With the share of mortgage originations insured by the Federal Housing Administration tripling in the past year, some observers are questioning whether it can handle the additional risk it is taking on.
And if the housing bill making its way through Congress is enacted as expected (see
However, other observers and market participants say lenders are already tightening standards on loans headed for the FHA.
Last week, the agency began setting its mortgage insurance premiums according to the borrower's creditworthiness. Previously it charged all borrowers 1.5% of the loan balance up-front and 0.5% annually. Under the new structure, FHA's up-front premium ranges from 1.25% to 2.25%; an annual premium of 0.55% is charged only for high loan-to-value mortgages.
"By charging different premiums, FHA will operate like most other insurance companies," the Department of Housing and Urban Development said last week. "This premium structure will preserve lower premium costs for FHA's traditional borrowers, including low-income and minority families who have a strong credit history and save for a down payment."
But the housing bill, which the House approved Wednesday, contains a provision that would force FHA to revert to flat-fee pricing on Oct. 1. Conservative Republicans have seen risk-based pricing as an unnecessary expansion of the FHA's power, while some Democrats — including House Financial Services Chairman Barney Frank — are wary of the FHA's risk-based pricing plan, saying it could unjustly raise premiums for low-income borrowers.
Meg Burns, the FHA's director of program development, said in an interview Wednesday that the agency was "disappointed" by the housing bill's moratorium on risk-based pricing after Oct. 1 but that such a structure would not affect underwriting or eligibility.
"There was a negative reaction to risk-based pricing," she said, in part because FHA had not given Congress data showing that borrowers with the lowest incomes would pay lower, not higher, premiums. "Many low-income borrowers are cross-subsidizing our riskiest, higher-income borrowers," she said.
It would be "very frustrating" for the industry to have to convert its systems back to a flat fee structure, Ms. Burns said. FHA may also try to "carve out around the edges" higher premiums for some riskier products like FHASecure, she said.
In an interview Tuesday, Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, said the moratorium provision is one reason he opposes the bill. "If anything we've learned in the last two years, it's price for risk," the Alabama Republican said. "And knowing all that, they put a moratorium in this bill saying FHA cannot set premiums based on risk — that is just a step toward socialism."
David Hamermesh, the research director for consumer lending at TowerGroup Inc., an independent research firm owned by MasterCard Inc., said that, without risk-based pricing, FHA "could fall prey to some of the same problems that caused disasters at subprime lenders." However, he said, because the bill also would impose a fee on Fannie Mae and Freddie Mac to fund FHA programs, the agency would have a way to recoup insurance losses.
Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. in Washington, said FHA has become "the new subprime" and now is insuring the highest-risk mortgages with high loan-to-value ratios. "Risk-based pricing is what subprime lending did where the borrower paid more for a subprime loan, but nobody got the appropriate underwriting. Neither the borrower nor the investor was protected in any way," she said. "What is the point of the government pricing high premiums if the loan is unsound?"
But Todd Geiman, an executive vice president of the mortgage unit at National Bank of Kansas City, an Overland Park, Kan., subsidiary of Ameri-National Corp., said his lender and many others have set a minimum FICO score of 580 for FHA loans. "No one wants to write a bunch of loans that they have to buy back if they go bad," he said.
Because FHA requires that borrowers have a 12-month "clean history" of making their mortgage payments, risk is lower even with lower credit scores, Mr. Geiman said.
Brian Chappelle, a former HUD official and a managing partner at Potomac Partners LLC in Washington, said liquidity concerns have forced lenders to increase their due diligence and manual underwriting, "creating a built-in systemic protection" for FHA. "It's really not the government but lenders that are imposing their own standards because they won't get paid if a loan doesn't perform," he said.
Brian O'Reilly, the managing director of Capital Financial Solutions, a Washington consulting firm, said the bigger concern is how HUD and FHA will handle the volume of loans when liquidity returns to the market.
"The question is whether their operational capabilities can keep pace with the flood of originations," he said. "Their management would suggest they are thinking about the right things but there can be a disconnect in translating that into executable initiatives."
