Real estate trouble: reverse mortgages deplete FHA insurance reserves

November 21, 2018 By Chriss Street

The Federal Housing Administration’s 2018 audits revealed that losses from real estate reverse mortgages destroyed about a third of the taxpayer-guaranteed insurance reserves.

The FHA Mutual Mortgage Insurance Fund on November 15 reported an $8 billion profit with a $1.26 trillion portfolio of loan guarantees for the fiscal year ending September 30. FHA’s traditional single-family home loan portfolio program is very profitable due to the housing boom and has a positive economic net worth of +$46.8 billion. But its reverse mortgage program for seniors, called Home Equity Conversion Mortgage (HECM) that represents only 6 percent of FHA guarantees, disclosed its economic net worth plunged to a negative -$13.6 billion, almost triple the prior year’s negative net worth of -$5 billion.

FHA mortgage insurance now allows private lenders to make home loans for up to $679,650 to borrowers with poor credit risk of repayment FICO Scores of between 500 to 579 to obtain loans with 10 percent down payments, and borrowers with fair credit risk of repayment scores of 580 and above to obtain loans with just 3.5 percent down payments.

At the bottom of the real estate crash in 2012, FHA’s mortgage insurance fund had estimated taxpayer losses of up to $150 billion. But the Obama administration cut the taxpayer bailout cost to $1.7 billion by its Justice Department forcing the five biggest U.S. banks into $25 billion in settlements for making mortgage loans, hit banks for another $7 billion in False Claims Act fraud settlements, and pocketed billions more in penalties under the Financial Institutions Reform, Recovery and Enforcement Act.

Unwilling to make new FHA guaranteed loans and then being sued again under the False Claims Act, most large banks exited the program during the Obama administration and were replaced by undercapitalized small banks and mortgage brokers.

Congress still allows the FHA portfolio to be leveraged up to 50 times with a minimum capital reserve ratio of 2 percent. The roaring bull market in real estate has pushed up the FHA insurance fund up to an economic net worth of +$34.8 billion at the end of September, but FHA’s capital reserve ratio is just 2.76 percent, a 36 times leverage.................Read more

My Take - With the Community Reinvestment Act they forced the banks to give out loans the banks knew couldn't be paid and then punished them for doing it when the housing bubble exploded and took the nation and much of the investing world down in the last economic crash.