WASHINGTON — A federal agency that's supposed to help the housing market recover from the financial crisis is taking steps to avoid becoming a victim itself.
The Federal Housing Administration, which insures mortgages, announced Friday that its reserves are set to fall below the legally mandated level. The agency is fully funded through fees paid by homeowners who have FHA-backed loans, and that money is endangered by the continued tide of foreclosures.
But FHA Commissioner David H. Stevens said there was no need for the government to pump money into the agency for the first time. Instead, he announced a series of policy changes to reduce its risk of future losses that will be enough to strengthen the reserve fund.
"There will be no taxpayer bailout," Stevens said. He emphasized that the fund in question is a secondary reserve and is projected to return to its required level in two years without any changes by the FHA.
But with the FHA insuring more and more mortgages as banks have tightened their lending requirements, it might be only a matter of time before the struggling housing market and rough economic conditions cause the agency's losses to outstrip its reserves, said Bert Ely, an independent banking consultant.
"They're putting a lot of mortgages on their books," Ely said, many of them taken out by weak borrowers at a time when unemployment is still high. "None of this bodes very well for the FHA down the road."
Sen. Christopher S. Bond (R-Mo.) described the FHA as "a powder keg that will explode," potentially at taxpayer expense. He called for more sweeping changes, including greater management oversight and tougher efforts to prevent fraud. "It's critical we address FHA's problems now because the taxpayer credit card is maxed out and a viable FHA is necessary for our economic and housing recovery," he said.
The FHA, the world's largest mortgage insurer, was created during the Great Depression to help average people buy homes. It insures mortgages made with a down payment of as low as 3.5%. Its business fell off during the housing boom as lenders offered subprime and other risky mortgages to buyers. But after the market collapsed, the FHA has taken on a greater role. The agency now insures 23% of the mortgage market, compared with about 2% in 2006.
"They're absolutely critical," said Josh Denney, associate vice president for public policy at the Mortgage Bankers Assn. "They're the tool for many first-time homeowners or anyone else who doesn't have a 20% down payment right now."
