Record Mortgage Settlement Greatly Reduces Likelihood of FHA Bailout

An independent audit of the Federal Housing Administration’s Mutual Mortgage Insurance Fund found in November that the fund was, at 0.24%, well below its mandated capital reserve ratio of 2%. While housing officials said at the time that the Department of Housing and Urban Development’s Home Equity Conversion Mortgage Program was self sustaining, the Obama Administration’s budget proposal, released last week upon review by the Congressional Budget Office, again brought FHA’s financial situation into the spotlight.

According to the budget proposal, FHA was on the verge of needing roughly $688 million from the Treasury. That is, until the historic mortgage settlement was signed just days earlier, providing FHA with a near-$1 billion windfall.

The historic, $26 billion mortgage settlement announced February 9 officially put the five largest mortgage lenders—Bank of America, J.P Morgan Chase, Wells Fargo, Ally Financial and Citigroup mortgage—on the hook for repaying some borrower losses as well as a transfer of roughly $1 billion directly to FHA.

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Today, speaking before the Mortgage Bankers’ Association’s annual servicing conference, Acting FHA Chief Carol Galante said that even in light of the settlement funds, FHA will have to take additional steps to maintain its financial well being.

“While the Budget projects FHA’s Capital Reserve account will have a positive balance in 2013, we must continue to take steps to ensure that the fund does rebound,” she said in prepared remarks. “In addition to the increases in the annual premium of 10 bps mandated by Congress and 25 bps for jumbo loans which are already included in the FY 2013 budget, we will soon be announcing more changes to the premium structure.”

When asked in a phone press conference following HUD’s budget announcement whether FHA would have required a bailout had it not been for the unforeseen funding, Secretary Shaun Donovan did not provide a definitive answer.

“The numbers that are in the budget are an estimate,” Donovan told reporters. “And until the actuary review is completed each year…until we know where house prices are going the rest of the year, until we know what volumes of FHA, the answer is, no one could have answered that question. So there is no perfect prediction.”

Donovan noted efforts to preserve the FHA fund through increases in mortgage premiums for forward loans, to go into effect for 2013. He also noted premiums to be announced in the coming weeks, although those changes have yet to be known. Those changes might have been modified had it not been for the settlement, he said.

“I think it’s fair to assume that had we not gotten the settlement done, we would have implemented larger premium increases than we will announce later this week,” he said. Because the settlement is completed, we do not believe we will need all of those premium increases. But there will still be additional premium increases that we will announce within the next week.”

Written by Elizabeth Ecker

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  • To be clear, HUD did not say the HECM program was self sustaining.  The budget projected a negative credit subsidy for the HECMs to be endorsed in the next fiscal year.  The facts are that in the last two fiscal years, HUD has had to transfer over $2.2 billion in assets out of MMI reserve into the HUD portion of that fund.  Since the HECM fund has never contributed anything into those reserves, the transfers were intended to shore up projected losses just for those HECMs endorsed after September 30, 2008.  That is slightly less than 50% of all outstanding HECMs.
    New View Advisors seem to believe that the HECM portion of the GI fund is and will continue to be in deep trouble unless home values quickly turn around.  Their projections are more negative than HUD’s which also seem to indicate that the HECM portion of that fund could end up slightly negative upon termination of all HECMs endorsed before October 1, 2008.It is strongly hoped that the start of the promised housing turnaround is in the not too distant future.  Strong home appreciation has a unique way of swallowing up projected losses.

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