Defaults on Federal Housing Administration mortgages increased in December for the ninth-straight month.

More than 711,000 FHA-backed home loans were in default at Dec. 31, nearly 19% higher a year earlier.

As defaults increased, a constricted and delayed foreclosure process is hurting the government's ability to unload the properties once they are repossessed.

The U.S. Housing and Urban Development Department held 32,170 REO in December, according to a recent report, the lowest level measured since the same month in 2007. The high was reached in March 2011 at 68,997 properties.

The FHA insures roughly one-third of the mortgage market, as private insurers have been struggling with capital shortfalls since the crisis in 2007.

But the FHA is in trouble as well because of the surging defaults. The capital ratio of the agency's mutual mortgage insurance fund slipped to 0.24% last year, well below the 2% mandated by Congress.

Analysis from the White House's Office of Management and Budget released this week showed the fund would actually fall into the red this year and need an unprecedented bailout from the Treasury Department.

Bank of America (BAC) will send roughly $500 million to the FHA as part of a settlement reached last week over past Countrywide origination problems. HUD Secretary Shaun Donovan said more settlements would be announced soon, sending between $900 million and $1 billion to the FHA.

The agency will also be raising insurance premiums above the hikes set to take place in 2012 as a result of the payroll tax cut extension reached last year.

Donovan said this week that new loans written this year and last are proving to be more profitable than expected. But the market remains fragile and another downturn in housing could put the fund in further trouble.

"A very significant piece of what determines the actuarial value of the fund is what we project to happen to home prices," Donovan said. "The better than expected performance of the new loans can be offset if home prices perform worse than we expect."

jprior@housingwire.com