FHA to Take First Ever Bailout

The Federal Housing Administration (FHA) will be accepting a bailout of more than $1 billion to make up for losses sustained from the agency’s legacy books and its reverse mortgage program.

Following reports last week that FHA’s financial situation would require a Treasury draw in the neighborhood of the Obama administration’s $943 million forecast, Commissioner Carol Galante revealed in a letter to theSenate Banking Committee that the agency is taking an appropriation of approximately $1.7 billion.

“This amount is higher than the estimate provided in the President’s budget because of a decline in FHAendorsement volume in the last few months of the fiscal year—consistent with the trend in the broader housing market in response to higher interest rates,” Galante explained in the letter. “It is also consistent with FHA’s goal of reducing its footprint in the market.”

The majority of damage inflicted to FHA’s Mutual Mortgage Insurance Fund (MMIF) came from losses on loans insured from 2007-2009, which—according to an actuarial report released last year—“continue to place a significant strain on the Fund with $70 billion FHA claims attributable to loans insured in those years.”

Also damaging to the fund was the agency’s Home Equity Conversion Mortgage (HECM) program, which was consolidated earlier this year as part of an effort to bolster FHA’s finances. Other changes include an increase in premiums and a requirement for mandatory underwriting on riskier loans.

In her letter, Galante noted the necessary appropriation “is an accounting transfer and does not reflect an up-to-date view of the MMIF’s performance, its long-term fiscal health, or its current cash position,” saying the calculation does not incorporate recent improvements in loan performance or current economic factors.

An estimate using updated data would show an improvement in recovery rates worth more than $5 billion, she said.

She also reminded the committee that the bailout “does not mean that FHA is in need of cash to pay claims,” as the agency currently has more than $30 billion in liquid assets on hand and has generated another $17 billion in fiscal year 2013. (FHA is required to have enough in its reserves to cover expected losses for the next 30 years.)

As usual, the news attracted both criticism and defense for the FHA from either side of the political spectrum. Sen. Mike Crapo (R-Idaho), ranking member of the Senate Banking Committee and one of the recipients of Galante’s message, called the announcement “unacceptable” and said it “reinforces the need for Congress to pass FHA and broader housing finance reform.”

“Taxpayers have already been forced to provide hundreds of billions of dollars to Fannie Mae and Freddie Mac. FHArequiring nearly $2 billion for this year suggests that predictions of billions more in taxpayer liability could come to pass if we do not act on serious reform now,” Crapo said.

Meanwhile, Rep. Maxine Waters (D-California) reminded critics of the agency’s pivotal role in the housing crisis and pointed out that the Treasury draw doesn’t reflect an immediate threat—though she agreed reform is necessary going forward.

“Above all, we must strive to have a healthy, viable FHAthat can continue to facilitate homeownership for first-time and low-income homebuyers, while standing ready in the unfortunate event of another housing downturn,” Waters said.

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