Federal Housing Administration May Need A Bailout

Thought the housing market couldn't get any worse? Think again.

Apparently, the housing situation is in such poor shape that the Federal Housing Administration (FHA) may soon need a bailout.

The FHA was created in 1934 as a part of the new deal. The idea was that it would insure loans made by banks for building and/or buying a home. The supposed goal of the FHA is to improve housing standards and conditions and to provide financing via insurance. However, these goals have become increasingly difficult to support since the housing market collapsed.

Since the onset of the recession, the agency's cash reserves have dropped to $2.7 billion, a level so low that there is a "close to a 50%" chance it will seek a bailout in 2012, the Wall Street Journal reports.

Last year the FHA backed a third of mortgages used to finance home purchases last year, up from just 5 percent in 2006, reports Newser.

The FHA raised insurance premiums and enforced tighter "risk controls" in an effort to avoid using Treasury funds, but now it looks like they will have no other option.

Reportedly, "auditors predict that it will need a bailout if home prices drop by more than 5.6 [percent] next year. The FHA has 'permanent and indefinite' budget authority so it won't need to run any request for funds past Congress, which has reached a deal to raise the maximum size of loans the agency can insure," Newser writes.

Technically, the FHA has the authority to bypass Congress to get the money it wants to continue operating.

The audit, to be released on Tuesday by the FHA, was prepared by Integrated Financial Engineering Inc, an analytics firm, the WSJ reported.

"Even in the tough economic environment, we have been successful in protecting the (insurance) fund. We still clearly see there are downside economic risks that we have to be vigilant about," Carol Galante, acting commissioner of the FHA, told the Journal.

(h/t Newser)