FHA reserves drop below Congressional requirement

[Freedom4all]

No that this is at all surprising anymore, but does this sound familiar? A government lending agency gets mandated by Congress to get more aggressive in underwriting marginal loans in order to manipulate lending markets into giving out more credit. Then the agency’s reserves drop below the red line, and then what?

Thanks to the FHA, we will soon find out:

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency’s cash reserves will drop below the minimum level set by Congress, FHA officials said.

The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

“It’s very serious,” FHA Commissioner David H. Stevens said in an interview. “There’s nothing more serious that we’re addressing right now, outside the housing crisis in general, than this issue.”

Until now, government officials have warned that the agency could be forced to ask Congress for billions of dollars in emergency aid or charge borrowers more for taking out FHA-insured loans if the reserves fell below the required level, equal to 2 percent of all loans guaranteed by the agency.

FHA faces a big problem at this level of reserves. The mortgage failure rate at the moment is above the level of the reserves FHA has, which means that they could face collapse if the market turns even more sour.