FHA Official: 'Federalization' Not the Answer

The foreclosure prevention bill that’s now under consideration in the U.S. Senate isn’t the best answer to the challenges of today’s real estate and mortgage markets, FHA Commissioner Brian Montgomery told REALTORS ® at the 2008 NAR Midyear Legislative Meetings & Trade Expo.

The bill, approved by the U.S. House of Representatives last week, would “federalize" the mortgage market, he said. A better solution would be for lenders to work out most of the loans themselves.

The NATIONAL ASSOCIATION OF REALTORS® has applauded the U.S. House passage last week of The Foreclosure Prevention Act, which would make more FHA loans available and allow more troubled borrowers to refinance their mortgage with the government’s help.

Montgomery said Congress should take a more targeted approach and send only certain types of loans to FHA. Any bill should also include reforms to FHA that the U.S. Department of Housing and Urban Development has been trying to get passed for two years, he said.

FHA Already ‘Picking Up Slack’

Even without expanded authority, FHA is already picking up slack in the mortgage market created by the exodus of subprime lenders, Montgomery said: In the first quarter of 2008, mortgage commitments are up 100 percent year-over-year to about 200,000 loans. That volume is expected to rise to half a million loans by year's end, said Montgomery. As of May 2008, FHA's single-family mortgage insurance portfolio stood at about $400 billion.

Fannie Mae and Freddie Mac are also at work, successfully playing the countercyclical role that was envisioned for them when they were created by Congress, said James Lockhart III, head of the agency that regulates the companies' safety and soundness, the Office of Federal Housing Enterprise Oversight (OFHEO).

It helps that OFHEO has been able to ease some of the financial restrictions on Fannie and Freddie, thanks to their improved financial management. Among other things, OFHEO has reduced their capital reserves to 20 percent from 30 percent and has lifted the caps on the volume of loans they can hold in their portfolio, said Lockhart.

REALTORS® Say That’s Not Enough

Real estate practitioners at the session made it clear, though, that the government needs to do more. Why?

* The policies that Fannie and Freddie have in place for areas deemed “declining markets” are making it unnecessarily hard for buyers — even those with good credit — to get financing in neighborhoods that are hardest hit by foreclosures.
* Lenders are dragging their feet on short sales and partial loan modifications even though those deals would help lenders stem their losses and strengthen otherwise shaky neighborhoods.


Lockhart's response? He said OFHEO has been talking with Fannie and Freddie about changing their declining-markets policy. He also acknowledged that inadequate staffing and loan servicers are allowing otherwise good deals to fall through the cracks.

Jim Leach, a former 15-term member of Congress from Iowa and one-time House Financial Services Committee chairman, said Fannie Mae and Freddie Mac are global capital magnets and need to be overseen by a world-class regulator.

That means OFHEO needs to be brought under the U.S. Department of Treasury so the agency will have the clout it needs to properly regulate the secondary mortgage market companies. Fannie and Freddie, along with the Federal Home Loan Banks now oversee some $6.5 trillion in outstanding mortgage debt, more than all the publicly held debt in the U.S.

— By Robert Freedman for REALTOR® magazine online