2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
May 30, 2018
Mr. Brian Montgomery
Federal Housing Administration
Department of Housing and Urban Development
451 7th Street SW
Washington, DC 20410
Dear Commissioner Montgomery:
The Community Home Lenders Association (CHLA) writes to congratulate you on your confirmation as FHA Commissioner, and to offer our views and recommendations on FHA priorities.
The Federal Housing Administration (FHA) is a critical access to mortgage credit source, providing affordable lower down payment loans, particularly for 1st-time low and moderate income homebuyers, minority borrowers, and underserved borrowers in urban and rural areas. Thus, CHLA urges FHA to:
(1) Address premium overcharging to borrowers in the FHA Forward Loan program, by reducing annual premiums to .55% and ending its Life of Loan premium policy.
(2) Protect FHA’s critical access to credit role, rejecting calls to artificially reduce its footprint through policy changes such as limiting loans to 1st-time homebuyers, increasing premiums, reducing loan limits, and other constrictive actions.
(3) Make other important policy changes, including finalizing pending proposed condo flexibility changes, increasing the permissible lender assumption fee from $900 to $3,000, and asking Congress for an extension of lapsed authority under HERA to use $25 million a year in FHA profits for IT and other technology upgrades.
Addressing the Over-Charging of FHA Premiums
FHA has a responsibility to taxpayers to run the FHA single family loan program in a sound financial manner. FHA accomplishes this through: (1) Underwriting standards and the charging of premiums commensurate with risk, (2) Neighborhood Watch, requiring all lenders to control their delinquency levels, (3) Indemnification, to penalize loans that don’t meet underwriting standards, (4) Lender financial ratios and Quality Control, to ensure the integrity of individual lenders, and (5) Loss Mitigation requirements, to reduce claims rates and loss severity levels.
FHA also has a responsibility to take actions as and when needed to maintain the Net Worth of the MMIF Fund at a level above its statutory 2% Net Worth benchmark.
However, by any objective performance metric, the FHA single family Forward Loan program’s finances and performance are very strong:
(1) The Administration’s FY 2019 budget estimates that newly originated FHA single family Forward Mortgage loans will produce a net profit (negative credit subsidy) of 3.2% on each new loan – contributing $7.36 billion in net profits to taxpayers next year.
(2) The 2017 FHA MMIF Actuarial Report shows a 3.3% Capital Ratio for the FHA single family Forward Mortgage program, with an Economic Net Worth of $38.413 billion.
(3) FHA’s serious delinquency (SDQ) rate declined in FY 2017 from 4.92% to 4.32% – a level less than half the 9.92% level in 2012 (the rate spiked in December because of hurricanes but has receded back down recently). Moreover, both claims rates and loss severity rates continue to fall – with claims down 22% in the first six months of FY 2018.
Therefore, CHLA urges FHA to cut the annual premium from the current .85% to .55%.
This would restore annual premium levels to the levels in place prior to the 2008 Housing Crisis and would build on the January 2015 annual premium cut from 1.35% to .85%. That previous premium cut was highly successful, as noted in HUD’s 2015 “Annual Performance Report.” That report concluded that the premium cut reduced annual mortgage payments by an average of $900 a year and resulted in 75,000 additional homebuyers in the first 8 months after the cut – which in turn increased FHA revenues by $1.5 billion because of the increased volume.
If FHA is concerned about the immediate impact of an annual premium cut on the MMIF Net Worth, FHA could offset the revenue impact in the near term by increasing the upfront premium – and then reduce that level back down as the MMIF fund continues to improve. This approach has several advantages: (1) annual premiums have a more significant impact on loan affordability than upfront premiums, (2) Increased loan volume as more borrowers qualify for a loan would increase revenues, and (3) FHA would collect premiums more quickly, accelerating FHA’s cash reserves,
CHLA also calls on FHA to end its Life of Loan policy – by reversing the prior Administration’s action in 2013 to end the longstanding practice of terminating the charging of premiums after an FHA loan pays down to 78% loan-to-value (LTV). FHA should revert to the pre-2013 policy.
Last year’s Actuarial Report cited runoff from refinances as an important factor in reducing FHA revenues. Life of Loan premiums contribute to that runoff; in fact, prior to the 2013 action requiring Life of Loan premiums, FHA retained 50% of refinanced loans. That has declined to only 15%.
Eliminating life of loan premiums is also fairer for the borrower. By the time a loan reaches 78% LTV, premiums paid up to that point greatly exceed the original risk such premiums are intended to cover. This would also conform FHA policy to similar statutory requirements on non-FHA loans.
Protecting FHA’s Critical Role in Access to Mortgage Credit
There are calls to reduce the footprint of FHA, from both FHA competitors (private mortgage insurers and some large banks) and from those philosophically opposed to a government role in mortgages. These include calls for limiting FHA loans to 1st-time homebuyers, reducing FHA loan limits, increasing premiums, and other policy changes designed to reduce the number of FHA loans and borrowers. Such calls are defended both on the grounds that it is better to have private capital than government insured loans and on claims the FHA forward program is at risk.
There are many reasons why FHA should reject such calls for curtailing FHA. First, given FHA’s strong loan performance, CHLA believes this would be inconsistent with the FHA statute.
Section 202(a)(7) of the National Housing Act clearly identifies two equal operational goals for FHA: (1) “meeting the needs of borrowers” and (2) “minimizing default risk.” Simply put, FHA is statutorily required to balance the impact on borrowers with the impact on risk – and as noted in the previous section, FHA’s Forward Loan financial and performance metrics are strong.
FHA’s historic role has generally been to serve parts of the mortgage market that the private market is not adequately serving – with a focus on otherwise qualified borrowers with lower down payment capabilities and lower credit scores. Policies that arbitrarily reduce FHA’s role could have a significant detrimental impact on its critical role in serving low and moderate income, minority, and other underserved borrowers.
We note that the September 2016 Federal Reserve report, analyzing the 2015 FHA premium cut, concluded that “We find that lowering the annual MIP in 2015 substantially increased the number of loans to lower credit score, high LTV borrowers — who as a group rely heavily on FHA insurance.” Policies that move in the opposite direction by shrinking FHA would hurt these same borrower types.
Second, CHLA believes that would be a mistake to adopt a kind of Field of Dreams strategy (“If you build it, they will come”). Given the critical role FHA plays in affordable home purchase loans, it is risky to reduce FHA’s role, merely in the hope private capital will step in to replace it.
Instead, we should pursue more direct actions to encourage private mortgage capital. Congress just passed a bill giving banks a QM exemption and FHFA now requires that almost all new Fannie Mae and Freddie Mac loans have private capital in the form of credit risk transfers. We should pursue constructive policies to encourage private capital – instead of rolling back FHA.
Moreover, there is evidence that the FHA footprint is shrinking of its own accord – with volume down 21% in the first six months of FY 2108 (including purchase volume declining 13%).
Finally, it would be risky to pursue proposals such as limiting FHA loans to 1st-time homebuyers, as this would contribute to adverse selection, and put the FHA fund at greater financial risk.
Other Policy Actions
Finally, FHA should take other important policy actions which would increase homeownership opportunities, improve program performance, and reduce risk. CHLA urges FHA to:
(1) Finalize proposals to improve flexibility for FHA condo loans, including eliminating owner occupied percentages in condo developments and streamlining the certification process.
(2) Raise the permissible FHA lender loan assumption fee from $900 to $3,000 per loan, to keep pace with inflation. As mortgage rates continue to rise, use of the FHA loan assumption option will increase. Lenders should be adequately compensated for underwriting a loan assumption, or they will not carry them out, and borrowers will suffer.
(3) Ask Congress for an extension for the next five fiscal years of the authority under Section 2126 of the 2008 HERA legislation for FHA to use some of its over $7 billion in annual net profits to fund $25 million a year for IT upgrades, and other technology improvements.
Thank you for your consideration of these views and recommendations.
COMMUNITY HOME LENDERS ASSOCIATION