Holistic approach needed to fix vital federal mortgage programs
In late March, the Trump administration sent a memo asking the Department of Housing and Urban Development and Treasury to develop plans and recommendations on housing finance reform, focusing on key federal mortgage programs that they oversee, such as the Federal Housing Administration, Ginnie Mae, Fannie Mae and Freddie Mac.
These programs are vital to firms like my own, Hallmark Home Mortgage; which, like countless other community-based independent mortgage bankers, rely on to create homeownership opportunities. These programs are especially crucial for qualified minority, rural, low-income, and other traditionally underserved borrowers.
At a recent roundtable hosted by the Community Home Lenders Association on these mortgage programs, we offered recommendations for improvements to the FHA. Heading the list was the importance of eliminating the FHA's "life of loan" premium policy. Enacted in 2013, this policy replaced the previous policy in which premiums expired when a loan paid down to a 78% loan-to-value ratio.
Life of loan premiums are unfair to FHA borrowers. Consider a family that Hallmark recently originated a $200,000 FHA loan for. That family is scheduled to pay $19,000 in FHA premiums by the time the loan pays down to 78% LTV — almost 10% of the home's value and many times over the risk that loan poses to the FHA. But under life of loan, the same family will pay an additional $15,000 over the remaining mortgage term. This truly undermines the asset building benefit of homeownership.
The life of loan policy is also financially harmful to the FHA, causing it to lose good quality loans and the revenue they produce. A January CoreLogic report found that the FHA has lost over 500,000 quality loans when "borrowers with good credit history and at least 20% home equity can eliminate their mortgage insurance premium." After life of loans went into effect, the percentage of refinanced FHA loans that FHA retained fell from 50% to around 15% today. We even see lenders and insurers market life of loan as a reason to refinance out of FHA.
Life of loan is also harmful to Ginnie Mae, which just issued a request for public comment on concerns about increases in prepayment speeds — a problem that FHA life of loan clearly exacerbates.
CHLA also released recommendations to modernize FHA, including: (1) allowing a higher pay scale to allow the FHA to retain skilled employees (an option other agencies like the FHFA and the FDIC have), (2) allowing FHA to use $25 million a year from its annual $7 billion in net profits to accelerate modernization of FHA IT, and (3) modernizing the FHA's underwriting guidelines to keep pace with the gig economy and to match flexibilities that Fannie Mae and Freddie Mac have implemented.
The homeownership achievements of the FHA, the Rural Housing Service and the VA would not be possible without Ginnie Mae to securitize the loans. Here, too, balance is needed. In a report on Ginnie Mae that CHLA released in January, CHLA commended Ginnie Mae for actions it took to prevent churning of loans and its focus on the risks of large issuers. But CHLA warned against actions that would drive smaller issuers out of the program and are not justified by the risk they pose.
The CHLA roundtable also explored the key role Fannie and Freddie play in our mortgage markets. Their recovery in the last decade has been remarkable. They have paid back their 2008 federal advance, plus an additional $85 million in profits for taxpayers. Also, major reforms have taken place, including ending the pernicious volume discounts under which the GSEs gave favorable pricing to large lenders like Countrywide and Washington Mutual, the end of no-doc loans, risk sharing to bring in private capital, and shrinkage of MBS portfolios and the interest rate risk they entailed.
The remaining steps are clear. The artificial profit sweep should be terminated, so Fannie and Freddie can rebuild capital. Other administrative steps should be taken to move towards the end of conservatorship, with the concurrence of Congress.
For all these reasons, the administration is to be commended for putting the focus on a holistic approach to making sure we have a housing finance system that helps Americans achieve the dream of homeownership, while promoting competition and protecting taxpayers.
The 2008 housing crisis was an example of what happens when we get this fine balance wrong. With careful and concerted forethought on the aforementioned matters, we should never have to experience a devastation like 2008 again.