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FHA bailout possible, Obama official concedes

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By The Los Angeles Times
Thursday, Dec. 6, 2012, 6:42 p.m.
 

WASHINGTON — A top Obama administration official said on Thursday that he could not guarantee that efforts to shore up a key government housing agency won't save it from needing a taxpayer bailout next year.

Housing and Urban Development Secretary Shaun Donovan cautioned senators worried about the increasingly precarious finances of the Federal Housing Administration that making hasty changes to its operations could endanger the housing recovery.

Sharp revisions to the FHA's standards for insuring mortgages — often for first-time, lower-income homebuyers — could dampen the recovery and lead to more foreclosures that further reduce the size of the fund the agency uses to cover its losses.

“We are seeing a recovery, but it is still fragile,” Donovan told the Senate Banking Committee. “We don't want to hurt the market, and in turn the FHA fund, by going too far and stopping that recovery.”

But several senators were critical of the way the FHA operates and the steps taken over the past four years by HUD, which oversees the agency, to stabilize its finances.

The FHA, for example, insures mortgages with as little as 3.5 percent as a down payment and has backed loans for people who went through foreclosures as recently as three years earlier.

The agency said last month that its reserves to cover losses dropped into negative territory for the fiscal year that ended Sept. 30.

Under law, the FHA's net worth must not drop below 2 percent of the outstanding balances of the loans it guarantees.

With the collapse of the housing market, the agency's “reserve ratio” has been dropping since 2006 and ended the 2012 fiscal year at minus-1.44 percent.

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