FHA to Seek $800M to Cover Reverse Mortgage Losses

The Federal Housing Administration (FHA) says that its finances are solid, but still expects to ask the federal government for $800 million to cover losses in a reverse mortgage program for senior citizens.

Foreclosures and falling housing prices have drained FHA reserves, which have shrunk to about 3 percent of outstanding mortgages, down from over six percent a year earlier. However, that's still above the 2 percent minimum required by law, and Housing and Urban Development (HUD) Secretary Shaun Donovan says he doesn't expect the reserves to dip that low.

In fact, Donovan said the FHA's single-family home financing program remains profitable despite the economic downturn, and expects to generate $1.7 billion in revenue over the coming year. FHA mortgage holders pay a monthly fee that goes into the reserve fund, which covers losses due to defaults.

Where the agency is looking for help is in covering potential losses in a reverse mortgage program for senior citizens. That program, which provides a steady source of revenue to seniors in return for an equity stake in their home, is expected to post losses due to declining home values.

Since housing prices have dropped dramatically since many of those reverse mortgages were issued, the FHA will not be able to recoup nearly as much money as it anticipated when the house is eventually sold, typically when the reverse mortgage holder dies or moves into other housing.

The FHA is asking for the $800 million subsidy to keep that program in the black rather than increasing the fees it charges seniors, the Washington Post reported.

With traditional lenders tightening credit, the FHA has taken an increasingly large share of the mortgage market. It now accounts for 30 percent of all new home loans, up from only 4 percent a few years ago. Donovan said he's confident in the soundness of those loans and that revenues from them will strengthen the FHA's finances.

"Loans made during fiscal year 2010 are likely to be made at a time when we can expect house prices to begin rising again, and to ensure safety and soundness of those loans," he said.