The FHA has taken steps to improve its default rate. It no longer backs loans where the seller finances the buyer's down payment, which it says was a leading cause for soured loans. It has also raised premiums and tightened underwriting standards. Still, in November, the agency announced that it had a $16.3 billion shortfall in its insurance fund. Last week, the agency said it would raise premiums further, increase the minimum down payment on jumbo loans and require tougher underwriting standards for loans where the credit score is less than 620. "The premium increases are a step in the right direction, but the FHA is getting diminishing returns on the increases, with premiums already quite high," says Pinto. Steps to tighten underwriting might not make much of a difference in the near term. Banks largely are not making loans to borrowers with a credit score of less than 620, anyway. "The FHA will not get back to zero in terms of capital for at least three to five years. If there is a recession, all bets are off," says Pinto. Still, some of those changes bode well for the future. "If the FHA won't price for risk, they should at least underwrite for risk," he says, adding that the new changes offered a glimmer of hope that underwriting standards were improving. According to Pinto, the FHA charges the same premium for all borrowers regardless of credit score. That allows the agency to use the premiums from more creditworthy borrowers to cover the losses from risky ones. It also masks to the borrower the true risk he undertakes in taking a loan. And while on average it looks like the risk profile of the FHA's lending has improved, about 40% of the borrowers in fiscal 2012 had a FICO score below 660 or a debt ratio above 50%. "Either of those would have been called subprime back in 2000," Pinto notes. He believes that the agency should focus on working-class families, but do more to "de-layer risk." "If you take a 580 FICO score loan, with a 50% debt-to-income ratio, with a 3.5% downpayment and a 30-year term, that is four layers of risk." The FHA needs to achieve a more equitable balance in its underwriting and define its tolerance for failure if it needs to stay on mission, he said. -- Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj. >To follow the writer on Twitter, go to http://twitter.com/shavenk. >To submit a news tip, send an email to: email@example.com.