FHA's cash cushion sinking

WASHINGTON — The Federal Housing Administration's financial cushion has fallen to a dangerously low level, but government officials maintain the agency should avoid a taxpayer bailout under "most economic scenarios."

The agency, a major source of funds for first-time home buyers, faces mounting concerns that it will eventually need an infusion of cash. FHA losses have increased with the unemployment rate as more homeowners default on their loans. About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

Agency officials said Thursday the agency won't need a rescue unless the economy slips back into a severe recession. In that worst-case scenario, home prices in 10 large cities would fall 28 percent and unemployment would soar to 12.5 percent from 10.2 percent.

FHA's reserves have fallen to $3.6 billion, compared with $685 billion in outstanding insured loans for the fiscal year ended Sept. 30. That's a ratio of 0.53 percent and far below the 2 percent threshold required by Congress.

"It is absolutely critical that going forward, we build that cushion back up," Housing Secretary Shaun Donovan said.

Also Thursday, RealtyTrac Inc., a foreclosure listing firm, reported that the number of households that received a foreclosure-related notice fell in October, the third straight monthly decline.

"Foreclosures are still far higher than we want them to be, but we do appear to have them on the right path now," Donovan said.

The FHA does not make loans, but rather offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans require down payments of only 3.5 percent of the purchase price.

Donovan said the agency is considering raising its insurance premiums for borrowers and the 3.5 percent down payment requirement. Legislation introduced by Rep. Scott Garrett, R.-N.J., would raise the down payment to 5 percent.