UPDATE 1-White House says housing agency won't need Treasury aid

Tue Mar 4, 2014 3:53pm EST

By Margaret Chadbourn

WASHINGTON, March 4 (Reuters) - The U.S. Federal Housing Administration, which turned to the Treasury for aid in 2013, will avoid that fate this year because of efforts to shore up its finances, the White House predicted in its budget proposal on Tuesday.

Last year, White House budget writers said the FHA, which is a major provider of mortgages for first-time home buyers, would need a $943 million Treasury subsidy, but the agency ended up drawing $1.7 billion when the fiscal year closed on Sept. 30.

The Obama administration now estimates the agency has adequate reserves and will not need turn to the Treasury for a second time. Last year's draw was the first in the government mortgage insurer's 80-year history.

"We still have more work to do on sustaining the FHA fund and we will continue to do that," FHA Commissioner Carol Galante said on a call with reporters. "The improved strength of the fund allows FHA to sharpen its focus on placing homeownership within the reach of many creditworthy Americans."

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.

To bolster its reserves, the agency has raised the amount it charges borrowers to insure mortgages against default and tightened underwriting.

An independent audit, using a separate calculation from White House budget forecasters, said in December the FHA's insurance fund would fall $1.3 billion short in the current fiscal year. The FHA will not finalize the size of any request until September, just as the fiscal year is drawing to a close.

Most of the damage to the FHA was caused by loans made during the years the real estate market was cratering, when it expanded its book of business to support the mortgage market as private lenders retreated. Loans originated in the past few years have performed much better.

Republican lawmakers have argued the FHA needs to take more aggressive action to protect taxpayers, including reducing maximum loan limits and raising minimum down payments.

The Obama administration contends some of those steps would undermine the agency's mission to provide credit to first-time home buyers and needy communities.

The FHA has played a critical role supporting the housing market by insuring mortgages for borrowers who make down payments of as little as 3.5 percent. The FHA insures about $1.1 trillion in mortgages and backs about one-third of all new loans used to purchase homes, up from about 5 percent in 2006.

President Barack Obama's fiscal 2015 budget proposal requests $30 million in new authority for the agency to charge lenders a fee for a program designed to uncover risk on substandard mortgages the FHA backs, officials told reporters on the call.

Congress would have to enact the "quality assurance" framework that is designed to increase lender confidence in originating loans eligible for FHA backing.

Details on the size of the fee are not yet determined, but the agency does not expect it will have much of an impact on costs for new home buyers.