Debating FHA and the housing finance system

The House of Representatives Financial Services Committee just completed a fairly acrimonious debate over the status of the FHA’s Mutual Mortgage Insurance (MMI) Fund, the role of FHA in the housing market, and whether the recent 50 basis point drop in the Mortgage Insurance Premium was a responsible decision. HUD Secretary Julian Castro was the man in the hot seat, spending nearly four hours defending the recent moves and the role of FHA.

On one side of the aisle the Republican majority emphasized their perspective that FHA is too big and crowds out private capital while also putting taxpayers at risk, that the 50 basis point drop was inappropriate while the MMI fund is still below the mandated capital reserve level, and that the FHA program itself puts homeowners and communities at risk with lending that is too open-ended.

{mosads}On the other side the Democratic minority defended the moves recently made and the role that FHA is playing. They argued that FHA is the access point for homeownership for first time homebuyers and others that would not otherwise be served.

As the former FHA Commissioner (2009-2011), I saw some valid points in both sides of the debate.

At its core, FHA is an insurance company.  No insurance company, private or public, that needs to raise its capital base can do so by premium increases alone.  Higher premiums will mean higher risk books of business, as low risk customers get cheaper insurance elsewhere.  This is called adverse selection. FHA faced exactly this risk, which is why it was time for HUD to reduce FHA premiums to protect the long term safety and soundness of the fund.  But that does not mean the work is over. 

FHA made many changes to its programs in the aftermath of the crisis.  We raised minimum credit score requirements, raised premiums (which still remain much higher even after the recent reduction), tightened the reverse mortgage program guidelines, and took enforcement actions or eliminated many poorly managed lending institutions from the program.

In fact, we were able to do this because it was this same committee that gave FHA the authority to raise premiums above the cap that was in place prior to the 2010 legislation and eliminated the very damaging Seller Funded Downpayment Assistance Program that caused enormous damage to families, communities, and the FHA fund.

But the recent premium reduction does not mean FHA’s work is over and the debate yesterday in the committee raised some good questions that could be worthwhile conversation for those who want to have a meaningful discussion about the long term health of the FHA: 

1.    Risk Based Underwriting:  Are the underwriting guideline changes made over the past seven years enough to protect the fund and the families and communities that the program serves. Quite frankly, the MMI fund is getting additional protection from the overlays lenders are putting in place on top of the FHA guidelines. If the overlays were not in place, would that create greater risk? How do we address the concerns about access to credit against the risk of greater harm should unsustainable borrowers be given a loan with more flexible guidelines?

2.    Means testing: Should FHA be limited to first-time buyers and those that have fallen out of homeownership due to documented hardships? 

3.    Loan Limits:  For most of its modern history, FHA had loan limits that were below those of the GSEs. Once FHA is stabilized and private capital has returned to most corners of the market, we need have a discussion about FHA’s market share and loan limits that target FHA’s core market.

The committee debate this week was clearly contentious, but it raised the right questions that are worthy of discussion and debate. With data, facts and engaged stakeholders, I think we have an opportunity to think about the FHA and the broader market dynamics of sustainability, credit, and capital in a way that could be productive for the long term housing finance system. 

Stevens is the president & CEO of the Mortgage Bankers Association. From 2009-2011 he was commissioner of the Federal Housing Administration.


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