FHA finally facing reality: Borrowers will need to put up more cash

The Federal Housing Administration has been focusing its efforts to shore up its finances on stricter rules for lenders, but in testimony before the House Financial Services Committee on Wednesday, Housing and Urban Development Secretary Shaun Donovan is expected to announce changes to rules for borrowers, requiring more skin in the game.

The change is needed because FHA reserves have dropped to $3.6 billion, or about 0.5% of the $685 billion in loans the FHA has insured. The law requires that the FHA hold 2% of its outstanding loans in reserve, but the agency can borrow from the U.S. Treasury without limit and without Congressional approval. So it can essentially become a black hole for taxpayers.