FHA is a $1 billion beneficiary in settlement with banks over foreclosure fraud

Correction: An earlier version of this story had the incorrect shortfall figure if the FHA’s capital reserves were to be depleted this year. This version has been corrected.

February 13, 2012

The landmark $25 billion settlement with banks last week over fraudulent foreclosure practices might aid more than struggling homeowners. Part of the proceeds also will help plug a projected shortfall in the reserves of the Federal Housing Administration.

Shaun Donovan, secretary of Housing and Urban Development, said in a conference call with reporters Monday that the financial firms involved in the settlement agreed to provide up to $1 billion to shore up the capital reserve fund of the FHA, which provides mortgage insurance on loans made by approved lenders throughout the country.

The Office of Management and Budget estimated that the FHA’s capital reserves could be depleted this year, leaving a nearly $700 million shortfall and potentially forcing the self-funded agency to seek aid from the Treasury for the first time since its creation in 1934.

But Donovan said Monday that the deal with banks would make such talk a moot point. In addition to the settlement payments from banks, Donovan said the agency would increase its mortgage insurance premiums again this year, a move that also could help the FHA bolster its finances.

While the government is legally required to ensure that the balance in the FHA’s emergency reserve fund does not drop below 2 percent of outstanding FHA loans, the agency’s reserves have sunk below that threshold in recent years because of the housing crisis.

Under law, if the FHA’s reserves were depleted entirely, the agency would automatically receive payments from the Treasury to make up for the deficit, a form of aid that the agency has never needed.

Officials have maintained that taxpayer funding will not be necessary to back the agency, in part because the FHA has the ability to raise cash through higher premiums and because any improvements in the housing market would ease the pressure on FHA’s bottom line. In fact, projections show that while the agency could further exhaust its reserves in the coming months, it should return to more solid financial footing by 2013.

Brady Dennis is a national reporter for The Washington Post, focusing on food and drug issues.
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