Reverse mortgage losses may force FHA to seek $1B bailout
WASHINGTON — The Federal Housing Administration may need as much as a $1 billion rescue package before the end of the year to bolster its reserves despite efforts to shore up its finances with higher mortgage insurance premiums, a Senate subcommittee was told Tuesday.
FHA Commissioner Carol Galante said her agency, which insures some 40 million home mortgages, is struggling with more than $5 billion in losses on reverse mortgages that allow people over 62 to borrow against their home equity and use the money for living expenses. Galante said the FHA played a crucial role in bringing the housing market back from the brink of collapse, but at a heavy financial price to itself.
The FHA is required by law to maintain reserves equal to 2 percent of the total amount of home mortgages it insures. It currently has about $32 billion in reserves.
The agency, created during the Great Depression to create more affordable homeownership opportunities, insures more than $1 trillion in mortgage loans to primarily low-to-moderate-income families and first-time homebuyers.
The Obama administration said in its fiscal 2014 budget request six weeks ago that FHA would probably need $943 million in taxpayer assistance to bolster its reserves to cover losses from loans it insures. The government's mortgage insurer has until Sept. 30 to decide whether or not it will need the cash infusion from the Treasury, which does not require congressional approval and would be the first in the agency's 79-year history.
“It's of great concern to us,” said Sen. Susan Collins, R-Maine.
Galante told the Senate Appropriations transportation and housing and urban development subcommittee it's still possible FHA could see “significant improvements in recoveries on defaulted loans” that could lessen the need for a bailout. She said the agency now has sufficient cash to pay insurance claims against mortgage defaults.
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.
During the financial crisis, the FHA's share of the mortgage market grew as private capital left the market. The FHA was hit with defaults on many single-family loans it insured from 2007 to 2009. The agency has projected that covering those losses will cost $70 billion.
The FHA's reverse mortgage programs suffered big losses when many homeowners took large payments up front and later ran into financial problems, often worsened by falling home values.