FHA's cash reserves rebounding, audit shows

By Dina ElBoghdady
Washington Post Staff Writer
Tuesday, November 16, 2010; 12:08 AM

The Federal Housing Administration's cash reserves remain below the level required by law, but they have not deteriorated much since last year and taxpayer funding will not be necessary to buoy the agency even under worst-case scenarios, federal officials said Monday.

The officials cited an independent audit, due to be released Tuesday, that examined the excess cash the agency must set aside to deal with unexpected losses in its flagship home-buying program. That program has played a critical role in propping up the housing market and currently supports one in five home purchases nationwide.

As of Sept. 30, the agency's reserves had an estimated value of $4.7 billion, up from $3.6 billion a year earlier. The current total represents 0.5 percent of all outstanding single-family home loans insured by the FHA, compared with 0.53 percent a year earlier. The margin narrowed from the previous fiscal year because the agency is insuring more loans.

The margin is far below the 2 percent cushion required by law. The reserves dipped below that level for the first time last year, and the agency has toughened its lending standards and rooted out fraudulent lenders in an effort to regain its financial footing.

Federal officials said these actions have paid off and expressed optimism about the agency's finances. The new audit shows that the reserves will approach the required level in 2014 and exceed it by 2015, according to a report submitted to Congress on Monday.

The rebound is expected to occur even though the auditing firm, Integrated Financial Engineering of Rockville, used much more pessimistic projections for home prices than it had the previous year. If not for the conservative price estimates, the FHA's reserves would have gained an additional $8.5 billion in value, mostly because FHA loans have attracted more creditworthy borrowers since 2009.

"It's clear that FHA is in a stronger position today than we were just one year ago," FHA Commissioner David H. Stevens said in a statement.

The FHA's reserves are closely watched because they help gauge the agency's financial health. The agency's default rate climbed as its loan volume exploded in recent years. Lawmakers worry that taxpayers may have to kick in funds to cover the agency's losses if its reserves vanish. That would be a first for the agency, which has always self-financed its operations using premiums collected from borrowers.

But the most recent audit shows that under the toughest stress tests, the FHA's reserves remain above the point at which taxpayers would have to foot the bill.

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