FHA reserve cushion drops to historic low

The Federal Housing Administration's mortgage-insurance reserves fell to the lowest level in history, according to a report yesterday, and the government said more steps were needed to shore up the agency, which guarantees one of every five single-family home loans.

FHA's reserves fell to $3.6 billion in the fiscal year ended Sept. 30. That reserve covers insured loans totaling $685 billion - or a ratio of 0.53 percent, which is far below the 2 percent threshold required by Congress. The reserve ratio was 3 percent in fiscal 2008 and 6.4 percent in 2007, according to the annual review.

The FHA does not make loans, but rather it offers insurance against default. The reserve fund is used to pay off mortgages on which homeowners have defaulted. About 17 percent of FHA-insured borrowers are at least one payment behind or in foreclosure compared with 13 percent for all loans, according to the Mortgage Bankers Association.

While the FHA said the fund "has good prospects," it is changing its risk models to account for the possibility of the reserve ratio falling below zero.

"Additional actions" will be needed to shore up the agency, Housing and Urban Development Secretary Shaun Donovan said at a news conference in Washington.

The insurance fund tripled in size last year and has taken on more risk as private-industry sources for lenders to finance and insure home loans dried up and mortgage-default rates rose to record highs.

"I don't want to leave the impression that the reserves are adequate, that we have plenty of money," said Donovan, whose department includes the FHA. "FHA is not in the long run self-supporting. It isn't returning money to the taxpayer."

Donovan said that the economy had been worse than housing officials expected and that the projected claims against the insurance fund were higher than forecast.

With the fund below the 2 percent reserve threshold, Donovan said it was "critical" to rebuild that cushion.

Donovan avoided using "the bailout word," saying there is no extraordinary action Congress needs to take for FHA to continue covering claims.

The 0.53 percent reserve ratio is the lowest since FHA began publishing the data in 1990.