FHA to draw $1.7b from Treasury to cover losses

WASHINGTON (AP) — A federal housing agency said Friday it needs a $1.7 billion bailout from the Treasury to cover projected losses in a mortgage programs for seniors.

At issue are reverse mortgage programs, which allow seniors to borrow against their homes for everyday living expenses.

Federal Housing Administration Commissioner Carole Galante told Congress in a letter that her agency will 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 agency, which insures 40 million home mortgages, is struggling with $5 billion in losses on its reverse mortgage program.

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 suffered big losses when many borrowers took large payments up-front and later ran into financial problems, often due to falling home values 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, Galante said.

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

The FHA is required by law to maintain reserves equal to 2 percent of the total amount of home mortgages it insures. The 2 percent capital reserve ratio is aimed at covering projected losses over the next 30 years in the agency’s Mutual Mortgage Insurance Fund.

With help from Congress, the FHA has taken steps to limit its losses on the agency’s reverse mortgage program. The agency has curbed large up-front payments on reverse mortgages. It has also raised mortgage insurance fees and toughened 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 cash infusion from the Treasury is about twice as much as the Obama administration projected would be needed in April. Obama’s fiscal 2014 budget request said the FHA would probably need $942 million.

Galante said her agency needs more money from the Treasury now because higher interest rates have discouraged borrowers and reduced loan volume for the FHA in recent months.

Galante said the decline in FHA loans was “consistent with the trend in the broader housing market in response to higher interest rates.”

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