U.S. housing agency acts to bolster reserves

WASHINGTON (Reuters) - The Federal Housing Administration on Friday announced a series of credit policy changes to help rebuild reserves falling below congressionally mandated levels, saying it won't need a taxpayer bailout.

Nor will it will raise fees on loans made by FHA-approved lenders to homebuyers.

FHA Commissioner David Stevens said the draft of an independent actuarial study to be presented to Congress in November shows the FHA's capital reserve ratio dropping below a congressionally mandated 2 percent.

But he said that will not require an injection of money.

"The fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action," Stevens said. But he said that given the FHA's vital role in the housing market, policy changes were needed to ensure that lenders are well protected.

Stevens said the FHA has total reserves of more than $30 billion, representing about 4.4 percent of the book value of its business, and said the reserve fund the actuarial study is looking at is "a secondary cushion."

The FHA has guaranteed about a quarter of all U.S. home loans made this year and needs reserves as a cushion in the event of losses. Stevens said about 80 percent of its business is with first-time homebuyers, who typically have smaller down payments, so the agency's role in the housing market is vital.

He said the actuarial study forecasts that recovery in the hard-hit housing sector, particularly in home prices, will come later than previously thought, with prices remaining weak into early 2010.

But as markets gradually improve, the FHA reserves should reach the 2 percent threshold once more within about two years even if no credit policy changes were made.

Financial markets on Friday took the FHA announcement in stride.

FHA-insured mortgages and loans from the Veterans Administration, both carrying full faith and credit guarantees from the government, are used to create Ginnie Mae bonds, which traded only slightly lower in price.

Among the changes announced on Friday, the FHA said it intends to hire a chief risk officer for the first time in its 75-year history to concentrate efforts at managing and reducing risk to the FHA's insurance fund.

It is also boosting "net worth requirements" that mortgage companies must meet, a change that may ultimately thin out some marginal operators. Stevens said the FHA wants its lenders and brokers have "skin in the game" by ensuring they have a long-term interest in the performance of loans they originate.

The requirement currently calls for a lender using FHA guarantees to have a net worth of $250,000. But FHA's parent department, the U.S. Department of Housing and Urban Development, is proposing to boost that to $1 million and may put it higher in coming years.

As well, mortgage brokers will have to work through approved FHA lenders in order to offer FHA-insured loans rather than being able to originate such loans on their own.

"These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund," Stevens said.

(Additional reporting by Lynn Adler in New York)

(Reporting by Glenn Somerville; Editing by Dan Grebler)