From Dina ElBoghdady at The Washington Post yesterday and today.  News about the critical FHA program this week will be that it likely needs additional funds from congress. The controversy is likely to have a flavor of the bail-out debate infused with how important the FHA loan program is to the recovery of the housing sector. From the articles:

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said. The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

The FHA program is one where borrowers are charged a one-time insurance premium (fee) at the closing of their purchase in exchange for a low-money-down loan and competitive interest rate on a mortgage issued by a separate lender (who complies with the FHA program guidelines). In exchange, the FHA agency uses the premiums to guarantee the loans to the lenders (not the borrowers). It's been an extremely effective program in recent years as conventional lending has dried up.

 

So, it's not a government lending entity. (The government does not lend directly to consumers anyway.) It's an insurance program. And historically a very very effective insurance program:

Since its creation in 1934, it has never used taxpayer money to cover losses at its flagship home-buying program. But rapidly rising defaults have burned through the agency's reserves, raising the prospect that it would have to take dramatic action.

Today comes news that FHA commissioner David Stevens is defiant about a need for additional funds from congress:

[Stevens] insisted that the FHA will not ask taxpayers to kick in for the shortfall or raise premiums because it has more than $30 billion in cash to cover future losses. He dismissed as erroneous previous claims by government officials that those were the only two options available to the agency should its reserves dip below mandatory levels.

I have a feeling we will see who's right in the end. One thing's for sure: the FHA program is too important to economic recovery for it to be significantly destabilized. If this becomes a partisan hot-potato issue, it could be very harmful for the economy.

 

Economic recovery requires as much stability as possible.  And the last thing America needs to destabilize right now is the housing sector. I don't think congress will let that happen with FHA.