Tag Archives: taxpayer protection

FHA Annual Check-up

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The Department of Housing and Urban Development released its Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund. The MMIF fund is the FHA’s main vehicle for insuring mortgages. As we saw last week, FHA reverse mortgage (formally known as “Home Equity Conversion Mortgage” or “HECM”) portfolio is not doing so well. FHA standard (sometimes referred to as “forward”) mortgages are doing better, although their performance is also slipping.

The MMIF declined from its 2.35 percent FY 2016 Capital Ratio to 2.09 percent. This still exceeds its statutorily-required level of 2.00 percent.  The Economic Net Worth of the MMIF was $25.6 billion while the MMIF Insurance-in-Force was approximately $1.23 trillion at the end of FY 2017. The decline was driven by the negative Economic Net Worth of the reverse mortgage portfolio, as the capital ratio for the forward mortgage portfolio on its own was 3.33%.

The report contains a multitude of useful tables and charts about the FHA’s mortgage portfolio. The FHA has an 18 percent share of the mortgage market, which is pretty high. (Table A-2) Indeed, it is in the same range of its market share during the financial crisis years (2008-2010). The FHA remains a strong force in the first-time homebuyer market, with an 82.2 percent share. (Table B-2)

The FHA’s objectives for FY 2018 are worth reviewing:

Play a Significant Role in Disaster Recovery. In the wake of Hurricanes Irma, Harvey, and Maria, and wildfires in California, in FY 2017 and the first part of FY 2018, FHA has played a significant role in relief and recovery efforts in affected areas, while taking immediate actions to protect its Single Family assets and financial exposure. (78)

Make Necessary Changes to the Home Equity Conversion Program (HECM). During FY 2017, FHA revised the HECM initial and annual Mortgage Insurance Premiums (MIPs), and Principal Limit Factors (PLFs). These revisions were necessary to enable FHA to continue to endorse HECM loans in FY 2018, protect the program for seniors, and balance serving FHA’s mission with taxpayer protection. (79)

No less important than these objectives is the FHA’s second-to-last one, Technology Modernization:

FHA is working to update its systems over the coming years to allow the Agency to work more effectively with lenders participating in the program, while operating FHA with greater efficiency and control. The technology systems that support FHA’s Single Family business have an average age of more than 18 years, with the Computerized Homes Underwriting Management System (CHUMS) exceeding 40 years. Similarly, the systems supporting the servicing, default, claims and REO areas have an average age of 14 years. FHA’s systems have been maintained, modified and enhanced over the years, but it has become fundamentally difficult and exceedingly expensive to maintain systems beyond their usable life. FHA’s outdated systems make it more difficult to work with lenders and to collect and manage important data. FHA remains a largely paper-processing entity while the rest of the industry has increasingly migrated to digital processes. FHA needs systems that can capture and effectively process the extensive volumes of data now in use, with enhanced storage and processing capabilities to handle the migration from paper forms to digital ones. Additionally, FHA requires the ability to analyze and manage insured loans comprehensively over the many phases of the mortgage life cycle. (80)

When you stop and think about how bad the state of the FHA’s technology is, you think that maybe this should be their top priority.

Framing Bipartisan Housing Finance Reform

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photo by Jan Tik

The Bipartisan Policy Center has issued A Framework for Improving Access and Affordability in a Reformed Housing Finance System. The brief was written by Michael Stegman who had served as the Obama Administration’s top advisor on housing policy. It opens,

With policymakers gearing up to reform the housing finance system, it is worth revisiting one of the issues that stymied negotiators in the reform effort of 2014: how to ensure adequate access to credit in the new system. The political landscape has changed substantially since 2014. For those who are focused on financing affordable housing and promoting access to mortgage credit, the status quo—the continued conservatorship of Fannie Mae and Freddie Mac—may no longer be as appealing as it was during those negotiations. This brief draws upon the lessons learned from that experience to outline a framework for bipartisan consensus in this transformed political environment.

The “middle-way” approach described here is not dependent upon any one structure or future role for the government-sponsored enterprises (GSEs), though it does assume the continuation of a government guarantee of qualified mortgage-backed securities (MBS). It is this guarantee that forms the basis of the obligation to ensure that the benefits flowing from the government backstop are as broadly available as possible, consistent with safety and soundness and taxpayer protection.

In recent months, at least three such proposals have been developed that preserve a federal backstop (see Mortgage Bankers Association, Bright and DeMarco, and Parrott et al. proposals). Should the administration and Congress pursue a strict privatization approach to reform, lacking a guarantee, it’s unlikely that any affordable housing obligations would be imposed in the reformed system. (cover page, footnotes omitted)

Stegman goes on to describe “The Affordable Housing Triad:”

Over the years, Congress has made it clear that the GSEs’ public purpose includes supporting the financing of affordable housing and promoting access to mortgage credit “throughout the nation, including central cities, rural areas, and underserved areas,” even if doing so involves earning “a reasonable economic return that may be less than the return earned on other activities.” As part of this mandate, policymakers have created a triad of affordable housing and credit access requirements:

  1. Meeting annual affordable-mortgage purchase goals set by the regulator;
  2. Paying an assessment on each dollar of new business to help capitalize two different affordable housing funds; and
  3. Developing and executing targeted duty-to-serve strategies, the purpose of which is to increase liquidity in market segments underserved by primary lenders and the GSEs, defined by both geography and housing types. (1, footnote omitted)

The paper outlines three bipartisan options that would not

compromise the obligation to provide liquidity to all corners of the market at the least possible cost, consistent with taxpayer protection and safety and soundness. Each option attempts to ensure that the system as a whole provides access and affordability at least as much as the existing system; includes an explicit and transparent fee on the outstanding balance of guaranteed MBS; and includes a duty to serve the broadest possible market. (3)

The paper is intended to spark further conversation about housing finance reform while advocating for the needs of low- and moderate-income households. I hope it succeeds in pushing Congress to focus on the details of what could be a bipartisan exit strategy from the endless GSE conservatorships.