FHA Reserves Scraping Bottom

(MoneyWatch)  The Federal Housing Administration, which has kept the housing market going by insuring low-down payment loans, has drawn down its reserves well below required levels, Housing and Urban Development Secretary Shaun Donovan said Thursday.

Donovan notes in a press release that reserves are down to just 0.53 percent of the value of the mortgages the FHA insures, well below the 2 percent required by law and down from 3 percent just last fall.

Now, anyone with a budget like mine knows that scraping bottom is not bottom. In fact, HUD Secretary Donovan was quoted in a news story by Reuters' Corbett B. Daly that reserves would fall below zero only in a extreme situation such as 12.5 percent unemployment (we're currently hovering a little above 10) and continued severe home price declines (we're currently hovering flattish).

However, to get down to the last few pennies in the piggy bank (or, in Federal Government terms, $31 billion) is a little worrisome.

FHA default rates, as I understand it, tend to track unemployment, because when people lose their jobs, some stop paying their mortgages.

The problem really is that with the credit crunch, the FHA is one of the few games in town. The agency notes that "in the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans."

So we really need private lending. If only we had a system where we could give the banks some money to encourage them to start lending again. Oh, wait ...

Read More:

• New November Report Card for "Good" and "Bad" Mortgage Lenders
Mortgage Modification -- the "Good" and "Bad" Lenders -- September 2009 edition
• Three Million Mortgages Still Need to be Modified