as acting general counsel for the Department of Housing and Urban Development, FHA's parent agency, during the Clinton administration, worries that loading on too much business without proper funding raises the odds of breakdowns.

"FHA is assuming the risks of a mortgage market abandoned by private investors -- without the risk-management tools," he said.

Steve O'Connor, senior vice president of the Mortgage Bankers Assn., agreed that danger is lurking in the massive increases in loan business going to the FHA. "You just can't expect to fit that amount down the same-size pipe."

The National Assn. of Home Builders and the National Assn. of Realtors -- whose sales to consumers in the coming year will depend on financing support from FHA -- have similar worries. Dick Gaylord, president of the Realtors group, said if FHA "is truly going to serve its growing constituency," its staffing and funding will need to expand.