FHA Cash Cushion Has Fallen by 39%

The audit, prepared by Integrated Financial Engineering Inc. of Rockville, Md., estimated the economic value of the FHA's insurance fund was $12.9 billion as of Sept. 30, down 39% from a year earlier.

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The estimated value of the fund as of Sept. 30 worked out to 3% of total loans insured by the FHA, down from 6.4% a year ago. Federal law requires the ratio be at least 2%. If the FHA runs short of money to pay claims, Congress would have to provide taxpayer funds to make up the difference.

The share of new mortgages insured by the FHA jumped to 26% in this year's third quarter, from just 3% for the full year of 2007, according to Inside Mortgage Finance, a trade publication. Now that the subprime market has collapsed, the FHA is shouldering most of the risk on loans to people who can't afford more than a small down payment.

The audit's assumptions about house prices are based on July forecasts by Global Insight Inc., a research firm. Since July, the housing market has continued to deteriorate. Thomas Lawler, an independent housing economist based in Leesburg, Va., said he sees a risk that losses on FHA loans will be large enough to require Congress to replenish the reserves.

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Effective Oct. 1, the FHA raised the up-front premiums charged to most borrowers to 1.75% of the loan amount from 1.5%. The annual premiums paid by borrowers are 0.5% to 0.55% of the loan balance.

Borrowers can get FHA-insured loans with down payments as small as about 3%. That minimum will rise to 3.5% next year. But because house prices have been falling sharply, many FHA borrowers already owe more than the current value of their homes.