Behind FHA Strains, a Push to Lift Housing
As it tried to help shore up the ailing housing market during the past year, the Federal Housing Administration increased its exposure, particularly to mortgages in high-cost states that have also seen some of the sharpest price declines.  Now concerns are mounting that the agency -- and the U.S. taxpayer -- may have to pay the price.  The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default...Congress allowed the agency to make much larger loans, up to $729,750...

Behind FHA Strains, a Push to Lift Housing
Worry Mounts That Federal Agency, a Mortgage Insurer, Will Need a Bailout as Its Cash Dwindles and Role in Market Grows

As it tried to help shore up the ailing housing market during the past year, the Federal Housing Administration increased its exposure, particularly to mortgages in high-cost states that have also seen some of the sharpest price declines.

Now concerns are mounting that the agency -- and the U.S. taxpayer -- may have to pay the price.

The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default.     
                     

David Stevens, the FHA's new commissioner, said on Friday that the agency will continue to support the housing market and isn't in danger of needing a taxpayer bailout. But some housing analysts warn that, if home prices decline much further, the agency would require taxpayer assistance for the first time in its 75-year history.

At the end of June, some 7.8% of FHA-backed loans were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, up from 5.4% a year ago.

The prospect of yet another taxpayer bailout has put under the spotlight an agency that largely sat out the housing boom. It was created to serve first-time buyers and others with spotty credit. But during the boom, the FHA's rules on such matters as documenting income drove borrowers to lenders with looser standards.

As private lenders sharply curtailed credit when boom turned to bust, the FHA became one of the only places to turn for buyers who couldn't afford big down payments or who wanted to refinance but had little home equity. The number of loans backed by the agency has soared, and its market share reached 23% in the second quarter, up from less than 3% in 2006, according to Inside Mortgage Finance.

The FHA's growing role has been cheered by economists, the real-estate industry and members of Congress who felt that it prevented the housing collapse from being worse.

Even as the FHA tightened lending standards moderately last year, Congress allowed the agency to make much larger loans, up to $729,750 in the highest-cost markets. Previous loan limits, at $362,000, had kept the FHA out of more expensive markets, including some of the hardest hit during the housing bubble. In July, California accounted for 13% of the FHA's mortgages, up from 1.5% in 2006.

Mounting losses have eaten into the FHA's cash cushion. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

FHA officials have refused to comment on whether the reserves would fall below the 2% level, but say that even if that happens, the agency is adequately capitalized.

The release of the annual review will be an early trial-by-fire for Mr. Stevens, a well-regarded housing-industry veteran who took the top FHA job in July. Mr. Stevens already has begun boosting oversight and reining in risk. Last month, he suspended Taylor, Bean & Whitaker Mortgage Corp., the third largest FHA lender, from making FHA-backed loans, sending a clear signal about the agency's newly aggressive posture. Taylor Bean ceased operations and later filed for bankruptcy protection.

The agency is expected to announce measures this fall to improve oversight of its lenders and will name a chief risk officer, which it has never had.

Some housing analysts believe that deep losses could spur even tighter restrictions. "It absolutely changes the political dynamic once you have to ask taxpayers" for money, said Lisa Marquis Jackson, vice president at John Burns Real Estate Consulting in Irvine, Calif.

Last month, the consultancy wrote in a note that mounting losses could lead to an "imminent pullback" from the FHA, and the firm has been warning investor and home-builder clients: "Be prepared for this to happen in some way, shape or form."

Members of Congress have voiced concerns over the agency's reserves. But many may balk at raising new hurdles for borrowers.

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