Federal Housing Administration facing $16.3 billion loss

The Federal Housing Administration is facing a $16.3 billion loss, raising the specter of a possible taxpayer bailout for the first time in its nearly 80-year history. 

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An independent audit set for release Friday estimates that the mortgage insurer, which has more than $1 trillion worth of loans in its portfolio, has burned through its capital reserves because of bad mortgages. The $16.3 billion shortfall is more than expected.

“While the loans made during this administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously," said Carol Galante, the FHA's acting commissioner.

"We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

The agency cited three reasons for the losses: Prices have not gone up as fast as forecast, a drop in interest rates to historic lows that has helped borrowers but cost the FHA revenue, and a refined methodology "to more precisely predict the way losses from defaulted loans and reverse mortgages." 

More broadly, the agency is still struggling from the burst of the real estate bubble. 

By many measures, housing prices have only recently started to stabilize and increase. The rate of foreclosures remains high.

The agency's books were hit hard by loans made from 2007 to 2009 and "continue to place a significant strain" on its finances. 

The Housing and Urban Development Department is expected to release a series of steps on Friday that will further help shore up the agency's finances. 

“FHA has weathered the storm of the recent economic and housing crisis by taking the most aggressive and sweeping actions in its history to reform risk management, credit policy, lender enforcement, and consumer protections,” said HUD Secretary Shaun Donovan. 

“During this critical period in our nation’s economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse to a point where the outlook is positive and recovery is under way.”

Coupled with the actuary’s expectation of $11 billion in additional capital from new business in fiscal 2013, "these changes are intended to return FHA’s capital reserves to a positive position within the year" and decrease the likelihood of a taxpayer bailout. 

The independent actuaries project more than $70 billion in losses on those loans.

House Financial Services Chairman Spencer Bachus (R-Ala.) warned on Thursday that "because of the number of foreclosures, they’ve indicated they will have to come to the American people and ask for money." 

Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee, said that the "FHA has strayed a long way from its original mission." 

"The recognition that FHA's economic value is now negative is a stark reminder that we have put off fundamental housing finance reform for too long."