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FHA Bailout Exceeds Original Projections

Written by Than Merrill

In an unwelcome turn of events, the Federal Housing Administration (FHA) has found itself at the center of growing controversy. Accordingly, a representative associated with the FHA recently acknowledged their request for a $1.7 billion bailout. The government program allegedly lost a significant amount of funds to a mortgage program for seniors and is seeking aid from the Treasury to cover the losses. The FHA bailout is said to be two times more than projected.

At the heart of the FHA bailout are reverse mortgage programs specifically drafted to assist with the senior population. Programs that were originally intended to allow seniors to borrow against their homes to acquire every day living expenses are now responsible for significant losses.

Federal Housing Administration Commissioner Carole Galante told Congress in a letter that her agency would withdraw the money from the Treasury before the fiscal year ends Monday. Congressional approval is not required. The cash infusion is the first in the agency’s 79-year history.

The recent request comes in the wake of a $5 billion deficit that was created by the reverse mortgage program for seniors. Reverse mortgage borrowers, who must be 62 or older, can take lump sum or monthly payments. They still must pay property taxes and insurance. Sale proceeds from a home go to the lender when the borrower dies or moves out.

The FHA bailout is the result of borrowers receiving large, up-front payments. The same borrows then became the victims of financial obligations and high mortgage rates. Their inability to make payments was directly correlated to falling home prices during the financial crisis.

The agency has sufficient cash to pay insurance claims against mortgage defaults, Galante said, citing 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.

According to federal law, the FHA must have at least 2% of the total amount of home mortgages it insures on hand as a backup fund. Serving as a reservoir, or a safety net, this reserve capital is expected to cover losses for the next 30 years. However, the 2% is specifically dedicated to the agency’s Mutual Mortgage Insurance Fund.

Congress has continued to assist the FHA by limiting losses on the agency’s reverse mortgage program. In doing so, the agency has curbed large up-front payments on reverse mortgages and raised mortgage insurance fees. The collaborative effort has also seen increased scrutiny of reverse mortgage borrowers’ finances.

Galante said those steps should help boost the insurance fund’s reserves down the road.

“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 wrote.

The agency’s recent request represents approximately twice as much money as was projected by the government. Original projections saw the agency needing $942 million. However, higher interest rates have discouraged borrowers and reduced loan volume for the FHA in recent months. The decline has forced the agency to request more money from the Treasury.

House Financial Services Committee Chairman Jeb Hensarling is pushing a housing finance overhaul bill that includes a provision that would limit the FHA to insuring loans only for first-time and lower-income borrowers. The bill passed his committee this year.

“The FHA is clearly headed toward financial disaster and taking taxpayers along for the ride,” Hensarling said in a statement. “Unless Congress enacts sustainable housing finance reform, it’s possible taxpayers will be forced to write blank bailout checks to the FHA indefinitely. That is unacceptable.”