FHA May Soon Need Its First-Ever Bailout

Auditors say agency will need taxpayer funds if home prices keep falling
By Rob Quinn,  Newser Staff
Posted Nov 15, 2011 1:41 AM CST
Rising defaults amid falling home prices are creating greater losses on the sale of foreclosed homes and draining the FHA's reserves.   (Getty Images)

(Newser) – The US housing market is in such sorry shape that the Federal Housing Administration may soon need an injection of taxpayer funds for the first time since it was created as part of the New Deal 77 years ago. The agency's cash reserves have dropped to $2.7 billion, a level so low that there is a "close to a 50%" chance it will need a bailout in 2012, the Wall Street Journal reports.

The FHA, which provides lenders with insurance against default on mortgages that meet its standards, backed a third of mortgages used to finance home purchases last year, up from just 5% in 2006. So far, it has managed to avoid using Treasury funds by raising premiums, but auditors predict that it will need a bailout if home prices drop by more than 5.6% next year. The FHA has "permanent and indefinite" budget authority so it won't need to run any request for funds past Congress, which has reached a deal to raise the maximum size of loans the agency can insure.

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