How DOGE could shrink federal housing spending

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As the Trump Administration looks for cost savings at HUD and FHFA, they are learning that things that seem easy to achieve on the surface can be far more complex in practice. After the relatively easy task of headcount reductions, for example, the Trump team faces a morass of under-managed federal housing programs and subsidies at HUD that are not easy to unravel.

A major obstacle to finding savings at FHA and the GSEs is that credit costs are very understated thanks to soaring home prices. Even as the supply of unsold homes accumulates around the country, the averages for home prices in many markets continue to rise. There may appear to be a lot of capital inside FHA's Mutual Mortgage Insurance (MMI) fund, but when home prices correct downward, the cost of default rises and that capital will disappear.

As the Trump Administration looks for savings and economies inside the bloated federal housing complex, the most obvious opportunity is to return defaulted assets to the private sector and reduce the government's continuing expense as a landlord. 

In the world of credit ratings, the value and therefore probability of default of a mortgage loan is a function of the loan-to-value ratio, a metric that the Fed temporarily lowered dramatically in 2020. One of the perverse aspects of how the Federal Reserve Board boosted home prices before and after COVID is illustrated by an important policy conflict involving Ginnie Mae issuers and home foreclosures. 

In most but not all states, when a borrower defaults, the creditor is allowed to bid the amount of the debt owed on the mortgage and any allowable expenses. The creditor bids the value of the debt on the house in the foreclosure to prevent a cash buyer from taking a distressed home below the value of the loan. In April of this year, the FHA published an update to Claims Without Conveyance of Title Procedures, which is when an issuer sells the house without conveying it to HUD and then makes a claim for the cost of the buyout of the delinquent loan from the Ginnie Mae MBS. 

The Ginnie Mae guide at the present time says that the "Commissioner's Adjusted Fair Market Value (CAFMV), which is the estimate of the fair market value of the mortgaged property, less adjustments, should be the basis of any repayment to HUD. But the FHA field staff have been telling issuers for years to simply bid the amount of the debt plus allowed expenses so as to recoup the principal amount of the loan. Given high home prices, HUD naturally wanted to capture some of the upside. But issuers cried foul. 

Sources tell NMN that FHA is working on a Mortgagee Letter to address what has been inconsistent guidance. They think they can do this without having to go through formal rulemaking. The objective is to give uniform guidance to bid the amount of the debt, which is what is legally allowed in many states. The HUD position on the CAFMV conflicted with the laws in many states.

In judicial states like New Jersey, New York, Pennsylvania and Florida, for example, you bid the judgment amount in additional to the post-judgment interest and allowable expenses (taxes and insurance). Some states, issuers tell NMN, use the HUD definition for CAFMV in foreclosures sales. But the key point is that as home prices weaken, the cost of default to HUD and for servicing these loans will increase.

Another area of potential savings lies in the hundreds of thousands of loans and pieces of real property owned by the federal government. For example, FHA mortgage program has 7.8 million active loans. Nearly 14% of them are currently in default, but COVID-era credit waterfalls that conceal this serious delinquency end October 1.  

FHA also has hundreds of billions in exposure on reverse, multifamily and other commercial properties. The FHA Commissioner holds around 195,000 Home Equity Conversion Mortgages (HECM) loans that were repurchased by HUD from the servicer/investors upon maturity of a reverse mortgage. 

HUD has a contract with vendors and approved budget to do a property preservation, servicing fees through Compu-Link, FHA required appraisals and occupancy checks on the regular basis.

"If we figure on average $1,000/mo/property to hold it on HUD's book, the annual cost of property maintenance and servicing of the HUD portfolio is over $2 billion," estimates Alex Goldovsky, CEO of ProTitle.

The tested method used by previous administrations to reduce risk to the taxpayer is to utilize HECM property sales to private funds, but sales have stopped since the start of the Trump Administration. Because of ultra-low or even zero default rates on conventional and jumbo 1-4 family collateral, NPL sales by the GSEs and banks have also dried up. Why even ask HUD for reimbursement when the defaulted loan has an LTV below 50? 

The Street is hungry for product and astute managers at HUD and Treasury should be able to get great execution for HECM loans and other assets. Selling the HUD inventory of reverse and forward mortgages will also improve the affordability of homes in markets where supply constraints are most acute. 

The homes owned by HUD will be sold at a significant discount with requirements for funds to offer them to first-time home buyers and, say, receive "bonus points" from FHA for preferential/ priority treatment on the next HECM auction. Focusing the terms of the HECM sales on first-time home buyers and veterans helps to manage the reputation risk inherent in a portfolio of mature HECM loans.

Dispositions of HUD's portfolio of residential and commercial mortgages in FY 2024 was less than $3 billion or 20 bps out of a total risk portfolio of $1.4 trillion, a remarkable statistic.  Sales from HUD's trillion dollar book in 2015 were $15 billion or 1.5% of the portfolio. Already elevated loss severities in multifamily assets and the likelihood of a home price correction ahead in residential mortgages means the disposals are likely to increase. 

Not only does the Trump Administration need to clean house at HUD and the GSEs, but the Federal Deposit Insurance Corp is sitting on billions more in moribund multifamily assets that the Biden Administration refused to sell left over from the sale of Signature Bank.