WASHINGTON — The Federal Housing Administration's financial cushion has fallen to a dangerously low level, but government officials maintain the agency should avoid a taxpayer bailout under "most economic scenarios."

The agency, a major source of funds for first-time homebuyers, faces mounting concerns that it will eventually need an infusion of cash. FHA losses have increased with the unemployment rate as more homeowners default on their loans. About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

Agency officials, however, said Thursday the agency won't need a rescue unless the economy slips back into a severe recession. In that worst-case scenario, home prices in 10 large cities would fall another 28 percent and unemployment would soar to 12.5 percent from the current level of 10.2 percent.

Already, FHA's reserves have fallen to $3.6 billion, compared with $685 billion in outstanding insured loans for the fiscal year ended Sept. 30. That's a ratio of 0.53 percent and far below the 2 percent threshold required by Congress.

"It is absolutely critical that going forward, we build that cushion back up," said Housing Secretary Shaun Donovan.

Also Thursday, RealtyTrac Inc., a foreclosure listing firm, reported that the number of households that received a foreclosure-related notice fell in October, the third straight monthly decline.

"Foreclosures are still far higher than we want them to be, but we do appear to have them on the right path now," Donovan said.

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.

Donovan, however, said the agency is considering raising its insurance premiums for borrowers as well as the 3.5 percent down payment requirement. Legislation introduced by Rep. Scott Garrett, R.-N.J., would hike the down payment to 5 percent.

"The administration has to stand up and say, 'This is what's best for the taxpayer,'" Garrett said.

While agency officials say they are making more loans to far more creditworthy borrowers than in the past, critics say FHA borrowers are still vulnerable to default, particularly if job losses keep climbing and the recent increase in home prices reverses course.