The Federal Housing Administration (FHA) announced yesterday that its cash reserves had declined significantly in the last year and that it was therefore tightening its loan standards.

It released to Congress an annual independent audit that indicated that its reserves were now 0.53 percent of its total portfolio, far below the 2 percent mandated minimum set by Congress.

The audit indicated that the agency "has sustained significant losses from loans made before 2009, and the capital reserve ratio has fallen below the congressionally mandated threshold, but concludes that under most economic scenarios considered FHA's reserves would remain above zero."

The lead article in today's edition of The New York Times by David Streitfeld said that "in 2007, just before housing prices began their worst slump in decades, the reserves were above 6 percent," adding that "Ann Schnare, a consultant who has analyzed the F.H.A. balance sheet, put the situation this way: 'They're running on empty.'"

In a statement, David H. Stevens, the F.H.A. commissioner, said that "there are real risks to the FHA and we are aggressively addressing those real risks with real reforms."

"The volume of FHA insurance guarantees has increased since 2008, as private sources of mortgage finance have retreated from the market. Nearly 80 percent of FHA's purchase-loan borrowers in 2009 were first-time homebuyers. In the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans. The new lending is being done as FHA has halted the seller-financed down payment assistance program, tightened underwriting standards on streamline refinances, increased oversight of lenders, and is considering additional prudent measures," the agency's statement maintained.

"The quality of new loans insured by FHA has improved on several metrics," it continued, "including average borrower credit score: the average borrower FICO score today is 693 compared to 633 two years ago."

The audit noted that the agency "insured 995,590 purchase loans and 836,528 refinances in FY 2009, almost 30 percent of total purchases and 20 percent of total refinances in the housing market."

According to the Mortgage Bankers Association National Deliquency Survey for the Second Quarter of this year, illustrated in the accompanying chart, subprime deliquencies of more than 90 times climbed from about 6 percent in the second quarter of 2005 to about 27 percent in the second quarter of this year while FHA deliquencies in the same period climbed only from about 5 percent to about 7.5 percent and prime deliquencies from less than 1 percent to more than 5 percent.