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FHA Reform, Past, Present, and Future
 

FHA Reform, Past, Present, and Future

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Keynote address for the National Association of Mortgage Brokers Legislative Regulatory Conference

Keynote address for the National Association of Mortgage Brokers Legislative Regulatory Conference

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    FHA Reform, Past, Present, and Future FHA Reform, Past, Present, and Future Presentation Transcript

    • FHA REFORM:PAST, PRESENT & FUTUREEdward Pinto, Resident FellowAmerican Enterprise InstituteMarch 11, 2013The views expressed here are those of the authoralone and do not necessarily represent thoseof the American Enterprise Institute. nightmareatfha.com |1
    • FHA REFORM SUPPORTCOMMON CRITIQUES OF FHA OVER THE YEARS INCLUDE:*• Raised loan limits are counter to FHA mission• Imprudent appraisal practices• 100% guarantee causes problems• Poor underwriting practices impact first time and working class borrowers• Reform requires structural change “Mr. Chairman and Committee members, I would like to close by reminding you that this is far from the first time I have been before you to talk about the problems at the FHA. It’s time we finally got the FHA straightened out.” Gale Cincotta, 1998 FHA hearing “[H]ousing is the American dream, but there is nothing worse than a dashed dream. So if someone gets involved in a housing circumstance for which it is over their head and they have some of their real savings lost, and then they lose the house, you have a real issue of social cohesion.” Rep. Waters, 2000 Predatory Lending hearing *Additional quotes may be found in Appendix A. nightmareatfha.com |2
    • FHA CLAIMSAND CLAIM RATEWEIGHTED AVERAGE CLAIM RATE OF 12.54% FOR 1975-20113.14 MILLION FORECLOSURES AND 1 IN 8 FAMILIES1,800,000 35% FHA projected cumulative claim rate- note: annual claim rates do not exclude1,600,000 FHA-toFHA refinances (right axis) 30% FHA adjusted loan count (excludes streamline/FHA-FHA refi from 1983 on) left1,400,000 axis 25%1,200,000 Weighted average claim rate: Over 37 years (1975-2011 ): 10.63%1,000,000 20% Over 37 years (1975-2011 ): 12.54% (net of 4.5 million FHA-to-FHA refinances) 800,000 15% Actual and projected claims (foreclosures) 600,000 over 37 book years: 3.14 million families 10% Sources: 400,000 Loan count: HUD PD &R historical data 5% 200,000 Projected annual cumulative claim rate and FHA-to-FHA refinances: Annual FHA Actuarial Studies 0 0% Number of claims by year: Loan count (includes FHA-toFHA refinances) nightmareatfha.com |3
    • FHA LENDINGRISKIER THAN EVERVA AND FHA DELINQUENCY RATES 10% the FHA’s rate averaged 9%1946-1967 96%of the VA’s VA serious delinquency FHA serious delinquency 8% the FHA’s rate averaged1979-2000 118% of the VA’s 7% the FHA’s rate averaged 6%2001-2012 197% of the VA’s 5% 4%Working class families 3%with FHA loans 2%deserve better. 1%Sources: 1946-1967: John P. Herzog and James S. Earley, Home MortgageDelinquency and Foreclosure (Cambridge, MA: National Bureau of Economic 0% 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012Research, 1970), www.nber.org/books/herz70-1 and 1979-2012: MBA NationalDelinquency Survey. All data year-end, except 2012 data, which is Q2:2012. nightmareatfha.com |4
    • FORECLOSURECRISIS:CHICAGOHighest foreclosure ratesand greatest loan volumesare concentrated in workingclass zip codes nightmareatfha.com |5
    • FORECLOSURE CRISIS:QUADRANT OF DOOMIn Chicago, the highest foreclosure rates and percentage of loanswith FICOS greater than 660 are concentrated in working-class zipswhere incomes and home prices are below area median nightmareatfha.com |6
    • FHA VERSUS VAFHA AND VA AFRICAN AMERICAN LOAN GUARANTEE PERCENTAGESThe VA serves a greater percentage of African American families than FHA15% FHA African American Percentage VA African American Percentage14% Source: Mortgage Bankers Association, derived from Home Mortgage Disclosure Act.13%12%11%10% 9% 8% 7% 6% 2004 2005 2006 2007 2008 2009 2010 2011 nightmareatfha.com |7
    • PRACTICE COMPARISONVA FHA• Covers 25-50% of claim (est. average 25%) • Covers 100% of claim• Uses an appraiser panel • Does not use appraiser panel • Vets appraisers • Accepts state certification • Assigns appraisers by rotation • Allows lender to choose Since appraiser is independent of lender appraiser influence, appraisal quality regarding Appraiser is then dependent market value and property condition is on lender influence better assured• Uses a more comprehensive definition of • Uses a less comprehensive housing related obligations (includes utilities definition of housing related and home maintenance) and tests for residual obligations and does not test income to cover ability to pay other remaining for residual income household expenses nightmareatfha.com |8
    • STOP FINANCING FAILURE580-679 FICO BORROWERS HAVE ENOUGH CHALLENGES,HERE’S HOW TO BREAK THE CYCLE OF FAILUREBalance down payment, loan term, FICO, and debt-to-income (DTI) to achieve meaningfulequity and a Claim Termination Rate of 6.5% (includes an estimated 25-30% favorablereduction in CTRs due to impact of process improvements outlined in Appendices B-E). Maximum1 Maximum Equity @4 Claim termination rate (CTR)FICO Maximum total DTI Proposed loan term years2 under current / proposed policies3660 - Current: 98% 30 years 15% >50%/Aver=41% 7% CTR=10.7%679 95% 30 years <50%/Aver=37% 10% CTR-6.8% Current: 98% 30 years 15% >50%/Aver=41% 7% CTR=17%620 - 95% 20 years <50%/Aver=40% 16% CTR=5.9%659 90% 25 years <45%/Aver=35% 15% CTR=6.3% 85% 30 years <30%/Aver=25% 20% CTR=6.3% Current: 98% 30 years 15% >50%/Aver=41% 7% CTR=25% 90% 15 years <45%/Aver=37% 26% CTR=7.0%580 - 85% 20 years <45%/Aver=37% 25% CTR=6.9%619 80% 25 years <40%/Aver=32% 26% CTR=7.5% Current: 80% 30 years <35%/Aver=27% 24% CTR=11.8% nightmareatfha.com |9
    • FHA REFORM,A BIPARTISAN EFFORT• Sensible risk mitigation steps and time tested process reforms allow a return to core mission of supporting home purchases by first-time homebuyers and working class families • Insuring 580-679 FICO households at a 6% FHA claim rate is both desirable and feasible • Targets the substantial Ginnie/FHA subsidy to those who need it most — first-time homebuyers and working class families• 25% of all households (not homeowners) have a FICO of 580-679• Reduces competition with the private sector nightmareatfha.com | 10
    • APPENDIX AFHA REFORM SUPPORTLoan limits and FHA’s mission: “The first such ‘reform’ is a proposal to raise the FHA program’s loanlimits. Despite the fact that it is absurd to expand a program already in such a deep crisis, raising thelimits would move the FHA away from its mission of helping low and moderate income families achievehomeownership.” Gale Cincotta-1998 hearingAppraisal practices: “Since December 1994, private mortgage [lenders] who make FHA insured loanshave been able to select any licensed or certified appraiser listed on FHAs roster. Before that time,appraisals for FHA insured loans were conducted almost exclusively by a panel of fee appraisers whichFHA assigned to the lenders on a rotational basis….some appraisals did not reflect conditions weobserved that could adversely affect the structural soundness and continued marketability of the housesand the health and safety of their occupants.” GAO-1998 hearingLack of Appraiser independence: “Everybody knows the appraiser works for the lender and goes outthere—many times they just stay in their car. Its a three-room flat, vinyl roof; its got a garage, and its inthis neighborhood, and they check against other things.” Rep. Gutierrez-1998 hearingProblem with 100% guarantee: “The FHA is liberals’ nightmare of corporate welfare and profiteeringthat preys on minority and working-class people—since mortgage bankers can’t lose with the FHA’s100% guaranteed loan program.” Gale Cincotta-1998 hearing nightmareatfha.com | 11
    • APPENDIX AFHA REFORM SUPPORTImpact on first-time homebuyers and problem with 100% guarantee: “Because of the quandaryFHAs foreclosures present, the people who truly lose the most are the first-time homeowners. At theend of this process, they have nothing to show except a seven-year negative credit report with aforeclosed property. Mortgage bankers and brokers collect their fees, and lenders loan losses arecovered by the guarantee insurance they purchased from the FHA.” Rep. J. Jackson, Jr.-1998 hearingExcessive debt load: “Now the economists also say…if youre buying a house, it shouldnt cost morethan twice your income….say its a family with an income of ten thousand dollars, the house shouldntcost much more than twenty thousand. Well, Ive seen folk making ten thousand dollars, living in a forty-and fifty-thousand-dollar house. And you know they just barely make it….Never have anything to putaway for rainy days.” Martin Luther King, Jr. 1968Decades of FHA fraud, abuse, and neglect: “We have been fighting abuse, fraud, and neglect of theFHA program that has destroyed too many neighborhoods and too many families’ dreams ofhomeownership for more than 25 years.” Gale Cincotta-1998 hearingFHA finances failure: “They [HUD] point with pride to the thousands of families who get FHAmortgages every year. It’s a meaningless statistic if last month’s homeowners become next month’shome losers because of FHA-related foreclosures..” Gale Cincotta-1998 hearingNeed for structural change: “[S]ome structural changes must be made in the program or more low tomoderate first-time homebuyers may suffer…. Many opponents of FHA raise a valid point. The FHAneeds to be preventative instead of reactive.” Rep. J. Jackson, Jr.-1998 hearing nightmareatfha.com | 12
    • APPENDIX BVA’S ABILITY TO PAY PRACTICESThe VA requires underwriters to identify and verify income available to meet:• The mortgage payment• Other shelter expenses (includes utilities and maintenance)• Debts and obligations (includes job related expenses such as child care)• Family living expensesIf utilities, maintenance and job related expenses were added, the FHA’s average total debtratio would be increase from 41 percent to approximately 50 percent.In addition, the VA deducts federal, state and social security taxes from income and thenapplies a residual income test. Using a table derived from regional Census data (adjusted forfamily size and loan amount), an estimate of a family’s remaining living expenses is calculated.This sum is compared to the amount of the borrower’s residual income. VA’s minimumresidual income (balance available for family support) is used as an underwriting factor.Use of the VA’s ability to pay practices would protect working class home buyersand neighborhoods as well as reduce FHA’s default incidence and severity rates. nightmareatfha.com | 13
    • APPENDIX CREINSTATE APPRAISER PANELS• Panel members based on experience and geographical competence (VA) vs. state certified appraiser (FHA)• # of appraisers: 4500 (VA) vs. 55,000 (FHA). VA did 30 per cent of the FHA’s volume (2012) - Reopening of local panel based on need and as need arises additions based on competence (VA)• Assignment based on rotation (VA) vs. lender selection (FHA)• Quality control (VA) - By VA staff appraisers or designated lenders vs. minimal oversight (FHA) • Minimum of 10% of work is field reviewed (VA)• Tidewater initiative (VA): protocol to objectively address potential of a low valuation without compromising appraiser integrity and independence vs. FHA-not addressed.• While the benefits of appraiser panels are many, two merit special mention: - Appraiser independence takes away a tool of unscrupulous lenders who provide assignments based on “made as instructed”. • This would help FHA’s efforts in policing its mortgagees--a challenging task for FHA. - Appraiser independence results in greater identification of needed property repairs and shortcomings. • Example: repairs—VA standard is to identify obvious deficiencies and repair root cause of deficiency vs. with FHA, risk is if appraiser points out too many problems, won’t get future assignmentsUse of appraiser panels would protect working class home buyers and neighborhoodsas well as reduce FHA’s default incidence and severity rates. nightmareatfha.com | 14
    • APPENDIX DREDUCE FHA’s 100% MAX COVERAGE• FHA has experienced substantially higher serious delinquency rates than the VA for decades and are currently double the VA rate (2001-2012). • LTV comparison: VA loans have higher risk based on effective LTV at closing. • FHA = 97.5% (96% LTV + 1.5% upfront MIP fee) • VA= 103% (100% LTV + 2.25% upfront average funding or guarantee fee)• FHA pays 100% of the claim amount, while the VA pays 25-50%. • The average claim paid by FHA is $78,000 (63% of gross claim-estimate) while VA pays an average of $38,000 (25% of gross claim). • The average claim paid by the Ginnie/FHA MBS issuer is $9,000 (7% of gross claim-estimate) while the Ginnie/VA MBS issuer pays an average of $45,000 (30% of gross claim-estimate). • Both FHA and VA issuers are paid the same fees, however the FHA issuer absorbs a 7% loss (but on twice an many claims) while the VA issuer absorbs a 30% loss (but on half an many claims) . • Because of this difference, Ginnie underwrites its VA issuers more stringently than FHA issuers since the former pose a much higher counter-party solvency risk.FHA’s loss rate is an estimated 5 times the VA’s (2 times the incidence and 2.5 times the severity).The VA charges 1/3 the premium of FHA (on a present value basis).VA issuers absorb two times the loss percentage compared to FHA issuers for the same fee.** 30%/7%=4x loss %, but ½ the loss incidence. nightmareatfha.com | 15
    • APPENDIX EREDUCE SELLER CONCESSIONSIn July 2010, FHA Commissioner Stevens proposedeliminating seller concessions >3%.* • FHA allows up to a 6% seller concession vs. 3% for conventional market: • 82 percent of FHA-insured homebuyers make the minimum down payment of 3.5%. • Median concession is 4%. • The incidence of concessions and the average concession is highest for loans <$180,000 (lowest loan size for which FHA provided data). • 33% of loans below $180,000: seller concession of >3% (nearly 50% of loans >4%). • When concession is >3%, default rate 1.9 times that of loans where 0% (1/3 of FHA loans below $180,000 have a 0% concession. • When concession is >3%, default rate 1.3 times that of loans where >0% and <=3%. • In February 2012, Commissioner Galante proposed a limit of 3% or $6,000, whichever is greater.Concessions of >3% subject working class familiesand neighborhoods to needless foreclosure risk.* These are not the same as seller assisted downpayments, which Congress banned. The above statistics are from theFebruary 2012 proposal and are for FY 2009 and 2010, after the ban on seller assisted downpayments took effect. nightmareatfha.com | 16