Bloomberg: FHA Losses May Require Treasury Support

The Federal Housing Administration could be gearing up to ask the Treasury for a capital infusion, reports Bloomberg News in an article published Monday. 

The Agency, which is expected to release an independent financial audit next week as part of its annual reporting requirements, could be poised to seek what would be its first Treasury draw in its nearly eight decades-long history, according to anonymous sources cited by Bloomberg. 

Despite improved quality of FHA loans due to higher insurance premiums implemented in 2012 and heightened credit standards, the agency’s Mutual Mortgage Insurance (MMI) Fund has suffered losses due to mortgage defaults that are not outweighed by the recent changes. 

Those changes, which acting FHA commissioner Carol Galante said in 2011 would “shore up” the fund, are still not enough, the sources told Bloomberg. 

“Still, the improved quality of recent FHA-backed loans — now comprising 15 percent of U.S. mortgages for home purchases – – may not offset continuing defaults from loans made from 2005 to 2008, said the people, who spoke on condition of anonymity because the report isn’t yet final,” according to the Bloomberg report. 

Last November, the agency’s annual MMI fund report revealed that while its capital balance remained in “positive territory,” the capital reserve ratio, at less than 0.3%, was well below the Congressionally-mandated level of at least 2%. At the time, however, Galante downplayed the possibility that the FHA may need a bailout, saying that there was “no current evidence” that sustained declines in housing prices would continue throughout 2012, creating a “situation in which the MMI Fund would require support from the Treasury.”

In addition to higher credit lending standards and mortgage insurance premiums, FHA also received a windfall of roughly $1 billion as the result of a landmark mortgage servicing settlement announced in early 2012 as a result of a robo-signing scandal that involved the nation’s largest mortgage lenders. 

The reverse mortgage portion of FHA’s portfolio looked to be in good standing, Galante said following the MMI report last year. The 2012 report is expected to be released by FHA under a November 15 deadline. 

Read the Bloomberg News report

Written by Elizabeth Ecker

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