Federal Housing Administration Needs $1.7 Billion Bailout

WASHINGTON (Los Angeles Times/MCT) —

The Federal Housing Administration, whose role in the real estate market expanded dramatically in recent years, on Friday said it would need approximately $1.7 billion to stabilize its long-term finances.

It marks the first time the 79-year-old agency will require a taxpayer bailout, which it has the authorization to receive without congressional approval.

The FHA, which insures more than $1 trillion in mortgages, is funded by premiums charged to homeowners. But the actions it took to stabilize the housing market after the subprime housing bubble burst left it backing billions of dollars in bad loans.

The agency has been working to improve its finances by tightening underwriting standards, even as it continues to try to assist the housing market by insuring mortgages with down payments as low as 3.5 percent and easing rules for foreclosed borrowers.

In a letter to lawmakers Friday, FHA commissioner Carol Galante said the agency would need about $1.7 billion on Monday, the last day of the fiscal year, to ensure it has sufficient reserves to cover anticipated losses on the loans it backs.

A bailout has been expected since April, when the Obama administration’s proposed 2014 budget projected the FHA would need $943 million by Sept. 30.

But the size of the bailout nearly doubled because the number of mortgages the agency has backed declined in the past few months as mortgage rates have risen, Galante said.

The mortgages the FHA insures now bring in new revenue to the agency and are less likely to produce losses than those backed from 2007-2009.

Galante said the bailout request doesn’t reflect the state of the FHA’s insurance fund. When the fund’s status is updated in the next few months, improvements the agency has made could result in more than $5 billion being added to the fund.

Galante stressed that the FHA does not need the bailout money to pay claims at this point. It has more than $30 billion in reserves. But under law, it is required to have enough reserves to pay off all claims in the next 30 years.

Many Republicans have been critical of the FHA’s expanded role in the housing market, warning that it puts taxpayers on the hook for losses. House Republicans are pushing legislation that would scale back the FHA’s role.

“I’m shocked to find out now that the FHA will require nearly double the amount they projected,” said Rep. Randy Neugebauer, R-Texas.

“How many more taxpayer bailouts will it take before the administration admits that the FHA’s current business model is no longer solvent?” he said. “This news is a clear sign that we must act quickly to reform the FHA, or taxpayers will be paying the price again and again.”

But Rep. Maxine Waters, D-Calif., said the FHA guarantees played a crucial role in providing liquidity to the mortgage market during the Great Recession and financial crisis, when “the private sector virtually left the market.”

“Although this one-time transfer of funds from the Treasury is legally necessary, it’s important to note that FHA is far from bankrupt, holding over $30 billion in reserves and continuing to generate revenue,” she said. “Above all, we must strive to have a healthy, viable FHA that can continue to facilitate homeownership for first-time and low-income homebuyers, while standing ready in the unfortunate event of another housing downturn.”


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