FHA Needs Bailout From Treasury to Plug Budget, Bachus Says

The Federal Housing Administration will need billions of dollars in aid from the U.S. Treasury before the end of the year to fill a financial hole caused by defaults on mortgages it insures, House Financial Services Committee Chairman Spencer Bachus said today.

FHA will propose increases in the premiums it charges to insure mortgages as one solution to its financial problems, Bachus said during a press conference in Washington. Still, that won’t be enough to offset its near term need for cash.

The agency is “burning through” its last $600 million and FHA officials have briefed him that they will need a financial backstop within a month, the Alabama Republican said during a press conference in Washington.

“Because of the number of foreclosures, they’ve indicated they will have to come to the American people and ask for money,” he said.

A request for aid would be the first in the agency’s 78- year history, and could create political problems at a time when Republicans and Democrats are engaged in negotiations over how to solve the nation’s fiscal woes.

FHA does not need prior approval from Congress to receive a financial infusion from Treasury. FHA spokesman George Gonzalez declined to comment.

Bachus refrained from criticizing the government mortgage insurer in remarks after the press conference and blamed the agency’s losses on the economy.

Bad Economy

“These are just a wave of foreclosures which we obviously are not over,” Bachus said. “It’s basically a function of a bad economy.”

Bachus’s remarks came a day before the agency is scheduled to release its annual actuarial report, which is expected to project that losses from defaults on the loans it insured from 2005 to 2009 will exceed the value of its insurance fund. That report, which will provide a picture of the agency’s financial situation, is separate from any eventual request for a draw from Treasury.

In advance of the report, FHA officials have been publicly emphasizing the role the agency plays in the economy as a backer of home loans for low-income borrowers who do not have large down payments. Agency officials have been sending out messages on Twitter with the hashtag #FHAmatters.

FHA insures a portfolio of about $1.1 trillion in home loans and now backs 15 percent of U.S. mortgages for home purchases.

The agency provides liquidity to the housing market by insuring lenders against losses on loans with down payments as low as 3.5 percent. Lenders are made whole if the mortgages default. Unlike Fannie Mae (FNMA) and Freddie Mac, the mortgage finance companies operating under U.S. conservatorship, FHA doesn’t package loans into securities or guarantee principal and interest payments.

The government-backed mortgage insurer until now has covered its costs with revenue from premiums. In the past two years, it has raised premiums and tightened credit standards in an effort to avoid asking for a taxpayer subsidy.

To contact the reporters on this story: Clea Benson in Washington at cbenson20@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net