FHA Projected Bailout “Outrageous,” Or Could Have Been Worse?

Following the projection by the Office of Management and Budget that the Federal Housing Administration could require a first-ever bailout in the amount of $943 million, some are outraged while others say it could have been much worse.

The projections indicate the shortfall is due to FHA’s reverse mortgage program, but indicate based on upward re-estimates of FHA’s financial position in 2014 that forward loans should result in a reserve surplus of more than $4 billion with reverse mortgages facing a potential shortfall of $5 billion.

House Financial Services Committee Chair Jeb Hensarling (R-Texas) called the bailout “outrageous” in stating his opposition to a taxpayer-funded windfall for the housing administration.


“We now know for certain that the FHA is not just broke, the FHA is bailout broke,” Rep. Hensarling said. “If the FHA were a private financial institution, likely somebody would be fired, somebody would be fined, or the institution would find itself in receivership. Instead, the FHA is merrily on its way to becoming the recipient of the next great taxpayer bailout. It’s outrageous.”

Yet others pointed to the potential for an deeper shortfall to FHA’s insurance fund saw the bottom line projections as a more positive development, still stressing the need to shore up the reverse mortgage program.

“The surplus in FHA’s core business of insuring single-family mortgages shows that the agency’s strategy of adjusted premiums, better management, and targeted policy changes made in recent years is working,” said Julia Gordon, Director of Housing Finance and Policy for the Center for American Progress. “The reverse mortgage program is still struggling, however, and FHA should make changes quickly to put it on a sounder financial trajectory. Congress should provide FHA with the authority to act swiftly to reduce risk going forward.”

Last year’s budget indicated the potential for a bailout of FHA, but ultimately losses were covered in part by a landmark servicing settlement that netted FHA around $1 billion.

“Today’s request simply reflects an accounting requirement for FHA to reserve enough money to pay all claims over the next 30 years if FHA went out of business today,” Gordon said. “The agency still has enough cash in its coffers—around $32 billion—to pay claims for years to come.”

Written by Elizabeth Ecker

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  • Is Ms. Gordon really as ignorant as the quotation makes her out to be? Is she trying to help or doing her best to damage?

    If I am not mistaken the 2% capital reserve requirement for the MMI Fund under 12 USC 1711(f) is not some silly accounting requirement as she so arrogantly states but rather a legal one.

    There is over $! trillion dollars in insurance in force accounted for within the MMI Fund. That means that the MMI Fund will be at least $21 billion short of meeting its 2% capital reserve requirement by year end.

    Ignorance is bliss.

    • Atare,

      The problem is what do you call a $5.2 billion projected net overall negative net position for the HECM program just within the MMI Fund? It seems like a disastrous experiment that FHA refused to terminate until it was too late.

      This positive credit subsidy has absolutely nothing to do with the other MMI Fund programs. In fact if you remove the transfer of over $2.2 billion in funds FHA has put into HECMs from the other MMI Fund programs in fiscal 2010 and 2011, FHA is predicting that the HECM program on its own is in the hole $7.4 billion just in the MMI Fund and the other programs are positive to the extent of $6.5 billion.

      The HECM program needs a fair bigger positive credit subsidy than just $943 million. The fixed rate Standard on its own has all but ruined the HECM program.

      FHA has stated that its largest losses come from loans made in 2006 to 2008 due to the loss in value of the underlying collateral. As to HECMs almost all of those were adjustable rate HECMs. Almost all of those loans are reflected in the General Insurance Fund. The losses in the GI Fund are not even close to what we are seeing in the MMI Fund.

      The HECM portion of the MMI Fund is ridiculously underwater. There never should have been anything close to the fiscal 2006 fixed rate HECM ever offered. It has harmed not just FHA but seniors as well. HECMs were never made so that seniors could age in place. The law itself makes that quite evident.

    • Hey Adam,

      But is the problem just $943 Million? The real problem is that there is no recognition in that number that the MMI Fund does not need to be zero; it must by law be 2% of the outstanding insurance in force. That 2% figure is projected to be over $20 billion.

      So if $943 million is intended to be a bailout, it falls $20 billion short and if it is just a way to close up the negative net position gap, there is a strong possibility the fiscal 2014 HECM book of business could once again be negative. So where does it stop?

      Congress had been assured there is no need for any monies as long as the fixed rate Standard was consolidated into the fixed rate Saver. Many falsely believe that 2 years in moratorium and the fixed rate Standard will be back. The losses projected by FHA (not the actuaries) to be generated by HECMs in the face of a rising home value market is rather breath taking.

      Oh yeah, not all of us are nearly as desensitized by fully comprehensible numbers as you.

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