By Robert Freedman, Senior Editor, REALTOR® Magazine
“Nobody has asked to come in and look at our balance sheet, to go through our finances, which I’ve offered to everybody.”—FHA Commissioner David Stevens
News reports raising concerns that FHA might be the next major financial institution requiring a government infusion are based on misinformed comparisons with what happened in the subprime market, FHA Commissioner David Stevens said in an exclusive interview with REALTOR® Magazine this week.
At their peak, subprime lenders commanded 40 percent of the residential mortgage market by making low-downpayment, no-document, interest-only, and other types of exotic loans to high-risk borrowers, investors, and speculators, a market that FHA sat out entirely, says Stevens.
Today, it’s FHA that commands 40 percent of the market, but that’s where the comparison ends. The agency makes 30-year, fixed-rate, fully documented loans only for households buying their primary residence. For each loan, the agency maintains capital reserves for the full 30 years of the loan rather than for the 1-2 years required of banks.
Today, the agency has more than $30 billion in reserves, including a fully funded loan-loss reserve. All the talk in the media about reserves dipping below a 2-percent required threshold is about a secondary account that’s above and beyond the agency’s primary reserve. Those two accounts together represent more than 4 percent of assets, he says.
An actuarial audit of FHA finances due out in a few weeks from a non-governmental auditor is expected to find that FHA has sufficient capital to cover all forecasted losses, even assuming further delines in home prices, says Stevens.
“What concerns me, and I think should concern all REALTORS®, is . . . non-fact-based [criticism] from people who jump to conclusions without looking at data [and] create an environment where we’ll be forced to make corrections where they are not required and can hurt this housing recovery.”
Stevens sat down with the magazine for a 30-minute interview that covered the agency’s new appraisal policy and an upcoming mortgagee letter that’s expected to make condo financing more attractive as well as the agency’s credit health. He also talked about the improvements to the agency’s processing that makes it comparable to conventional lenders in terms of processing speed and paperwork requirements.
Listen to snippets of the conversation here:
1. FHA’s credit health (5:51)
“We’re the last financial services institution standing. We haven’t needed any kind of government bailout. We’re positively capitalized. As for risk, if we have some sort of double-dip recession, the impacts to FHA will be the same as to Chase Manhattan, Wells Fargo, the United States Treasury, and everybody else.” Edited excerpt—not verbatim
2. FHA vs. subprime lenders (2:39)
“FHA is not for investment, it’s not for speculation, everything is full-doc. During the boom years, with all those stated-income loans, a FICO score could have artificially gone higher simply because people were borrowing their way to good credit. So, if you didn’t verify their income, and if you didn’t verify their assets, you could have had a truly troubled borrower underneath that good credit picture.” Edited excerpt—not verbatim
3. Appraisal policy (HVCC) changes (2:27)
“No where in the Home Valuation Code of Conduct does it say lenders have to use an appraisal management company. No where does it say you have to pay appraisers less or get the appraiser to drive from a remote location where they don’t understand the market. I believe HVCC was founded on good principles, which is to keep an arm’s-length distance between the people ordering the appraisal and anybody who could benefit on a commission basis from the outcome of that appraisal. Our policy goes a step further and says you’re not required to use an appraisal management company, the appraiser should be from the local area and should understand the area (already required in USPAP), and the appraiser’s income should not be impacted adversely.” Edited excerpt—not verbatim
4. Condo financing (1:28)
“We will be introducing a new condo policy in the next couple of weeks that will make the terms easier than the terms that were originally planned to go in effect in our October 1 Mortgagee Letter (some aspects of which have been given a later effective date). People will applaud them as being an improvement, but we will continue to have risk controls in place for condos.” Edited excerpt—not verbatim
5. FHA processing speed (3:04)
“FHA can be underwritten by any FHA-approved lender, which includes most of the major lenders in America. We have high loan limits just like the temporary high loan limits for Freddie Mac and Fannie Mae. You can buy a home with 3.5 percent down. 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. If you aren’t familiar with FHA, the best you can do is sit down with a loan officer who does FHA mortgages and learn how easy it is today.” Edited excerpt—not verbatim