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 home ownership 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 then later ran into financial problems, often exacerbated by falling home values. The FHA was stuck paying out claims for those defaulted loans. Galante said the FHA has sought to curb such large up-front payments in reverse mortgages.
There were red flags about the FHA's finances last November when an independent audit showed an estimated $16 billion in losses. But the agency's finances have since improved due to changes the FHA has made, including premium increases and changes to the reverse mortgage program.
The FHA has raised annual mortgage insurance premiums five times since 2009, including in April when premiums on new loans were boosted an average $13 a month. Galante said the premium increases since 2009 have yielded more than $10 billion for the Mutual Mortgage Insurance Fund.
For most FHA mortgages, borrowers can put 3.5 percent down and the annual mortgage insurance premium they pay is 1.35 percent of the loan balance. Borrowers also pay an up-front mortgage insurance premium of 1.75 percent of the loan balance. A borrower with a $200,000 mortgage, for example, pays about $2,700 a year in annual mortgage insurance premiums for most FHA loans, the agency said.
Also, FHA this week began requiring most new borrowers to pay for annual mortgage insurance for the life of their mortgages. Since 2001, FHA had dropped the mortgage insurance requirement for most borrowers once their equity in their home reached 22 percent of its assessed value.
Under the new policy, new FHA borrowers who put less than 10 percent down will be required to pay for mortgage insurance for the life of the loan.
FHA has also begun requiring that borrowers put down at least 5 percent on home loans of $625,000 or more. That's up from 3.5 percent, but is less than the 10 percent down that most other lenders require.
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