Shaun Donovan, secretary of housing and urban development, said Thursday at a hearing of the Senate Banking Committee that the agency, the Federal Housing Administration, has already taken action to strengthen its finances.
Republican senators said more must be done, such as ending the FHA's backing of reverse mortgages. They said the FHA has sustained big losses from defaults on those loans, which allow homeowners age 62 or older to borrow against their home's equity. They also urged reducing the maximum amounts of mortgages that can be insured by the FHA.
The independent audit showed that the FHA's estimated losses were steeper than earlier projections. High numbers of mortgage defaults triggered by the housing crisis have reduced the agency's reserve funds, it showed. Mortgages insured by the FHA that were issued in 2007 and 2008 caused a major part of the losses, Donovan said.
There is "clear potential now for a taxpayer bailout," said Sen. David Vitter, R-La.
The agency has expanded so-called short sales -- when a home sells for less than what is owed on the mortgage. And it has raised annual insurance premiums paid by FHA borrowers by an average of $13 a month.
"Based on those steps, I believe we have significantly decreased the chance of having a bailout at the end of 2013," Donovan said.
But Sen. Richard Shelby of Alabama, the committee's senior Republican, said the agency must do more.
"It is time for serious reform of the FHA before it needs a taxpayer bailout, if it isn't too late already."
Donovan agreed the changes would be helpful. But he said that HUD lacks the legal authority to make those changes in the FHA's operations and Congress would have to revise the law to make it possible.
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