Report Finds FHA Needs Replacement More Than Reform

Reform won’t be enough to fix the Federal Housing Administration’s (FHA) failings, according to a business and economics scholar who argues in a recent paper that the agency needs to be phased out and replaced, but omits mention of the Home Equity Conversion Mortgage program.

“The twin financial and policy failures raise obvious questions of whether FHA should be allowed to continue, and if so, how to reform the agency,” writes Joseph Gyourko, a professor of real estate, finance, and business economics and public policy at the Wharton School of the University of Pennsylvania, where he chairs the real estate department and is director of the Zell/Lurie Real Estate Center. 

FHA had a net deficit of $13.5 billion by the end of fiscal year 2012, according to its latest actuarial report, and has been in violation of the federally-mandated 2% capital reserve requirement since 2009. 


In recent years, reform suggestions have included risked-based mortgage insurance premium pricing and tightened underwriting standards. But while these recommendations make sense and could help strengthen the FHA, Gyourko—fearing that the agency cannot successfully be reformed—has more radical ideas.

“I recommend that FHA be phased out completely over some well-defined period (for example, three to five years) and replaced with a new subsidy program that would help first-time homebuyers and other specially targeted groups amass a 10 percent down payment that would then allow them to obtain financing at market rates from a private market lender,” he proposes, going on to outline how such a system could work. 

The FHA should shift gears by focusing homeownership policy on increasing equity through a subsidized savings program.

“There is no better time to fundamentally rethink a program than right after it has failed,” he concludes, “and there is no doubt that FHA has done so.” 

 The paper leaves out all mention of reverse mortgages or how they would fit into the refigured FHA. The HECM program accounted for about $2.8 billion of the agency’s overall $16.3 billion shortfall, according to the 2012 actuarial report. 

Read “Rethinking the FHA” here.

Written by Alyssa Gerace

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  • It wouldn’t hurt to think about what a Conventional, Private Mortgage Insurance reverse mortgage would l look like regardless of the outcome of all this GSE and HUD bashing.

  • Hecmvet,
    this has been looked at in the past by the PMI companies but they had a hard time embracing the program. However, it dies not mean it can’t be approached and investigated again.

    This article concerns me very much. It sound like we have a lot of panic in the air. It always disturbs me when I hear many of the same people who created the problem want to solve it by waving a wand and making it go away.

    FHA has a management problem and it always have. There are common sense ways to fix the problem, we don’t need to phase FHA out. To get into the problems FHA has and how to solve them would take to long and no one would wind up reading it all anyway.

    FHA is fixable, instead of talking about all there problems and solving them by doing away with the agency they should spend constructive time on solving the problems. They need to bring in qualified people that can solve problems!

    As I said, this is a disturbing article and I am sure many of you reading this are as disturbed as I am!

    John A. Smaldone

  • John,
    The last time we discussed this with PMI companies we were of the opinion that the program had to possess all the pieces and parts and features of the HECM program as it then existed but that has changed in some significant ways since then. Not only that but it is about to change again in significant ways so the picture is not the same now.
    Additionally, all that I want to see is what it would have to look like and perform like in order to be privately insurable. This doesn’t mean it would be acceptable or worthwhile to implement but it could establish a base line of what the private sector would be willing to do in the absence of HUD’s involvement.
    I’ve been originating HECM’s since 1991 so I have watched HUD pretty much since the beginning and I have to agree with you on many points. The veterans at HUD would also agree with our assessment.
    I think there is a market for a far less generous product that is much less complicated and less cost intensive.
    Let’s call it the Super Saver.

    • Hecmvet,

      Well put, I agree with you and I can relate. I have been in the reverse mortgage arena for 15 years, you and I got into it about the same time. You made very good points. Make it a great day.


      John A. Smaldone

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