The Federal Housing Administration and its role in the housing market is at a crossroads after making “unprecedented” steps toward stabilizing its future, including major changes to its reverse mortgage program. 

The housing market meltdown would have been “measurably worse” without FHA’s intervention as private lenders left the mortgage market, writes David Stevens, the agency’s former commissioner and the current president of the Mortgage Bankers Association, in an editorial.

However, the crisis left FHA in a poor financial position—and possibly in need of a Treasury bailout to avoid default. The 2012 audit of FHA’s mutual mortgage insurance fund indicated the agency was $16 billion in the hole, with the Home Equity Conversion Mortgage (HECM) program $2.8 billion in the red. 

It is only right, says Stevens, for policymakers to evaluate FHA policies and procedures, particularly researching a strategy for the agency to return to its Congressionally-mandated 2% capital reserve ratio. 

A number of Congressional hearings are scheduled regarding FHA’s structure. Current commissioner Carole Galante is scheduled to testify before the House Financial Services Committee on Wednesday morning regarding the agency’s financial health.  

“In the process of reviewing FHA, it is critical that policymakers recognize the important role that the program played, and is playing in the market. FHA is virtually the sole source of mortgage funding for borrowers with low downpayments, those without high incomes or large amounts of inherited wealth,” said Stevens in the editorial.

Stevens did credit the FHA and the Department of Housing and Urban Development (HUD) for a number of steps they have taken in the last few years to stabilize its existing loan insurance programs and improve the quality of its book of loans.

Those moves included raising mortgage insurance premiums, increasing net worth requirements for lenders, and hiring a Chief Risk Officer. More recently, the FHA also made changes to its reverse mortgage program when it placed a moratorium on the HECM Standard fixed rate product, along with increasing underwriting and documentation for low FICO/high debt-to-income loans. 

“Clearly, given these actions, the current Administration is taking seriously FHA’s situation,” says Stevens. “As a result, these unprecedented steps will help stabilize the program’s future viability.” 

As the real estate and mortgage markets head toward recovery, now is the time for “thoughtful, comprehensive” debate regarding the government’s future role in the housing market—not just for FHA, but also Fannie Mae and Freddie Mac. 

“Ultimately, all stakeholders want the same thing—a fully functioning market that relies most heavily on private capital, with a limited, appropriate role for the federal government,” he says. “A stable, sustainable FHA program must be a part of that system.”

Read the full editorial. 

Written by Alyssa Gerace