The Federal Housing Administration's financial statement for fiscal 1992 indicates that its single-family mortgage insurance program had its best vear since 1984. American Banker reporter Christopher Noble recently discussed the reasons for the performance with Brian Chappelle, staff vice president of the Mortgage Bankers Association of America.
Q.: Why is the FHA better off than was previously thought?
CHAPPELLE: Because the FHA made changes in the late 1980s to address problems in the program. First of all, they tightened underwriting requirements. And they also tightened by requiring that anybody who assumes an FHA mortgage receive credit approval.
We feel those steps, coupled with the improved economic environment, particularly in the Southwest, were what was needed to help the program.
Q.: How did the FHA get into trouble?
CHAPPELLE: They didn't get into trouble, I guess. What happened was that the economic problems of the Southwest were devastating to FHA. Just to give you an idea, in 1986 more than half their claims came out of the six oil states.
The problems of FHA were really regionalized, and you shouldn't extrapolate from those specific problems that the whole program was in trouble.
Q.: How do you explain the change in FHA's condition?
CHAPPELLE: While the fund showed a $291 million profit in fiscal year 1992, the 1992 financial statement also showed that FHA's business dropped.
There was significant runoff of quality loans from FHA's portfolio, and that's very troubling to us.
The reason they were refinancing conventionally is the [insurance] premium was raised to such a level in the 1990 legislation that it discouraged anybody from refinancing with FHA.
Q.: Why is it bad for the quality loans to refinance out of FHA?
CHAPPELLE: Because FHA is an insurance program. Like any good insurance program, you've got to spread your risk.
Q.: Critics have said that low down payments and high loan limits were the downfall of FHA and that the 1990 reforms were needed to save the fund.
CHAPPELLE: On the mortgage limits, I completely disagree, because Price Waterhouse came out with a study last year which showed that higher mortgage amounts have lower default rates than loans with lower mortgage amounts.
With regard to the down-payment issue, there is no question that the more the down payment, the lower the risk. But the method of calculating the down payment should be simplified. The amount of the down payment has to balance trying to get lower-income people into homes with the risk issue.
Q.: Is there anything to the notion that if FHA keeps raising the loan limits, it will abandon the middle- and lower-income people it was meant to serve?
CHAPPELLE: We're only talking about 95% of median sales price in an area, so we're still staying below the average price.
While lenders do make more money on a higher-balance loan, they also have increasing regulatory responsibilities through Home Mortgage Disclosure Act or Community Reinvestment Act-type requirements.
Q.: When you talk about the new administration revitalizing the FHA, what would you like to see changed?
CHAPPELLE: Lower the insurance premium; simplify the calculation of the down payment. We're not looking to lower the down payment. We do agree that borrowers have to have an incentive to ensure that they're going to want to stay in the house.
Also, FHA needs to develop new products. Mortgage limits should be raised.
We're not looking to take the caps off. We just want to raise them so they're 85% of the Fannie Mae and Freddie Mac limit or 95% of the median sales price of the area. Delegate more responsibility to the lender.
We fully recognize that with this delegation, the lender picks up accountability for their actions. And we have no problem with being responsible for our actions.