* FHA faces risks even with latest cash raising-Donovan
* Safeguarding FHA capital could help private market grow
WASHINGTON Feb 28 The U.S.
Federal Housing Administration faces "considerable risks"
to its finances and the Obama administration will continue to
scale back the agency's presence in the mortgage market, the top
U.S. housing official said on Tuesday.
Housing and Urban Development Secretary Shaun Donovan told
Congress that efforts to protect the FHA's dwindling capital
reserves were not only important in their own right, but that
they could open the door to more private mortgage funding.
"Despite the unprecedented efforts of the (Obama)
administration to alter the trajectory of FHA, considerable
risks remain," he told the Senate Banking Committee.
To create a more "robust private system of housing finance
and protect the FHA fund for the future" the government will
gradually reduce the mortgage-guarantee agency's presence in the
market, Donovan added.
The FHA's share of the mortgage market has increased sharply
since the depth of the financial crisis in 2008. It currently
backs about a third of all new mortgages; in 2006, its share of
the new loan market was just 5 percent.
Taking into account the big presence of Fannie Mae
and Freddie Mac, the government now backs about nine
of every 10 new home loans.
As the FHA's presence has grown, so has the strain on its
finances. The agency's capital reserves hit a record low $2.6
billion last year, and Donovan said it faced challenges even
taking into account recent steps to raise cash.
On Monday, the agency said it was increasing the up-front
fees it charges on mortgages it insures in an effort to raise
about $1.25 billion.
The U.S. housing market has begun to show some signs of life
in recent weeks, although a report on Tuesday showed home prices
fell a further 0.5 percent in December.
Prices have dropped about one-third from their 2006 peak and
nearly 11 million Americans owe more than their homes are worth.
Democrats on the panel voiced support for efforts to help
these underwater homeowners, while some Republicans took jabs at
the recent $25 billion settlement between the government and the
nation's largest lenders over foreclosure abuses.
Alabama Senator Richard Shelby, the leading Republican on
the panel, suggested the settlement could be overly broad.
"Homeowners who suffered no legal harm appear to be eligible for
compensation," he said.
Donovan said court filings spelling out the terms of the
settlement will be made public as soon as next week and will
provide further clarity on who is being helped.
The settlement requires some banks to work with troubled
homeowners to reduce principal on their loans.
In addition, the Obama administration has encouraged
government-controlled mortgage giants Fannie Mae and Freddie Mac
to write down principal on loans they guarantee - a case Donovan
pressed on Tuesday.
The administration's plan has run into resistance from the
Federal Housing Finance Agency, which oversees the two firms.
Under fire from Democrats at the hearing, FHFA Acting
Director Edward DeMarco repeated his contention that allowing
borrowers to defer payments through loan forbearance can provide
as much relief to homeowners at less cost to taxpayers. Fannie
Mae and Freddie Mac have already received $169 billion in
"It is economically approximately the same thing," he said.
Pressed whether or not the two firms had independently
evaluated principal writedowns, DeMarco said they had and had
determined it was not in their best interest.
The administration has tried to entice DeMarco into allowing
Fannie Mae and Freddie Mac to reduce principal by offering money
from the government's financial bail-out fund as an incentive.
FHFA has yet to say whether the financial support is enough
to offset any increased costs Fannie Mae and Freddie Mac might
face if they undertake a principal reduction program.
Still, DeMarco did not back down from his defense that
principal write-downs have proven to go against his duty of
"preserving and conserving" the assets of the two firms.