The U.S. Federal Housing Administration is facing likely losses that will swamp its capital and fuel a $16.3 billion deficit, but the Obama administration plans to take steps to try to avoid the need for taxpayers to bail out the loan insurer.
An independent audit found a gauge of the agency's capital adequacy had dropped into negative territory, the Department of Housing and Urban Development said on Thursday.
The findings likely mean the agency, which insures about one-third of all U.S. mortgages, will need taxpayer funding for the first time in its 78-year history. They also appear certain to fuel a long-standing debate on the government's role in supporting the housing market.
The audit showed the FHA had exhausted the capital it would need to cover losses on the $1.1 trillion in loans it guarantees. It is legally required to maintain a 2 percent capital ratio, which is a gauge of its ability to withstand losses, but it has not met that target in almost four years.
The audit found that the ratio had dropped to negative 1.44 percent, representing a negative economic value of $16.3 billion, the department said.
"During this critical period in our nation's economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse," HUD Secretary Shaun Donovan said in a statement.
An audit last year found the FHA, a primary source of funding for first-time home buyers and those with modest incomes, faced a nearly 50 percent chance of needing a bailout. Full details of the latest audit will be released on Friday.
The FHA has never needed an infusion of funds from the U.S. Treasury because it has been able to take other actions, including raising insurance premiums, to stay solvent.
Those premiums help cover the costs related to defaulted mortgages. It is possible the agency could raise them again to shore up its finances, but unlikely they would cover the full capital shortfall.
The agency said it "should add an additional $11 billion" to the mortgage insurance fund by the end of the 2013 fiscal year.
Earlier this year, the FHA managed to avoid a bailout because it received an almost $1 billion payment from a U.S. settlement with mortgage servicers on claims of lending abuses.
But critics of the agency have warned that taxpayers could soon be on the hook if losses continued to mount.
Republicans have worried the FHA could turn out to be a burden on taxpayers along the lines of Fannie Mae and Freddie Mac, the mortgage finance firms the government seized in 2008.
Those companies have soaked up almost $190 billion in taxpayer funds, although they are both now profitable, and sparked cries for the government to ratchet back its support for the housing sector.
"It's time for us to return to fundamentals in housing, recognizing that having the federal government making loans to people who can't pay them back isn't good for homeowners, communities, or the country," Senator Bob Corker, a Republican on the Senate Banking Committee, said in a statement.
Supporters of the FHA hail the role it has played keeping mortgage funds flowing since the housing bubble burst in 2006.
The agency does not make loans itself, but offers private lenders guarantees against homeowner default.
Its share of the home loan market has increased sharply since the housing bubble burst, with its loan portfolio more than tripling. In 2006, it only insured about 5 percent of U.S. mortgages.