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* FHA needs the cash to maintain required capital cushion
* Shortfall stems from loans backed from 2007 to 2009
* Republicans say FHA was irresponsible propping up market
* White House predicted $943 million draw in April
* Obama administration officials see finances improving
By Margaret Chadbourn
WASHINGTON, Sept 27 (Reuters) - The U.S. Federal Housing Administration said on Friday it will draw $1.7 billion in cash from the U.S. Treasury to help cover losses from troubled loans, marking the first time in its 79-year history that it has needed aid.
The agency, which offers mortgage lenders guarantees against homeowner defaults, does not have enough cash to cover projected losses on the loans it backs, senior Obama administration officials said. They said the FHA needs the subsidy to shore up its insurance fund by the end of its budget year on Monday in order to maintain a required capital cushion.
While the FHA had been expected to draw from the Treasury, the cash infusion, which Republicans have dubbed a bailout, will heighten the political tension over the government's pervasive role in the mortgage market.
Taxpayers have already propped up mortgage finance giants Fannie Mae and Freddie Mac to the tune of $187.5 billion, although those government-controlled companies are now profitable and will have returned $146 billion in dividends to the Treasury by the end of the month for the taxpayer stake.
Including Fannie Mae and Freddie Mac, federal housing agencies support about nine in 10 new U.S. mortgages.
"As expected, we will be required to take a transfer in order for us to close our financial statement," a senior administration official told reporters. "It isn't a reflection of the current performance of our portfolio. There's been a significant improvement."
The cash infusion marks what could be considered a book end to the 2007-2009 financial crisis, which was sparked by a burst U.S. housing bubble that sent home prices tumbling.
White House officials projected in April that the FHA would face a shortfall of $943 million in the fiscal year that is drawing to a close, and some analysts predicted an improving housing market might allow it to avoid tapping what is essentially a credit line it has with Treasury.
The FHA said it has more than $30 billion in cash and investments on hand to pay potential claims, but that it does not have enough to meet a legally required 2 percent capital ratio, which is a measure of its ability to withstand losses.
"Although this one-time transfer of funds from the Treasury is legally necessary, it's important to note that FHA is far from bankrupt," said Representative Maxine Waters, a California Democratic who is a strong supporter of programs that help low-income borrowers. Waters noted that the FHA continues to generate revenue.
Since the cash draw from Treasury will not be disbursed by the FHA, it will not impact how quickly the government runs out of money to pay its bills under the nation's $16.7 trillion debt ceiling. In addition, the Treasury has the authority to take the $1.7 billion back once the FHA rebuilds its reserves.
When the White House made its prediction, the FHA said it needed to see if an increase in insurance premiums on the loans it backs and rising home values would close its funding gap.
But a spike in interest rates reduced the volume of new FHA-backed loans, tempering the hoped-for increase in premium-related income and worsening its projected shortfall.
The FHA is legally required to keep a 2 percent capital ratio, which is a measure of the fund's ability to withstand losses, but it has failed to meet that threshold since 2009.
Senior administration officials said nearly $70 billion in losses were due to loans issued between 2007 and 2009 as the U.S. housing bust deepened, and that they expected the agency's finances to improve in coming months.
Metrics of the current portfolio show that the money the agency is recovering on foreclosed properties is improving and early payment defaults are down dramatically.
After an independent audit in November found that its insurance fund could face losses as high as $16.3 billion, the FHA raised the amount it charges borrowers to insure mortgages against default and tightened underwriting. The changes, coupled with rising home prices, helped shrink the projected gap.
Loans originated in the past few years have been performing better. The number of loans seriously delinquent, or 90 days past due, at the end of July was 15 percent below the level of a year earlier and the lowest point in almost three years.
The FHA has said its cash needs were mainly driven by losses from reverse mortgages, which allow homeowners age 62 or older to withdraw equity and repay it only when their homes are sold. The agency, which is expected to spend $2.8 billion this year insuring reverse mortgages, backs 90 percent of such loans.
It has already announced new guidelines for potential reverse mortgage borrowers, including lower limits on the amount seniors can withdraw, higher mortgage insurance fees and tougher vetting of applicants. Those changes, however, do not go into effect until Tuesday.
Republicans 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 its 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 now backs about one third of all new loans used to purchase homes, up from about 5 percent in 2006.