Originally published Friday, November 18, 2011 at 10:01 PM

FHA might need taxpayer bailout next year

There might yet be another casualty in the real-estate market: the Federal Housing Administration. With home prices still seeking their...

Los Angeles Times

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WASHINGTON — There might yet be another casualty in the real-estate market: the Federal Housing Administration.

With home prices still seeking their bottom, the federal agency that insures more than $1 trillion in mortgages faces a nearly 50 percent chance that it could need a taxpayer bailout next year, according to a government report released this past week.

If the housing market fails to rebound next year, the FHA would need as much as $43 billion from the U.S. Treasury to stay afloat, the report said.

That would add to the combined $150 billion already spent to rescue seized housing finance giants Fannie Mae and Freddie Mac.

The FHA's projected losses on loans made mostly before 2009 continue to increase, eating away its cash reserves.

The agency is dangerously close to being in the same dire position as many homeowners — upside down on its housing finances.

"They have no margin for error right now," said Richard Green, director of the University of Southern California Lusk Center for Real Estate.

The agency, created during the Great Depression to help revive a devastated housing market, has never required taxpayer assistance.

It has been playing a major role in the housing market since the subprime housing bubble burst four years ago, and most of its losses have come from loans made before early 2009.

The FHA's annual independent actuarial study showed that the agency's cash reserves, which are not supposed to drop below 2 percent of projected loan losses, continued to plunge this year.

They are down to 0.24 percent from the already seriously low level of 0.5 percent last year as the FHA's cash reserves fell to $2.6 billion from $4.7 billion last year.

"The way the FHA is currently operating, I think there's a pretty high probability they will run out of reserves," said Anthony Yezer, an economics professor at George Washington University who has studied the FHA. "Their reserves are already pretty inadequate."

Under the report's primary projection for housing prices, which assumes they will drop 5.6 percent this year before rebounding to 1.2 percent growth next year, the FHA would not need any taxpayer money.

The reserve fund would return to its mandated 2 percent level by 2014, slightly earlier than projected last year.

"It would take very significant declines in home prices in 2012 to create a situation in which the current portfolio would require any kind of additional support," acting FHA Commissioner Carol Galante said.

She added that the agency's reserve fund continues to be "actuarially sound."

But predicting the fate of the real-estate market has proved to be difficult since the crash of the subprime housing bubble.

Last year, the FHA's actuarial report projected housing prices would fall less than 1 percent in 2012.

Given the volatility of the market, this year's report warned that there is a "close to 50 percent" chance that a bailout would be needed next year.

Galante said the FHA probably could withstand an additional housing price drop of 4 to 5 percent beyond its primary projection before it would need a bailout.

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