U.S. FHA says facing $1.3 billion capital shortfall

Fri Dec 13, 2013 10:30am EST

* FHA declines to say whether it might need more aid

* Decision on need for funds to come at end of fiscal year

* Loans backed from 2007-2009 have eroded FHA's reserves

By Margaret Chadbourn

WASHINGTON, Dec 13 (Reuters) - The Federal Housing Administration, which recently received an infusion of funds from the U.S. Treasury to cover projected losses, said an audit of its finances has found it still faces an expected $1.3 billion capital shortfall.

The annual analysis, overseen by an independent auditor, calculates the solvency of the FHA's mortgage insurance fund under a range of economic assumptions. It is set for delivery to Congress on Friday.

FHA Commissioner Carol Galante declined to comment at a briefing for reporters on whether the agency will be able to avoid the need for a second straight taxpayer subsidy. The government mortgage insurer received a $1.7 billion infusion from the Treasury in September, marking the first time in its 79-year history that it has needed aid.

The report is likely to raise concerns about the prospect of more taxpayer dollars being added to the U.S. government's effort to stabilize the housing sector, which was at the epicenter of the 2007-2009 financial crisis and recession.

The Obama administration would typically make an initial determination on whether the FHA would need to tap its Treasury credit line in February, when the White House releases its annual budget proposal. A final determination would not be made until the fiscal year is drawing to a close in September.

The FHA insures a portfolio of more than $1 trillion in mortgages. It increased its share of the home loan market when the U.S. housing bubble burst, more than tripling its loan portfolio. The agency now insures almost one-third of all U.S. mortgages, up from about 5 percent in 2006.

The FHA has struggled to manage the growing glut of delinquencies on mortgages it insured during the housing crisis, and loans it backed from 2007 to 2009 have eaten away at its cash reserves. Loans made since 2010 are expected to remain profitable.

"The health of the (insurance fund) is improved," Galante said. "We want to keep and maintain this momentum."

The FHA is legally required to maintain a 2 percent capital ratio, which is a measure of the fund's ability to withstand losses. While it has breached that level for three straight years, Galante said the audit will show the agency will meet the mandated target in 2015.

With an FHA-backed loan, buyers can put down as little as 3.5 percent. The FHA, which does not make loans, provides mortgage insurance to borrowers who are unable to make a large enough down payment to qualify for prime loans.

The FHA has taken a series of steps to improve its finances over the last few years. It has raised the amount it charges borrowers to insure mortgages against default six times and has tightened underwriting.

The policy changes, coupled with rising home prices and improved rates of recovery on delinquent loans, are helping to shrink the projected funding gap, Galante said.