Obama Budget Sees FHA Avoiding a Taxpayer Subsidy in 2014

President Barack Obama’s fiscal-year 2015 budget projects the Federal Housing Administration won’t require a taxpayer subsidy this year as the agency’s efforts to shore up its finances have offset losses from defaulted loans.

The government mortgage insurer has been raising fees and tightening underwriting to pay for a wave of soured mortgages it backed as the housing bubble burst. Last year, the FHA required a $1.7 billion cash infusion from the Treasury, the first ever in its 80-year history. The agency must keep enough cash on hand to cover all projected future losses.

The Obama administration is pressing Congress to pass legislation that would give FHA more authority to crack down on bad lenders and require mortgage servicers to hire outside help if they have a poor track record of aiding delinquent borrowers, according to a White House budget proposal released today.

“The improved strength of the fund allows FHA to sharpen its focus on placing homeownership within the reach of many creditworthy Americans,” FHA Commissioner Carol Galante said today on a conference call with reporters.

The agency is also requesting authority to raise $30 million by imposing a new fee on lenders for improved scrutiny of underwriting, Galante said. The effort is intended to expand mortgage credit to more borrowers by giving lenders better feedback about whether they’ll potentially have to cover the costs of defaults on flawed loans. Lenders have raised the minimum credit scores and incomes they require of borrowers amid fears that FHA will refuse to pay for defaults.

Final Determination

The FHA has until the end of the current fiscal year to determine whether it will require aid from the Treasury this year.

The agency insures $1.1 trillion worth of mortgages and backs about 17 percent of the U.S. loan originations for home purchases, more than quadruple the 4 percent share it covered in 2007, before the credit crisis. About 8 percent of FHA-insured loans were at least 90 days delinquent in October, down from 9.5 percent a year earlier. Loans unpaid for at least 90 days are considered likely to default.

The FHA’s losses stem largely from loans it backed from 2007 to 2009, when it expanded its book of business as private capital evaporated.

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