Today, however, FHA is at a crossroads. The same housing crisis that resulted in millions of homeowners defaulting on their mortgages and drove hundreds of private mortgage lenders out of business has left FHA’s single family insurance fund in danger of needing a cash infusion from the Treasury in order to avoid default. Much of FHA’s current troubles are attributable to the critical function it played when the market turned and many private lenders refused to lend. Without FHA to step in, the housing crisis would have been measurably worse.
Therefore, it is only right that policymakers should evaluate FHA policies and procedures. In particular they should research how the agency intends to return its capital reserve ratio for single family programs above Congressionally-mandated two percent level. Currently, Congress is in the process of holding hearings to assess these topics surrounding FHA’s structure.
While reviewing FHA, it is critical that policymakers recognize the important role that the program played, and is playing in the market. FHA is virtually the sole source of mortgage funding for borrowers with low downpayments, those without high incomes or large amounts of inherited wealth. Many of these are first time homebuyers – young families looking to put down roots in a community, and a segment that must be served if we are going to grow our housing recovery.
Further, almost 80 percent of minority homebuyers are getting loans through a government program – either the FHA, the Veterans Administration or the Rural Housing Service of the Department of Agriculture. While this concentration is clearly not the sign of a healthy mortgage market, it shows that an unintended consequence of acting too quickly to scale back FHA could eliminate a large segment of qualified homebuyers from homeownership opportunities.
To its credit, FHA and HUD have not waited for Congress to act. Beginning when I was Commissioner in 2009, and continuing today, FHA has taken a series of critical steps to stabilize its programs and improve credit quality that will assist in rebuilding the fund. We raised FHA’s mortgage insurance premiums, increased net worth requirements for lenders and hired the agency’s first ever Chief Risk Officer. We also stepped up enforcement against lenders who were committing fraud against the government and borrowers.
Subsequent leadership at FHA has continued to propose and implement changes that will allow FHA to better manage its risk and strengthen the single-family MMI fund. They have increased premiums and raised down payment requirements on lower-FICO borrowers, while making programmatic changes to improve loss mitigation activities and thus limit loss severity. In late January of this year, HUD announced yet another round of additional steps to bolster the capital reserves, including instituting changes to the reverse mortgage, or Home Equity Conversion Mortgage (HECM), program, and increased underwriting and documentation for low FICO/high DTI loans.
Clearly, given these actions, the current administration is taking FHA’s situation seroiusly. As a result, these unprecedented steps will help stabilize the program’s future financial viability. In fact, data clearly shows that the loans that FHA has made in the last three years are among the best performing books of business the program has ever underwritten.
With the housing crisis fading (yet still fresh in our memory), and the real estate and mortgage markets starting to recover, it is now time to have a thoughtful, comprehensive debate over the future of the government’s role in the housing market. That includes looking at the future of FHA. It also means determining the long term role of Fannie Mae and Freddie Mac. Ultimately, all stakeholders want the same thing – a fully functioning market that relies most heavily on private capital, with a limited, appropriate role for the federal government. A stable, sustainable FHA program must be a part of that system.
Stevens is president and CEO of the Mortgage Bankers Association. He served as assistant secretary of Housing/Federal Housing Commissioner at the U.S. Department of Housing and Urban Development in 2009 and 2010.