Housing Agency’s Reserves at Risk!

The Federal Housing Administration will exhaust its reserves over the coming year, according to budget projections released Monday, which would require a Treasury infusion for the first time in its 78-year history.

But Obama administration officials said more recent developments, including fines that will go to the FHA from last week’s $25 billion mortgage settlement with five major banks, could cover any shortfall and obviate the need for taxpayer funding.

The FHA has burned through its reserves over the past three years as defaults mount on loans it guaranteed as housing markets deteriorated. FHA-backed mortgages are an attractive option for borrowers because they can make down payments as low as 3.5%. But as home prices continue to fall, many of those borrowers have fallen underwater, where they owe more than their homes are worth and are at greater risk of default if they experience income shocks.

The estimates by the White House’s Office of Management and Budget show that the FHA’s capital reserves, which stood at $4.7 billion in October, would be wiped out in the coming year, forcing the agency to seek nearly $700 million from the U.S. Treasury.

FHA officials said they could collect as much as $1 billion from last week’s settlement between federal agencies, 49 state attorneys general, and five banks as a result of false claims submitted to the agency.

“It’s highly unlikely that we’ll need any special assistance from the Treasury given the policy changes we’re making as well as the settlement dollars,” said Carol Galante, the FHA’s acting commissioner.

The FHA also plans to announce an increase in mortgage insurance premiums that it charges to borrowers later this month, Ms. Galante said. Those increases come on top of a 0.1 percentage point increase in premiums required last year by Congress.

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