FHA program strained by record loan defaults

Bloomberg News / April 3, 2009
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WASHINGTON - Federal Housing Administration mortgage-insurance programs are at risk as record home-loan defaults erode the government agency's reserves, the inspector general of the Housing and Urban Development Department said.

The agency has never been under more strain, as other sources for lenders to finance and insure mortgages have dried up and as policy makers create new FHA programs for riskier borrowers, Kenneth Donohue told a Senate Budget Committee panel on housing yesterday.

The FHA may not have the systems and infrastructure to "adequately perform" its duties, or take on new functions imposed by Congress, including insuring jumbo loans of as much as $729,750, Donohue said. The FHA accounted for about 70 percent of the market in the first quarter of this year, up from 21 percent a year earlier, according to Donohue.

"If Congress and the administration place more risk on FHA before the problems are solved, this powder keg could explode and taxpayers will be on the hook," said Senator Christopher "Kit" Bond, a Missouri Republican.

A record US mortgage default rate - now at 7.88 percent in Mortgage Bankers Association data - has eroded FHA's mortgage insurance fund, which has fallen by almost half to $12.9 billion from $21 billion, Donohue said. The loan insurance ratio, which measures the amount of reserves to the amount of loans insured, dropped to 3 percent from 6.4 percent a year ago. FHA is required to maintain a ratio of at least 2 percent.

"If more pessimistic assumptions are factored in, the ratio could dip below 2 percent in succeeding years, requiring an increase in premiums or congressional appropriation intervention to make up the shortfall," Donohue said.

To deal with the added demand, FHA has relaxed mortgage-broker licensing requirements, which Donohue says exposes the system to potential fraud. FHA approved 3,300 lenders in fiscal 2008 from 692 in 2006, Donohue said.