By
NICK TIMIRAOS
The Federal Housing Administration's projected losses hit $16.3 billion at the end of September, according to an independent annual audit to be released Friday, a much larger figure than had been forecast earlier.
The report suggests the FHA will require taxpayer funding for the first time in its 78 years, though that won't be decided until early next year.
Housing officials said late Thursday they would announce a series of steps on Friday to raise revenue and avert such a milestone. Those steps are likely to raise the cost of FHA-backed mortgages for future borrowers.
The FHA is required to maintain enough cash to pay for projected losses on the $1.1 trillion in loans that it guarantees. Last year, the independent audit said the FHA would have $2.6 billion after covering estimated losses.
But the latest forecasts show that while the FHA currently has reserves of $30.4 billion, it expects to lose $46.7 billion on the loans it has guaranteed, resulting in a $16.3 billion deficit.
The report is likely to unleash a political fight over the government's role backstopping the housing market, which already has required taxpayers to spend $137 billion to rescue Fannie Mae FNMA -1.46% and Freddie Mac FMCC -1.75% . Together with Fannie and Freddie, federal agencies are backing nearly nine in 10 new mortgages.
"If [the FHA] were a private company, it would be declared insolvent and probably put under conservatorship like Fannie and Freddie," said Thomas Lawler, an independent housing economist in Leesburg, Va.
The agency is required to report a picture of its finances to Congress annually. Experts were expecting the report to project a loss, but a much smaller one.
The FHA doesn't actually make loans, but rather insures lenders against losses. It has played a critical role helping the housing market by backing mortgages of borrowers who make down payments of as little as 3.5%.
"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 underway," Shaun Donovan, secretary of the Department of Housing and Urban Development, which oversees the FHA, said in a statement.
Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of all insured loans.
Most of the agency's losses stem from loans made between 2007 and 2009, as the housing bust deepened. Loans made since 2010 are expected to be very profitable.
"FHA has strayed a long way from its original mission," said Sen. Bob Corker (R., Tenn.) in a statement on Thursday.
"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."
Rising losses are largely a result of less optimistic estimates about home prices and revisions to the models that the FHA's independent auditor uses to project how much the agency is likely to pay for loans that default.
The decision over whether the FHA will need money from Treasury won't be made until next February, when the White House typically releases its annual budget. Because the FHA has what is known as "permanent and indefinite" budget authority, it wouldn't need to ask Congress for funds; it would automatically receive money from the U.S. Treasury.
The FHA is required by law to maintain reserves equal to 2% of its total loan guarantees. It breached that level three years ago, and last year its reserves stood at 0.2% of all loan guarantees. The capital-reserve ratio in the latest report stands at -1.4%.
The report amounts to a snapshot of the FHA's projected capital resources. It looks at what would happen if the FHA were to stop making new loans and then had to pay for all projected losses over 30 years. It doesn't take into account income from loans insured in the future, which could offset losses.
HUD said Thursday that the report didn't include nearly $11 billion in expected revenue that would be brought in over the next year, which together with to-be-announced steps would restore the agency's reserves by the end of next year.
The projection shows that the agency's traditional mortgage business is running a deficit of around $13.5 billion, while the agency's reverse mortgage business faces a $2.8 billion shortfall.
The audit was prepared by Integrated Financial Engineering Inc. of Rockville, Md., an analytics firm.
Write to Nick Timiraos at
nick.timiraos@wsj.com
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