Rising mortgage defaults may force FHA to request bailout from Treasury: report

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The Federal Housing Administration may for the first time need a bailout from the U.S. Treasury as rising defaults on mortgages it insures have pushed its insurance reserves into deficit, according to a new report.

The shortfall, first reported by the Reuters news agency, is far smaller than the default-driven losses that pushed FHA’s cousins Fannie Mae and Freddie Mac into insolvency five years ago, likely amounting to less than $1 billion. Unlike Fannie and Freddie, FHA has a pre-established credit line with the Treasury, and the White House projected it would need a small cash infusion when it presented its budget earlier this year.


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Still, the first-ever bailout for the Depression-era mortgage insurer is a sign of the lingering stress in the housing market and stirred controversy in Congress, where conservatives have called for reforms to make the agency less vulnerable to defaults.

After the collapse of the private mortgage market in 2008, FHA’s loan programs have become the first choice for nearly all first-time home buyers and those with shaky credit and little cash to make a down payment. A surge in loans to such marginal borrowers since the recession has pushed the agency’s loan portfolio to an unprecedented $1 trillion.

“Over the years, the FHA has strayed far from its original mission,” Rep. Jeb Hensarling, Texas Republican and chairman of the House Financial Services Committee, said in a statement. “It has become the nation’s largest subprime lender. It’s time to return the FHA to its traditional mission of helping first-time homebuyers and those with low and moderate incomes.”

Mr. Hensarling and other members of Congress said the impending bailout demonstrates why Congress needs to act on housing reform legislation after stalling for years out of concern about the fragility of the depressed housing and mortgage markets. Mr. Hensarling’s own bill would scale back the FHA to its original mission, while the Senate Banking Committee also has approved reforms for the agency.

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