September 4, 2009 / 1:58 PM / 9 years ago

FHA says won't need congressional support

WASHINGTON (Reuters) - The U.S. Federal Housing Administration said on Friday it would not need a congressional subsidy even if mortgage-related losses push its reserves below a level demanded by Congress.

A new home sits for sale in Lemont, Illinois in this July 27, 2009 file photo. The head of the U.S. Federal Housing Administration said on Friday the agency would not need a congressional subsidy even if its capital reserve ratio fell below the 2 percent demanded by Congress. REUTERS/John Gress

Rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, raise the possibility its capital reserve ratio could dip below the 2 percent level, and the government might have to support the agency, analysts say.

The Wall Street Journal on Friday reported that government officials believed reserves at the FHA, which provides government guarantees on mortgages for some home buyers, were in danger of breaching the 2 percent mark.

“Even if that level falls below 2 percent, FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force,” FHA Commissioner David Stevens said in a statement. “Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent.”

Mortgage loans insured by the government have soared to the highest levels in two decades as borrowers take advantage of downpayment requirements for FHA loans, which are lower than those for other mortgages.

Some analysts say the agency may have to tighten lending standards to confront losses.

In his statement responding to the Wall Street Journal article, Stevens noted the mandated FHA reserve ratio measures excess reserves above and beyond projected losses of the next 30 years.

“FHA’s full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement,” Stevens said, adding that the FHA continued to generate income for taxpayers.

Credit losses at the FHA would not impact Ginnie Mae mortgage-backed securities, according to Arthur Frank, director and head of MBS research at Deutsche Bank in New York.

“It is completely irrelevant to the Ginnie Mae mortgage bond market,” he said.

Ginnie Mae mortgage-backed securities, the only mortgage bonds backed by the full faith and credit of the U.S. government, did not react to the news and were outperforming Treasuries in afternoon trading.

Ginnie Mae wraps loans from the FHA, along with loans from the Veterans Administration, into mortgage-backed securities for sale to investors, so they do not take on the credit risk that FHA takes. Ginnie Mae mortgage bonds have a zero risk weighting for banks because the government is obliged to back them.

When an FHA loan defaults, FHA takes most of the loss, while mortgage servicers take on the rest. Ginnie Mae, however, would have to provide a backup if the servicers default on their obligations.

Reporting by Tim Ahmann; additional Reporting by Julie Haviv; Editing by Padraic Cassidy

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