In just a year on the job, Brian D. Mongtomery has led the Federal Housing Administration mortgage insurance program back to a measure of relevance, and started a push that could return it to a place of prominence in the single-family housing market.
Shortly after being appointed the Department of Housing and Urban Development's assistant secretary in charge of the FHA last year, Mr. Mongtomery began making process and other changes that, along with some market shifts, have stanched the agency's dramatic loss of market share in recent years.
And this spring he began lobbying lawmakers to pass a broad package of reforms to make the FHA more competitive, including raising loan limits, instituting risk-based pricing, and eliminating down-payment minimums.
One might ask whether the effort is worth it. Many lenders say that today the private market can serve the first-time homebuyers and low- and moderate-income borrowers who relied on the program's insurance in the past.
Mr. Montgomery offered his response in an interview last month. "Its time is not over and done with," he said. "The need for FHA today is as profound as it was in 1934," when the program was created.
He also laid out other changes, legislative and otherwise, that the program is exploring and has not discussed previously: the creation of an automated underwriting system, "graduated payment" mortgages, and a compromise approach to getting smaller brokers more involved. He also shared his thoughts about lenders that have quit the FHA loan business.
THE ROAD TO HUD
As he has done in other interviews, speeches, and meetings with lawmakers, Mr. Montgomery repeatedly emphasized how much better the types of loans the FHA envisions insuring in the legislative part of his reform effort could be for borrowers than the subprime ones they are getting.
He said housing issues have interested him since he spent several years as the communications director (a job in which he helped shaped policy) at the Texas Department of Housing and Community Affairs under then-Gov. George W. Bush.
Once the Bush team hit Washington, Mr. Montgomery said, he "all along wanted to get" to HUD.
But he got sidetracked. He was initially appointed the deputy assistant to the President, and in 2003 he was named the secretary of the Cabinet. In that role, he led a working group that tracked the efforts of a NASA board investigating the Columbia space shuttle disaster. The investigation persuaded the White House to seek a new mission for NASA that Mr. Montgomery helped develop and President Bush announced in January 2004.
"So, I kind of have a reputation of being able to go into an entity and sit down and identify areas that need to be reformed and bring together key players throughout the government and throughout the industry," Mr. Montgomery said. "I've tried to bring those skills to reforming the FHA, and I think so far they have been beneficial."
Industry insiders and observers agree with that assessment, with surprising uniformity and vigor.
"The FHA has withered on the vine for a long time," said Howard Glaser, a Washington lobbyist and a high-level HUD official under President Clinton. "And Mr. Montgomery has done more to move it forward than any of his predecessors that I can remember."
UPHILL BATTLE
Whether FHA reform legislation will be enacted this year is uncertain. A bill easily passed in the House in July by a vote of 415 to 7, but things have not gone as smoothly in the Senate.
According to numerous sources, this is mainly because election-year politics have held the Democrats back from supporting a bill introduced by Sen. Jim Talent, R-Mo. (A more-limited bill by Sen. Hillary Rodham Clinton, D-N.Y., has also languished.)
Another approach to reform - using the appropriations process - has shown intermittent signs of promise, but no firm results.
"We recognize it's a short year," Mr. Montgomery said. When lawmakers return from recess, "they're not going to be back very long, but we're still going to keep pushing for it on all fronts." Specifically, the Bush administration is "optimistic we're going to have some key committee chairmen sign on as soon as they come back."
Time is of the essence, he said. "We think it's important to get it done this year. With FHA's … business basically being in free fall for five years now, every day" that goes by without legislative action is another day the issue can lose relevance.
Though the FHA "stopped the hemorrhaging" of market share this year, "we've found ourselves taking two steps forward - and the next month, taking one step back," he said.
In hindsight, according to Mr. Montgomery, it was foolish not to get consumer groups behind the reform bill early on.
In July, eight leading groups lobbied against several key tenets of the proposal in a letter to Sen. Christopher Bond, R-Mo., the chairman of the Senate Appropriations subcommittee dealing with HUD's budget, and Sen. Patty Murray of Washington, the subcommittee's ranking Democrat.
Mr. Montgomery has recently been trying to make up for the early lack of outreach, and he says he is having success. He held talks with seven of the consumer groups recently.
"It was a good first step," said Monica Gonzales, the vice president of legislative and regulatory affairs for the National Community Reinvestment Coalition. Allen J. Fishbein, the director of housing and credit policy at Consumer Federation of America, agreed and said he hopes there will "continue to be a discussion about what our concerns are."
He and Ms. Gonzales said that even though their groups support FHA modernization, they are still on the fence when it comes to the proposal. For example, the consumer groups worry that risk-based pricing could hurt weaker borrowers.
Mr. Montgomery said that he was disappointed the groups did not notice earlier what the FHA has already done to address such concerns.
He said the administration worked closely with Rep. Barney Frank, D-Mass., to tweak that part of the House bill, for instance by creating premium caps and automatically low premiums in the later years of a loan.
Ms. Gonzales and Mr. Fishbein said that the Senate Appropriations bill lacked those changes, and that they are more comfortable with the House bill's approach to risk-based pricing, though they are not completely sold on it.
BROKER BARRIERS
Another contentious part of the House bill is a plan to reduce the financial audit and net worth requirements for brokers that want to arrange FHA loans - something not part of the blueprint the administration released in February.
Mr. Montgomery expressed sympathy for the "small-business owners who are brokers" and have been shut out by the requirements, especially those in rural communities. "Having said that," he added, "the pendulum can't swing the other way. I have the responsibility to protect the soundness of the … insurance fund and making sure only financially viable brokers, and lenders, for that matter, participate in the program."
He said he has been talking with broker industry representatives about a compromise: a "hybrid" path in which small brokers could avoid the requirements by entering "financial arrangements" with "high-performing" mortgage banks.
A HUD spokesman said such a setup would not require legislative action.
The FHA suffered a blow this year when the Internal Revenue Service published a ruling that probably will remove the nonprofit status from most seller-funded down-payment gift profit providers. If the outfits are classified as for-profit enterprises, the gifts - which have become a big part of the FHA's business - would no longer meet the program's requirements.
When asked if the FHA has a "plan B" if the reform package does not pass before the IRS ruling takes its toll on volume, Mr. Montgomery would not say whether he had one.
However, he did say that he is "actually using that ruling" to highlight the need for true zero-down programs, and that the FHA is touting its experience with the gifts as evidence of its ability to handle zero-down loans.
Such gift-enabled loans are an "extreme example of zero down," he said. "In this case the down payment is essentially tacked on the back of the loan" - the purchase price increases to reflect the seller contribution.
Another lobbying adjustment: The FHA is trying not to emphasize the fact that there will be "zero down" loans as part of its reform plan, Mr. Montgomery said.
Rather, it is talking about "flexible" down payments, putting more weight on the fact that many borrowers still "will have some stake" in their homes, by putting down less than the 3% required today, but some amount.
FARM TEAM
Mr. Montgomery also revealed that the FHA could work with the Department of Agriculture's Rural Development Division as it pilot tests an automated underwriting system, dubbed a "Guaranteed Underwriting System," so that it can be used for FHA lending.
"We're not there yet on the decision, but we are talking to USDA about perhaps partnering with them in that endeavor," he said.
In 2004 the FHA created an underwriting "scorecard" used with underwriting engines, but not on its own.
On the product front, Mr. Montgomery said the FHA should not insure loans that can produce a large "sticker shock" after a period of time, such as interest-only or negative-amortization loans. (In the interview, he put part of the blame for borrowers' not understanding these loans' terms on consumers. However, the administration has made the rise of such riskier products a key part of its FHA reform promotion.)
He also said his agency is interested in offering "graduated payment" products with essentially fixed rates and traditional amortization schedules. The HUD spokesman said that idea would require legislation. With such loans, the rates creep up in the first few years on a set schedule.
The regulatory changes Mr. Montgomery said he is proudest of making are "process improvements," particularly the reduction of the number of large case binders that are mailed in to get FHA insurance.
These were a staple of the program "when everyone else," including lenders that work with the Department of Veterans Affairs, "was pressing the send key on their computer," he said.
Since January lenders with good track records have been authorized to make loans insured without the FHA's prior review and later deliver files to the agency electronically. Today about half its loans are processed this way, Mr. Montgomery said.
He also cited a change to appraisal guidelines that had required, as he put it, that "a wobbly doorknob or cracked window pane" be fixed before an appraisal could be used.
Product changes "were going to be all for naught if we didn't improve our processes, and the realtors and mortgage bankers and brokers essentially told me that," he said. "Lectured me on it, actually."
Other regulatory changes have included allowing more types of closing costs and higher cash-out refinancing limits.
LENDER RELATIONS
One passing comment underscored how much Mr. Montgomery has already taken his charge to heart. It came when he was asked about the consolidation of FHA business among a small number of large lenders, in particular in light of Washington Mutual Inc.'s recent exit from government lending, as it sold its servicing portfolio and operations to Wells Fargo & Co.
Wamu "basically said it didn't fit their future business model, which seemed a little odd to me, that low-to-moderate-income borrowers and veterans didn't fit," Mr. Montgomery said.
He then praised the commitment by Wells and Countrywide Financial Corp. to FHA lending. He also noted that Bank of America Corp. recently opened a 125-person fulfillment center (with a 200-person capacity) in Jacksonville, Fla., that does only government lending and is part of the Charlotte company's effort to get bigger in the business. (He visited the center during a ceremony last month.)
Allen Jones, the head at government lending at B of A, which is strongly considering starting to make such loans through brokers next year, has worked inside HUD and on projects with it since the 1980s, including under the previous FHA commissioner. He joined B of A in 2004.
He said last month that Mr. Montgomery's changes have made B of A only "more enthusiastic" about its decision to ramp up in his area - a decision made before Mr. Montgomery arrived on the scene.
"I've walked those halls for 20 years now, and you really do see … a real breath of fresh air in the department," Mr. Jones said.
