Sec­ond FHA tour would be much di er­ent for Mont­gomery

National Mortgage News - - Contents - by brian collins

for brian mont­gomery, his sec­ond tour of duty at the Fed­eral Hous­ing Ad­min­is­tra­tion is likely to be sub­stan­tially dif­fer­ent than his first.

Nom­i­nated last month as Fed­eral Hous­ing Ad­min­is­tra­tiom com­mis­sioner, Mont­gomery served in that role dur­ing the Ge­orge W. Bush ad­min­is­tra­tion, when FHA’s sin­gle-fam­ily pro­gram was in dire straits and the fi­nan­cial cri­sis helped bank­rupt its mort­gage fund.

The sit­u­a­tion this time around is much bet­ter — the FHA has a 5.02% delin­quency rate as of June 30, com­pared with 18.5% at the end of 2007 — but it is likely to prove chal­leng­ing in other ways.

For starters, the FHA is un­der grow­ing pres­sure to re­duce its pre­mi­ums for its tra­di­tional sin­gle-fam­ily pro­gram, a move that could anger the Trump ad­min­is­tra­tion’s Repub­li­can al­lies in Congress. For an­other, the agency’s re­verse mort­gage pro­gram con­tin­ues to lose money and is ex­pected to re­port a loss for its fis­cal year 2017, which ends Sept. 30.

“He comes to the job with ex­pe­ri­ence. And he is ex­tremely knowl­edge­able,” said David Stevens, head of the Mort­gage Bankers As­so­ci­a­tion and a for­mer FHA com­mis­sioner. “So he can hit the ground run­ning.”

Though Mont­gomery was just nom­i­nated, he is ex­pected to be ap­proved rel­a­tively quickly, given his past ex­pe­ri­ence in the job, and the lack of ex­pe­ri­ence of his would-be boss, Hous­ing and Ur­ban De­vel­op­ment Sec­re­tary Ben Car­son, a re­tired neu­ro­sur­geon.

Over the past eight years, Mont­gomery has worked as a con­sul­tant and vice chair­man of The Colling­wood Group in Washington, which serves many of mort­gage com­pa­nies.

“So he will have a much bet­ter un­der­stand­ing of where FHA fits in the whole mort­gage mar­ket­place,” said Brian Chap­pelle, a co-founder and part­ner of the con­sult­ing firm Po­tomac Part­ners.

The most press­ing is­sue fac­ing the FHA is whether it should lower its pre­mi­ums again if the an­nual ac­tu­ar­ial re­port, due out in mid-Novem­ber, shows that the mort­gage cap­i­tal ra­tio ex­ceeds 2%.

Un­der the cur­rent rate struc­ture, home buy­ers pay a 1.75% up­front premium and an an­nual 85 ba­sis point premium. The last re­duc­tion in the an­nual premium was in 2015.

If the re­port looks good and FHA ex­ceeds it min­i­mum cap­i­tal ra­tio, that would “put pres­sure on the Trump ad­min­is­tra­tion to lower the FHA mort­gage in­sur­ance premium,” ac­cord­ing to a trade group lob­by­ist who did not want to be iden­ti­fied.

But Stevens doubts the new ad­min­is­tra­tion would act quickly on a premium re­duc­tion. And he ex­pects they will take their time con­sid­er­ing how big a role FHA should play in the mar­ket­place.

“Lower pre­mi­ums would make their role big­ger and that may be con­trary to where the ad­min­is­tra­tion be­lieves it should be,” Stevens said.

Also, there is “un­known risk to the FHA fund due to the two big hur­ri­canes that just hit. And HUD has a lot of ex­po­sure in Puerto Rico,” Stevens said.

While the sin­gle-fam­ily mort­gage pro­gram is likely to have per­formed well, the re­verse mort­gage pro­gram, also part of the cap­i­tal ra­tio, is strug­gling. If the cap­i­tal ra­tio is be­low 2%, that would put “pres­sure on Congress and HUD to sep­a­rate the re­verse mort­gage pro­gram from the FHA sin­gle-fam­ily pro­gram,” the lob­by­ist said.

Some are al­ready ad­vo­cat­ing for this switch for the Home Eq­uity Con­ver­sion Mort­gage pro­gram.

“They need to sep­a­rate the for­ward book from the per­for­mance of HECM book if they want to make a case for low­er­ing FHA pre­mi­ums for first-time home­own­ers,” said Lynn Fisher, vice pres­i­dent of re­search and eco­nomics at the Mort­gage Bankers As­so­ci­a­tion.

HUD ap­proved a premium re­duc­tion in the wan­ing days of the Obama ad­min­is­tra­tion, but that was put on hold when Pres­i­dent Trump took of­fice. The de­ci­sion is likely to fall to Mont­gomery af­ter he is con­firmed.

Fisher said it may be a tricky ques­tion, be­cause it’s hard to know what a premium re­duc­tion will do to FHA pur­chase mort­gage ac­tiv­ity. “That’s be­cause of the short­age of new homes and it’s go­ing to take time for that pro­duc­tion to meet the cur­rent de­mand,” she said.

Many ob­servers said the case for a fur­ther premium cut is straight­for­ward given the per­for­mance of the sin­gle-fam­ily pro­gram and its low delin­quency rate.

“The credit qual­ity of FHA-in­sured sin­gle-fam­ily loans to­day is the best in nearly 40 years,” Chap­pelle said.

“Are you go­ing to ef­fec­tively pe­nal­ize first-time home buy­ers be­cause of con­cerns about FHA’s mar­ket share or us­ing their pre­mi­ums to pay for other HUD pro­grams?”

Dur­ing his first tour as FHA com­mis­sioner, Mont­gomery worked to mod­ern­ize the sin­gle-fam­ily loan guar­an­tee pro­gram and im­ple­mented elec­tronic en­dorse­ments so lenders could get mort­gage in­sur­ance cer­tifi­cates elec­tron­i­cally.

Mont­gomery also stream­lined the FHA 203(k) pro­gram, which pro­vides fi­nanc­ing for home­own­ers to ren­o­vate their homes. These 203(k) loans can also be used to re­ha­bil­i­tate homes af­ter hur­ri­canes and other dis­as­ters.

Mont­gomery is a “real pro­po­nent” of the FHA pro­gram and he is “well re­spected by the [HUD] staff,” Chap­pelle said.

That may give him cover if he en­dorses a premium re­duc­tion.

Repub­li­cans in Congress are likely to ob­ject to such a move, given con­cerns about gov­ern­ment dom­i­nance of the mort­gage mar­ket. An­other premium cut could boost FHA’s mar­ket share.

Some law­mak­ers are also wor­ried that an­other down­turn in the hous­ing mar­ket may be in the off­ing, leav­ing the FHA fac­ing prob­lems when the loans go bad later.

Basil Petrou, man­ag­ing part­ner at Fed­eral Fi­nan­cial An­a­lyt­ics, noted that it has been al­most 10 years since the hous­ing cri­sis. “Af­ter the long re­cov­ery, lenders and the sec­ondary mar­ket agen­cies are loos­en­ing their lend­ing stan­dards again,” he said.

The hous­ing mar­ket moves in cy­cles and Mont­gomery should be “con­cerned about re­duc­ing mort­gage in­sur­ance pre­mi­ums at the wrong time,” Petrou said, “which could lead to losses down the road.”

Debt-to-in­come ra­tios on FHA loans have been go­ing up and Fan­nie Mae and Fred­die Mac are buy­ing sin­gle-fam­ily loans from lenders with higher loan-to-value ra­tios. “Ev­ery­body is loos­en­ing up now,” Petrou said.

Since the start of the year, 40% of FHA pur­chase loans have debt-to-in­come ra­tios over 45% and more than a fifth have DTI ra­tios over 50%.

Adolfo Mar­zol, a se­nior hous­ing ad­viser to Car­son, re­cently told credit union ex­ec­u­tives that HUD of­fi­cials are con­sid­er­ing ways to re­duce Fed­eral Hous­ing Ad­min­is­tra­tion mort­gage pre­mi­ums or make other changes to help first-time home buy­ers.

“We are ex­plor­ing ways to bring more cred­it­wor­thy bor­row­ers into home­own­er­ship,” he said.

BRIAN MONT­GOMERY Fed­eral Hous­ing Ad­min­is­tra­tion

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