The MMI shield

By the time the calendar had turned to 2021, nearly 12% of FHA’s borrowers had not paid their mortgages in more than three months.

The nonpayments represented a 200% increase in the share of seriously delinquent mortgages at the agency since the onset of the pandemic.

Although “unlikely,” Morris wrote, if those borrowers do not resume payments when both the federal moratorium on foreclosures and the COVID-19 forbearance options expire, the resulting wave of defaults and foreclosures was “potentially unprecedented.”

“FHA’s senior management has not properly planned for, or managed, the unfolding crisis to protect the FHA’s MMI [Mutual Mortgage Insurance Fund] and the homeowners,” Morris wrote. “Immediate action is called for in this regard.”

By Morris’ own accounting, FHA’s office of risk management forecasted that, by the end of 2021, a quarter of its mortgages could be seriously delinquent. Since Morris wrote his letter, a slight decline in the serious delinquency rate has tempered those fears.

Still, industry experts are not discounting the risk to the agency (and therefore, taxpayers).

In interviews, former HUD officials described the risk-mitigation efforts to develop a process to allow loan modifications, and how the agency was working with large servicers to prepare for the onslaught of loss-mitigation. The meetings in which the most catastrophic scenarios were discussed were restricted to just a handful of officials, former appointees and staffers said.

HUD and the FHA did not respond to HousingWire’s requests for comment.

Despite preparations, former HUD officials and federal housing policy experts acknowledged that it is still unclear how significant the losses may be.

Indeed, several former officials emphasized how well-capitalized the MMI fund is — enough, said Michael Marshall, most recently HUD’s acting assistant secretary for policy development and research, to take significant losses.

“The MMI fund is better capitalized than it ever has been— possessing the highest ever recorded level of capital reserves, $78.9 billion, which is just $15 billion shy of what analysts believe is necessary to withstand losses similar to the 2008 financial crisis,” said Marshall.

Former HUD officials said in interviews that a foreclosure wave is unlikely, primarily because home prices have appreciated dramatically in the past year. Homeowners unable to make payments could simply sell their home and become renters.

But for the low- and moderate-income and first-time homebuyers FHA is charged with serving, and particularly for Black homeowners, exiting the housing market could erode hard-fought progress to narrow the wealth gap.

And once it’s gone, it’s not easy to get back. Joe Weisbord, who oversaw foreclosure prevention at Fannie Mae in the years following the Great Recession, said that when Black households lose their homes, they tend to be out of the market longer and are less likely to re-enter the market.

“They lose years of home-price appreciation that they can’t regain,” said Weisbord. “How much Black wealth is at risk in the event that someone is forced to sell their home today, versus in another five or 10 years?”

Replacing dino tech at HUD

As COVID-19 raged across the country, Morris wrote that HUD had rushed a modernization effort without sufficient oversight, timed to precede the November 2020 election.

The program, known as FHA Catalyst, was intended to transform the agency technology systems to a secure, flexible, cloud-based platform. The automated underwriting system would allow lenders to digitally apply for loans and receive eligibility decisions based on FHA’s rubric.

The program was hastily completed and the development was outsourced to Pyramid Systems, which had “limited previous experience” with FHA, Morris said.

Pyramid Systems, which completed a HUD pilot program with Wells Fargo on single family claims in April 2016, did not return a request to comment.

A “secretive group” coordinated work on the project, and there was “excessive pressure” to implement the automated underwriting system before the 2020 election, Morris wrote. The stakes for borrowers and lenders would be high: the new program was tasked with making decisions on as much as $700 billion of new single-family mortgage insurance each year.

Staff had concerns with how the program interfaced with FHA’s data system, but senior project leadership dismissed them, according to Morris. Actions to “mitigate the risks … were suppressed and not addressed,” Morris wrote in the letter.

In interviews, former HUD officials complained of HUD’s outdated computer systems, which one described as “a dinosaur.” Another said that the computers had been built on 40-year-old mainframes. Officials said that HUD was especially interested in updating the systems, which the person said were far inferior to Fannie Mae and Freddie Mac’s capabilities.

The modernization effort, at a cost of $42 million, was also a priority for FHA commissioner Brian Montgomery, who was, for a brief period, commissioner under the Obama administration. Although his second act at the agency would be short, updating the tech was among the items he hoped to accomplish.

“The idea that the development of Catalyst was not transparent is absurd,” Marshall told Housingwire. He added that HUD Secretary Ben Carson and Montgomery were regularly briefed on the project.

HUD officials touted the launch of the automated underwriting system as a “huge milestone” in October 2020. By the end of that month, FHA borrowers were using the Catalyst automated underwriting system.

By December 2020, Marshall said, Catalyst had processed 100,000 claims. It’s unclear how many claims Catalyst has processed since. 

On the outside looking in

Morris, one of the highest-ranking African American male officials at HUD, felt the new administration was ignoring his concerns and that he was not allowed to lead the transition process, as he believed he should.

He wrote that he was “not permitted access” to share his concerns with the Biden administration. And although the Presidential Transition Act stipulates that Morris should have led the changeover to a new administration, he was instead “denied access to the transition process,” he wrote. Morris does not explain why he was excluded from the transition effort, and it is unclear how receptive the incoming Biden administration was to the alleged problems Morris highlighted.

Morris declined to comment beyond confirming that he wrote the letter.

Since Morris wrote his letter, the Biden administration has allowed borrowers already in forbearance to further extend their forbearance for an additional six months. Biden’s $1.9 trillion American Rescue Plan sent direct payments to millions, and $10 billion to homeowners struggling to make mortgage payments.

Already there are some signs of improvement in the rate of seriously delinquent mortgages. At the end of February, the rate of FHA mortgages more than three months past due was only 10.35%, according to Black Knight.

Regardless of political allegiances — Morris noted in his letter that his “core values align” with the Biden administration — it’s typical for a new administration to bring on a new team of people to further its priorities.

Multiple sources with direct knowledge told HousingWire that Morris received a promotion during the Trump administration. Salary records show Morris received a modest salary increase from 2016 to 2018, from $161,800 to $162,900. Those sources also said that Morris was perceived as being close to former HUD Secretary Ben Carson.

After 23 years at the agency, Morris has experienced political shakeups from new administrations before. None in recent history, however, have been as tense as the leadup to the 2020 transition of power.

“It’s not easy being [a] career [official] at these agencies,” a former HUD official said. “Every four to eight years, their life is thrown into chaos.”