Capital reserves of the Federal Housing Administration (FHA) remained below legally required levels for the second straight year as loans from earlier in the decade continued to weigh, Housing and Urban Development Secretary Shaun Donovan said today.

The FHA has capital reserves equal to just 0.50 percent of the value of the thousands of national outstanding home mortgages it insures, well below the 2 percent required by law and down from last year’s 0.53 percent, Donovan said, citing an independent actuarial study released today.

However, Donovan said tighter lending standards imposed on his watch are slowly improving the fiscal health of the cash-strapped agency and FHA reserve ratios are not expected to dip into negative territory, even if the housing market were to suffer a "complete collapse."

"While we need to continue to carefully manage risk, the report shows the (Mutual Mortgage Insurance) Fund remaining self-sufficient in every scenario tested by the actuaries," Donovan said in the report to Congress.
He said the agency expects to exceed 2 percent levels by 2015.

"It’s clear that FHA is in a stronger position today than we were just one year ago," FHA Commissioner David Stevens said in a press release.

"While we are not yet completely out of the woods, based on the evidence we’re seeing, FHA is weathering the economic storm while helping to create a firm foundation for our nation’s recovery," Stevens said.

Donovan said he expected FHA to play an outsized role in the mortgage market in the near-term while slowly stepping back from the housing market "as the credit industry recovers."

The FHA guaranteed close to 40 percent of home purchase mortgage loans originated in the past year, Donovan said.
"We are committed to stepping back from this role and supporting the return of private capital to the market," Donovan said. (Reuters)