How Trump can make the FHA more lender friendly
Regulatory relief has been a central tenet of the Trump administration's strategy to strengthen the economy. That philosophy could be applied to the housing market with changes to government-backed mortgage programs to improve access to credit and increase homeownership.
"I am working with the Congress on a pro-growth agenda of reducing rules and regulations, cutting taxes, and eliminating unnecessary government spending," President Trump said in a proclamation Thursday recognizing June as National Homeownership Month. "These policies will unshackle our economy and create and sustain high-paying jobs so that more Americans have the resources and freedom they deserve to fulfill their American dream."
But that may not be so easy when inventory of new and existing homes is so tight and lenders still skittish about easing up on credit standards. The FHA's gateway to homeownership could be wider if the Trump administration takes actions to reduce mortgage insurance premiums and clarify lender penalties under the False Claims Act, industry analysts said.
The National Association of Realtors "believes FHA insurance premiums can come down a bit because it has surpassed its capital reserve requirement," Lawrence Yun, the group's chief economist, said Thursday during a housing forum sponsored by the Department of Housing and Urban Development.
While HUD Secretary Ben Carson did not mention FHA premium reductions in his remarks at the housing forum, he said the agency has a "strong role to play" in the housing market, adding that "an estimated 40% of first-time borrowers use FHA."
The FHA's financial condition has improved over the past few years. And the FHA could lower its upfront fee from 85 basis points to 60 basis points, as proposed by the Obama administration.
The premium reduction was set to go into effect Jan. 27 but was placed on hold by the new Trump administration.
First-time buyers are typically less creditworthy than repeat buyers. And they are generally more dependent on FHA financing, as opposed to loans guaranteed by Fannie Mae and Freddie Mac.
The FHA tolerates lower credit scores and higher debt-to-income ratios than Fannie and Freddie. It also allows down payments as low as 3.5%. The average loan-to-value ratio for a first-time FHA borrower is 95.5%. For Fannie and Freddie first-time borrowers, the average LTV ratio is 86.5%, according to the Urban Institute.
Yun also stressed that it will be important to increase the supply of new homes to "tame house price growth and make housing more affordable to middle-class, first-time homebuyers."
Over the past five years, home values have risen 40% while wages have risen by only 10%. "We need to ensure there is an incentive for the homebuilders to build starter homes, more affordable homes," Yun said.
For the FHA to increase its market share significantly, the new administration "needs to create and enforce a clear and fair set of rules for lenders," said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute.
"Triple damages under the False Claims Act have to be re-examined," she said during a recent briefing with journalists.
The current approach to the enforcement of the False Claims Act has been a significant deterrent for depository institutions doing FHA loans.
FHA lenders have become cautious in their underwriting practices because of the huge penalties the Obama Justice Department levied on banks and nonbank mortgage lenders for alleged violations of the False Claims Act.
Many banks stopped originating FHA loans over the uncertainty surrounding the False Claims Act litigation. Today, nonbanks "originate 38% of all mortgages and an amazing 75% of FHA loans," according to a report by the investment banking firm Keefe, Bruyette & Woods.
Mayer Brown partner Laurence Platt told National Mortgage News that False Claims Act litigation continues to pose a threat to lenders.
"There are still False Claims Act cases out there and we're involved in a bunch," he said in an interview this week.
"We have had a couple of new ones, too. The Justice Department hasn't gone away," the Washington attorney added. "Hopefully the new administration will be little bit more business friendly."
HUD recently issued a loan defect taxonomy for identifying underwriting errors that lenders make in originating FHA-insured single-family loans.
Lenders began using the new taxonomy to detect underwriting errors on May 15.
However, the FHA has not implemented the loan sampling and penalty aspect of the taxonomy, according to consultant Brian Chappelle, a former FHA executive and co-founder of Potomac Partners, a mortgage industry consulting firm in Washington.
"The trouble is the taxonomy relies on judgment calls about what is considered allowable income, gifts and debts. If FHA started imposing financial penalties for taxonomy errors, it would have significant ramifications for the many lenders and the program," Chappelle said.
Goodman said the range of errors that are eligible for False Claims Act penalties should be made clear to lenders. "HUD should clarify that only the most serious category of errors in their loan quality assessment, which includes fraud and material misrepresentation, should be penalized under the False Claims Act."