WASHINGTON - The Federal Housing Administration could run out of money over the next year and require a $700 million cash infusion from the Treasury Department to stay afloat, according to the Obama administration's budget request sent Monday to Congress.

But Obama administration officials said $1 billion from the government's $25 billion mortgage settlement with the nation's largest banks would be used to replenish the agency's reserves.

The FHA's losses have increased as more homeowners have defaulted on their loans. The FHA does not make loans, but rather offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.

Agency officials say they are making more loans to more creditworthy borrowers. But critics say those borrowers are still vulnerable to default, particularly if unemployment remains high and home prices continue to lag.

The agency is vital for the housing market because it insures roughly 30 percent of new loans and is the largest back of mortgages to first-time buyers. The FHA is expected to raise its insurance premiums this year.

http://hosted.ap.org/dynamic/stories/U/US_HOUSING_AGENCY_MONEY?SITE=AZYUM&SECTION=BUSINESS&TEMPLATE=DEFAULT