It’s as bad as many thought. The results of the Federal Housing Administration’s (FHA) annual independent audit were released yesterday after being delayed for about a week. The Federal mortgage insurer’s cash reserves have fallen to 0.53%, well below the 2% limit set by Congress.

If you’re a regular reader of this blog you’ll know that we’ve been documenting the FHA’s troubles for most of the year, and have at times referred to them as “The New Subprime,” and the probable recipient of the “Next Taxpayer Bailout.”

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In terms of this blog — in 2009 alone, it started out with warnings that the subprime market would return. When the below-prime market did return, it found a home with loans guaranteed by Federal Housing Administration (FHA). From there our coverage morphed into blog posts that skeptically documented the FHA’s growing balance sheets. Soon after, we flat out knew that the FHA was going to cost us (taxpayers).

Earlier this month HSH President Paul Havemann presented the exact scenario that would cripple the FHA’s lending abilities. Paul warned that “If [the FHA's] reserves falls below the minimum, either FHA will have to get out of the loan-insurance business until it improves… or Congress will have to shore up the FHA reserves with cold, hard cash.” The minimum for the FHA’s reserve fund must stay above the required level of two percent.

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When the nation’s banks invested heavily in the private mortgage market, taxpayers were left to pay the $700 billion tab it has taken so far to clean up their mess. Now, with about 8,500 federally-insured banks again investing heavily in the shaky American mortgage market, who do you think will be left to pick up that tab when or if that market collapses? Ding, ding, ding — you guessed it — the American taxpayers!

During the housing boom, the mortgage-backed securities in which the large banks invested in were chock full of subprime and poorly-underwritten loans. Since the collapse of the housing market, lenders have ceased writing new subprime loans or any which can’t be easily sold. All the way back in January we predicted that a lender or lenders would eventually come along to cater to the under-served, “non-prime” audience. That lender turned out to be the Federal Housing Administration (FHA), a.k.a the Federal government.

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The proverbial writing was already on the wall back in April when we asked, a few months ago, How much is FHA going to cost us?

The discussion surrounding the FHA’s current situation suggests that they have two options: either ask Congress for a bailout, or raise the premiums they charge their borrowers. The latter choice seems like a no-brainer except for the fact that Congress voted against risk-based pricing last August.

With the collapse of all but the ‘prime’ conforming loan markets (which also would have imploded without nationalization), FHA has again become America’s de facto subprime mortgage market. Over the past two years, FHA’s growth has exploded — and so has taxpayer exposure:

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We’ve learned entirely too much over the last few years or so not to be able to recognize the writing on the wall. As taxpayers, we’ve endured far too many bailouts to not get the sense that another one may be lurking just around the corner. That’s why it should come as no big surprise that our third story of the week featuring the escalating mortgage defaults at the Federal Housing Administration involves the discussion of yet another taxpayer bailout.

On Tuesday we blogged about the rise in “zero pay” defaults on FHA-insured loans. Yesterday we updated the story about how the government was sending “SWAT teams” unannounced to problem (FHA) lenders. Finally, on page three of this morning’s Wall Street Journal comes an article titled “FHA Losses Spur Talk Of a Taxpayer Bailout.”

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