Video: Realtor: 'It's a great time to buy a home'

updated 4/2/2009 3:16:27 PM ET 2009-04-02T19:16:27

The Obama administration soon may be forced to subsidize the government's mortgage insurance program with taxpayer dollars as economic troubles cause defaults and foreclosures to surge.

No decision has been reached, officials said Thursday at a Senate subcommittee hearing focused on the fiscal health of the Federal Housing Administration. But if the agency's losses grow too high, the FHA would be forced to raise money — either by increasing insurance premiums on new borrowers or seeking a subsidy from the federal budget.

President Barack Obama's housing secretary, Shaun Donovan, told senators that officials are evaluating whether aid for FHA will be needed as part of the administration's $3.6 trillion budget for next year.

However, Donovan said FHA is "unlikely to face the catastrophic losses borne in the subprime sector." That's partly because the agency has more conservative standards than the subprime lenders that fueled the housing boom. It also didn't back loans for more expensive properties that have plummeted in value, particularly in places like California, he said.

As of February, 7.2 percent of loans backed by the FHA were either 90 days overdue or in foreclosure, up from 5.8 percent in August. "Based on the numbers we're seeing, I think it's going in the wrong direction," said Kenneth M. Donohue, inspector general for the Department of Housing and Urban Development.

Lawmakers, meanwhile, are worried taxpayers will be stuck with the final bill.

Sen. Kit Bond, R-Mo., called the FHA a "powder keg" waiting to explode, and said Congress and the Obama administration shouldn't place a greater financial burden on the already strapped agency. "The taxpayer credit card is maxed out," Bond said.

"My constituents have been clear that they don't want to wake up to learn that Congress has taken steps that leave the taxpayer holding the bag," said Sen. Patty Murray, D-Wash. "That is exactly what could happen if the FHA is pushed to buy loans that could go bad soon or down the line."

The FHA became the main source of home loans to borrowers with poor credit and low down payments after the subprime lending market's collapse. It allows borrowers to take out home loans with down payments as low as 3.5 percent, compared with 20 percent for a typical loan that doesn't require mortgage insurance.

FHA loans are made through by banks, insured by the government and sold as mortgage-backed securities by Ginnie Mae, the government's mortgage finance agency. The FHA currently backs around a third of new home loans, up from about 3 percent in 2006.

To combat fears that shady mortgage lenders are feeding fraudulent loans into FHA, Donovan said the government has activated "SWAT teams" that will conduct unannounced inspections of lenders whose loans are showing unusually high default rates. The agency has the right to revoke lenders' ability to do business with FHA.

Obama last month nominated real estate industry veteran David Stevens to head the FHA. Stevens is currently president and chief operating officer of Long and Foster Cos., a Chantilly, Va.-based real estate brokerage. The position requires Senate confirmation.

Meanwhile, a program launched by former President George W. Bush's administration to assist troubled borrowers has been canceled. The "FHASecure" refinancing program announced with great fanfare in August 2007 produced disappointing results, aiding few delinquent borrowers, and was allowed to expire at the end of last year.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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