FHA healthier than subsidy from Treasury suggests: official

WASHINGTON Mon Oct 28, 2013 11:09am EDT

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WASHINGTON (Reuters) - The Federal Housing Administration is healthier than its recent $1.7 billion taxpayer subsidy from the U.S. Treasury would imply, a top Obama administration official said on Monday.

Housing and Urban Development Secretary Shaun Donovan said the draw "doesn't reflect the (insurance) fund's current health," noting that the FHA had worked to decrease losses in its portfolio and that housing prices had risen.

"This was an accounting transfer that has not yet caught up with reality. It's based on the housing market more than a year ago, and doesn't reflect policy changes we've made since then," Donovan said in remarks prepared for delivery to a conference sponsored by the Mortgage Bankers Association.

The government mortgage insurer requested the draw on September 30. The agency has nearly $50 billion in liquid assets, Donovan said, but it had to ask for assistance because it is required to keep enough money on hand to cover all projected future losses.

The draw from Treasury was the first for the FHA in its nearly 80-year history and it provided fodder to Republicans in Congress who want to shrink the insurer's size and scope.

Donovan said the administration is "eager to take the next steps" this year to overhaul the broader housing finance system that is funded mainly by the government. Right now, taxpayer-owned Fannie Mae and Freddie Mac, along with the FHA, guarantee more than 80 percent of all home loans.

"Reform legislation should have flexibilities that will allow for private capital to be creative and innovative, eventually leading to a more efficient market for all," Donovan said. "That means winding down Fannie and Freddie."

The FHA expanded its book of business when private capital dried up during the 2007-2009 financial crisis. Currently, it backs about a third of all new mortgages; in 2006, its share of the new loan market was just 5 percent.

White House officials projected in April that the FHA would face a shortfall of $943 million in the fiscal year that recently ended September 30, but rising mortgage rates cut its loan volume and curbed a hoped-for increase in revenues from higher loan premiums.

The FHA has worked to improve its finances through a series of policy changes over the last year. It has raised the amount it charges borrowers to insure mortgages against default and tightened underwriting.

"Through these efforts and more, we are sending a clear message: that even as the financial crisis becomes more distant in our nation's rear view mirror, the Obama administration's commitment to our recovery will never waver," Donovan said.

The policy changes, coupled with rising home prices, are helping to shrink the projected funding gap.

"Sales are up. Prices are up. Construction is up. Optimism is up. In short, so many critical trends are going in a positive direction," he said.

Most of the damage to the FHA was caused by loans that were made as the real estate market was cratering and it was expanding its book of business to support the mortgage market.

(Reporting by Margaret Chadbourn; Editing by Tim Ahmann and Chizu Nomiyama)

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