A continued weakening of the economy could require new steps to solidify the Federal Housing Administration's (FHA) reserves, according to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD).
Reuters reports that in an appearance yesterday before the House Financial Services Committee, Donovan warned that ‘any worsening of economic conditions in 2012’ that would result in fraying the FHA's portfolio by more than $7 billion would require a new cash influx. A recent audit of the FHA determined that the agency's reserves fell to 0.24%, down from 0.5% in 2010 and far below the 2% required by law.
‘While the fund has remained positive, we are keenly aware of the importance of remaining vigilant to the risks the agency faces and will continue to take the actions necessary to protect the fund and taxpayers,’ Donovan said, adding that HUD was considering several options including premium increases in FHA mortgage insurance, to help stave off financial catastrophe.
Donovan's testimony was met with agitation by the committee's Republican members. Rep. Shelly Moore Capito, R-W.Va., stated, ‘We see a major red flag here with the decline of the capital ratio. A bailout of the FHA would be intolerable to the American people.’
‘FHA is a disaster in the making,’ added Rep. Jeb Hensarling, R-Texas. ‘If we're not careful, it may become Fannie Mae and Freddie Mac the sequel.’