UPDATE 1-US FHA likely to need a taxpayer bailout - report

Thu Nov 15, 2012 6:51pm EST

WASHINGTON Nov 15 (Reuters) - The U.S. Federal Housing Administration's capital is inadequate to cover its expected losses, an audit has found, and the agency will likely need taxpayer funding for the first time in its 78-year history, the Wall Street Journal reported on Thursday.

The Journal said the annual audit had found that the agency, which insures about one-third of all U.S. mortgages, faced a deficit of $13.5 billion at the end of September.

The findings, which were scheduled for release on Friday, are likely to add further fuel to a long-standing debate on the government's role in supporting the housing market.

Fannie Mae and Freddie Mac, the mortgage finance firms the government seized in 2008, have soaked up almost $190 billion in taxpayer funds.

An audit by an outside firm last year found the FHA, which is a primary source of funding for first-time home buyers and those with modest incomes, faced a nearly 50 percent chance of needing a taxpayer bailout. The FHA avoided one earlier this year because it received an almost $1 billion payment from a U.S. settlement with mortgage servicers on claims of lending abuses.

But critics of the agency have warned that taxpayers could soon be on the hook if losses continued to mount. FHA's cash reserves fell to a record low of $2.6 billion last year.

The agency 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 target for three straight years.

The annual analysis is supposed to calculate the solvency of the FHA's mortgage insurance fund under a range of economic assumptions.

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