MBA, NAR Outline Importance of FHA

by devteam March 1st, 2013 | Share

David H. Stevens,rnPresident & CEO of the Mortgage Bankers Association (MBA), and Gary Thomas,rnPresident of the National Association of Realtors® (NAR) testified today beforernthe U.S. Senate Committee on Banking, Housing and Urban Affairs at a hearingrntitled, “Addressing FHA’s Financial Condition and Program Challenges.”  </p

Stevens, who served as FHA Commissioner from 2009 to 2111 notedrnfindings from FHA’s 2012 Actuarial Review that the capital ratio of the MMIrnFund had fallen to negative 1.44 percent which prompted concerns that it mightrnneed a draw from the U.S. Treasury and raised questions about whether FHA’srnpolicies need to be adjusted.</p

Thesernfindings Steven’s said do not mean that FHA has insufficient cash to pay insurancernclaims, a current operating deficit, or willrnneed to immediately draw funds from Treasury; only the President’s FY2014 budget can makernthat determination.  It is not surprisingrnthat FHA is experiencingrnsignificant losses onrnloans made during the recent crisis, asrnwell as lossesrnon the large volume of its new business. </p

The soundnessrnofrnFHA’s financial position</bisrnintricately tiedrnto whether the assumptions andrnpredictions behind the Actuarial Review holdrntrue. Whilernthernindustry is cautiously optimistic about FHA's recent programmatic changes, MBA recognizes the severity of the losses stemming fromrnthe 2007-2009 books of business are so great, and thernuncertainty in forecasting economic trends is so high, that thernpossibility of a further decline inrnthe capital ratio must bernacknowledged as well as that other key variables such as the futurernpaths of homernprices and interest rates, can significantly sway the estimate of Fundrnvalue inrneither direction.</p

Stevens said FHA has already raised insurance premiums, increasedrnand taken other steps to address many of the causes that have led to losses inrnits single-family portfolio.  The creditrnprofile and performance of the 2010 to 2012 portfolios demonstrate the effectsrnof these changes.  </p

MBA believes furtherrnprogrammatic changes at FHA must balance three priorities: restoring financialrnsolvency; preserving FHA’s critical housing mission; and maintaining thernagency’s countercyclical role.  ThernAssociation plans to release a white paper next month that looks at variousrnpolicy options to determine their impact on FHA.  </p<ul class="unIndentedList"

  • Limit excessive riskrnlayering. Risk-based underwriting orrnspecifying additional underwriting criteria or compensating factors withinrncertain credit boundaries, could further reduce FHA’s credit risk, but overlyrntight credit controls could mitigate against FHD’s traditional borrowers. FHA must find the right balance. Locking in some of the overlays employed byrnlenders would protect FHA from any erosion in standards as market conditionsrnevolve.</li
  • Increasernminimum downpaymentrnrequirement from 3.5 percent to 5 percent. FHArnhasrnalready increased minimum downpayments forrnborrowers withrna credit score below 580 to 10 percent and has proposed raising the minimum for borrowers withrnloans above $625,500 to five percent. FHArncouldrncontinue this trend by designingrna tiered downpayment structure based on creditrnscores where borrowers with the greatest risk of defaultingrnwould be requiredrnto pay higherrndownpayments thanrnborrowers with better credit scores.rn</li
  • Establish a credit scorernfloor of 620. FHA recentlyrnbegan requiring that borrowers with credit scores below that score have theirrnloans manually underwritten to ensure adequate compensating factors. Establishing an absolute credit score floor would reflect the current marketrnstandard of private lenders, making FHA less subject tornadverse selection. Borrowers with extremely weakrncredit may be better served by credit counselingrnand a slower path to homeownership, ratherrnthan an immediate and costlier loan.</li</ul

    Arndownside risk is that a minimum score of 620 could reducernaffordable creditrnoptions for many borrowersrnespecially penalizing some with a one-timerncredit damaging life event.  Eliminating FHA as an option forrncredit-impaired borrowers might make the market fertile ground for a new subprimernmarket and/or predatory lending.</p<ul class="unIndentedList"

  • Requiring two month reservesrnand tightening DTI requirements for allrnborrowers would prepare homeowners to absorb major householdrnexpenses and wouldrnpositively impact FHA’s default rate. Moreover, this would be another way to verify if borrowers are truly financially prepared for therncost of homeownership. The changes however would also delay homebuying for borrowers whornwould potentiallyrnneed to accumulate additional cash for a downpayment.</li</ul<ul class="unIndentedList"
  • ThernFHA high-cost loan limit of $729,750 is due to expire at the end of the yearrnand will then match the current GSE limit of $625,500. Stevens said this willrnhelp return FHA’s focus to serving low-to-moderate income and first-timernborrowers. MBA data indicates that lessrnthan one percent of FHA-insured loans arernbetween $625,500 and $729,750 anyway and it appears that as demand for larger loans grows,rnthe need willrnbe adequately served by the private sector. </li</ul

    On the other hand, larger loansrntend to perform better comparedrnwithrnsimilar smaller loans, and,rnas borrowers are already charged an additional 25rnbasis points for these loans, they actually improvernthe performancernofrnthe MMI Fund andrnprovide additional revenue. Givenrnthat loans abovern$625,000rncomprise a small percentagernofrnFHA’s portfolio, but have significant positivernattributes, policymakers may consider extending the limits untilrnthe MMI Fund is financially stable.</p

    Also, in recentrnyears, FHA has increased its enforcement of agency-approved lenders whichrnStevens said, when warranted, is certainly the right thing to do for the fund.rnHowever, given current market conditions, FHA must take a balanced approach tornenforcement to guard against further credit tightening.</p

    MBA supports high standards for all FHA lenders inrnorder to protect the agency’s viability, thernlender’s reputation, and the reputation of the industry. There must, however, be a reasonablernmargin for human error, especially when thernerror is notrnthe cause of the delinquency or default. MBA would staunchly opposernefforts that allow FHA to go beyondrnreasonable standards of lender enforcement.  </p

    Stevens also suggested some ofrnthe recent regulatory changes will affect FHA. The new definition of QualifiedrnMortgage establishes a safe harbor for lenders and Stevens said MBA strongly believes that for the foreseeable future lenders willrnbe extremely wary of originatingrnloans that fall outsidernofrnthe QM safe harbor. Consequently, if thernthresholdrnis not at least expanded, thernavailability of FHA credit for underserved populations – first-time, minority,rnand low- andrnmoderate-incomernborrowers – may bernunduly limited, jeopardizing FHA’s ability to fulfillrnitsrnimportant role.</p

    ThernDodd-Frank risk retention rule as currently drafted wouldrnrequire families to make arn20 percent downpayment andrnmeet relatively lowrnDTI andrnother stringent requirements. The proposed QRM definitionrnappears to conflict directly withrnthernAdministration’s planrnto shrink FHA from its current role of financing one-third of all mortgages andrnone-half of all purchase mortgages because itrnwould make it far more difficult for private capital to re-enter the housingrnfinance market.  The widerndisparity between FHA’s downpaymentrnrequirement of 3.5 percent and the QRM requirement of 20 percent would force over-utilization of FHArnand other government programs. </p

    Thomas told the Senators that, without the FHA, the housing downturnrnand economic recession would have been far worse for the nation.  “FHArnhelped fill the void over the past five years after private lending fled thernmarket by providing safe, affordable access to mortgage credit to millions ofrnAmericans who wanted to purchase a home.  Had FHA not stepped in to fill the market gap,rnmany families would have been unable to purchase homes, current homeownersrnwould have experienced far greater drops in equity and their home’s value,rnand our nation’s economy would be much further from a recovery.”</p

    Thomas said that FHA has always been a staple in home financing; neverrnoffering risky products, using predatory lending practices, or engaging inrnexotic underwriting.  Yet, like allrnlenders, it incurred great financial losses as a result of overall market conditionsrnthat led to millions of foreclosures. </p

    NAR is confident, Thomas said, that FHA has already taken many of thernnecessary steps to stabilize the fund as well as numerous administrativernchanges to mitigate risk. “FHA currently has one of the strongest books onrnrecord and the quality of borrowers has skyrocketed; continued marketrnimprovements and rising home prices will also help improve the fund’s futurernfinancial condition,” he said.</p

    He cautioned about making arbitrary changes to FHA, such as furtherrnincreasing costs to consumers or limiting the use of the program to certainrntypes of buyers, only for the sake of luring back private markets.   Any actions designed to deliberately lowerrnFHA’s market share could disrupt the availability and affordability of mortgagerncredit and undermine the fragile real estate recovery, he said.</p

    NAR welcomes a time when FHA’s market share is reduced to its morerntraditional levels of 10 to 15 percent of the market, and the private lendingrnmarket is once again robust, Thomas said, but we are not there yet. “Uncertaintyrnabout pending financial regulations and the future of the secondary mortgagernmarket are keeping private lenders from returning to mortgage markets.</p

    “Once the rules for mortgage finance are resolved and housing pricesrnstabilize nationwide we anticipate that private investors will return to the marketrnand FHA’s market share will return to more traditional levels.”

    All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of is prohibited.

  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

    See all blogs


    Leave a Comment

    Leave a Reply

    Latest Articles

    Real Estate Investors Skip Paying Loans While Raising Billions

    By John Gittelsohn August 24, 2020, 4:00 AM PDT Some of the largest real estate investors are walking away from Read More...

    Late-Stage Delinquencies are Surging

    Aug 21 2020, 11:59AM Like the report from Black Knight earlier today, the second quarter National Delinquency Survey from the Read More...

    Published by the Federal Reserve Bank of San Francisco

    It was recently published by the Federal Reserve Bank of San Francisco, which is about as official as you can Read More...