FHA to Tap Treasury for First Time in History

Updated from 12:17 p.m. ET with further details from FHA Commissioner's letter to Congress.

NEW YORK (TheStreet) -- The Federal Housing Administration said Friday that it will require an infusion of $1.7 billion from the Treasury to cover projected losses from its loan portfolio.

The agency will be drawing funds from the Treasury for the first time in its 79-year history, even as it expects its finances to improve significantly in the next year.

The White House budget in April predicted the agency will have a $943 million deficit. The shortfall has increased since then as rising interest rates and higher insurance premiums for FHA loans has led to a decline in market share and in the projected revenues to cover likely losses.

Still, the budget estimates are based on December 2012 data and do not reflect recent home price increases.

FHA Commissioner Carol Galante said in a letter to Congress that the health of the insurance fund had improved significantly on the back of higher insurance premiums and improving home prices. The updated forecasts in the next few months would likely show that the agency won't need a subsidy in 2014, she indicated.

"This required mandatory appropriation is an accounting transfer and does not reflect an up-to-date view" of the insurance fund's "performance, its long-term fiscal health or its current cash position," Galante wrote in the letter.

If the estimate from last December was updated it would reflect significant improvement in the portfolio including a 15% decline in the delinquency rate, a 91% reduction in early payment defaults, a 20% reduction in foreclosure starts and a 26% improvement in recovery rates on defaulted assets, she pointed out.

The agency estimates that the improvement in recovery rates alone will add more than $5 billion to the insurance fund.

"In the next few months we expect updated data and economic forecasts to reflect what we already know to be true -- the health of the Fund has improved significantly," she wrote.

The FHA, administrated by the Department of Housing and Urban Development, insures lenders against loan losses. Borrowers who qualify for an FHA loan can make a downpayment as low as 3.5%.

The agency which primarily dealt with low-income and first-time homebuyers saw its market share jump in the wake of the housing bust, when private capital shrank. Loans made during the period 2007-2009, when the economy sank into a recession, led to big losses. Officials say at least $70 billion in losses is due to loans originated in that period.