Market Weakness May Force FHA to Raise Risk.

Washington -- Deteriorating market conditions and adverse loan performance could force the Federal Housing Administration to raise its insurance premiums later this year if Congress doesnt give the agency more tools to manage its risks, according to HUD officials.

Department of Housing and Urban Development officials are blaming high default rates on seller-funded downpayment assistance for pushing the FHA insurance fund toward the point where expenses exceed revenue.

In DPA transactions, a nonprofit group arranges for the seller to provide a cash gift that covers the buyers downpayment or closing costs. The FHA claims the seller recoups the cost by raising the sales price, leaving the borrower with negative equity. The nonprofits claim this assistance allows low-income families to become homeowners.

To protect the general FHA single-family portfolio, the Bush administration wants to create a separate account for FHA-insured mortgages with downpayment assistance and require Congress to appropriate funds to cover the losses.

This proposal to wall-off DPA loans appeared in the presidents budget request for fiscal year 2009 that the White House sent to Congress last week.

FHA commissioner Brian Montgomery told reporters last week the FHA mortgages with DPA have default rates two and a half to three times greater than other FHA loans.

The proliferation of the seller-funded gift downpayment assistance programs unfortunately is not sustainable and the budget book reflects that, Mr. Montgomery said.