The FHA doesn't issue mortgages, but instead insures lenders against defaults. However in November 2011, an independent audit of FHA's finances found that losses from mortgage defaults had depleted the agency's reserve fund to 0.24%, or $2.6 billion, during fiscal 2011. This leaves the agency well below the Congressionally-mandated 2% level. (The ratio measures the net worth of the reserve fund compared with the value of the loans FHA has insured.) In 2006, the reserve fund stood at 7%.
According to the report, the percentage of loans in the FHA's portfolio with three missed payments or more rose to 9.3% in November, up from 8.4% in August.
At the time, the agency's auditor warned that if home prices continued to drop, FHA could run through the remainder of its reserves, forcing it to either seek a bailout from the Treasury Department or further increase the premiums it charges borrowers. Such a bailout could cost billions.
Joseph Gyourko, a Real Estate Professor at the University of Pennsylvania's Wharton School and author of a report entitled "Is FHA the Next Big Housing Bailout?.", argues that the FHA is so undercapitalized that it would need at least $50 billion, even if the housing markets don't deteriorate further. But even by more conservative measures, the agency would need at least $20 billion to meet the capital requirements mandated by Congress.
"It's highly likely that the FHA will need a taxpayer bailout over the next three to five years," said Gyourko.
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