FHA Required to Take Treasury Draw

The Federal Housing Administrationrn(FHA) notified Congress this morning that, as had been rumored earlier in thernweek, it will need to draw on its borrowing authority from the U.S.rnTreasury.  In a letter signed by FHArnCommissioner Carol Galante, FHA said it would require $1.7 billion to shore uprnits Mutual Mortgage Insurance (MMI) Fund, marking the first time in thernagency’s 79 year history it has needed taxpayer help.</p

The request is twice what Housingrnand Urban Development Secretary Shaun Donovan said last April would be FHA’srnshortfall at the end of the fiscal year next week, $943 million, and well abovernthe $1 billion number that was rumored earlier this week.  </p

Those rumors previously sparked arnreaction from Republican members of both the House and Senate committees studyingrnthe reform of the nation’s housing finance system.  Jeb Hensarling, Chairman of the HousernFinancial Services Committee issued a statement in which he called FHA “thernnation’s largest subprime lender.“</p

In her letter Galante said that thernneed for a Treasury draw does not mean the agency’s finances are in trouble andrnthat forthcoming data will indeed show its finances to be on solidrnfooting.  Other FHA officials said therernis more than $30 billion in cash and investments on hand to pay expenses andrnpotential mortgage claims.  HoweverrnCongress requires the MMI to maintain 2 percent in capital reserves, a level itrnhas not met for some time.  </p

In addition to the unprecedentedrnclaims FHA has had to pay out since 2007 for defaults on mortgages itrnguaranteed, largely during the 2005-2007 real estate boom, the company has hadrnlosses totalling $5 billion in its Home Equity Conversion (HECM) or reversernmortgage.  </p

An independent actuarial audit ofrnFHA last year found the MMI to have a negative value of about $16 billion.  Through raising guarantee fees, tighteningrncredit requirements, changing HECM lending procedures, and other risk reducingrnfactors FHA had substantially reduced that shortfall by spring when Donovanrnquoted the $943 million number.  </p

Reuters quoted Maxine Waters (R-CA),rnranking member of the Financial Services Committee as saying “Althoughrnthis one-time transfer of funds from the Treasury is legally necessary, it’srnimportant to note that FHA is far from bankrupt.”  She noted the agency continues to generate revenue.</p

The Center for Responsible Lending released a statement that said in part, “The proposed draw from the U.S. Treasury Department wouldrnnot have been needed if Congress had not prevented FHA from clamping down onrnfraudulent seller-funded down payment loans, as it tried to do.  Noting that FHA’s losses are related to only arnsmall portion of its portfolio, CRL said “In response, FHA has increased itsrnpricing and tightened its underwriting, including the ban on seller-funded downrnpayments and fixing some reverse mortgage problems. These administrativernadjustments have led recent loans to perform extremely well.”</p

According to Reuters, “Since the cashrndraw from Treasury will not be disbursed by the FHA, it will not impact howrnquickly the government runs out of money to pay its bills under the nation’srn$16.7 trillion debt ceiling. In addition, the Treasury has the authority torntake the $1.7 billion back once the FHA rebuilds its reserves.”

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