Battered by defaults on loans it insures, the Federal Housing Administration is expected to tap the Treasury Department for $1 billion to $1.5 billion to plug a budget shortfall, according to three people familiar with the agency's finances.
The FHA is expected to ask for the funds at the end of the month, the sources said. If it does, it would be the first time in its 79-year history that the agency needed a bailout from the Treasury.
The Obama Administration estimated in April that the FHA would need nearly $1 billion to close its funding gap this year.
That gap is due almost entirely to losses in the FHA's reverse mortgage program. Many seniors who received the loans in a lump sum were later unable to pay taxes and insurance, resulting in a wave of defaults. The reverse mortgage program was projected to have a $5.2 billion deficit this year. By comparison, the FHA's mortgage program was projected to have a surplus of $4.3 billion.
The agency, which insured 27% of all mortgages last year, has been in the hot seat since November when an independent actuarial report found that projected losses over the next 30 years could put the agency $16 billion in the red, far out of reach of a required 2% capital buffer.
The FHA is requires to maintain a 2% capital reserve but has fallen below that congressionally mandated level for the past four years. The changing nature of the housing market and the FHA's fluctuating finances made it unclear for most of this year whether the agency would need to invoke its "permanent and indefinite" budget authority, allowing it to receive funds from Treasury.
The FHA's finances have improved recently, with its overall serious delinquency rate falling for four consecutive quarters to 8.47% at June 30.
The FHA also has benefited from foreclosure delays and a slow process for reimbursing lenders on defaulted loans. Even though the FHA paid out $21.4 billion in claims in the past four quarters, it had $36.1 billion in cash reserves at the end of its fiscal second quarter, up from $32.3 billion a year earlier.