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Obama administration foresees $943 million bailout for FHA

Houses under construction are seen in Fontana in San Bernardino County, California, in this February 5, 2009 file photograph. REUTERS/Mario
Houses under construction are seen in Fontana in San Bernardino County, California, in this February 5, 2009 file photograph. REUTERS/Mario

WASHINGTON (Reuters) - The cash-strapped Federal Housing Administration will likely require a $943 million taxpayer bailout to cover expected losses from loans it insured as the U.S. housing bubble was deflating, the Obama administration said on Wednesday.

It would be the first bailout of the government's mortgage insurer in its nearly 80-year history. The White House estimates the government agency has nearly $30 billion on hand, but it won't cover estimated losses on FHA-insured loans.

The FHA, which has struggled to manage a glut of delinquent mortgages, will likely need the funds given a shortfall in its reserves, the administration said in President Barack Obama's fiscal 2014 budget proposal.

FHA Commissioner Carol Galante said the agency might still be able to avoid taking aid from the U.S. Treasury despite the projected budget hole. The agency has until September 30 to decide whether it needs a cash infusion.

"FHA, while still under stress from legacy loans, has made significant progress and is on a sound fiscal path forward," Galante told reporters on a conference call. "We are moving in the right direction and continuing to take action to ensure the positive trajectory of the fund."

The FHA is required by Congress to keep enough cash on hand to cover all expected future losses and must take a taxpayer subsidy if its projected revenue falls short.

The agency provides liquidity to the housing market by insuring lenders against losses on loans. Currently, it backs $1.1 trillion of loans and is a primary source of funding for first-time home buyers and those with modest incomes.

Last year, the White House budget said FHA would need about$700 million from Treasury to remain solvent, but legal settlements with the nation's largest banks allowed the agency to avoid an infusion of government aid.

If the FHA does end up needing to draw on taxpayer funds this year, the amount of aid "could be a little higher, it could be a little lower" than the almost $1 billion from taxpayers the White House has projected, Galante said. "But I would not expect a major change."

In November, an independent audit found that the FHA faces projected losses of $16.3 billion and was at risk of depleting its cash reserves.

Since then, the FHA has a taken a number of steps to shore up its finances, including charging borrowers higher premiums. In addition, housing prices have continued to recover, further strengthening the agency's balance sheet.

While those policy changes have helped, the FHA may still need a Treasury subsidy mainly for losses on its reverse mortgages, Galante said. Reverse mortgages can serve as financial lifelines by helping seniors leverage their equity without selling their homes. But the reverse loan market has faced growing problems in recent years -- the result of sinking post-crash home values.

The latest snapshot of the agency might soften Republican concerns about the FHA's books. Both the top Democrat and Republican leaders of the Senate Banking Committee have promised to work on legislation that will help the agency's portfolio, and Republicans in the House of Representatives are also structuring a separate bill.

"FHA still doesn't have enough capital to squeeze by but they keep saying not to worry," said Edward Pinto, resident fellow at the American Enterprise Institute and frequent critic of the FHA. "They have a huge book of risky loans and remain incredibly vulnerable, which in turn makes the taxpayer incredibly vulnerable, to even a moderate economic slowdown."

Critics of the agency often argue FHA needs to require more stringent borrowing standards for loans it insures and the agency should narrow its market share. They say structural changes are necessary even if FHA avoids drawing from Treasury.

Agency supporters and officials have responded by saying safeguards are in place to make sure FHA borrowers are creditworthy, and that the government-mortgage insurer stepped in when private capital dried up, taking on an expanded role that blunted the housing market from collapse.

(Reporting by Margaret Chadbourn; Editing by Tim Ahmann, Philip Barbara and Alden Bentley)

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