The Federal Housing Administration (FHA) played a vital role in providing homeownership for millions of Americans during the financial crisis. But as the nation recovers from one of the worst economic downturns in U.S. history, housing finance experts say the time has come for some much-needed FHA reforms.
During a special seminar earlier this month hosted by the Urban Institute, key senior housing finance officials shared their thoughts about what FHA reforms should look like, discussing everything from budgetary challenges, to making FHA servicing more “friendly” and eliminating the burden of the False Claims Act in hopes of attracting more banks to the FHA lending market.
“FHA reform needs to be part of a bigger picture,” said Shawn Krause, executive vice president at Quicken Loans, during the event in Washington, D.C. “We can’t just look at a spreadsheet or a budget, cut something and think this is going to fix it. We need to go deep and really understand what is happening behind the scenes.”
This means examining current FHA systems, which according to some policy experts, are inefficiently dated to serve a mortgage marketplace and industry that is evolving technologically. Making this happen, however, requires more resources allocated to the Department of Housing and Urban Development (HUD) to upgrade FHA systems.
Getting ‘out of the box’
Policy experts anticipate that federal budgets will be more constrained during the year ahead, meaning resources for federal housing programs are likely to be further tightened and subject to limitations.
A challenge for HUD, which is a $48 billion department whose budget is subject to Congressional appropriation, is that most of its budget is consumed by only a select few programs, according to Rick Lazio, partner at Jones Walker LLP and former member of the House of Representatives (R-NY).
“They are increasing every year and they are slowly cannibalizing the ability of HUD to have the kind of impact that people would like to seem them have,” Lazio said. “It’s a huge challenge to what HUD is supposed to be when you have a department in this position.”
As Lazio sees it, the “way out of the box” is to do a better job understanding that no community and no family lives in silos.
“You have to develop a federal model to leverage the health care dollars, the public safety dollars, the education dollars, the Department of Labor dollars, and help create these synergistic environments where communities can make it,” he said.
When it comes to budget, FHA is ultimately constrained by the appropriations process, making it difficult for the agency to implement system upgrades and not have to rely on paper mail for certain processes, which could result in delays or even non-receipt.
FHA servicing hurdles
Tight mortgage lending and servicing regulations also present a challenge for both FHA lenders and the prospect of attracting banks to the FHA marketplace.
“Servicing rules are expensive, complicated and difficult,” Lazio said. “That ought to be something else we look at and I certainly think there are some things that can be done to help address those issues.”
An analysis last year by the Mortgage Bankers Association estimated that the non-reimbursable costs and direct expenses associated with FHA’s foreclosure and conveyance policies were two to five times higher than for GSE loans, as covered in a February 2016 report from the Urban Institute.
The report outlined several factors driving this higher cost, each of which must be addressed by FHA, including foreclosure timelines in conflict with Consumer Financial Protection Bureau servicing requirements; large penalties associated with failure to meet these timelines; vague standards for conveyance; and insufficient allowances for property preservation.
FHA servicers are required to initiate foreclosure actions within 180 days of default. The penalty of missing this “first legal action date” is applied whether a servicer misses this date by one day or by one year.
Under the Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), the CFPB does not allow the initiation of any foreclosure process until the borrower is more than 120 days delinquent.
“If the borrower submits the loss-mitigation application near the end of that period, the application is denied, and there is an appeal that is also denied, then the servicer is likely to miss the first legal action date,” Urban Institute writes. “Moreover, if the servicer is in discussion with the borrower on day 120 and the borrower does not have the application in, most servicers believe it would not be appropriate to begin foreclosure proceedings.”
Over 60% of all FHA foreclosures completed between 2001 and 2013 missed the deadline for first legal action and an additional 23% met the first legal action data but failed to meet the due diligence time frame, according to CoreLogic data.
It is because of this that the Urban Institute recommends that “moving to a single reasonable FHA foreclosure timeline that is consistent with CFPB regulations would be a major step toward reducing the costs of servicing delinquent FHA loans.”
Part of the servicing hurdles also have to do with regulatory components born out of Dodd-Frank, such as the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules—regulations that need to be “seriously re-thought,” said Mark Calabria, director of financial regulation studies at Cato Institute, a public policy research organization based in Washington, D.C.
The overall consensus among housing experts of the need for various FHA reforms was very “heartening,” especially as they apply to more money for systems, eliminating the burden of the False Claims Act and making the conveyance process, and FHA servicing on the whole, more friendly, said Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute.
“Certainly, these are issues that we are going to be focusing on,” she said.
Written by Jason Oliva