Oct. 1 (Bloomberg) -- Mortgage borrowers seeking federally backed loans would have to make bigger down payments under legislation introduced today as lawmakers try to shore up the Federal Housing Administration’s insurance fund.

Representative Scott Garrett, a New Jersey Republican, is pushing the measure to recoup some of the program’s losses as record-high delinquencies drive FHA’s reserve fund below 2 percent of loans insured, he said in a statement. The bill would increase the minimum down payment required for an FHA loan to 5 percent from 3.5 percent.

The program is projected to insure $1 trillion in loans by the end of next fiscal year, up from $410 billion in 2006, according to FHA. It’s under strain with the U.S. mortgage default rate at a record high and private-industry sources for lenders to finance and insure mortgages dried up. The FHA said in a Sept. 18 statement that it’s tightening credit and appraisal standards and appointing a chief risk officer.

“The benefits with promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk,” Garrett said in a letter sent to the U.S. House today.

Melanie Roussell, spokeswoman for the Housing and Urban Development Department, said there is no immediate risk to the insurance fund. HUD oversees FHA, which provides mortgage insurance to low-and-moderate income borrowers.

Portfolio Analysis

FHA has hired an outside consultant to analyze its portfolio holdings. Early results show that as of as of Sept. 30 its reserve ratio would fall below its congressional requirement of 2 percent, FHA officials said Sept. 18

“As FHA is key to the housing recovery, we would urge Congress not to take precipitous action while we are awaiting the full details the independent actuarial study,” Roussell said.

FHA’s total reserves are more than $30 billion, or more than 4.4 percent of outstanding loans insured, according to FHA. The loan insurance ratio, which measures the amount of reserves compared with the amount of loans insured, was 6.4 percent a year ago, according to government data. FHA currently insures about 20 percent of all U.S. home loans.

Garrett’s legislation would also prohibit the FHA from letting borrowers roll their closing costs into the outstanding balance of the loan, a practice he said can lower down payment requirements by a full percentage point.

“You’ve got two conflicting public policy goals here,” Federal Reserve Chairman Ben Bernanke told lawmakers at a hearing today, referring to the FHA. “On the one hand, it’s providing support to the housing market and homeownership. On the other hand, clearly, I think it’s fair to say, given the low down payments, there’s certainly greater risk of loss there that would ultimately be borne by the taxpayers.”

Bernanke said it was a “trade-off” Congress needs to examine.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com.

Last Updated: October 1, 2009 19:01 EDT