The ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory (FHA) submitted an ""annual actuarial report"":http://portal.hud.gov/hudportal/documents/huddoc?id=FHAMMIFundAnnRptFY11No2.pdf to Congress Tuesday that suggests diminishing returns from a fledgling growth strategy could lead the agency to a taxpayer-funded bailout next year.
[IMAGE]The reason why? The FHA currently fails to meet a 2-percent capital reserve ratio mandated by federal law, with cash reserves on hand falling to less than an eighth below the required threshold.
The report said that cash reserves on hand fell accordingly from $4.7 billion last year to $2.6 billion over 2011 ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô an amount that fails to meet the needs of more than $1 trillion loan guarantees.
Writing in the preface, ""HUD"":http://portal.hud.gov/portal/page/portal/HUD ""Secretary Shaun Donovan"":http://portal.hud.gov/hudportal/HUD?src=/about/principal_staff/secretary_donovan described the FHA's insurance fund as ""actuarially sound,"" although he noted ""significant near-term economic risks"" that could include rapidly declining home prices and rising defaults among homeowners with single-family loans.
If Congress acted to shore up the agency with taxpayer funds, it would mark the first bailout for the FHA in its nearly 80-year history. Some estimates predict that the FHA could require as much as $50 billion or more from the ""Treasury Department"":http://www.treasury.gov/Pages/default.aspx.
The actuarial report comes on the heels of ""another"":https://themreport.com/articles/study-fha-may-soon-need-50b-in-bailout-funds-2011-11-11 by ""Joseph Gyourko"":http://real-estate.wharton.upenn.edu/people/faculty.cfm?id=805, a real estate and finance professor with the University of Pennsylvania, who used the word
[COLUMN_BREAK]""overoptimistic"" to describe an FHA strategy that aims to recover capital and meet federal requirements by 2014.
Speaking with _MReport_ for a past story, several sources in the know about problems with the FHA credited any sudden bailout that may happen with the FHA's decision to take on more loan guarantees.
FHA ""Acting Commissioner Carol Galante"":http://portal.hud.gov/hudportal/HUD?src=/about/principal_staff/assistant_secretary_galante, now an Obama administration nominee for the position, assured reporters in a teleconference Tuesday that FHA business has expanded ""significantly,"" even while the average credit score for a homebuyer meets or exceeds 700.
She cited base-case statistics to justify the FHA's capital position, saying that the agency could withstand as much as 4-percent to 5-percent declines in home prices without becoming insolvent.
""We are very mindful and aware that there are downside economic risks,"" she said.
""The more complicated the FHA story becomes, the more cautious banks will be in originating FHA loans,"" Paul Miller, a financial analyst with ""FBR Capital Markets"":http://www.fbr.com/, said in a note.
He projected that FHA denials ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô the result of a sudden bailout that requires the administration to hold off on loan guarantees ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô could cost banks $13.5 billion if the hammer falls on servicers, and $11.5 billion, if it falls on lenders.
Despite the talk of a bailout, he said, ""we believe that the risk is more a headline risk than a capital concern.""
Others defended the FHA as a needed buttress for the sagging economy, despite a growth policy that has expanded its portfolio from just 5 percent of homeowners to 30 percent this year.
""FHA plays an important countercyclical role in the housing market, with its greatest contributions coming during those times of market stress, like those we have seen in recent years,"" ""Michael Young"":http://www.mbaa.org/michaelyoungbio.htm, chairman of the ""Mortgage Bankers Association"":http://www.mbaa.org/default.htm, said in a statement. ""Without FHA's support, our housing market would be in far worse shape than it is today.""