Did the Mortgage Settlement Just Save the FHA?

The state attorneys general mortgage settlement may have saved the FHA from insolvency.

We’ve been covering the state attorneys general mortgage settlement for the last couple of days, and analysts have uncovered an interesting nugget of information that spells good news for the Federal Housing Administration (FHA).

The finances of the FHA have been constant media fodder the last few months, but according to a Bloomberg piece on the mortgage settlement, a $1 billion cash infusion from the nation’s five largest banks – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – may prove the saving grace for the agency.

One of the supplementary agreements of the settlement, the deal would require the banks to inject $1 billion into the FHA’s capital reserve fund to compensate for the monetary damages that fraud and foreclosures have wreaked on the agency’s books.

According to the Bloomberg article, Carol Galante, the FHA’s acting commissioner, said that previous statements on the FHA’s finances are “obsolete,” a comment that referred most directly to the Obama White House’s 2013 Budget, which had called for up to $688 million in U.S. Treasury Department funds for the FHA.

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

Galante, though, is not taking the bank’s settlement as a matter of fortune.

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

Specifically, the banks’ $1 billion injection is divided into two equal parts. The first $500 million is a settlement with all the banks for abusive foreclosure practices, and the second $500 million is part of a settlement with Countrywide Financial Corp. (now Bank of America) for mortgages that the lender sold to unqualified buyers.

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