The Federal Housing Administration warned Thursday its capital reserves have tumbled below mandated thresholds due to heavy loan losses, raising worries about the need of a federal bailout.

An independent audit of the agency, which provides loans to many first-time home buyers, showed its capital reserve ratio slumped to 0.53% of total insurance in force this year, well below the 2% ratio mandated by Congress and the 3% ratio a year earlier.

However, the FHA said the study concluded that “under most economic scenarios,” the agency’s reserves would “remain above zero.”

“The FHA will not need a bailout today,” Shaun Donovan, the Secretary of the Department of Housing and Urban Development, said at a press briefing. However, Donovan also explained that the term “bailout” isn’t applicable because the FHA is a government agency.

If at the end of the year, the Office of Management and Budget determines an agency will lose money, it would require a Congressional appropriation, an FHA spokeswoman said. As long as the FHA remains above zero, as it expects it will, it would not need a cash infusion.

“There are real risks to the FHA and we are aggressively addressing those real risks with real reforms,” David Stevens, the commissioner of the FHA, said in a statement.

The FHA said its depleted reserves are due to the “difficult conditions in the housing market.” While home sales have picked up steadily in recent months, the foreclosure rate remains elevated amid a 26-year high in the U.S. unemployment rate.

As banks have shied away from making loans after the credit crisis, the FHA has stepped in as a critical source of funding. By the second quarter of 2009, almost half of all first-time home buyers in the U.S. used FHA-insured loans.
The FHA said the quality of its new loans have improved as the average borrower’s FICO score is 693 today, up from 633 two years ago.

“FHA is playing a critical role in restoring health to the housing market by helping working families access mortgage finance when private capital is tight,” Donovan said in a statement. “This is a temporary role which FHA has played in previous economic downturns.”