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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Nov 9, 2012

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The Federal Housing Administration (FHA) will issue its 2012 report next week and may reveal a need for U.S. Treasury funding.

According to Bloomberg News, three people briefed on the report who requested to remain nameless for security purposes, stated that the report will be more negative than expected. During the agency’s 2011 report, it stated the insurance fund was being drained and that premiums and standards would be raised in order to avoid financial problems.

An FHA loan is a mortgage loan backed by the Federal Housing Administration. Created under the National Housing Act of 1934, the FHA was designed to increase home construction, fuel employment and provide loan insurance programs. Although the agency does not provide the loans themselves, it does provide an extra security for lenders. FHA loans enable lower income U.S. citizens to apply for mortgages when traditional lenders would likely reject them.

The 2012 report, if negative as expected, could stop a government effort to expand the FHA’s role. The government has been planning to enable the FHA to insure borrowers who have homes worth less than they owe on them, commonly referred to underwater homeowners.

John Griffith, an analyst for the Center for American Progress, is preparing to highlight the economic need for the agency, in case the FHA’s importance is questioned.

“If FHA alone simply stopped doing business, we would have been propelled down into another double-dip recession,” Griffith said to Bloomberg.

Since the report will not be released until next week, a FHA spokesperson would not comment on the report’s contents.

In the past, the FHA was able to cover all of its costs because the insurance premiums exceeded the cost of claims. This year, it refused a taxpayer-funded subsidy because of a singular $1 billion payment from a legal settlement. Although recent FHA loans have improved in quality, and comprise 15 percent of all U.S. mortgages, it might not be enough to offset the effects of the housing market bubble. FHA loans made from 2005 to 2008 might prove to be a heavier burden for the agency. Outstanding balances for these 7.6 million FHA loans currently reach $1.1 trillion, three times the amount from five years ago.

As unidentified informants stated, this could lead the FHA to the Treasury’s door. The Treasury can financially assist the FHA without Congressional approval, but it cannot run from the agency’s critics. Ed Pinto, told Bloomberg that he does not agree with the FHA and advocates for free markets instead.

“FHA has been used by the Realtors, by the homebuilders and by the administration as a stimulus program rather than as a responsible lending program,” Pinto said.