Stevens: To ‘Fix’ FHA, Create Certainty for Lenders

WASHINGTON–The Federal Housing Administration has served many purposes: as a source of insurance on single-family and multifamily homes and as a countercyclical alternative to private credit and capital. Since its inception in 1934, FHA has insured more than 47.5 million properties.

“FHA matters for the borrower; it matters for home buyers; and it matters for minorities,” said Sarah Rosen Wartell, President and CEO of the Urban Institute, Washington. “Unfortunately, it doesn’t work as well as it should.”

Several times in recent years, the FHA Mutual Mortgage Insurance Fund has fallen below congressionally mandated levels; most recently, the 2017 actuarial report cited a jump in FHA claims for reverse mortgages administered through the Home Equity Conversion Mortgage program, resulting in a 26-basis-point drop in the reserve ratio of the main FHA insurance fund in fiscal 2017, to 2.09 percent.

The Mortgage Bankers Association and other industry trade groups have called for a HUD review to look at removing the HECM program from the FHA Mutual Mortgage Insurance Fund. MBA President and CEO David Stevens, CMB, who served as FHA Commissioner from 2009-2011, said removing the HECM program “would strengthen the MMI fund, give a more accurate look at the health of FHA’s forward book of business and could allow for the consideration of a mortgage insurance premium reduction.”

But Stevens also points to other issues hampering FHA’s ability to provide access to credit. Speaking here yesterday at the National Fair Housing Alliance’s National Access to Credit Forum, he said it would be inappropriate for FHA to return to pre-recession levels of insuring loans that led to many of its problems. But he noted lenders are wary of taking up the slack.

“The challenge today is that we have a system with an extraordinary amount of uncertainty in the origination process,” Stevens said. “One of the things we have to do is look at the burdens imposed on lenders, who must navigate a complex set of compliance and regulatory requirements that remain subject to interpretation. It’s making lenders reluctant to engage in FHA loans.”

Until Washington resolves and creates clarity in what kind of errors can be permitted–such as applying a sensible defect taxonomy–and modifying the certifications related to that, “you’re going to have lenders proudly saying in their earnings conference calls that they are deliberately keeping their FHA business low,” Stevens said. “We need to separate clear, egregious attempts to defraud from the majority of lenders who want to–and are working toward–doing the right thing.”

Laurie Goodman, Vice President of the Housing Finance Policy Center with the Urban Institute, Washington, cited MBA data showing servicing FHA non-performing loans is three times more expensive than GSE non-performing loans. “So why would lenders even consider servicing FHA loans?” she asked.

The answer, Goodman said, is that servicers price for it. But she said FHA could help simplify the process by unifying servicing timelines that would provide more flexibility for lenders and servicers and lower costs. She also noted the FHA conveyance process takes, on average, more than a year and provides sub-optimal outcomes. “It’s very costly and detrimental to communities,” she said. “FHA should look into less costly conveyance alternatives.”