FHA Won't Need Bailout, Commissioner Says

The Federal Housing Administration may be running low on cash, but it won't need a government bailout, FHA Commissioner David Sterns told members of Congress on Thursday.

Testifying before a House Financial Services subcommittee, Sterns said that, absent a "catastrophic" decline in home prices, the FHA will not need taxpayer assistance to stay afloat, despite projections that its cash reserves will soon dip below a congressionally mandated 2 percent minimum of outstanding loans.

Concerns about the FHA's finances have been growing as the agency has massively increased its lending during a time of rising foreclosures and falling home prices. In less than two years, the FHA has gone from backing less than 5 percent of U.S. mortgages to projections that it will account for one-quarter of the entire U.S. mortgage market this year.

A former senior executive with Fannie Mae warned that mounting losses will likely mean that the FHA will require a taxpayer bailout within the next three years. In written testimony to the subcommittee, Edward Pinto, a financial consultant who was Fannie Mae's chief financial officer in the late 1980s, said the FHA's losses will likely total $40 billion in losses in the next 24 to 36 months.

FHA Commissioner Stevens rejected the assertion, saying the FHA has other reserves to draw upon besides the loan reserve. He said that even though the agency is taking on more mortgage debt, stricter underwriting standards mean those loans will be more secure than those issued in the past. He said an independent audit of the FHA's mutual mortgage insurance fund shows that it will replenish itself within the next three years, based on conservative projections of the recovery of the housing market.

Patrick Newport, an economist with HIS Global Insight, which generated the market forecast used in the audit, said there are a number of signs the housing market is stabilizing and that prices should begin to recover early next year.

Pinto, the former Fannie Mae executive, said the audit's projections were overly optimistic and said the FHA is particularly vulnerable because it requires only a 3.5 percent down payment on mortgages. He called for raising the minimum to 10 percent and reducing the maximum loan amount to reduce the agency's exposure to potential losses.