Tag Archives: Federal Housing Administration

Underwriting Sustainable Homeownership

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Mesa-Mesa Journal-Tribune FHA Demonstration Home-1925" by Marine 69-71

I have posted Underwriting Sustainable Homeownership: The Federal Housing Administration and the Low Down Payment Loan to SSRN (and to BePress). It is forthcoming in the Georgia Law Review. The abstract reads,

The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. The FHA was created in large part to inject liquidity into a moribund mortgage market. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety of additional social goals. These goals included supporting civilian mobilization during World War II; helping veterans returning from the War; stabilizing urban housing markets during the 1960s; and expanding minority homeownership rates during the 1990s. It achieved success with some of its goals and had a terrible record with others. More recently, the FHA is in the worst financial shape it has ever been in.

Today’s FHA suffers from many of the same unrealistic underwriting assumptions that have done in so many other lenders during the 2000s. It has also been harmed, like other lenders, by a housing market as bad as any seen since the Great Depression. As a result, the federal government recently announced the first bailout of the FHA in its history. At the same time that it has faced these financial challenges, the FHA has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop using the FHA to do anything other than provide liquidity to the low end of the mortgage market. These critics rely on a couple of examples of programs that were clearly failures but they do not address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.

In order to demonstrate this, the article first sets forth the dominant critique of the FHA. Relying on often overlooked primary sources, it then sets forth a history of the FHA and charts its constantly changing roles in the housing finance sector. In order to give a more detailed picture of the federal government’s role in housing finance, the article also incorporates the scholarly literature regarding (i) the intersection of race and housing policy and (ii) the economics and finance literature regarding the role that down payments play in the appropriate underwriting of mortgages for low- and moderate-income households. The article concludes that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market. It further proposes that FHA homeownership programs for low- and moderate-income families should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. Such a proposal will ensure that the FHA extends credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts.

Principal-ed Reduction

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Torn Dollar

 

The Urban Institute’s Housing Finance Policy Center has issued a report, Principal Reduction and the GSEs: The Moment for a Big Impact Has Passed. It opens,

The Federal Housing Finance Agency (FHFA) prohibits Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) from unilaterally reducing the principal balance of loans that they guarantee, known as principal reduction. When director Ed DeMarco established the prohibition, he was concerned that reducing principal would cost the GSEs too much, not only in setting up the systems required to implement it, but also— and to him more important — in encouraging borrowers to default in order to receive the benefit. DeMarco’s position generated significant controversy, as advocates viewed principal reduction as a critical tool for reducing borrower distress and pointed out that the program the Obama administration had put forward to provide the relief had largely eliminated the cost to the GSEs, including the moral hazard. We believe that at the time the advocates had the better side of the argument.

The FHFA is now revisiting that prohibition, though in a very different economic environment than the one faced by Director DeMarco. Home prices are up 35.4 percent since the trough in 2011, adding $5 trillion in home equity and reducing the number of underwater homeowners from a peak of 25 percent to 10 percent. This means that far fewer borrowers would likely benefit under a GSE principal reduction program today. (1, footnote omitted)

Principal reduction was highly disfavored at the start of the financial crisis as it was perceived as a sort of giveaway to irresponsible borrowers. Some academics have disputed this characterization, but it probably remains a political reality.

In any event, I think this report has the analysis of the current situation right — the time for principal reduction has passed. But it is worth considering the conditions under which it might be appropriate in the future (for that next crisis, or the one after that). The authors make four  assumptions for a politically feasible principal reduction program:

  1. borrowers must be delinquent at the time the program is announced, in order to avoid the moral hazard of encouraging borrowers to default;
  2. borrowers must be underwater;
  3. the house must be owner-occupied; and
  4. the principal reduction is in the economic interest of Fannie and Freddie.

It is worth noting that during the Great Depression, the federal government figured out ways to reduce the burden of rapidly dropping house prices on lenders and borrowers alike without resorting to principal reduction much. Borrowers benefited from longer repayment terms and lower interest rates. Below-market interest rates are similar to principal reduction because they also reduce monthly costs for borrowers. They are also politically more feasible. It would be great to have a Plan B stored away at the FHFA, the FHA and the VA that outlines a systematic response to a nation-wide drop in housing prices. It could involve principal reduction but it does not need to.

Mortgage Credit Conditions Easing

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Home of Easy Credit

The Urban Institute’s Housing Finance Policy Center has released its July Housing Finance at a Glance. It opens,

Our latest update to HFPC’s Credit Availability Index (HCAI) shows early signs that the overly tight mortgage lending standards of the post-crisis period may finally be starting to ease. This HCAI update shows improvements for both GSE and FHA/VA channels. Between Q3 2013 and Q1 2015, the expected mortgage default rate increased from 1.8 to 2.1 percent (17 percent increase) for GSE originations, and from 9.6 to 10.8 percent (a 13 percent increase) for FHA/VA originations. The expected default rate for portfolio loans and PLS channels has remained largely flat at 2.6 percent over this period.

Long overdue, these improvements are largely a result of efforts to clarify put-back standards and conduct early due diligence. While the FHA has lagged the GSEs in these efforts, it has made some progress. Still, more needs to be done, especially to mitigate uncertain lender litigation risk arising out of FHA’s False Claims Act.

These improvements notwithstanding, there is still significant room to safely expand the credit box. Even if the mortgage market had taken twice the default risk it took in Q1 2015, that level would have still been below the level of default risk of the early 2000s. (3)

This excellent chartbook contains many very interesting graphs. I recommend that you look at the National Housing Affordability Over Time graph in particular. It shows that housing “prices are still very affordable by historical standards, despite increases over the last three years.” (16)

Tuesday’s Regulatory & Legislative Update

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  • The Federal Housing Administration (FHA) released a final notice, The Small Buildings Risk Sharing Initiative invites private sector lenders to partner with the FHA to provide long term fixed rate capital to small building owners with mortgages of $3 – 5 million. Lending under this initiative will be limited to properties which are willing to meet affordability requirements.  The FHA will guarantee 50% of the mortgages.  The FHA is also pursing a change to Section 542(b) of the Housing and Community Development Act of 1992  to allow SBRSI lenders to access capital through Ginnie Mae and to authorize securitization of the loans. In the mean time lenders can access low interest long term capital through the U.S. Treasury’s Federal Financing Bank.
  • The Mayor of Seattle has released an Action Plan to address the affordability crisis in that city, where 15-20% of the population is severely rent burdened and minorities are disproportionately impacted. The Mayor’s goal is to create 50,000 units over the next 10 years.
  • The U.S. Department of the Treasury has proposed a rule which, “provides for the enforcement of Title VI of the Civil Rights Act of 1964…to that end no person in the United States shall on the grounds of race, color, or national origin be denied participation in, be denied benefits of, or be otherwise subjected to discrimination under any program or activity that receives Federal financial assistance from the Department of the Treasury.”  The rule, open for comment until September 11, provides guidance to recipients and provisions for “consistent and appropriate enforcement.” The proposed ruled covers 12 programs including the Community Developments Financial Institutions Fund (CDFI).

New FHA Guidelines No Biggie

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Welcome_to_Levittown_sign

(Original Purchases in Levittown Funded in Large Part by FHA Mortgages)

Law360 quoted me in New Guidelines For Bad FHA Loans Won’t Boost Lending (behind paywall). It opens,

The federal government on Thursday provided lenders with a streamlined framework for how it determines whether the Federal Housing Administration must be paid for a loan gone bad, but experts say the new framework will have limited effect because it failed to alleviate the threat of a Justice Department lawsuit.

The U.S. Department of Housing and Urban Development provided lenders with what it called a “defect taxonomy” that it will use to determine when a lender will have to indemnify the FHA, which essentially provides insurance for mortgages taken out by first-time and low-income borrowers, for bad loans. The new framework whittled down the number of categories the FHA would review when making its decisions on loans and highlighted how it would measure the severity of those defects.

All of this was done in a bid to increase transparency and boost a sagging home loan sector. However, HUD was careful to state that its new default taxonomy does not have any bearing on potential civil or administrative liability a lender may face for making bad loans.

And because of that, lenders will still be skittish about issuing new mortgages, said Jeffrey Naimon, a partner with BuckleySandler LLP.

“What this expressly doesn’t address is what is likely the single most important thing in housing policy right now, which is how the Department of Justice is going to handle these issues,” he said.

The U.S. housing market has been slow to recover since the 2008 financial crisis due to a combination of economics, regulatory changes and, according to the industry, the threat of litigation over questionable loans from the Justice Department, the FHA and the Federal Housing Finance Agency.

In recent years, the Justice Department has reached settlements reaching into the hundreds of millions of dollars with banks and other lenders over bad loans backed by the government using the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.

The most recent settlement came in February when MetLife Inc. agreed to a $123.5 million deal.

In April, Quicken Loans Inc. filed a preemptive suit alleging that the Justice Department and HUD were pressuring the lender to admit to faulty lending practices that they did not commit. The Justice Department sued Quicken soon after.

Policymakers at the Federal Housing Finance Agency, which serves as the conservator for Fannie Mae and Freddie Mac, and HUD have attempted to ease lenders’ fears that they will force lenders to buy back bad loans or otherwise indemnify the programs.

HUD on Thursday said that its new single-family loan quality assessment methodology — the so-called defect taxonomy — would do just that by slimming down the categories it uses to categorize mortgage defects from 99 to nine and establishing a system for categorizing the severity of those defects.

Among the nine categories that will be included in HUD’s review of loans are measures of borrowers’ income, assets and credit histories as well as loan-to-value ratios and maximum mortgage amounts.

Providing greater insight into FHA’s thinking is intended to make lending easier, Edward Golding, HUD’s principal deputy assistant secretary for housing, said in a statement.

“By enhancing our approach, lenders will have more confidence in how they interact with FHA and, we anticipate, will be more willing to lend to future homeowners who are ready to own,” he said.

However, what the new guidelines do not do is address the potential risk for lenders from the Justice Department.

“This taxonomy is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in separate law. Nor does it address FHA’s response to patterns and practice of loan-level defects, or FHA’s plans to address fraud or misrepresentation in connection with any FHA-insured loan,” the FHA’s statement said.

And that could blunt the overall benefits of the new guidelines, said David Reiss, a professor at Brooklyn Law School.

“To the extent it helps people make better decisions, it will help them reduce their exposure. But it is not any kind of bulletproof vest,” he said.

Friday’s Government Reports

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  • Consumer Financial Protection Bureau report Credit Invisibles estimates that 19.4 million Americans will have difficulty accessing credit for lack of credit history. This trend is most pronounced in the young and in poor black and latin populations.
  • The Department of Housing and Urban Development report Examination of Alternative FHA Mortgage Insurance Programs for Financing Single Family Rental and Small Multifamily Rental Properties considers, among other things, whether FHA should play a greater role in financing for small multifamily properties. Possible benefits include: a greater supply of affordable rental housing, a more diverse stock of rental housing and neighborhood stabilization benefits if better financing options spur investment in distressed properties.

Monday’s Adjudication Roundup

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