Putting a Check on Risk

FHA Commissioner David H. Stevens discusses how his agency is prudently keeping the housing market alive.

January 1, 2010

The Federal Housing Administration, created during the Depression era, has been a steadying presence in residential markets for the last two years, yet some buyers, sellers, and even practitioners remain hesitant about the agency’s role, believing that obtaining federally backed mortgage loans requires more hoops to jump through than conventional mortgages do. Meanwhile, some analysts are predicting that the agency could become the next financial institution requiring a federal bailout. Likely? In an exclusive sit-down with REALTOR® Magazine, FHA Commissioner David H. Stevens says no.

After the FHA in late 2009 reported to Congress that it would miss a target on one of its reserve funds, some analysts in the media raised concerns that the agency is following the path of subprime lenders and was next in line for a federal bailout. How realistic is that?

First of all, I’m very concerned about risk. I keep worrying that I’m the poster child for defending the capital of the FHA, but what some are saying about the FHA isn’t fact-based. Let’s talk about our product mix: owner-occupied primary residences only. This is shelter for families. It’s not investment; it’s not speculation. Everything is fully documented. This is important because, in the subprime, stated-income world of the boom years, a FICO score could have gone higher simply because people were borrowing their way to good credit. So if you didn’t verify income or assets, you could have a truly troubled borrower [who was benefiting from rising home appreciation]. With the FHA, you know for a fact what the borrower’s income level is.

Yet credit risks for the agency remain. In October you made an announcement about a reserve fund dipping below a 2 percent threshold and that the FHA was bringing on a risk officer.

The 2 percent reserve became a story because there’s a legislative requirement that the FHA hold two reserves. The second reserve is a capital account to pay unexpected claims and, by law, it has to be at least 2 percent of assets. If you look at the FHA’s total capital today, it’s about $31 billion. That’s the combined capital reserves of our financing account, which is our primary loan-loss reserve, and this capital reserve. Those two accounts together equal well over 4 percent of assets. And capital at the FHA is not like capital at a bank. Our reserves are to cover loan losses over a 30-year term. Under BASEL II international financial services protocols, banks must only hold reserves for one year.

What concerns me, and what should concern real estate professionals, is that we need to balance a concern for risk with views from people who jump to conclusions without looking at data. [None of the critics in the media] have asked to look at our balance sheet, to go through our finances, which I’ve offered to everybody. If we allow uninformed views about risk to take hold, we can create an environment in which we’re forced to make unnecessary corrections, and that can hurt this housing recovery.

The risk facing the FHA today is the same as the risk facing every financial institution in the country, which is a return to the recessionary cycles that we’re now coming out of. If a double-dip recession were to happen, the impact on the FHA will be the same as on JPMorgan Chase, Wells Fargo, and the U.S. Treasury. Today, we’re positively capitalized. We haven’t needed any funds from taxpayers, and that’s something that virtually no other participant in the mortgage industry can claim.

Some sellers and even some professionals in the industry believe that working with the FHA isn’t worth its rules and paperwork.

That’s a natural occurrence of the environment we’ve been in. Go back to 2006. The FHA was 2 percent of the housing market. Nobody knew how to use the FHA. In my own case, I’ve been in the mortgage finance system for almost 30 years, and I wasn’t an active user of the FHA. But this is not your grandfather’s FHA. Real estate practitioners today who aren’t using the FHA need to rethink that, because we’re keeping the housing market alive. We’re close to 40 percent and by some analyses even 50 percent of all purchase transactions, which means practitioners who are avoiding the FHA are missing out on an opportunity to put people into homes.

What are a few points about the FHA’s processing that practitioners should know?

Loans can be underwritten by any approved lender, which includes most of the major lenders in the country. We have the same high loan limits as Freddie Mac and Fannie Mae [which have been extended to the end of 2010]. You can buy a home with a 3.5 percent down payment, compared to at least 10 percent for Fannie or Freddie. You can get your loan scored for approval through a variety of underwriting engines, including Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Prospector.

The FHA has released guidelines that track the set of appraisal rules, called the Home Valuation Code of Conduct, agreed to by Fannie Mae, Freddie Mac, and the New York State Attorney General. These rules have raised concerns because of the way they’re being implemented in some cases. We’re seeing more appraisals commissioned through appraisal management companies and valuations being made by appraisers from outside market areas. Will your guidelines help clear things up?

I actually believe the HVCC was founded on good principles, which is to keep an arm’s length between the people ordering the appraisal and those who benefit on a commission basis from the outcome of that appraisal. I encourage every real estate professional to read it. Nowhere does it say you have to use an appraisal management company, pay the appraisers less, or get appraisers to drive from a remote location, where they don’t understand the market. Our policy takes the HVCC a step further by saying you’re not required to use an appraisal management company. It says the appraiser should be from the local area and should understand the area—by the way, that’s required by the Uniform Standards of Professional Appraisal Practice anyway. It also says the appraiser’s income should not be impacted adversely as a result of going through some service [e.g., an appraisal management company], so that we don’t impact the quality of the appraisal. Our code is being hailed by most in the industry as improving the HVCC.

What about condo rules? We keep hearing that the FHA, for all of its improvements, can still be hard to use for condos. How’s that changing?

Let me first say that the FHA is probably the sole source of financing for condos right now, so if we’re hard to use on condos, it’s got to be hard for other lenders. When you’re doing financing for 3.5 percent down, you’d better be careful, and condominiums tend to be predominantly first-time home buyers with [fewer resources]. Our new policy makes the terms easier. People will applaud them as being an improvement, but we will continue to have risk controls in place there.

Editor’s note: The interview preceded the release of the new condo rules and Stevens couldn’t disclose details at the time. You can read more at the Speaking of Real Estate blog at REALTOR.org/realtormag; search for FHA Eases Concentration, Other Rules, November 10, 2009.

The Stevens File

The U.S. Senate in mid-July confirmed David H. Stevens to be President Barack Obama’s assistant secretary for housing-federal housing commissioner at the U.S. Department of Housing and Urban Development.

In this position, Stevens oversees the Federal Housing Administration, the federal government’s principal agency for helping households obtain safe and affordable home mortgage financing. The agency insures approved lenders against loss in the event of borrower default.

Prior to coming to the FHA, Stevens was president and chief operating officer of Long & Foster Real Estate in Chantilly, Va., which he joined in 2006 as president of affiliated businesses. Previously, he served as a senior vice president of the secondary mortgage market company Freddie Mac and held executive positions at a number of financial services companies, including Wells Fargo and World Savings.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.