FHA Seeks $800 Million to Cover Losses

Because of falling home values, the Federal Housing Administration plans to ask Congress for nearly $800 million in taxpayer money to buttress a mortgage program for seniors.

Nonetheless, the agency's flagship home-buying program remains solid, Housing and Urban Development Secretary Shaun Donovan said yesterday.

The requested money would cover projected losses on reverse mortgages, which enable seniors to take out equity in their homes. The loan and the accumulated interest do not have to be paid back until the owner dies or sells the home.

"Imagine a situation where a senior took out a loan for $200,000, but they die 10 years later and the house is only worth $150,000," said Guy Cecala, publisher of Inside Mortgage Finance. "That means the lender can only recoup $150,000 even though it insured a $200,000 loan. That's what they're worried about."

The administration is asking for the subsidy instead of increasing charges to seniors, Donovan said.

Even so, the FHA would still make money, producing $1.7 billion in revenue through its flagship single-family home buying program next year, Donovan said.

The popularity of the program surged after the mortgage market collapsed and funding for other mortgages dried up. The FHA does not make loans; rather, it insures them against losses.

But the default rate has climbed as the economy soured, raising concerns about the program's ability to remain self-sustaining.

FHA borrowers pay premiums into a fund that covers default-related losses. As of Sept. 30, that fund contained about $12.9 billion, or about 3 percent of the mortgages insured by the FHA, according to an independent audit. That's above the 2 percent required by law, but below 6.4 percent from a year earlier. Donovan said he expects the ratio to remain above 2 percent in the next fiscal year.