There’s a battle getting under way on Capitol Hill that could affect the ability of hundreds of thousands of first-time and moderate-income families to buy a home with a low down payment.
It’s a fight over the nearly 80-year mission of the Federal Housing Administration to support homebuying by people who are otherwise cut out by the conventional marketplace. Their credit doesn’t quite make the grade; they don’t have a lot of cash; and they can’t jump through the underwriting hoops required by the big banks.
On one side you have the major housing and mortgage lending lobbies — NAR, the homebuilders and mortgage bankers — who want to preserve the core purposes and essence of the Federal Housing Administration’s home mortgage insurance program and strengthen it administratively.
They see FHA’s surge in market share during the housing bust years — from less than 3 percent in 2005 to more than 25 percent in 2010 — as having been crucial to hundreds of thousands of home purchases that otherwise would not have taken place.
In 2012, for example, 78 percent of FHA’s purchase business was on behalf of first-time buyers. Nearly half of all U.S. first-time buyers — 46 percent — used FHA-insured loans last year. Fannie Mae and Freddie Mac, by contrast, served just 33 percent of first-time buyers.
On the other side of the fight: Republican critics, especially in the House, who see FHA’s current deficiency in insurance fund reserves as symbolic of an agency out of control, insuring loans for people with subpar credit and financial resources who shouldn’t be buying a house.
They are joined by critics such as Edward Pinto, a resident fellow at the politically right-tilting American Enterprise Institute think tank, who accuse FHA of facilitating the foreclosures of vast numbers of working families through lax underwriting standards and minimal 3.5 percent down payments.
In an unusual move last week, Pinto threw a gut punch at NAR by lampooning a pro-FHA advertisement paid for by the association and printed in news media with heavy readership by staff and members of the House and Senate.
Pinto, a former executive at Fannie Mae who has become FHA’s most persistent gadfly, has frequently testified before congressional committees and wields influence among conservative legislators, including Financial Services Committee Chairman Rep. Jeb Hensarling.
Hensarling, a Republican from Texas who makes no secret of his distaste for federal involvement in the housing market, says "it’s an open question whether FHA has now morphed into Countrywide," the former lending giant that’s often blamed for many of the excesses of the boom years. "Arguably, the FHA has now become the nation’s largest subprime lender."
The agency’s "high loan-to-value (ratios), low credit scores plus high rates of default" have caused its single-family insurance fund to be "flat-broke," said Hensarling at a hearing last week.
"If the FHA were a private financial institution, somebody would be fired, somebody would be fined, or the institution would find itself in receivership," Hensarling said. "Instead, it is merely and merrily on its way to become the recipient of the next great taxpayer bailout."
Next in the fight: FHA gets to defend itself Wednesday at a hearing chaired by Hensarling. FHA Commissioner Carol J. Galante will be the sole witness and is expected to encounter hostile questioning about the management of the agency during the Obama administration.
According to FHA, it had a 9.6 percent "serious delinquency" rate as of last September, which is the latest data available on its website. FHA defines "serious" as 90 days late, in foreclosure or bankruptcy.
FHA’s serious delinquency rate is much higher than Fannie Mae’s (3.35 percent as of last October) or Freddie Mac’s (3.31 percent same month).
But that’s been the case for decades, because FHA’s statutory mission has been so starkly different from Fannie and Freddie’s. Its job is to insure loans made to higher-risk borrowers.
Much of FHA’s current problems stem from the 2008-2010 vintages of loans, when Fannie and Freddie — seized by the government because of their own reckless investments in subprime — started targeting only borrowers with pristine credit, adding hefty fees onto loans for those with FICO scores under 740, and charging even more or withdrawing from geographical and product segments of the market they perceived as risky.
Almost overnight FHA became the go-to source of mortgage financing for people with any sort of credit blemishes, and a lot of folks who simply wanted to buy a house with a minimal down payment. The agency also had to deal with an overhang of loans insured with seller-financed down payment assistance, which Congress finally banned in October 2008 after years of attempts by FHA to prohibit them administratively.
More recent vintages of FHA-insured loans are among the best-performing on record, according to officials, and are likely to yield significant profits to the government.
Galante is expected to defend the record of the Obama administration in tightening up underwriting at FHA — three increases in mortgage insurance premiums in the past two years, establishment of 10 percent minimum down payments for borrowers with FICO scores below 580, and the rescission of a previous rule allowing cancellation of insurance premiums when mortgage balances amortize down to 78 percent loan-to-value.
Galante’s not likely to dissuade Hensarling or others in the House and Senate who’d like the agency to scale back to irrelevance. They will continue to insist that FHA needs to raise its minimum down payment to 5 percent or more, and reject borrowers with FICO scores below 620 or 640.
Don’t be surprised to see legislation mandating changes like these, and pressuring FHA to require even higher insurance fees. All of these measures would be designed to force the agency to reduce its loan volumes dramatically.
The upshot: The fight for the soul of FHA is under way. And if Jeb Hensarling or Ed Pinto get the upper hand, a lot of first-time buyers with modest financial resources simply won’t be buying.