FHA Asks Treasury for $1.7 Billion Bailout

The Federal Housing Administration has officially requested a $1.7 billion taxpayer-funded bailout from the U.S. Treasury—the first in its nearly 80-year history.

While the agency says its current books are cash flow positive, the bailout is required to address past losses.

“Losses from the 2007 to 2009 legacy books and  Home Equity Conversion Mortgage program (HECM) were responsible for the most severe strain,” FHA Administrator Carole Galante wrote in a Friday letter to Congress. The federal reverse mortgage program is about $5.2 billion in the red, according to the president’s budget proposal for fiscal year 2014.

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The FHA plans to withdraw the money from the Treasury by Sept. 30, when the fiscal year ends.

The agency already has sufficient cash to pay insurance claims against mortgage defaults, according to Galante, with more than $30 billion in cash and investments on hand.

“These are more than sufficient resources to allow FHA to fund its claim activity,” she wrote.

In April, the White House estimated the agency would need nearly $943 million to bridge its budget shortfall for the year and cover reverse mortgage losses. However, that figure has grown as mortgage origination volume has decreased, attributed by Galante to a rise in interest rates.

By law, the FHA must maintain reserves equal to 2% of the total amount of home mortgages it insures, intended to cover projected losses over the next 30 years in the agency’s Mutual Mortgage Insurance (MMI) Fund. The fund has remained beneath its Congressionally-mandated capital reserve ratio since 2009.

However, FHA has recently taken steps to strengthen the HECM program by tightening borrower qualifications and loan disbursement rules.

“In the next few months, we expect updated data and economic forecasts to reflect what we already know to be true—the health of the fund has improved significantly,” Galante said in the letter.

Written by Alyssa Gerace

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  • According to a recent article in the Wall Street Journal warning that the housing market rebound is unsustainable they reported that house values are finally back to 2000-2001 levels. I guess that means that we’ve still got a ways to go to get insurance claims behind us even if we plan on paying claims with the new, fluffed up MIPs we hope to get from the new hecms.

    • hecmvet,

      It all depends.

      The Wall Street Journal is dealing in averages but the value of real estates is based on three factors: “local, local, local.”

      One HECM borrower in the San Fernando Valley has a 900 square foot home on a half acre property in a desirable neighborhood. That same property in Anza, CA would be valued at less than $200,000 but based on its location it is worth slightly over $800,000. This woman got her loan in 2007 when the lending limit was $362,790. When she got her loan her home was valued at $840,000.

      So you tell me if the home of that borrower is a risk to HUD since all she has taken from her line of credit is just over $200,000? The value of her home in 2000 was about $300,000.

      The HECM projections for the MMI Fund is not based on all home values being less than their related loan balances at termination but rather those homes in regions of the country where home value recovery has been slow. To date there have been slightly less than 400,000 HECM endorsements accounted for in the MMI Fund.

  • Interesting thought. But sell more insurance that will result in a high rate of claim losses? Starts to sound like a ponzi scheme, lol. Personally I think it’s a good idea to take the medicine now and hope for a full recovery, but I guess we’ll see.

  • cynic, What you’re saying is that everything would be fine if all the HECM’s were in Anza California. I can’t argue with that.
    You are also correct in your observation that the Wall St Journal “is dealing in averages” which happens to be what the HECM MMI fund is dealing with as well.

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