Obama administration says housing agency needs $943 million

WASHINGTON Wed Apr 10, 2013 4:00pm EDT

Houses under construction are seen in Fontana in San Bernardino County, California, in this February 5, 2009 file photograph. REUTERS/Mario Anzuoni/Files

Houses under construction are seen in Fontana in San Bernardino County, California, in this February 5, 2009 file photograph.

Credit: Reuters/Mario Anzuoni/Files

WASHINGTON (Reuters) - The cash-strapped Federal Housing Administration will likely require a $943 million taxpayer bailout to cover expected losses on loans it insured as the U.S. housing bubble was deflating, the Obama administration said on Wednesday.

It would be the first bailout of the government's mortgage insurer in its nearly 80-year history.

The White House estimated the FHA has about $30 billion on hand, but said its cash reserves would likely be swamped by souring loans.

FHA Commissioner Carol Galante said the agency still might be able to avoid taking aid from the U.S. Treasury, despite the financial hole projected in President Barack Obama's 2014 budget proposal. It has until September 30 to decide whether it needs a cash infusion.

"FHA, while still under stress from legacy loans, has made significant progress and is on a sound fiscal path forward," she told reporters on a conference call.

In November, an independent audit found that the FHA faced a projected deficit of $16.3 billion. Since then, the agency has a taken a number of steps to shore up its finances, including raising the premiums borrowers pay. Galante said the policy changes could bring in about $18 billion this year.

The FHA is required by Congress to keep enough cash on hand to cover all expected future losses and must take a taxpayer subsidy if its projected revenue falls short.

"Since 2009, administration officials have repeatedly assured Congress and the American people that FHA was healthy and on a sustainable financial footing," Republican Representative Jeb Hensarling, chairman of the House Financial Services Committee, said in a statement. "The facts, however, as even the president's own budget now confirms, prove otherwise."

The FHA is a major source of funding for first-time home buyers and people with modest incomes. It currently backs $1.1 trillion in loans.

Last year, the White House said the FHA would need about $700 million from the Treasury to remain solvent, but legal settlements with the nation's largest banks allowed the agency to avoid an infusion of taxpayer aid.

If the FHA does end up needing to draw on taxpayer funds this year, the amount of aid "could be a little higher, it could be a little lower" than the almost $1 billion from taxpayers the White House has projected, Galante said.

ANOTHER WASHINGTON BAILOUT?

Galante said losses on so-called reverse mortgages were the main reason the FHA might need a bailout.

Reverse mortgages can serve as financial lifelines by helping seniors access their equity without selling their homes. But the reverse loan market has faced growing problems - the result of sinking post-crash home values.

Given that the FHA's financial situation does not appear as dire as the independent audit suggested, the latest snapshot of the agency's health might sap the appetite some lawmakers have shown to tighten the standards on FHA loans.

The top Democrat and the top Republican on the Senate Banking Committee have promised to work on legislation to bolster the agency's portfolio. House Republicans are also preparing a bill.

"FHA still doesn't have enough capital to squeeze by but they keep saying not to worry," said Edward Pinto, a resident fellow at the American Enterprise Institute who is a frequent critic of the FHA. "They have a huge book of risky loans and remain incredibly vulnerable, which in turn makes the taxpayer incredibly vulnerable, to even a moderate economic slowdown."

Critics of the agency often argue the FHA needs to require more stringent borrowing standards for the loans it insures and should shrink its market share. They say structural changes are necessary even if the FHA avoids drawing from Treasury.

Agency supporters and officials say safeguards exist to ensure that FHA borrowers are creditworthy and that the mortgage insurer stepped in when private capital dried up and helped soften the blow from the housing market's collapse.

"By attempting to be all things to all borrowers, the Obama administration has abandoned FHA's historical mission, it has endangered the future operations of the agency, and it has put taxpayers at risk for another Washington bailout," Hensarling added.

(Reporting by Margaret Chadbourn; Editing by Tim Ahmann, Philip Barbara, Alden Bentley and Andre Grenon)