The Federal Housing Administration (FHA), which insures mortgages to help underserved borrowers, is still feeling the sting of the foreclosure crisis. The agency has lost money on troubled loans, particularly those that originated in 2008 and 2009 during the housing bust. Because of these losses, the FHA does not have enough in its insurance fund to cover all expected claims over the next 30 years, according to its November actuarial report. But the agency is still strong and still has a crucial mission to carry out. So, what should be done to get FHA’s finances back in order and prevent unnecessary losses in the future?
Enabling the agency to better manage, price, and mitigate risk would help, Urban Institute President Sarah Rosen Wartell advised Thursday in her testimony before the Senate Committee on Banking, Housing and Urban Affairs.
Wartell proposed innovative strategies to allow FHA to respond effectively to rapidly changing market conditions. She noted that, unlike private mortgage insurers, FHA’s ability to mitigate risk is constrained by complicated rulemaking and legislative processes. For example, for three years, the agency has been trying to strengthen the indemnification process, which requires congressional approval of two key authorities: to force lenders whose loans do not meet agency guidelines to reimburse taxpayers for the cost of those claims, and to immediately stop known irresponsible lenders from originating FHA-insured loans. Despite near consensus among experts about the need for these additional authorities, FHA has had to continue insuring excessively risky loans without collecting appropriate penalties as it awaits required input from Congress.
Wartell’s recommendations included granting the HUD secretary emergency powers, subject to congressional oversight, to suspend or modify FHA insurance programs in times of crisis to quickly avert these risks. Additionally, she called for directing the HUD secretary to develop and continuously improve early warning indicators of risk and allowing FHA to offer higher salaries to recruit talented staff that can develop and run analytical and risk management systems.
While Wartell’s testimony offered concrete proposals, policymakers are sure to encounter more questions as they consider how to address FHA’s challenges: What does FHA look like in the context of broader housing finance system reform? How will changes to FHA’s practices affect private insurers’ market share? And most important, how can FHA best improve its financial situation while continuing to provide underserved borrowers with access to credit and serving as a countercyclical force in times of crisis? The next few months will be critical for the future of American housing.
The Urban Institute is partnering with Next City, Bank of America, the Penn Institute for Urban Research, and the National Building Museum for a panel discussion on “The Future of the FHA and Affordable Housing in Cities.” Sarah Rosen Wartell and other key leaders in housing, lending, real estate, and government will discuss the future of housing policy by examining the FHA’s role.
To learn more about housing finance system reforms, see the Bipartisan Policy Center’s Housing Commission report, which outlines a possible blueprint for changes.