As published in Scotsman Guide's Residential Edition, January 2010.
As the Federal Housing Administration (FHA) adjusts to its increased market position, it also faces highly publicized fiscal challenges. FHA Commissioner David H. Stevens set aside time to talk to us about the future of FHA and mortgage brokers' role amid recent changes.
The U.S. Department of Housing and Urban Development issued a rule proposal on Nov. 30 that intends to stop mortgage brokers from offering FHA loans directly to borrowers; instead, they must go through FHA-approved mortgagees, or lenders. Why? FHA does not have the resources to monitor thousands of mortgage brokers and ensure that they're manufacturing loans appropriately. Nor do we believe that the capital levels that were placed on brokers are anywhere near adequate to back up what they're underwriting.
Will brokers still be able to work with FHA products? Yes. We're going to behave very similarly to Freddie Mac and Fannie Mae. Brokers will be able to be approved by the lenders they sell their loans to for FHA.
What changes do you expect to result from this? I think it will have two outcomes. One, I believe more brokers ultimately will be allowed to originate FHA mortgages. For brokers, that's a good thing. Two, some of the bad performers will probably be cut off from being able to do FHA loans. That is better for the industry, it will be better for the FHA portfolio, and it puts the accountability for quality where the capital is. The capital lies with the lender.
Does the recent boom in FHA-insured lending concern you? Let me put it this way: We shouldn't be growing this fast. The growth of FHA really reflects what we need to repair in the housing-finance system — we need private capital to come back in. Long-term, FHA should return to its traditional role in the market and its traditional market-share level.
FHA's secondary reserve fund has dipped below a congressionally mandated level. Has FHA's growth dictated its fiscal concerns? What's hurting capital is not the new book of business. We're insuring the best-quality book in 2009 that we've ever seen. The problem is the '06, '07 and '08 books.
How does FHA plan to fix the shortfall? We're looking at every potential possibility, including all the obvious ones like mortgage-insurance premiums, downpayment requirements and FICO cutoffs. But if you overcorrect on the FHA portfolio, you stop the housing recovery. Quite frankly, our greatest lift to the capital situation would be to deal with holding lenders accountable if they originated loans outside of guidelines. We have increased our meeting schedule of the mortgagee review board — the body that has legal authority to take action against institutions that violate FHA policy — and recently have suspended or debarred many lenders. The bottom line is that lenders should be put on notice that FHA is more vigorously pursuing enforcement of its requirements.
How does increased enforcement help with the shortfall? By stepping up enforcement, we will help mitigate risk to the FHA fund. Also, we find that poor performance is often concentrated in select lenders. By stopping these lenders, we will stop the bad loans from coming in and improve the loss rates, which will improve capital.
Darrick Meneken is an associate editor at Scotsman Guide. Reach him at (800) 297-6061 or firstname.lastname@example.org.