February 13, 2012 / 8:46 PM / 8 years ago

Mortgage deal to provide FHA with $1 billion in cash

WASHINGTON (Reuters) - The Federal Housing Administration will receive about $1 billion from the Obama administration’s mortgage settlement with the country’s largest banks, officials said on Monday, which could help it avoid tapping a U.S. Treasury credit line.

Department of Housing and Urban Development Secretary Shaun Donovan speaks during a news conference at the Department of Justice in Washington D.C. December 21, 2011. REUTERS/Benjamin Myers

The cash reserves of the FHA, which insures about one-third of all U.S. mortgages, reached a record low of $2.6 billion last year.

The White House said in President Barack Obama’s budget proposal on Monday that the agency’s capital reserves would run out in the coming year, forcing it to draw as much as $688 million from the Treasury.

However, U.S. Secretary of Housing and Urban Development Shaun Donovan later said that the banks involved in the $25 billion mortgage settlement unveiled on Thursday had agreed to pump close to $1 billion into the FHA.

He also said the agency would raise premiums on loans it insures in a further step to bolster its reserves.

“We are taking all the actions that we can at this point to protect the fund while ensuring that our housing market continues to recover,” Donovan told reporters on a conference call.

The FHA’s share in the mortgage market has increased sharply since the depth of the financial crisis in 2008. Critics of the FHA say it might need a taxpayer subsidy if loan losses continue to grow.

Donovan said the FHA is expected to formally announce the higher mortgage insurance premiums in the coming days. He provided no further details.

A spokesperson for the White House budget office said the estimates for the FHA’s capital reserves were “no longer accurate” as a result of the bank settlement. The settlement was reached after details of the budget proposal were locked down, the spokesperson added.

The FHA, created during the Great Depression, helps provide liquidity by protecting lenders against borrower defaults. The agency took a number of steps to shore up its finances last year, including twice raising the premiums borrowers must pay.

“We will remain vigilant. If there are any additional headwinds that we see over the next few months, any additional information that we get, we’re prepared to take further actions as well,” Donovan added.

The majority of homeowners taking out FHA-backed loans are middle-income, first-time buyers. Their minimum down payment is 3.5 percent.

Obama last month proposed spending up to $10 billion to help Americans who have been unable to refinance move into FHA-backed loans. Some Republicans worry the plan, which needs congressional approval, could saddle the agency with more losses.

The FHA has never needed an infusion of funds from the Treasury because it has been able to take other actions, including hiking premiums, to stay solvent.

Reporting By Margaret Chadbourn, editing by Chizu Nomiyama, Gary Crosse

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