WASHINGTON - The Federal Housing Administration said Friday that its financial cushion will sink below mandatory levels for the first time in its 75-year history, but officials insisted the agency won't need to be rescued.
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"Under no circumstance will any taxpayer bailout be needed," said David Stevens, the FHA's commissioner. He also said the agency doesn't expect to raise fees for borrowers, or curtail the number of loans it insures.
Amid the collapse of the subprime lending market, the government has taken up the slack. The FHA has insured nearly a quarter of all new loans made this year, and about 80 percent of that business is from first-time homebuyers.
But the agency has faced mounting concerns on Capitol Hill that it will soon need a taxpayer bailout. As of this summer, about 17 percent of FHA borrowers were at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.
Plummeting home prices, Stevens said, are the main reason its financial reserves are dwindling. While an earlier analysis had assumed prices would hit bottom this year, the agency now is assuming prices will fall through next spring.
"While FHA didn't take part in the housing boom, it's not immune from the ripple effect of declining house prices," said Brian Montgomery, the agency's former commissioner. "That's quite frankly what this is about."
The agency itself does not make loans, but rather offers insurance against default. Many borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.
The FHA now insures about 5.3 million mortgages, up from about 4 million three years ago.
In an effort to weed out shady operators, it wants to require that participating lenders have a net worth of $1 million, up from the current requirement of $250,000, and undergo annual audits.
Last month, FHA banned mortgage company Taylor, Bean & Whitaker from making any more federally insured loans after it failed to submit a required financial report, raising fraud concerns.
FHA officials have long pushed in Congress for more money to upgrade the agency's outdated computer systems and say they are stepping up the agency's efforts to catch shady operators who funnel bad loans.
But Bert Ely, a banking industry analyst in Alexandria, Va., said he wouldn't be surprised if the FHA asks for a taxpayer bailout in the coming years. Though, he said, it's likely to be far smaller than the $96 billion that mortgage companies Fannie Mae and Freddie Mac have tapped since they were seized by federal regulators a year ago.
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