The Federal Housing Administration will have to increase its standard mortgage insurance premiums, according to the President's 2009 fiscal year budget, unless Congress passes FHA reforms that allow the agency to charge risk-based premiums. Budget documents show that FHA is in trouble and expects to pay $8.4 billion in claims due to defaulted loans in FY 2008, up from $5.1 billion in FY 2007. The Office of Management and Budget estimates that FHA will pay $9.8 billion in claims in FY 2009. "Because of deteriorating market conditions, as well as adverse loan performance," FHA will use its authority to increase the upfront premium by 45 basis points to 1.95% and the annual premium by 2 bp to 52 bps. The President's budget also suggests that FHA should stop insuring mortgages with seller-financed downpayment assistance unless Congress wants to provide funding to cover the losses. FHA has tried to curtail the downpayment assistance programs run by nonprofit groups for years. But the courts and Congress have blocked the agency's efforts despite the high default rates on those loans. "The Budget proposes no new loan guarantees under this program; and provides no funding for its credit subsidy costs," the budget says.

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