HUD: Big risks are looming, will need to scale back within the mortgage market

by 28 Feb 2012

(Reuters) - The Federal Housing Administration faces "considerable risks" to its finances and the Obama administration will continue to scale back the agency's presence in the mortgage market, the top U.S. housing official said on Tuesday.

Housing and Urban Development Secretary Shaun Donovan told Congress that efforts to protect the FHA's dwindling capital reserves were not only important in their own right, but that they could open the door to more private mortgage funding.

"Despite the unprecedented efforts of the (Obama) administration to alter the trajectory of FHA, considerable risks remain," he told the Senate Banking Committee.

To create a more "robust private system of housing finance and protect the FHA fund for the future" the government will gradually reduce the mortgage-guarantee agency's presence in the market, Donovan added.

The FHA's share of the mortgage market has increased sharply since the depth of the financial crisis in 2008 as private mortgage capital grew more scarce. It currently backs about a third of all new mortgages; in 2006, its share of the new loan market was just 5 percent.

Taking into account the big presence of Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), the government now backs about nine of every 10 new home loans.

As the FHA's presence has grown, so has the strain on its finances. The agency's capital reserves hit a record low $2.6 billion last year, and Donovan said it faced challenges even taking into account recent steps to raise cash.

On Monday, the agency said it was increasing the up-front fees it charges on mortgages it insures in an effort to raise about $1.25 billion.

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