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Industry leaders advise FHA on how to improve housing

Housing industry experts testified before the U.S. Senate Committee on Banking, Housing & Urban Affairs advocating for various solutions to strengthen the Federal Housing Administration’s financial stability Thursday.

While each panelist supported and acknowledged the overall positive efforts made by the agency, they had specific recommendations focused on key facets that would ensure the FHA’s continued strength and availability to homeowners.

For instance, the National Association of Realtors called for some additional changes to rules related to condominiums.

In 2012, the FHA updated the condominium rules, however President Gary Thomas of NAR suggested additional changes that will provide greater liquidity to this segment of the real estate market without causing additional risk to the Mutual Mortgage Insurance Fund.

“We support enhancements to the rules and limits relating to owner-occupancy, investor ownership, and delinquent homeowner association (HOA) assessments,” Thomas said. 

Furthermore, NAR called for the elimination of the owner-occupancy ratio requirement for FHA condo mortgages.

“Eliminating this requirement will allow more households looking for a principal residence to purchase condominiums, which are often more affordable, raise occupancy levels, and stabilize these developments and their communities,” Thomas noted. 

However, some questioning members of Congress suggested such a move would actually destabilize condo markets by turning them into rental units that devalue the investments of owners occupying accompanying units.

While the private mortgage insurance industry has gradually increased its market share in recent years, FHA remains the dominant player in the low down payment market for various reasons, which continues to jeopardize the agency’s financial health and also restrains the growth of the private sector, said President Teresa Bazemore of Radian Guaranty

As a result, reforms are seen as necessary to scale back FHA to its original purpose of supporting underserve borrowers and improve the agency’s financial position while enabling private MI, with its reliance on private capital, to be used by borrowers in the conventional market, Bazemore noted.

Recommendations by Radian include sharing the risk with the private sector, focusing FHA on low and moderate-income borrowers, reducing the level of the government guarantee, providing more flexibility for FHA premiums and avoiding government actions that unintentionally drive borrowers to FHA.

Additional issues facing the mortgage market that Congress is expected to address include the qualified residential mortgage rule and Basel III.

The proposed QRM rule would impede the availability of private capital to serve low-down payment borrowers and the U.S. taxpayer will be asked to bear even more of the risk associated with low-down payment borrowers, Bazemore said. 

“With the elimination of risky mortgage terms through the final qualified mortgage rule, the low down payment borrower is protected from entering into a risky mortgage. With the addition of responsible and independent second underwriting by a mortgage insurer, both the borrower and the mortgage securitizer can be protected,” the president added. 

Meanwhile, implementing Basel III poses significant problems in the proposed rule in “a unique proposal by banking regulators” to not recognize private MI as a risk mitigate when assigning residential mortgage credit asset risk-weightings based on a mortgage’s loan-to-value ratio.

“The final rule should continue the current treatment of private MI and permit banks to offset some of their capital with that of a qualified private MI, as this will significantly increase credit availability for first-time buyers without putting either the bank or taxpayer at risk,” according to Bazemore.

The National Reserve Mortgage Lenders Association believes FHA has the tools to meet its MMI Fund losses and supports the agency’s current and forthcoming implementations. 

For instance, there are a few adjustments that FHA can do by mortgagee letter, such as changing the principal limit factors – “something that they are currently doing to essentially implement a moratorium on the Fixed-Rate (full draw) Home Equity Conversion Mortgage Standard loan option,” said President and CEO Peter Bell at NRMLA.

He added, “However, there are other thoughtful, longer-term solutions to strengthen the program that currently require pursuing the formal regulatory development process.” 

Further changes the FHA would like to implement and Bell believes the mortgage industry would support includes requiring set-asides or escrows for taxes and insurance, introducing restrictions on initial draws and utilization of funds and establishing a financial assessment process, basically a new approach to underwriting.

From the Mortgage Bankers Association’s perspective further programmatic changes at FHA must balance three priorities including restoring financial solvency, preserving the housing mission and maintain its countercyclical role.

President David Stevens of the MBA provided various recommendations specifically related to reducing or eliminating risk layering.

“The key to further improving the credit quality of the portfolio going forward is to limit excessive risk layering. Doing so could make future FHA business even stronger than the 2010-2012 books,” Stevens said. 

Another reform, which FHA has begun to employ and MBA supports is to tier downpayment with credit scores and possibly other loan characteristics. By increasing the agency’s minimum downpayment requirement this would improve FHA’s risk profile on new business. 

“This step would increase the economic value of future books of business, but obviously would do nothing to reduce losses already on the books,” Stevens said.

By raising the minimum credit score to 620 from the required credit score floor for all borrowers would reflect the current market standard of private lenders, making FHA less subject to adverse selection based on its credit policy, according to the MBA president. 

Stevens added, “As the average FHA credit score has risen, performance of the corresponding books of business has greatly improved. Borrowers with extremely weak credit may be better served by credit counseling and a slower path to homeownership, rather than a costlier loan today.”

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