According to the actuarial study to be delivered to Congress in November, FHA's capital reserve ratio is dipping below the mandated 2 percent.
FHA insures mortgages and is funded through fees paid by homeowners who borrow loans backed by FHA, and these funds are continuously eroding due to high number of foreclosures. This year the agency has guaranteed about a quarter of all U.S. home loans.
FHA’s financial soundness questioned
But critics have raised doubts over the agency’s financial health. They assert that currently the economy is fragile and any deterioration could necessitate a bailout.
The shrinking loss reserves "is just the tip of the iceberg as job losses continue to mount, and more and more homeowners are expected to lose value in their homes,” U.S. Senator Christopher S. Bond (R-Mo.) said in a statement. "It's critical we address FHA's problems now because the taxpayer credit card is maxed out."
“They're putting a lot of mortgages on their books,” said Bert Ely, an independent banking consultant. Many of the loans are given to weak borrowers. "None of this bodes very well for the FHA down the road."
Calabria, a former Republican staffer on the Senate Banking Committee, said that the only way FHA can survive without a bailout is if the housing and labor markets rebound.
FHA dismisses bailout concerns
Despite falling reserves, FHA Commissioner David Stevens said that the agency will not ask Congress for support to build the reserves.
"Reports about the fund being insolvent and needing taxpayer bailout are inaccurate and do not reflect the total health of the fund," Stevens said. "Under no circumstances will a taxpayer bailout be needed to support the fund."
But he added that given the vital role played by FHA, policy changes are required to reduce losses in future.
Among the various changes announced, banks and lenders doing business with FHA would be required to have at least $1 million in capital to reimburse the agency for losses in case of fraud. Currently, the lenders using FHA guarantees are required to have net worth of $250,000.
Further, FHA intends to hire a chief risk officer for the first time ever to help narrow down losses.
"These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund," Stevens said.
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