HUD secretary defends efforts to stabilize FHA finances WASHINGTON - A top Obama administration official said a key government agency that has helped stabilize the housing market might be able to stay afloat next year, but he couldn't guarantee it wouldn't need a taxpayer bailout. He warned lawmakers, however, not to make the situation worse by messing too much with how it does business. In a Senate hearing Thursday, Housing and Urban Development Secretary Shaun Donovan cautioned lawmakers worried about the increasingly precarious finances of the Federal Housing Administration that making hasty changes to its operations could endanger the strengthening housing turnaround. The FHA insures more than $1 trillion worth of mortgages and has backed about 14% of new loans made this year. It played a crucial role in keeping the housing market afloat after the subprime mortgage bubble burst, and now it is paying the price for bad loans it backed from 2007 to 2009. But severely tightening the agency's standards for insuring mortgages, typically made to first-time, lower income home buyers, could damp the recovery and lead to more foreclosures that would further reduce the size of the fund the FHA uses to cover its losses. We don't want to hurt the market, and in turn the FHA fund, by going too far and stopping that recovery. Still, some senators were critical of the way FHA operates and the steps taken over the last four years by HUD, which oversees the agency, to stabilize its finances. They want to move more quickly to address possible changes at the agency. "It is time for serious reform of the FHA before it needs a taxpayer bailout, if it isn't too late already," said Sen. Richard Shelby (R-Ala.). The FHA insures mortgages with as little as 3.5% down and has backed loans for people who went through foreclosures as recently as three years earlier. In its annual actuarial report to Congress, the agency said that its reserves to cover losses dropped into negative territory for the fiscal year that ended Sept. But hit by foreclosures and lower house prices, the agency's so-called reserve ratio has been dropping since 2006 and ended the 2012 fiscal year at negative 1.44%. The shortfall could force it to tap the U.S. Treasury, as it is legally allowed to do, for the first time in its 78-year history. But while Republicans pushed for quicker action by the administration to shore up the agency, Democrats echoed Donovan in warning against acting precipitously. "There is a clear case to be made in my mind that, but for FHA in the midst of this housing crisis, we would have a far greater crisis on our hands," said Sen. Robert Menendez (D-N.J.). And so reconciling the fiduciary responsibilities here to the taxpayers as well as to the [FHA] mission to the people of America is incredibly important. But given the continued problems at the FHA, some Republicans weren't satisfied with the slow pace of changes. Sen. Bob Corker (R-Tenn.) said he did not understand why the FHA was backing loans for so-called rebound buyers, borrowers who recently went through foreclosure. Donovan said the agency was considering revising its standards for such buyers. But he stressed that some were responsible borrowers who simply lost their jobs during the Great Recession. Donovan said Congress could help the FHA by enacting some changes that the agency is unable to make on its own. He noted that lawmakers last year reduced loan limits for seized housing finance giants Fannie Mae and Freddie Mac to $625,500 but kept the FHA limit at $729,750. The move increased the FHA's exposure to large, potentially bad loans. Lowering the FHA limit would help the agency's finances, Donovan said.