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FHA capital reserves have fallen due to big losses on home loans

Capital reserves of the Federal Housing Administration have fallen well below legally required levels, due to significant losses on home loans made before this year, Housing and Urban Development Secretary Shaun Donovan said on Thursday.

Donovan added that it was only in the most extreme forecast, such as 12.5 percent unemployment and severe home price declines, that FHA capital reserves could fall below zero.

The FHA has guaranteed about a quarter of all U.S. home loans made this year and needs reserves as a cushion in the event of losses.

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Donovan was careful to stress that all is not well with the FHA. “I don’t want to leave the impression that the reserves are adequate,” he said, adding that he and FHA Commissioner David Stevens are committed to changing the way the agency does business to bring it to fiscal health.

“There are real risks to the FHA and we are aggressively addressing those real risks with real reforms,” Stevens said in a statement.

Donovan said the FHA was “actively looking” at raising the mortgage insurance premium borrowers pay on every loan, which would bolster reserves but could also cause a slowdown in the housing market as it would raise borrowing costs; he said no decision had been made.

Since about 80 percent of the FHA’s business is with first-time home buyers, who typically make smaller down payments, the FHA’s role in the housing market is widely seen as vital.


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