FHA challenged on projected risk to taxpayers

By Dina ElBoghdady
Washington Post Staff Writer
Friday, March 12, 2010; A14

The Federal Housing Administration will need taxpayer money because it failed to properly project how borrowers with FHA-backed loans are affected by job losses and diminished equity in their homes, New York University professor Andrew Caplin told a House panel Thursday.

The agency, which insures lenders against defaults, has nearly depleted the cash it must set aside to deal with unexpected losses. But a recent audit of FHA's finances concluded that the agency will not need taxpayer money except in two catastrophic scenarios.

Caplin said the audit ignored the risks posed by FHA borrowers who owe far more than their homes are worth and yet managed to refinance into new FHA-backed loans. It treated those borrowers as if they were trouble-free, even though they would be vulnerable to foreclosure if they suffered a financial setback, said Caplin, who co-wrote a study on this topic with the Federal Reserve Bank of New York.

Also at the hearing, FHA officials said the higher fees and tougher credit requirements that it plans to impose on new borrowers in fiscal 2011 will generate $5.8 billion for its cash reserve. But the Congressional Budget Office estimate is closer to $1.9 billion. The FHA said it is confident about its projections.

-- Dina ElBoghdady

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