Editor: David Reiss
Brooklyn Law School

May 16, 2014

Wary of FHA HAWKing Mortgage Access

By David Reiss

The Federal Housing Administration issued its Access Blueprint: What FHA is Doing to Expand Access to Mortgage Credit for Underserved Borrowers. The blueprint identifies a serious problem:

The economic crisis significantly constrained credit making it tough for anyone with less than perfect credit to obtain a mortgage.

According to the Urban Institute, the average credit score for loans sold to the GSEs is 752. Currently, there are 13 million people with credit scores ranging from 580 to 680. Shutting these consumers out of the market hurts American families and undermines our efforts to build more stable communities, create pathways to the middle class, and increase homeownership opportunities for minority and low-wealth borrowers.

A healthy mortgage market serves all qualified borrowers. FHA is committed to finding ways to responsibly increase access for underserved borrowers. (3)

Unfortunately, the FHA’s solutions to this problem seem half-baked. The blueprint states that “Responsible access can be enhanced by ensuring borrowers are well-educated about the home- buying and mortgage finance process.” (3) Under the heading, Homeowners Armed with Knowledge (HAWK), the blueprint states that “Housing Counseling works.  Research shows a strong correlation between housing counseling and mortgage performance.” (4)

As the FHA should know, correlation is not the same thing as causation. It could be that those who have the traits that make them likely to sign up for housing counseling also make them more likely to make their mortgage payments. In fact, the scholarly literature on making people financially capable is not so comforting when it comes to decreasing credit defaults.

The blueprint has other disturbing passages that make one wonder if the FHA is keeping safety and soundness concerns as high priorities. For instance, it states that

FHA primarily selects higher-risk loans for review, e.g. loans evidencing payment challenges. FHA recognizes that this risk-based approach does not accurately reflect a lenders overall underwriting quality as it is primarily focused on non-performing loans. Going forward, we plan to expand our evaluation of loans to include random sampling of performing loans closer to the time of endorsement. This approach provides a more balanced view of underwriting quality. (5)

This is kind of the inverse of the old saw about the drunk who is searching for something for a long time under a lamp post.  When asked why he is looking so long and so unsuccessfully in that one place, he responds that that is is where the light is. FHA appears to be saying that it is going to be spending less time looking in the problem areas because that is where they are likely to find problems. What is that about?#@!?

Obviously, the FHA should be focused on promoting sustainable homeownership for “all qualified borrowers.” (3)  Obviously, the FHA should find ways to “responsibly increase access for underserved borrowers.” (3) What is not obvious is whether the FHA’s blueprint will achieve those goals.

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