GET READY FOR ANOTHER $54 BILLION BAILOUT-THIS TIME ITS THE FHA INSURANCE PROGRAM-WHAT'S NEXT?

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

Representative Scott Garrett, a New Jersey Republican, introduced legislation this month to boost the FHA’s minimum down payment to 5 percent from 3.5 percent to help shore up the agency’s insurance fund, a move that could add to the housing market’s burdens as it struggles to recover.

The market could also get less help from government aid programs that may lapse, including buyer tax credits and the Federal Reserve’s effort to cut loan rates by buying bonds.

Brian Sullivan, a spokesman for the Housing and Urban Development Department, which oversees the FHA, declined to comment.

Falling prices will push the FHA’s single-family fund’s reserves below a 2 percent cushion required by Congress, Commissioner David H. Stevens, who will also speak today, said last month. “Under no circumstances will a taxpayer bailout be needed” because the shortfall will be cured over time, he said.

Sufficient Reserves

The idea the FHA needs a rescue is “just plain wrong,” Stevens said in an Oct. 6 letter to the Wall Street Journal. That’s in part because the FHA’s accounting method mean its reserves are enough to cover more than 30 years of projected losses, assuming no revenue from new business, he said.

FHA’s total reserves exceed $30 billion, or more than 4.4 percent of its insurance, according to Stevens. The loan- insurance ratio, which compares the reserves with the loans insured, was 6.4 percent a year ago, government data shows.

The agency said last month it would tighten some credit, appraisal and lender standards and appoint a chief risk officer. In the first half of the year, FHA insured more than $178 billion of new mortgages, or about 19 percent of the total, according to the newsletter Inside Mortgage Finance.

‘Optimistic’ Assumptions

First-time buyers account for about 78 percent of FHA loans for home purchases, while minorities represent 30 percent, according to prepared remarks by David Kittle, chairman of the Mortgage Bankers Association.

Official figures on FHA’s reserves as of Sept. 30 won’t show a shortfall when released because “the assumptions used will be overly optimistic relative to loss mitigation resulting from both loan modifications and recent and expected underwriting changes,” Pinto said.

In December, three months after regulators seized Fannie Mae and rival Freddie Mac of McLean, Virginia, Pinto told lawmakers “taxpayers will have to stand behind hundreds of billions of dollars” of losses at the companies. That was before the firms tapped almost $100 billion of their capital lifelines at the Treasury, which this year grew from the $100 billion each initially pledged to $200 billion.

Performance Projections

Pinto’s testimony says he based his FHA estimates on his performance projections for high loan-to-value ratio loans insured by Fannie Mae in 2006, about 20 percent of which he expects to default costing 50 percent of balances.

About 14.4 percent of FHA loans were delinquent as of June 30 and 2.98 percent were already being foreclosed upon, according to the Mortgage Bankers Association. The combined percentage for all mortgages was a record 13.16 percent, according to data from the Washington-based trade group, which said in releasing the figures the share of FHA loans past due is being suppressed by the large amount new debt.

Boyd Campbell, testifying on behalf of the National Association of Realtors, said that the FHA has helped avoid a worse collapse, according to his prepared remarks.

Changes to the agency should include moves meant to bolster its technology and staff, ease its restrictions on condominium loans and extend its ability to back larger mortgages, he said.

“Due to solid underwriting requirements and responsible lending practices, FHA has avoided the brunt of defaults and foreclosures facing the rest of the real estate finance industry,” Campbell said in the prepared testimony.

Tougher Hurdles

FHA loans charge 1.75 percent up front and 0.55 percent annually for home-loan insurance. The agency generally wants lenders to require housing payments to be less than 31 percent of borrowers’ pretax income and for pay to be fully documented. Those are tougher hurdles than once required by so-called subprime mortgages, which have dwindled since 2007.

While the FHA has no minimum credit-score requirements, lenders impose their own to guard against early defaults that revoke the insurance.

Options for ensuring the FHA won’t require taxpayer money include “moving to a risk-based pricing structure, increasing the upfront premium, tightening credit guidelines, or a combination of these approaches,” the Mortgage Bankers Association’s Kittle said.