FHA Reform Proponents Make Case on Hill

WASHINGTON — Capitol Hill lawmakers heard testimony this week from industry experts on both sides of the FHA reform debate — an issue gaining more and more momentum among Washington, D.C. politicos. The hearing concluded with the commissioning of a study to examine FHA’s role and the effect of the agency’s proposed reforms. U.S. Senator Wayne Allard (R-CO), Chairman of the Subcommittee on Housing and Transportation, opened the hearing by explaining that the purpose of the meeting was to examine the role that the federal housing agency should play in today’s and tomorrow’s marketplace. In an attempt to modernize the agency’s practices and to reverse its drop in market share, FHA has proposed instituting risk-based pricing, increasing its maximum premiums, an across-the board increase in loan limits and a new zero down payment mortgage product. The proposal also includes eliminating audit and net worth requirements for mortgage brokers, eliminating the cap on reverse mortgages, the authorization of a 40-year mortgage product, restructuring the manufactured housing programs and streamlining the condominium program.

Subcommittee on Housing & Transportation

FHA loans today account for only 3 percent of the overall mortgage market, compared to about 12 percent in the 1990s.Allard said changes are necessary to ensure that FHA can continue to help homebuyers but warned that the agency has to first “get its existing house in order” since it continues to be considered “high risk” by the General Accountability Office. The agency has issued a number of reports since 2005 identifying weaknesses in FHA’s ability to manage risk and estimate program costs.

“It would be irresponsible to expand a seriously troubled program,” Allard said.

FHA Commissioner Brian Montgomery testified that acceptance of FHA’s proposal to overhaul its products and policies is important in allowing the agency to continue to provide homebuyers with safe and affordable home financing options.

Montgomery said that with a risk-based premium structure, FHA could reach borrowers who can not qualify for conventional, prime financing. He said, with the reforms in place, FHA will be able to provide home loans at a better price than could be achieved with subprime loans.

Montgomery indicated each one percent increase in the upfront mortgage insurance premium on a $200,000 loans costs about $12 a month. For this low monthly payment — the price of a pizza, Montgomery said — an FHA borrower could obtain a market rate loan. In comparison, if the same borrower had to obtain a subprime loan, where the interest rate averages 3 points higher than for prime borrowers, the borrower would have to pay an additional $255 a month.

The FHA proposal will also help to preserve the financial soundness of its single-family funding source — the Mutual Mortgage Insurance Fund, Montgomery said. The fund operates similar to a trust fund and allows FHA to accomplish its mission at little or no cost to the government.

Since 1990, FHA has generated more than $29 billion in potential income which has been offset by $18.8 billion in re-estimates of potential losses, meaning that FHA’s projected annual average net income over the past 16 years has been $670 million a year, Montgomery said. FHA has never lost money, he declared.

Montgomery testified that the proposal is good for the private sector as it expands the borrowing pool and provides the real estate financing industry with products to reach higher list homebuyers. Ninety percent of FHA borrowers can not qualify for a prime convention loan, he said.

He also explained that FHA will not take business from private mortgage insurers as the insurers have not traditionally served the lower income, higher risk borrowers.

Regina Lowrie, chairman of the Mortgage Bankers Association and president of Gateway Funding Diversified Mortgage Services, urged the subcommittee to look favorably upon passage of the proposed legislative reforms as that would allow FHA to adapt to today’s mortgage market.

Lowrie testified FHA should be allowed to introduce new products and to make program changes. She said the agency should be allowed to institute a flexible down payment program, should be allowed to offer longer mortgage terms and should be allowed to raise FHA loan limits in high-cost areas. She also said FHA needed to be allowed to invest in new technology and to be given the authority to gain greater control over its personnel practices so it can hire a more sophisticated and knowledgeable workforce.

Thomas B. Stevens, president of the National Association of Realtors, told the subcommittee that FHA reform is needed because, for many homebuyers, FHA’s loan limits, down payment requirement and fee structure have made it a “lender of last resort.”

A.W. Pickel, president of LeaderOne Financial, testified on behalf of the National Association of Mortgage Brokers that access to FHA-insured loans will help low-to-moderate income homebuyers take advantage of the safer and less expensive financing options provided through FHA. Pickel said elimination of the audit and net worth requirements for brokers and increasing FHA loan limits will make the loans more attractive to both brokers and consumers.

However, GAO and the Federal Financial Analytics sounded a different note.

William B. Shear, Director, Financial Markets and Community Investment, testified that, although FHA has implemented some of the recommendations GAO made in its reports, “open questions” in several areas remained.

Basil Petrou testified that it is not appropriate for FHA to launch initiatives to expand its market share. He said recent GAO and HUD Inspector General Reports and the president’s fiscal year 2007 budget raise serious questions about the Mutual Mortgage Insurance Fund’s financial soundness.

Petrou said the FHA should not seek to grow its way out of its current financial problems, as doing so is reminiscent of the actions taken by distressed savings and loans during the 1980s. He said 50 percent of all FHA loans insured in 2004 have down payment assistance with non-profit organizations that receive seller funding. He said these sellers raise the price of their properties to recover their contribution to the seller funded nonprofits, placing the FHA buyers and mortgages above the true market value. While the IRS is curtailing these programs, the significantly higher claim rates FHA has experienced in these loans will continue, Petrou warned.

Petrou also testified that raising FHA loan limits will not help low and moderate-income families but would distance FHA from its mission. Petrou said raising FHA base loan limits to $271,000 would require that a borrower had an income of about $87,000. Raising loan limits in high-cost areas to $417,000 would require $132,000 to qualify.

Industry Experts Testifying

He testified that allowing FHA to replace its current premium structure with a risk-based premium structure is a risky proposition, in part, because GAO and HUD reports indicate that FHA does not have the necessary data or analytical ability to make the switch. He also said that eliminating the three percent down payment requirement should be carefully structured to prevent harm to borrowers and communities. He suggested that a pilot program first be put into place. FHA should become an income-targeted rather than a loan-amount targeted housing program, he said. House prices fall, Petrou said. Income targeting would assure that low and moderate-income borrowers became the primary focus of the program, he said. At the close of the hearing, Allard said that he and Sen. Richard Shelby (R-AL) are commissioning a GAO study because there are still too many unanswered questions regarding the role of FHA and the effect of the proposed reforms. They are asking GAO to examine the factors underlying the decline of FHA’s market share, the financial and public policy implications of the decline, the extent and areas of overlap between the types of borrowers served by FHA and other markets, the most viable options FHA could pursue to serve additional first-time and low-income homebuyers, and the implications of the reform proposal.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: burdenlisa@yahoo.com