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FHA Won’t Need Aid Because of Bank Settlements, Galante Says

The Federal Housing Administration, beset with dwindling reserves and failing loans, won’t require an infusion of government aid thanks to last week’s legal settlements with mortgage lenders and servicers, Acting Commissioner Carol Galante said.

A budget plan sent to Congress today projected that the FHA could require as much as $688 million from the U.S. Treasury Department to remain solvent. It would be the first cash infusion in the agency’s history.

That estimate is “obsolete,” Galante said, because five of the nation’s largest banks last week agreed to inject about $1 billion into the agency’s capital reserve fund to settle fraud and foreclosure claims.

“This is not luck,” Galante said. “This was a result of us going after these lenders to ensure that we would be compensated for losses that we might incur.”

On Feb. 9, the five banks reached a $25 billion settlement with 49 states and the federal government to end an investigation of abusive foreclosure practices. That settlement will pay approximately $500 million into the FHA, which is part of the Department of Housing and Urban Development.

On the same day, HUD reached an agreement with Bank of America Corp. to settle claims that Countrywide Financial Corp., which it purchased in 2008, sold FHA mortgages to unqualified borrowers. That agreement will inject another $500 million into the agency, Galante said.

Premium Increase

“It’s more than enough to compensate for the negative estimate for the draw on Treasury,” she said.

The agency also plans to announce another premium increase in the coming days, Galante said.

“This is a technicality that allows HUD to state that the insurance fund will not need extraordinary assistance,” said Clifford Rossi, a professor at the University of Maryland and former managing director of Citigroup’s consumer lending group.

The FHA, created in 1934 with the goal of expanding homeownership, charges lenders and borrowers a fee in exchange for a guarantee that mortgages will be paid. The agency has grown rapidly since the 2008 subprime lending collapse drove private lenders out of the market. The FHA now insures more than a third of home purchases.

The agency’s cash reserves hit a record low of $2.6 billion last year. Since 2008 the FHA has paid $37 billion in claims related to defaulted mortgages.

Earlier this month, President Barack Obama said he would ask Congress to approve a plan that would make it easier for households to refinance their mortgages, even if they owe more than the homes are worth.

Residential real estate values have dropped 33 percent from their July 2006 peak and have left about 11 million households underwater, or owing more on their homes than the properties are worth. Earlier this month, the Federal Reserve Board called the housing market “depressed.”

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