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Federal Housing Administration Bailout Mandated by Law

Following a story from yesterday, Sept. 30, regarding the need for a $1.7 billion bailout of the Federal Housing Administration (FHA) by Treasury, FHA Commissioner Carol Galante says the request for funds comes from an estimate of forecasted losses from Dec. 2012 that cannot be altered due to mandated accounting rules. She says the next report will document that the agency is in better shape than one year ago. But critics argue the FHA was too lax with bad lenders and borrowers with high default rates. Republican leaders want swift passage of the Protecting American Taxpayers and Homeowners (PATH) Act which will eliminate Fannie Mae and Freddie Mac and reform FHA’s accounting system. As nationalmortgagenews reports, earlier this year the White House had projected a shortfall of $943 million, but that number has grown due to the slowdown of mortgage applications recently. However, Galante says the main reason is due to accounting, MHProNews has learned. The Federal Credit Reform Act of 1990 requires the agency to cover all expected future losses for 30 years and maintain a 2% capital reserve. “No bank in America reserves for credit losses on a 30-year terms, instead banks get to adjust reserves based on economic conditions,” says David Stevens, president of Mortgage Bankers Association (MBA). “But this is very complicated, very unique accounting and technically they have to draw the funds even if they don’t need the money.”

(Image credit: Federal Housing Administration)

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