Magazine article Mortgage Banking

Putting FHA Back on Track

Magazine article Mortgage Banking

Putting FHA Back on Track

Article excerpt

AT THE MORTGAGE BANKERS ASSOCIAtion's (MBA's) National Policy Conference in mid-April, Department of Housing and Urban Development (HUD) Secretary Alphonso Jackson said something that was music to the ears of the gathered MBA members: He wants the new Federal Housing Administration (FHA) commissioner to develop a plan to "get [FHA's] share of the market back." Jackson's marching orders for his new commissioner are great news for MBA members.

Over the past several years there has been a steady decline in FHA's market share, along with a deterioration in the quality of its portfolio. These trends threaten the long-term viability of FHA and must be reversed.

As you know, FHA is not just a government program that tries to do good things. It is a government program that has done its job for nearly three-quarters of a century in a way that works well with private industry.

FHA helps more minorities own homes. In 2003, 30 percent of FHA loans were made to minority families--nearly double the rate of the conventional market (16 percent). In fact, FHA insured as many loans to African-American and Hispanic homebuyers in 2003 as Fannie Mae and Freddie Mac combined. This at a time when the black and Hispanic home-ownership rates, at about 49 percent, lag far behind that of white households, at about 76 percent.

FHA helps more lower-income families own homes. In 2003, more than half (58 percent) of FHA loans went to households earning less than $50,000, compared with 26 percent of conventional loans. And nearly 80 percent of all FHA loans made for home purchases go to first-time homebuyers.

The bottom line is, without FHA many of these families would not own homes at all. This country needs FHA. And FHA pays for itself. The fees collected pay for the programs' operating expenses. In its 70-year history, FHA has never needed any kind of bail-out.

So you have this great success story with FHA insuring almost 30 million home mortgages since 1934. But on the other hand, you have a program that has gone from a 12 percent market share in 1994 (making one out of every eight loans) to a 3.5 percent market share in 2003--that means only one out of every 28 loans was done through FHA. And early indications are there was more market-share slippage in 2004 and in the first quarter of 2005.

Somehow, FHA is on the road to oblivion. How is this happening?

The main culprit is oversight obsession. If you look at the types of rules and policies that have been coming out of the agency over the past five to 10 years, they have all been in response to quality-control concerns raised by the various entities that watch over FHA: HUD's Inspector General, the Office of Management and Budget (OMB), the Government Accountability Office (GAO), even the U.S. Congress.

Whenever these players do a study on FHA, they end up focused not on FHA's solvency or the important way it supports underserved borrowers--but on how FHA needs to purge the system of any possible abuses.

To be sure, there have been problems with some of the FHA programs over the years. But, in my opinion, this obsession isn't driven by outrageous abuses or disproportionate defaults. It is driven by an intolerance for any abuse in any aspect of FHA operations.

This approach is both unrealistic and counterproductive. Abuse is not unique to government programs--all private mortgage lenders and mortgage insurers must tolerate some risk. Only the government has the luxury of being able to focus on this exclusively, in a way that, ultimately, will kill the patient through the cure. …

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