‘I’m a budget nerd’: How new FHA chief is confronting pandemic
WASHINGTON — Dana Wade is taking the reins of the Federal Housing Administration during an unsteady time for the mortgage market.
The risk of delinquences remains elevated due to the pandemic, and Congress has not passed another round of stimulus to help the lower-income borrowers that the FHA traditionally serves.
The delinquency rate of FHA loans increased to 15.65% in the second quarter of this year, according to the Mortgage Bankers Association, compared with 6.09% in the first quarter.
But Wade — whom the Senate confirmed as FHA commissioner July 28 — says she's confident she can steer the agency through this challenging period.
She stands behind initiatives put in motion by her predecessor, Brian Montgomery, to address pandemic-related risks, including making FHA insurance available for loans in forbearance and requiring lenders to pay the agency for loans that enter foreclosure. (Montgomery is currently deputy secretary for the Department of Housing and Urban Development.)
While Wade plans to continue other policies spearheaded by Montgomery, like bolstering the agency’s capital reserve and updating the FHA’s complex servicing policies, she also intends to embark on a few of her own.
“We will step up and do whatever we can to make sure that we ensure market stability,” she said in an interview with American Banker. “But we know [the pandemic will] ... pass and we're going to have a strong, vibrant economy when it does. We'll be going gangbusters when the pandemic passes, and hopefully that happens soon.”
Wade is no stranger to the job. She served as acting FHA commissioner from July 2017 until June 2018. She then worked as the general deputy assistant secretary in HUD's Office of Housing before joining the Office of Management and Budget, where she worked as a program associate director for general government until December 2019.
She plans to put her budgeting acumen to use to stress-test the FHA’s capital reserves and possibly update an underwriting metric for mortgage borrowers with student debt. She also plans to monitor how policies of other agencies — like the Federal Housing Finance Agency — affect FHA borrowers.
“I am diving in right now and definitely hitting the ground running," Wade said.
The following interview has been condensed and lightly edited for clarity.
Under former Commissioner Brian Montgomery, the capital reserve ratio of the FHA's Mutual Mortgage Insurance Fund improved significantly. How concerned are you now about the fund, especially with delinquencies on the rise and no congressional stimulus in sight?
DANA WADE: I am definitely in the position where I see myself as the chief risk manager of FHA. That is my background. I'm a budget nerd, so I am digging into the numbers, and I am looking at the books on an hourly basis. I will say that one thing that has been incredibly important is that this administration has taken a lot of steps, including under the prior commissioner and including during my prior tenure as acting commissioner, to strengthen the capital position. Oftentimes you will get a lot of calls to lower mortgage insurance premiums, and this is something that always has to be evaluated very carefully. We took a lot of steps to manage the risk, to make the risk more transparent, to build capital and currently, FHA is well above its statutory 2% minimum level for capital. It's more than double.
Given the uncertainty and the challenges that have presented themselves during this time, having strong capital is what will help us weather the storm, and I cannot emphasize that enough. What we are really doing and what has been incredibly important to me in this role is stress testing the portfolio. We will be going through multiple scenarios — we’ll be using our own baseline, the president's economic assumptions, we'll be using the Moody's baseline, we'll be using several more pessimistic scenarios and making sure that we are fully projecting our losses and doing everything we can to understand what's coming down the pike. We do that on an informal basis, but of course, we'll be releasing that data to the public in November [when FHA releases its annual report to Congress].
Will you consider extending the FHA’s eviction and foreclosure moratorium past the end of this month? It’s currently set to expire Aug. 31.
We are looking at that. I think the president has made clear that HUD should, given this unprecedented pandemic, look at all of its resources to prevent evictions. And for the single-family portfolio, we do have that authority that we can do that administratively.
Fannie Mae and Freddie Mac recently said that starting Sept. 1 they will impose an adverse market fee on refinanced mortgages, which the industry has strongly opposed. Are you concerned that that fee will bring riskier refi borrowers to the FHA? And is the FHA considering a similar fee for its portfolio?
We are a different program. FHA is geared towards first-time homebuyers, low-income, moderate-income, minority borrowers, and so we do not have the same share of refinances. I think it's under one-third of our book. We are not looking at imposing a loan-level price adjustment at this time. We monitor trends, and so we will see what the impact of Fannie and Freddie and FHFA's decision to apply this fee is on FHA. We're monitoring it carefully. We have no plans right now to increase pricing for refinances.
Before you came aboard, the FHA implemented a policy on insuring new loans entering forbearance that requires lenders to be on the hook for 20% of the amount of the loan if it goes into foreclosure. How do you respond to lenders who say that policy is punitive and will limit access to FHA loans?
This policy has not limited access to credit. We have seen that with the data that we follow. It's a small percentage of borrowers that actually would find themselves in forbearance prior to endorsement, so no, it has not had a broad impact on availability of credit.
The indemnification at 20% was needed to protect FHA's risk. I appreciate the comments of the industry, [but] we have to balance what we do with our mandate, quite honestly. It is in the statute to protect taxpayers and protect the capital reserve position, and so we had to kind of build that in in order to account for the risk of those loans that would go into forbearance prior to endorsement.
A number of industry groups have called on the FHA to change an underwriting calculation that they say disqualifies borrowers with income-based student loans. Is that something you may consider?
I am looking at it. I am sympathetic to this issue. I understand where they are coming from. I know that FHA is out of step with some of the other government and quasi-government providers of mortgage credit. What we've heard from the industry is that this inflates the debt-to-income ratio for certain borrowers with student loan debt, especially those that have income-based repayment. However, FHA, compared to the conforming market, has a higher average debt-to-income ratio, and we accept higher DTI loans. So I'd want to balance any decision made with an overall look at what should be the right level of debt-to-income and our borrowers being too stretched. We want to provide good access to credit. We also want it to be sustainable for borrowers.
The FHA currently has a proposal in the works to streamline its servicing practices. How would you like to see FHA’s servicing practices change, and what is your ideal outcome for developing the current proposal?
I think first of all, we need to get rid of outdated practices that don't make any sense. You find a lot of times when you come to an organization or a government entity, people do things based on what has always been done, and frankly, the market has outgrown FHA's servicing policies. In fact, FHA takes some losses through the fund through servicing, through the asset disposition process, and so we know this is something that needs to be modernized. We've already worked a lot, and I started this when I was acting commissioner, to enhance the claims without conveyance of title. It's such a wordy term, but it basically allows us to dispose of assets before they become [real estate owned]. REOs are very costly for FHA. We don't like to see the REO inventory get too high, and so we look for alternatives to asset disposal. When a property sits vacant for too long, it has an adverse impact on the neighborhood. We've done a lot of really good things to get that turned around and get them off FHA's books and into the marketplace quicker.
HUD Secretary Ben Carson and Montgomery have focused on bringing banks back into the FHA program by providing some relief from requirements in the False Claims Act. Is this also a goal of yours, and if so, how do you plan to achieve it?
Yes, I would love to see banks come back to FHA, and there are a lot of reasons for that. The first is that, I think from the borrower's perspective, I would like to see them have as many access points to the market as possible. It's also a good thing for FHA, because banks have capital, and they have uniform standards for regulation. I think there's just a lot of variation in terms of the counterparty risk that we face by having over 85% of the lenders on FHA's books [as] nonbanks. So I like the capital; I like providing consumers as many access points to credit as possible.
I think this administration has taken action that will have a lot of staying power when it comes to the MOU with DOJ [and] when it comes to the expectation that we have set on uses of the False Claims Act — that it's really for the most egregious cases—and that we are continuing to use the administrative tools that we have, such as the Mortgagee Review Board to conduct enforcement in house, and basically provide clarity to lenders on penalties that are associated with the defects in their loan portfolios.