The agency said last month that its reserves to cover loosses dropped into negative territory for the fiscal year that ended Sept. 30.
Under law, the FHA’s net worth must not drop below 2 percent of the outstanding balances of the loans it guarantees. But with the collapse of the housing market, the agency’s “reserve ratio" has been dropping since 2006 and ended the 2012 fiscal year at minus-1.44 percent.
“Hopefully, the shock produced by these latest projections will finally be a wake-up call for everyone," said Sen. Richard Shelby, R-Ala. “It is time for serious reform of the FHA before it needs a taxpayer bailout, if it isn’t too late already."
The agency, which is funded by mortgage insurance premiums it charges to homeowners, had $30.3 billion in cash reserves as of Sept. 30 to cover $46.6 billion in projected losses in coming years.
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 to shore up its finances.
Democrats and Republicans said they were concerned about that possibility. But while Republicans pushed for quicker action by the FHA, Democrats cautioned that the FHA plays a key role in the housing market.
The agency insures more than $1 trillion worth of mortgages and has backed about 14 percent of new loans made this year. It played a critical role in keeping the housing market afloat after the subprime bubble burst and is paying the price for loans it backed between 2007 and 2009.
“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.
Donovan said the FHA has been raising the insurance premiums it charges to home-owners and plans another increase, by an average of about $13 a month, for new loans it backs. The agency also plans to sell at least 40,000 delinquent loans a year and streamline short sales to reduce losses from foreclosures.
The changes “have significantly decreased" the chances of a bailout, Donovan said. But when pressed by Sen. David Vitter, R-La., Donovan would not predict the likelihood the FHA would need to draw taxpayer money.
A determination would not be made until the end of the 2013 fiscal year, Donovan said.
Some Republicans pushed the administration to act more quickly to make changes at the FHA.
Sen. Bob Corker, R-Tenn., said he did not understand why the FHA was backing loans for homeowners who recently went through foreclosure.
Donovan said the agency was considering revising its standards for people who have undergone foreclosures. But he stressed that, in some cases, those were responsible borrowers who simply lost their jobs during the recession.
“We believe if somebody can show they are back at work and are a responsible borrower again, that’s somebody we should work with," he said.