The conversation on housing finance reform has revolved around the fate of Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs).
But the Federal Housing Administration (FHA) is just as critical to the housing finance system: having insured 13 percent of all single-family mortgages in the US for the past 84 years. The FHA also played a key role in the recovery following the Great Recession by keeping the mortgage market afloat and helping minorities and first-time homebuyers access credit.
Last week, a panel of experts convened by the Terner Center for Housing Innovation and the Urban Institute’s Housing Finance Policy Center discussed how updating the FHA should fit into broader housing finance reform. The discussion, moderated by Genger Charles from PwC, focused on suggestions recently offered by the Urban Institute’s Mortgage Servicing Collaborative and from a report by the Terner Center’s Carol Galante and Nate Shultz.
The experts agreed that reforming the FHA is critical to the fate of the US housing market and that changes should focus on addressing the FHA’s technological deficiencies so the agency can better serve homeowners and renters.
Structural reform is necessary to address the FHA’s operational deficiencies
Barry Zigas of the Consumer Federation of America noted that both the “inside game” and “outside game” need to be considered as we look to the future of the FHA. The inside game, he said, would address the reforms needed to keep the FHA functioning. The outside game would focus on the FHA’s long-term objectives and about how the FHA should interact with the GSEs or their successors.
These two themes emerge from the structural and practical challenges the FHA faces today.
For example, the FHA is understaffed despite being a $1.2 trillion agency. Carol Galante, who was FHA commissioner in the prior administration, described the FHA as “doing its job with two hands tied behind its back.” She proposed direct budget authority for the FHA, rather than through the US Department of Housing and Urban Development (HUD), and allowing the FHA to retain a portion of its insurance revenues. This would give the FHA more effective operational and risk management capabilities.
Outdated technology and computer systems also put the agency at risk. Adolfo Marzol, senior adviser to HUD secretary Ben Carson, agreed that “no matter what other reforms happen, FHA needs a strategy for technology modernization and better risk management, analytics, and modeling.”
Looking forward, what is the FHA’s role?
Experts largely agree on the need to expand the FHA’s operational capacity, but debate continues on who the FHA should serve. Galante suggested that the FHA focus on underserved populations through its product offerings, while maintaining access across the credit spectrum. She added that borrowers easily served by the GSEs or private market should use those channels instead.
Marzol pointed out that the 2015 FHA premium cut helped increase the FHA’s single-family origination share. “There’s some reasonable population that can shift between conventional financing where there’s private capital and FHA,” he said. “We’ve got to look at what FHA’s framework and footprint should be.”
Ed Golding, a former FHA acting commissioner, pointed out that the agency’s share of the single-family market is close to its long-term average. Golding also cautioned against “overdefining the role of FHA and its boundaries with the GSEs,” and argued that “the FHA’s role is not just countercyclical.”
Looking to the future, the FHA can do more to serve the condo and rental markets. As the FHA looks to continue opening the credit box, innovations such as evaluating loans based on alternative forms of credit and other measures of income will be the new frontier of ensuring broader access to homeownership.