Second FHA tour would be much different for Montgomery

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WASHINGTON — For Brian Montgomery, his second tour of duty at the Federal Housing Administration is likely to be substantially different than his first.

Nominated last week as FHA commissioner, Montgomery served in that role during the George W. Bush administration, when FHA’s single-family program was in dire straits and the financial crisis helped bankrupt its mortgage fund.

The situation this time around is much better — the FHA has a 5.02% delinquency rate as of June 30, compared with 18.5% at the end of 2007 — but it is likely to prove challenging in other ways.

For starters, the FHA is under growing pressure to reduce its premiums for its traditional single-family program, a move that could anger the Trump administration’s Republican allies in Congress. For another, the agency’s reverse mortgage program continues to lose money and is expected to report a loss for its fiscal year 2017, which ends Sept. 30.

“He comes to the job with experience. And he is extremely knowledgeable," said David Stevens, head of the Mortgage Bankers Association and a former FHA commissioner. "So he can hit the ground running.”

Though Montgomery was just nominated, he is expected to be approved relatively quickly, given his past experience in the job, and the lack of experience of his would-be boss, Housing and Urban Development Secretary Ben Carson, a retired neurosurgeon.

Over the past eight years, Montgomery has worked as a consultant and vice chairman of The Collingwood Group in Washington, which serves many of mortgage companies.

"So he will have a much better understanding of where FHA fits in the whole mortgage marketplace," said Brian Chappelle, a co-founder and partner of the consulting firm Potomac Partners.

The most pressing issue facing the FHA is whether it should lower its premiums again if the annual actuarial report, due out in mid-November, shows that the mortgage capital ratio exceeds 2%.

Under the current rate structure, home buyers pay a 1.75% upfront premium and an annual 85 basis point premium. The last reduction in the annual premium was in 2015.

If the report looks good and FHA exceeds it minimum capital ratio, that would “put pressure on the Trump administration to lower the FHA mortgage insurance premium," according to a trade group lobbyist who did not want to be identified.

But Stevens doubts the new administration would act quickly on a premium reduction. And he expects they will take their time considering how big a role FHA should play in the marketplace.

"Lower premiums would make their role bigger and that may be contrary to where the administration believes it should be," Stevens said.

Also, there is "unknown risk to the FHA fund due to the two big hurricanes that just hit. And HUD has a lot of exposure in Puerto Rico," Stevens said.

While the single-family mortgage program is likely to have performed well, the reverse mortgage program, also part of the capital ratio, is struggling. If the capital ratio is below 2%, that would put "pressure on Congress and HUD to separate the reverse mortgage program from the FHA single-family program," the lobbyist said.

Some are already advocating for this switch for the Home Equity Conversion Mortgage program.

"They need to separate the forward book from the performance of HECM book if they want to make a case for lowering FHA premiums for first-time homeowners," said Lynn Fisher, vice president of research and economics at the Mortgage Bankers Association.

HUD approved a premium reduction in the waning days of the Obama administration, but that was put on hold when President Trump took office. The decision is likely to fall to Montgomery after he is confirmed.

Fisher said it may be a tricky question, because it’s hard to know what a premium reduction will do to FHA purchase mortgage activity. "That's because of the shortage of new homes and it's going to take time for that production to meet the current demand," she said.

Many observers said the case for a further premium cut is straightforward given the performance of the single-family program and its low delinquency rate.

"The credit quality of FHA-insured single-family loans today is the best in 40 years," Chappelle said. “Are you going to effectively penalize first-time home buyers because of concerns about FHA's market share or using their premiums to pay for other HUD programs?”

During his first tour as FHA commissioner, Montgomery worked to modernize the single-family loan guarantee program and implemented electronic endorsements so lenders could get mortgage insurance certificates electronically.

Montgomery also streamlined the FHA 203(k) program, which provides financing for homeowners to renovate their homes. These 203(k) loans can also be used to rehabilitate homes after hurricanes and other disasters.

Montgomery is a "real proponent" of the FHA program and he is "well respected by the [HUD] staff," Chappelle said.

That may give him cover if he endorses a premium reduction. Republicans in Congress are likely to object to such a move, given concerns about government dominance of the mortgage market. Another premium cut could boost FHA’s market share.

Some lawmakers are also worried that another downturn in the housing market may be in the offing, leaving the FHA facing problems when the loans go bad later.

Basil Petrou, managing partner at Federal Financial Analytics, noted that it has been almost 10 years since the housing crisis. "After the long recovery, lenders and the secondary market agencies are loosening their lending standards again," he said.

The housing market moves in cycles and Montgomery should be "concerned about reducing mortgage insurance premiums at the wrong time," Petrou said, "which could lead to losses down the road."

Debt-to-income ratios on FHA loans have been going up and Fannie Mae and Freddie Mac are buying single-family loans from lenders with higher loan-to-value ratios. “Everybody is loosening up now,” Petrou said.

Since the start of the year, 40% of FHA purchase loans have debt-to-income ratios over 45% and more than a fifth have DTI ratios over 50%.

Adolfo Marzol, a senior housing adviser to Carson, recently told credit union executives that HUD officials are considering ways to reduce FHA mortgage premiums or make other changes to help first-time home buyers.

"We are exploring ways to bring more creditworthy borrowers into homeownership," he said.

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