Bloomberg News

FHA May Need Taxpayer Aid to Bolster Reserve Fund, Report Says

November 17, 2011

Nov. 15 (Bloomberg) -- The Federal Housing Administration may need taxpayer aid or higher premiums to bolster its mortgage insurance fund after reserves fell to a record low this year, according to an analysis presented to Congress.

The FHA, which has paid out $37 billion in claims related to defaulted mortgages in the past three years, faces a 50 percent chance of having to raise money because its net worth has fallen to near zero, according to an independent analysis cited in the agency’s annual actuarial report released today.

The capital ratio, a measure of the fund’s ability to withstand losses, fell to 0.24 percent in the year ended Sept. 30, from 0.50 percent a year earlier and 3 percent in 2008, according to the Moody’s Corp. analysis. The FHA has failed to meet the legal minimum 2 percent ratio for three straight years.

The FHA, which provides liquidity by protecting lenders against borrower defaults, has increased its share of the mortgage market in the wake of the 2008 credit crisis. The agency, created in 1934 during the Great Depression, now guarantees a third of U.S. mortgages, according to the report.

The agency insured $236 billion in loans last year, its third-highest dollar volume ever. That’s down about 30 percent from the peak volume in 2009, FHA Acting Commissioner Carol Galante said today during a conference call with reporters.

“That’s a trend we hope to see continue as private capital returns to the market,” Galante said.

‘Additional Support’

FHA officials said they don’t believe home prices are likely to drop far enough to push the fund into insolvency.

“It would take very significant declines of home prices in 2012 to create a situation in which the current portfolio would require any kind of additional support,” Galante said during the conference call.

The FHA has never required government funding because it has supported itself with insurance premiums, raising rates and tightening credit standards for the loans it insured if its solvency was threatened. The agency could use those policy tools, instead of a taxpayer subsidy, if the economy worsens, Galante said.

Critics of the agency say taxpayers could be on the hook if losses continue to mount.

The FHA could need as much as $100 billion in subsidies if market conditions worsen, Joseph Gyourko, a real estate professor at the University of Pennsylvania’s Wharton School, said in a research paper released last week by the American Enterprise Institute.

--Editors: Gregory Mott, Lawrence Roberts

To contact the reporter on this story: Clea Benson in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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