Congress Hears Recommendations for FHA Reform from Industry Leaders

The House Financial ServicesrnSubcommittee heard testimony today from housing industry leaders onrncongressional efforts to reform the Federal Housing Administration (FHA).   Thisrnis the third hearing this committee has held thus far in the 113^{th</supCongress on the FHA and the financial difficulties that may be affecting itsrnMortgage Insurance Fund.</p}

Sarah Rosen Wartell, President, Urban Institute recommendedrnseveral actions she said would  “better enable FHA tornassess risk,rnact more nimbly to mitigate it, and, ultimately, operate more efficiently and sustainably” rnShe said her recommendations promised quick impact,rnwere both politically and operationally feasible,rnand not mired in ideologicalrndebate.rn</p<ul class="unIndentedList"<liCongressrnshould give the HUDrnsecretary special emergency powers to suspend FHA insurance programsrnor make emergency modifications tornthe program whenrnthernsecretary finds thatrncontinuation under currentrnprogram terms exposesrnthe taxpayers to “elevated risk of loss” and “fails to serve the public interest.” </li</ul<ul class="unIndentedList"<liCongress should give the HUD secretary the authority to establish appropriate risk indicators on anrnongoing basisrnand to use these indicatorsrnto limit access to participation in FHA insurance programs where these indicators suggestrna lender,rnservicer, or other program participantrnis more likely to expose the taxpayersrnto risk.rnWhenrnprogramrnparticipantsrncan overcome a burdenrnof proof that they dornnot pose undue risk or thatrna better indicator is available, then FHA's decisions canrnbernsubject to scrutiny. Butrntherngoal should be to give therntaxpayers-not program participants-the benefitrnof the doubt.</li</ul<ul class="unIndentedList"<liCongressrnshould give FHA expressrnauthority to implement pilot programsrnquickly where the goal it so better understand,rnmeasure, andrnmitigate risk. Fullrnimplementation would follow normal administrative procedures. So, for example, FHA could testrnwhether a new alternative underwriting standard (e.g., incentives for pre-purchase counseling), or loss mitigation procedures, orrnREO disposition approachrncanrnachieve programrnobjectives in a cost-effective manner.</li</ul<ul class="unIndentedList"<liAllow FHA to hire for select positions atrnelevated compensation levels tornensure that FHA can attract appropriate insurance,rnfinancial, andrnrisk managementrnskills. Also providernFHA with the ability tornuse insurance premiums for systemsrnand analytical model acquisitionrnto strengthen their capacityrntornmitigate risk.</li</ul

Keven Kelly, first vice president of thernNational Home Builders Association (NAHB) said his group supports reformrnefforts but urged lawmakers to proceed in a cautious manner so as not torndisrupt the nation’s housing finance system.</p

“While there is no doubt that thernhousing finance system needs to be reformed, the contributions that the FHArnmade during the economic downturn underscore the need for a government backstoprnfor both the primary and secondary mortgage markets,” said Kelly. “Inrntimes of crisis, private sources of mortgage credit have been unable orrnunwilling to meet housing capital needs.”<br /<br /Kelly pointed out that before the downturn hit, FHA's 2006 market share was 3rnpercent as private institutions competed actively in the market.  "When the housing downturn hit, there was arnrole reversal, as private players fled the market and FHA-insured mortgagesrnbecame the only credit option for first-time home buyers, minorities and thosernwith limited downpayment capabilities," he said.<br /<br /"This dramatic shift is evidence that FHA is performing its mission ofrnproviding the federal backstop to ensure that every creditworthy American hasrnaccess to a stable mortgage product," said Kelly. "As the privaternmarket assumes a greater role in the mortgage marketplace, maintaining anrnappropriate level of government support is essential to preserve financialrnstability, promote investor confidence and ensure liquidity and stability forrnhomeownership and rental housing."<br /<br /Noting that the Federal Reserve and leading economists have warned that overlyrnrestrictive underwriting requirements are preventing creditworthy borrowersrnfrom accessing mortgage credit, Kelly called on lawmakers to take a long-term,rnholistic approach to housing finance reform, combining discussions of FHArnprogram reforms with those relating to the future roles of Fannie Mae andrnFreddie Mac.</p

David Stevens, former Commissioner ofrnFHA and current president of the Mortgage Bankers Association (MBA) stressedrnthat FHA had never before played such an important role in the housing market,rnespecially for borrowers with low downpayments and without high incomes butrnacknowledged that since the onset of the housing crisis FHA’s books hadrnsuffered like everyone else’s.  Thernagency however has been proactive in addressing losses in its single familyrnportfolio by raising premiums and downpayment requirements, better regulatingrnits lenders, and establishing the Office of RiskrnManagement.<br /<br /"Looking ahead, MBA believes further programmatic changes at FHA must balancernthree priorities: restoring financial solvency; preserving FHA's criticalrnhousing mission; and maintaining the agency's countercyclical role," Stevensrnsaid.   "There are a number of steps this subcommittee could take tornfurther strengthen FHA and promote the return of private capital.  Loanrnlimits could be lowered from the levels that were necessary at the height ofrnthe housing crisis. Downpayment requirements could be adjusted to mitigate forrnother risk factors, like low credit scores. Risk sharing is another area that,rnif done prudently, could potentially meet all of the objectives I just listed.</p

“Similarly,rnrisk-based underwriting could further reduce FHA’s credit risk by targetingrnareas of risk layering. However, the consequences to FHA’s traditionalrnborrowers on each of the above suggestions could be significant if FHA employsrnoverly stringent credit controls.  Finding the right balance will berncritical.”</p

Stevensrnalso suggested that FHA consider locking in some of the overlays lenders haverninstituted in recent years, saying this would protect FHA from any erosion inrnstandards as market conditions evolve.<br /<br /"Also, in recent years, FHA has increased its oversight and enforcement ofrnagency-approved lenders.  Let me be clear: as FHA Commissioner, Irninitiated tighter controls and enforcement procedures that shut downrnirresponsible FHA lenders.   When warranted, this is certainly the rightrnthing to do for the fund.  The key is finding the proper tolerances andrncommunicating them clearly to market participants.  When lenders arernforced to operate their businesses to near-perfect standards, they will operaternwell inside of the published standards."</p

Right nowrnStevens said with credit standards so tight, the risks to lenders of makingrnmistakes too great, and the rules of the road unclear, lenders tend only tornlend to people with perfect credit and limit financing options for FHA’s targetedrnpopulation.  The uncertainty needs to berncleared from the system, he said, and a one created where homeownership isrnagain a doorway to opportunity and borrowers can again feel safe, confident,rnand secure in their loans, but also a system that thrives in an environmentrnthat encourages a competitive, responsible marketplace so business can grow.</p

Alsorntestifying before the House hearing were Adolfo Marzol, Vice Chairman,rnEssent US Holdings; Gary Thomas, 2013 President, National Association ofrnRealtors; and Clifford Rossi, University of Maryland.

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