Dear FHA, Ignore the Doubters
The Federal Housing Administration's annual financial report demonstrates the outsize influence of reverse mortgages on the performance of its insurance fund, fueling a debate about whether those loans belong there.
Higher mortgage rates and other macroeconomic challenges may dampen lending under the Federal Housing Administration's single-family program, but they will produce a net benefit to the insurance fund. Here's why.
The Federal Housing Administration's unexpected windfall is already generating industry talk about another premium cut by the agency but FHA officials insist such discussion is premature.
The Federal Housing Administration can count 2015 as another successful marker in its management of the post-crisis period. But looking ahead to 2016, the FHA should be dubious about calls for it to reduce its mortgage market footprint.
FHA has continued to fulfill its mandate of insuring loans with an emphasis on families with lower credit ratings and limited down payment capabilities. And FHA has done this profitably — including rebounding from difficult times recently to once again meet its statutory net worth requirement. During the subprime mania of the last decade, as the big bank securitization machines and other private lenders went off the deep end, FHA did not relax its lending standards. Its market share plummeted to around 3%, but FHA escaped needing a major taxpayer advance — unlike Fannie Mae and Freddie Mac and other big companies that received bailout funds.
Private lenders exited the market when the crisis hit. Fannie and Freddie pulled back as they entered conservatorship. Thankfully FHA filled the void, at one point financing as much as 50% of all new home purchases. Without FHA, housing prices would have cratered — and losses on existing FHA and GSE loans would have increased by tens or hundreds of billions of dollars more. Taxpayers would have paid the price.
To handle its increased market share against the backdrop of falling home prices, FHA hiked premiums and tightened requirements for lower FICO score and low down payment borrowers. But it maintained its critical role of enabling credit access. In the end, FHA got the balance right: it fulfilled both of its statutory missions under Section 207(a) of the National Housing Act — serving borrowers and being financially responsible.
So where does FHA go from here? Some argue that the top priority should be to reduce market share, regardless of the consequences. This would be a mistake.
In fact, the Community Home Lenders Association argued that since mortgage credit is still generally tight, FHA should do more to serve borrower access. Almost two years ago, the CHLA was the first national association to call on FHA to cut premiums. Last January, FHA did exactly that, cutting premiums 50 basis points. The result was increased FHA loan volume, with more home purchases financed and more borrowers helped. At the same time FHA continued its progress toward financial strength.
FHA should continue on this trajectory, first by lowering annual premiums to their pre-crisis levels of .55% for most loans. FHA should also reverse the step it took in 2013 when it imposed premiums for the "Life of Loan". Continuing to charge borrowers after they have paid premiums for a decade is unfair and excessive. It is causing FHA to lose seasoned, low-risk loans as borrowers go to other sources to refinance.
FHA should also make prudent changes to make its condominium policies more flexible. Less support for condominium lending in the wake of the 2008 crisis was prudent as certain areas were overbuilt. But FHA condo loans are now defaulting at a lower rate than standalone homes. FHA should restore more balance to the program.
And FHA should explore other ways to improve access to credit for otherwise qualified FHA borrowers. FHA's Supplemental Performance Metric, which eliminated disincentives to lending to qualified lower FICO score borrowers, was a good first step. It is also critical that FHA pursue more flexible policies on indemnification for poor underwriting, including more balanced treatment under the False Claims Act. FHA should also responsibly enhance flexibility in its underwriting guidelines to reflect particular economic challenges that certain borrowers face, such as high student debt and being self-employed.
More than seven years after the crisis, the private sector is hopefully set to return to the mortgage market in a bigger way. But FHA should not arbitrarily pull back the reins in the hopes that the private market will rebound. FHA's role is still as important as ever.
Scott Olson is executive director of the Community Home Lenders Association.