The Federal Housing Administration (FHA) isn’t broke – but its reserves aren’t quite where they’re supposed to be either.

FHA’s capital reserves are supposed to be 2 percent of the outstanding loans. According to the actuarial review for fiscal year 2009, the reserves are just a half percent. By the time you read this, FHA’s capital reserves might have disappeared entirely, thanks to the increasing number of FHA foreclosures.

All FHA borrowers pay a mortgage insurance premium. These premiums go into the FHA’s capital reserves fund and are used to pay for loans that are foreclosed upon. As FHA loans have become much more popular, and the unemployment numbers rise, more of these loans are going bad, requiring more payments from the capital reserves.

Unlike the Federal Deposit Insurance Corporation (FDIC), which recently proposed that banks pay three years of insurance premiums at once in order to replenish the FDIC’s reserves, FHA can’t require current borrowers to pay more.

But, it can change the rules going forward that will make it more difficult to qualify for an FHA loan.

According to a senior HUD official, conversations are ongoing to determine what will make the most sense.

“Nothing will be taken off table. Everything needs to be assessed through the lens of the FHA core mission as well as the broad economic policies of the Administration with regard to stabilizing housing,” the senior HUD official said.

There are at least six specific ways HUD is looking at stabilizing FHA:

1. Upping the minimum required down payment. HUD is looking at whether increasing the required minimum down payment from 3.5 percent to 5 percent (or more) will help stabilize defaults. HUD officials wonder if buyers have more “skin in the game,” will they be less likely to default on their mortgage.

2. Changing mortgage insurance premiums. HUD officials are also looking at whether changing how FHA mortgage insurance premiums are structured will lessen the likelihood that buyers will go delinquent. And if mortgage insurance premiums are changed, should there be an extra fee upfront or should the amount paid over time change for maximum stabilization? (FHA borrowers currently pay an upfront fee and a monthly charge for mortgage insurance.)

3. Raising the minimum credit score required for an FHA loan. While credit scores have been lousy at predicting what will happen if people who have good credit lose their job, they have been more accurate in identifying risky behavior. At the height of the housing boom, FHA approved loans to borrowers with credit scores below 500. Discussions underway wonder whether the minimum acceptable credit score should be 620 or higher.

4. Dialing back how much money sellers can give FHA buyers. Right now, sellers can give buyers up to 6 percent to help cover closing costs and fees. Experts recommend dialing that back to 3 percent.

5. Requiring FHA lenders to have more cash on hand. Like borrowers, FHA feels its lenders should have more “skin in the game.” Right now, lenders need only have $250,000 in cash to cover fraud-related loan originations, but HUD officials want to see that amount rise to $2.5 million. That will reduce the number of lenders that can offer FHA loans, and hopefully cut down on mortgage fraud.

6. Eliminating abusive lenders. HUD is asking Congress for more power to eliminate abusive lenders from making FHA loans. According to HUD Secretary Shaun Donovan’s testimony before the House Committee on Financial Oversight, lenders will be required to “indemnify the FHA fund for their own failures to meet FHA requirements” and hold lenders accountable nationally for any improper activities. Donovan said that HUD “will also develop a Lender Scorecard that will summarize the performance of lenders who do business with the FHA. This scorecard will be posted on our website to ensure transparency and accountability for lenders, borrowers and the market.”

HUD officials say the quality of the FHA loan portfolio has improved over the course of 2009. The typical borrower’s debt-to-income ratio has declined, meaning the mortgage payment is a smaller portion of the borrower’s monthly income.

While HUD is pleased to see borrowers with a stronger personal finance balance sheet, there are two big concerns. First, HUD officials are concerned about the growing number of borrowers who are delinquent in paying their mortgages. If those borrowers don’t figure out a way to make up their missing payments and start paying their mortgage on time, more homes will fall into foreclosure, further depressing housing prices.

The other concern is about the rising level of unemployment. “If unemployment continues to track at high levels and goes to 11 or 12 percent, that’s a real struggle,” the senior HUD official said. “The big risk is a stagnant slow recovery that keeps unemployment rates high because there is no loss mitigation technique for that.”

In other words, if homeowners lose their jobs and can’t find replacements that pay enough to cover their monthly income, the fact that FHA’s capital reserves fund sinks into the red will be the least of the government’s problems.

More articles on FHA problems:

FHA Cash Reserves Fall To Lowest In History

HUD Secretary Shaun Donovan Speaks To National Association Of Real Estate Editors

HUD Secretary, FHA Commissioner Report on FHA’s Finance