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FHA could need taxpayer bailout next year, report says

The federal agency that insures more than $1 trillion in mortgages may need as much as $43 billion from the U.S. Treasury to stay afloat if the housing market fails to rebound next year.

November 16, 2011|By Jim Puzzanghera, Los Angeles Times

Galante said the FHA probably could withstand an additional housing price drop of 4% to 5% beyond its primary projection before it would need a bailout.

Should the FHA needs taxpayer money to stay afloat, it would not have to seek approval from Congress or the White House. The agency has the authority to tap the U.S. Treasury for funds.

With its reserves dwindling, the FHA took steps in late 2009 to improve its finances. Those steps included requiring higher premiums and better credit scores from borrowers.

The moves have helped buffer the agency against the continued slide in housing prices. For instance, the average credit score of 700 for borrowers whose loans were insured this year was a record for the FHA, Galante said.

Rep. Brad Sherman (D-Sherman Oaks), who has pushed to restore the higher limit for FHA-backed loans, said the change would help the agency's long-term finances by increasing insurance premiums that go into its cash reserves.

"The FHA is not going to lose money on this," Sherman predicted.

But he was concerned that Tuesday's report could endanger House passage of the new limits in the budget deal later this week.

"If they left it up to me, that report would have come out next week, not this week," Sherman said.

USC's Green said the drop in Southern California housing prices in October indicated that private companies weren't ready to step in yet and fill the void left by government agencies.

Although he'd like to see more data, Green thinks it's probably a smart move to increase the loan limits. And he agreed that the move was unlikely to hurt the FHA's finances.

"My gut answer is, I'd probably raise it back right now," Green said. "The downside of not raising it is potentially pretty bad."

jim.puzzanghera@latimes.com

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