Agency Seeks Additional Power to Boot Bad Lenders

HUD secretary Shaun Donovan called the increase in enforcement authority “a critical step.” Photo: Bloomberg News.

The Department of Housing and Urban Development is renewing its efforts to get Congress to pass legislation that will give the Federal Housing Administration additional enforcement powers.

The House passed a FHA reform bill by a 402-7 vote last summer that would have strengthened the agency’s hand to expel bad lenders from the single-family program and seek indemnification from all direct endorsement lenders.

But last-ditch efforts to bring the FHA reform bill (H.R. 4264) up for a vote in the Senate last December failed.

Now it is a new Congress and HUD secretary Shaun Donovan is pressing House leaders again to pass a FHA reform bill.

“Increasing our enforcement authorities is a critical step and we have four specific proposals enhancing our ability to increase returns,” he told House appropriators last week. One of the proposals is new and it would allow FHA to transfer servicing to reduce losses and better assist borrowers. That was not in H.R. 4264 last year.

The secretary indicated the enforcement powers would help FHA press claims against lenders and improve collections on its older legacy loans. That would reduce losses to the FHA mortgage insurance fund.

The FHA single-family program is projected to have a $4.3 billion surplus for fiscal year 2013, which ends Sept. 30. But the FHA reverse mortgage program is projected to have a deficit of $5.2 billion.

To cover the difference, FHA may have to seek $943 million from the U.S. Treasury to cover the losses later this year.

HUD would like to avoid such a draw. And it could avoid a draw if FHA improves its collections on old defaulted loans that were originated before FY 2010.

Fortunately, newer loans are performing much better.

“We are making significant money on new loans,” the secretary testified.

HUD estimates that FHA’s insured portfolio estimates will generate $18 billion in receipts in FY 2013 and almost $13 billion in FY 2014.

The lower receipts in FY 2013 are due to an expected reduction in FHA loan volume.

FHA has been raising insurance premiums over the past few years, which is making loans guaranteed by Fannie Mae, Freddie Mac and the Department of Veterans Affairs more attractive to borrowers.

In addition, FHA will require new borrowers to pay annual premiums over the life of the loan. Annual premiums will not be canceled when the loan-to-value ratio hits its 78%. This new policy goes into effect June 3.

FHA’s market share peaked at 21% in 2010 and it fell to 16.5% at the end of 2012.

FHA lenders originated $318.5 billion in single-family loans in FY 2010 compared to $226.5 billion in FY 2012. FHA estimates originations will total $189 billion in FY 2014.

FHA’s market share is shrinking. However, it remains elevated “primarily due to the substantial decrease in the size of the total mortgage market,” the secretary said.

“As the market continues to recover and private capital returns at more normal levels, FHA’s role will naturally recede,” he testified.