President-elect Donald Trump remains vague on housing policy, but his most recent cabinet nomination offers a glimpse of what a Trump Administration could mean for reverse mortgage lenders and the broader mortgage lending industry.
The nomination this week of Dr. Ben Carson to serve as Secretary for the Department of Housing and Urban Development (HUD) was met with mixed reviews from mortgage industry groups and policy experts. While some applauded the cabinet selection, others were left scratching their heads trying to grasp the qualifications that would earn a retired neurosurgeon the responsibility of leading an agency that serves millions of families, seniors and first-time homebuyers.
A key piece of the puzzle for housing over the next four years will be whoever Trump chooses for Commissioner of the Federal Housing Administration. But until that selection is made, there are several areas of housing finance that experts say would fit the agenda of the Trump Administration with a direct impact on FHA lending, including reverse mortgages.
More certainty under the False Claims Act
One such area could mean reassurance for lenders at odds with False Claims Act (FCA) uncertainty, said Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute.
Through the FCA, the Department of Justice has raked in billions of dollars in settlements from just about every major bank in the U.S., including Wells Fargo (NYSE: WFC) who entered into a $1.2 billion settlement with the government earlier, stemming from the bank’s participation in FHA’s Direct Endorsement Lender Program.
“The DOJ has extracted a lot of money from major financial institutions using the False Claims Act, that is, arguing that institutions have done FHA loans where there are errors,” Goodman told RMD.
The False Claims Act statute provides for a penalty of three times the size of the loan. That means any mistakes, however small or immaterial to the risk of the loan, can lead to a penalty that dwarfs the value of the loan to the lender, according to an Urban Institute brief published this week.
“Because lenders are unable to eliminate all mistakes through improved underwriting, they are unable to eliminate the risk of these penalties,” write Goodman and Jim Parrott, senior fellow at the Urban Institute.
As a result, the share of FHA lending that was done by banks has fallen from 60% three years ago to just 22% today, according to Urban Institute data.
“It doesn’t make a lender feel great about doing FHA lending when you have the False Claims Act,” Goodman told RMD.
To alleviate uncertainties caused by the FCA, Goodman suggests HUD can take cues from FHA’s defect taxonomy to grade the severity of errors. This way, the smaller mistakes receive smaller penalties and significant mistakes get the brunt of the FCA enforcement.
“Under this new system, lenders would finally be able to use improved underwriting to guard against the risk of heavy penalty and thus would no longer need to flee the FHA,” write Goodman and Parrott.
Less cumbersome FHA servicing
Another area of “fertile ground” for the new HUD Secretary and Trump Administration to consider, relates to FHA servicing and the laborious process associated with it.
“FHA servicing is over-regulated; servicers have little flexibility,” Goodman said.
The current FHA servicing process is cumbersome and high servicing costs deter lenders from participating in FHA lending programs, according to Goodman, who indicated several areas where FHA servicing is “over-prescribed.”
First, FHA prescribes tight timelines for each step of the loss mitigation process, which could make it difficult for servicers to comply without harming the borrower or running afoul of the Consumer Financial Protection Bureau.
“To avoid penalty for delays, though, servicers must receive special dispensation on a loan by loan basis, a cumbersome and expensive process,” said Goodman and Parrott. “The solution is to allow for more servicer discretion and an expanded timeline, where slowdowns in one part of the process can be offset by more speedy action on another.”
Second, the conveyance process for HUD is also cumbersome, Goodman said, stressing that when a lender forecloses on an FHA loan, they foreclose in their own name and then have to convey the property to the FHA.
On average, property conveyance could take 12 months to accomplish—a time period during which the servicer must bear the cost of managing the post-foreclosure process and, in some cases, maintain the condition of deteriorating properties.
“There has to be a better way to do that, like instant conveyance to FHA, which would save both lenders and FHA a bunch of money,” Goodman said.
Finally, a third aspect of FHA servicing that the Urban Institute would like to see the new HUD Secretary address is the issue of repair budgets—specifically, a raise in the budget amounts provided by FHA that are consistent with the appropriate level needed to bring properties into conveyance condition.
“These are issues I’d expect the new HUD Secretary would worry about: liability under the False Claims Act and giving lenders more comfort therein, and attacking the high costs of servicing FHA loans,” Goodman said.
Written by Jason Oliva