HOUSING FINANCE REFORM DEBATE: HOW CAN THE FHA MEET THE FUTURE NEEDS OF US HOUSING? #LiveAtUrban
Mission Critical: Retooling FHA to Meet America s Housing Needs Carol Galante January 9, 2018
FHA: An Important Component of the US Housing Finance System FHA Single-Family Forward Mortgage Endorsements January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 2
FHA: An Important Component of the US Housing Finance System Multifamily Endorsements January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 3
Serving the Underserved January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 4
Serving the Underserved January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 5
Serving the Underserved 33.3% of FHA endorsements served minority borrowers in 2017 18.2% Hispanic 11.7% Black 03.0% Asian In 2017, 37.7% of ALL minority borrowers using a mortgage to purchase a home did so with a mortgage backed by FHA January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 6
Principles of Reform FHA s focus must remain on underserved populations while also continuing to serve a broad spectrum of lower-wealth homebuyers Low down payments Long-term fixed rate loans Mortgage insurance premium pricing that averages pricing across the full range of credit risk A 100 percent insurance guarantee backed by the full faith and credit of the United States Government FHA must continue to be available as a countercyclical force in periods of economic stress FHA must have the tools and resources to manage its risks while executing its role and mission in the housing finance system January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 7
Better Target FHA s Programs Maximum Loan Limits FHA s maximum loan limit should be set at 100% of the median house price for a particular geographic region rather than the current 115% Loan Limit Methodology The use of smaller population-based geographic sub-regions (e.g. zip codes or census tracts) should be employed to better ensure that FHA s loan limits accord with actual market values in a given area Restrict Product Offerings Only purchase mortgages and refinances of existing FHAinsured mortgages (in normal times) January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 8
Structural Changes Restructure FHA to better align focus and resources: January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 9
Budget Authority Provide FHA a baseline appropriation, supplemented by retention of a portion of its insurance revenues. Comparison of Insurance Volume and Staffing Levels at FHA 2006-2016 January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 10
Capital Reserves Establish a new capital reserve standard that better accounts for tail risk Separate reserves for forward and reverse mortgage programs, and remove HECM from capital reserve calculation Provide FHA greater flexibility in loss mitigation strategies and use of operating capital to minimize losses January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 11
Management of FHA Operations Minimize red tape by permitting FHA to better exercise flexibilities afforded to government corporations Allow FHA to establish its pay scales with higher salaries for key positions Greater flexibility with regard to procurement and disposal of property January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 12
Emergency Powers Authority Grant FHA emergency powers under specified circumstances, which allow it to temporarily: Suspend or modify FHA insurance programs Receive an exemption from the Federal Acquisition Regulation (FAR), enabling it to more easily enter into contracts to expand consulting, research, and operational capabilities, and/or mitigate risk January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 13
Non-Legislative Policy Changes Provide certainty and transparency regarding lender certifications and liability Publish permanent policy governing mortgages for condominiums Update policies on deed restricted Affordable Projects Streamline and update loss mitigation and property disposition policies and procedures January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 14
FHA as Leader in SF Innovation A retooled FHA should lead in innovation and product testing to establish new means of safely and effectively addressing emerging affordable housing needs and opportunities, including: Lease-purchase options Dedicated single family affordable products, including for shared equity and long term rental Improve customer service via introduction of new technology that better interfaces with standard industry technology systems January 8, 2018 TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY 15
Thank you! Carol Galante, Faculty Director https://ternercenter.berkeley.edu
HOUSING FINANCE REFORM DEBATE: HOW CAN THE FHA MEET THE FUTURE NEEDS OF US HOUSING? #LiveAtUrban
FHA: Where We are Today Laurie Goodman Co-Director, Housing Finance Policy Center Urban Institute Terner Center and Urban Institute Washington, DC January 9, 2018
1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 FHA Share of Single-Family Originations, 1935-2017 FHA s share has averaged 12.8 percent over the entire period. FHA has played an important countercyclical role. 30% FHA share Average, 1935-2017 ± 1 standard deviation 25% 20% 15% 10% 5% 0% Note: 2016 and 2017 share based on estimates. Source: Inside Mortgage Finance, Mortgage Bankers Association, CoreLogic, and Urban Institute. 18
FHA disproportionately serves first time homebuyers First-Time Homebuyer Share 90% GSEs FHA GSEs and FHA 80% 81.6 70% 60% 50% 57.2 46.1 40% 30% 20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: embs, Federal Housing Administration (FHA ) and Urban Institute. Note: All series measure the first-time homebuyer share of purchase loans for principal residences. 19
FHA borrowers have weaker credit characteristics Comparison of First-Time and Repeat Homebuyers, GSE and FHA Originations GSEs FHA Characteristics First-time Repeat First-time Repeat Loan Amount ($) 226,878 250,283 201,996 225,734 Credit Score 738.4 753.7 675.0 681.5 LTV (%) 87.2 79.1 95.5 94.1 DTI (%) 35.1 35.7 42.2 43.4 Loan Rate (%) 4.15 4.02 4.18 4.10 Source: embs and Urban Institute. Note: Based on owner-occupied purchase mortgages originated in September 2017. 20
FHA disproportionately serves minorities Percent of purchase loans by channel and race/ethnicity FHA Black Hispanic Asian White VA Conventional All 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percent of purchase loans that are FHA-insured by race/ethnicity 45% 44% 11% 19% 23% Black Hispanic Asian White All Source: 2016 HMDA and Urban Institute. 21
3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 FHA Delinquency Rates vs. Conventional and VA Serious Delinquency Rates: Single-Family Loans Fannie Mae Freddie Mac FHA VA 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 3.86% 2.08% 1.01% 0.86% Source: Fannie Mae, Freddie Mac, MBA Delinquency Survey and Urban Institute. Note: Serious delinquency is defined as 90 days or more past due or in the foreclosure process. Data as of Q3 2017. 22
FHA origination is dominated by non-banks Non-bank Origination Share 90% 80% 70% 60% 50% 40% 30% 20% 10% Fannie Freddie FHA VA 82.4% 72.7% 54.8% 53.5% 0% 2013 2014 2015 2016 2017 Source: embs and Urban Institute. 23
Nonbank FHA originators have a wider credit box FHA FICO Scores by Originator Type FICO FHA All Median FICO FHA Bank Median FICO FHA Nonbank Median FICO 705 700 695 690 685 684 680 675 670 665 669 666 660 2013 2014 2015 2016 2017 Source: embs and Urban Institute. 24
Originators charge more for weaker borrowers; even though FHA does not do risk-based pricing Interest Rate 5.0 4.8 < 640 640 - <660 660 - <680 680 - <700 700 - <760 760 All 4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 Source: embs and Urban Institute.
Two steps to strengthen today s FHA 1. Remove uncertainty created by the False Claims Act. There are two ways to do this: - Improve the certification - Fully implement the defect taxonomy(fha s Single Family Housing Loan Quality Assessment Methodology) 2. Reduce the costs and complexity of servicing troubled loans - Allow for a unified timeline - Reform the conveyance process - Expand the toolkit to allow for successful modifications in a rising rate environment
False Claims Act Settlements and Litigation Firm Settlement Date Amount Citi Feb-12 $158.3 million Flagstar Bank Feb-12 $132.8 million Bank of America February 2012 (NMS), August 2014 (broader settlement) $1 bil (NMS), $1.85 bil (broader settlement) DB/Mortgage IT May-12 $202.3 million Chase Feb-14 $614 million US Bank Jun-14 $200 million SunTrust Sep-14 $418 million MetLife Feb-15 $123.5 million First Horizon/First Tennessee Jun-15 $212.5 million Walter Investment Management Corp Sep-15 $29.6 million Franklin American Dec- 15 $70 million Wells Fargo Apr-16 $1.2 billion Freedom Mortgage Apr-16 $113 million M&T Bank May-16 $64 million Regions Bank, Oct-16 $52.4 million Branch Banking and Trust (BB&T) Oct-16 $83 million Primary Residential Mortgage Oct-16 $5.0 million Security National Mortgage Co. Oct-16 $4.25 million United Shore Financial Services Dec-16 $48 million PHH Mortgage Aug-17 $75 million Allied Home Mortgage Capital/Allied Home Mortgage Corporation Sep-17 $296 million IberiaBank (LA) Dec-17 $11.7 million Litigation in Process Quicken Loans -- -- Guild Mortgage -- -- Source: Urban Institute, various press releases from the U.S. Department of Justice Office of Public Affairs, and other press reports 27
Urban Institute s Mortgage Servicing Collaborative Mortgage Servicing Collaborative: The purpose of the collaborative is to being the work of developing, analyzing and making recommendation for reforms that seek to improve access to credit for consumers and address lender reluctance to originate and service mortgages. Collaborative Members: National Servicers, depositories and nonbanks, community banks, credit unions, consumer and civil rights organizations, academics, specialty servicers/sub-servicers, trade associations, technology providers First Set of Issues Tackled by MSC: Improvements in FHA Servicing Government modifications in a rising rate environment 28
Cost of Servicing Servicing nonperforming loans is much more expensive than servicing performing loans. FHA servicing is still more expensive; servicing FHA nonperforming loans is 3 times as expensive as servicing GSE nonperforming loans. Performing Nonperforming $2,358 $2,386 $2,009 $1,965 $2,113 $1,246 $911 $704 $482 $59 $77 $90 $96 $114 $156 $156 $181 $163 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Mortgage Bankers Association Servicing Operations and Forum and Urban Institute. 29
Recommendations to Improve FHA Servicing Unified Timelines FHA currently has three timelines: one from first missed payment to first legal action date (the date foreclosure must be initiated), one from the first legal action date to the foreclosure auction and a third from the foreclosure auction to conveyance. There are interest curtailment penalties from the date of the missed deadline to conveyance; the penalties do not reflect the number of days of delay. There should be one unified timeline, as is the case for VA and GSE loans; this would provide for more flexibility in the loss mitigation process. FHA conveyance The FHA conveyance process does not have a counterpart in any other entity. For both GSE and VA loans, foreclosure is done in the name of the agency. On FHA loans, foreclosure is done in the name of the lender; the lender must then convey the property to FHA. This process takes a year, is very costly to all (FHA, lenders, and most important, to communities) and produces sub-optimal outcomes. To optimize the outcome, some properties should be improved before sale, others should not. In the short term, FHA should address the costly conveyance process by increasing the flexibility around conveyance alternatives (short sales, third party sales, foreclosure sales); in particular, the Claim Without Conveyance of Title Program could be improved. In the longer term, the conveyance issue should be improved by building a direct conveyance capability within HUD, or using the GSE REO disposition infrastructure. 30
Comparison of current FHA, USDA, VA, and GSE Modification Toolkits Rate reduction FHA mod. USDA mod. VA mod. GSE Flex Mod No more than Set rate to PMMS + Set rate to lower of original rate for 50 bps; rate PMMS or original traditional mods.; increase capped at rate no more than 1% PMMS + 50 bps for special mods. No more than PMMS + 25 bps Term extension Extend to 360 months Mortgage balance reduction Postmodification pooling Partial claim of up to 30% of defaulted UPB Re-pool at market rate; belowmarket-rate mods. at servicer expense Extend to 360 months for traditional or 480 months for special MRA of up to 30% of defaulted UPB (once over life of loan) Re-pool at market rate; belowmarket-rate traditional mods. at servicer expense Extend to 360 months No partial claim or MRA; principal forbearance at servicer expense Re-pool at market rate; belowmarket-rate mods. at servicer expense Extend to 480 months Forbear principal to 100% LTV, subject to cap of 30% of UPB or 80% MTMLTV a Held in GSE portfolios; belowmarket-rate mods. at GSE expense Note: : bps = basis points; FHA = Federal Housing Administration; GSE = government-sponsored enterprise; LTV = loan-to-value ratio; MRA = Mortgage Recovery Advance; PMMS = Freddie Mac Primary Mortgage Market Survey; UPB = unpaid principal balance; USDA = US Department of Agriculture; VA = US Department of Veterans Affairs. a MTMLTV, or mark-to-market loan-to-value ratio, is the unpaid principal balance of a mortgage divided by the current property value. It is a measure of how much equity (or negative equity) a borrower has in the home. Source: Urban Institute
Recommendations to Improve Government Modifications in a Rising Rate Environment The government modification toolkit is much more limited than the GSE toolkit. Government Modification Levers: reset to a market rate of interest (GSE loans allow for the rate to be set to the lower of PMMS or the original rate) term extension (to 360 months, GSEs allow 480 months) partial claim (up to 30% of UBP; VA has no mechanism to do partial claims at all) Solutions: (1) Partial claim with recast for FHA and USDA (i.e. modify mortgage within the pool to eliminate re-pooling. (2) Principal forbearance for FHA, USDA and VA) (3) Extend mortgage to 40 years (4) Create a balance sheet for warehousing modified, unsecuritized loans. Only the first two of these is viable in the near term. 32
HOUSING FINANCE REFORM DEBATE: HOW CAN THE FHA MEET THE FUTURE NEEDS OF US HOUSING? #LiveAtUrban