WASHINGTON — Like other agencies, the Federal Housing Administration has focused on ways to provide homeowners struggling under the weight of the coronavirus pandemic some relief. But as an insurer, the FHA is also mindful of the downside risk.
To enable borrowers to skip payments without scaring off originators, the housing agency is considering how to provide backing for new mortgages in which the homeowner might be in default before the loan is sold to investors.
The FHA is "looking at various options" to address that issue, Commissioner Brian Montgomery said in an interview.
But at the same time Montgomery would not rule out measures to mitigate potential risk to the FHA's insurance fund, including raising premiums.
“We want to make sure that our cash [inflows] exceed our cash outflows, so again, we’re looking at a lot of different things, and premiums being one of them, but there are other things that we’re considering as well," Montgomery said.
Montgomery, who is also serving as acting deputy secretary of Housing and Urban Development, is not a stranger to managing a crisis. He was the FHA commissioner under President George W. Bush, overseeing the agency in the midst of the 2008 housing crash. He also worked at the White House during the Sept. 11 attacks and was Bush's point of contact for the 2003 Columbia space shuttle disaster.
“This crisis, like others, has put an exclamation point on why the FHA is so vital and so critical during both good times and less than good times, like we're seeing now with the coronavirus,” Montgomery said.
The FHA and HUD imposed a moratorium on foreclosures and evictions for 60 days in March, and have rolled out payment relief efforts for borrowers that include a plan to allow borrowers to defer mortgage payments for up to a year.
Ginnie Mae — an agency within HUD — also launched a pass-through assistance program in March that allows Ginnie to advance the payments to investors that can’t be met by mortgage servicers.
![“We want to make sure that our cash [inflows] exceed our cash outflows, so again, we’re looking at a lot of different things, and premiums being one of them, but there are other things that we’re considering as well," FHA Commissioner Brian Montgomery said.](https://arizent.brightspotcdn.com/dims4/default/5c8d980/2147483647/strip/true/crop/1260x709+0+0/resize/1024x577!/format/webp/quality/90/?url=https%3A%2F%2Fsource-media-brightspot.s3.us-east-1.amazonaws.com%2Fc0%2Fd2%2F5bd96a5a4a9eb632ac3bfd4b8da9%2Fmontgomery-brian-fha.png)
“I think we got out early and quickly, which provided a little bit of calming effect for a lot of borrowers, and we'll continue to do that as we need to," said Montgomery.
The FHA is considering whether it should follow in the footsteps of the Federal Housing Finance Agency and insure loans in forbearance.
The FHFA announced Wednesday that Fannie Mae and Freddie Mac would begin purchasing loans in forbearance in order to ease origination pressure as the coronavirus has forced lenders to tighten standards.
“I expect we'll probably have something next week that will help address some of that issue relative to borrowers who have closed but haven't been securitized yet and go into forbearance,” Montgomery said.
The Mortgage Bankers Association reported Monday that loans in forbearance that are backed by the FHA, Department of Veterans Affairs or Department of Agriculture grew by 5.89% compared with the prior week. By contrast, loans in forbearance owned by depository institutions grew by 3.53%.
FHFA Director Mark Calabria, the chief regulator of Fannie and Freddie, predicted in an April 1 interview that there would be more visible stress in the FHA and Ginnie Mae segments of the market, and said he considered many FHA borrowers vulnerable.
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“With the credit quality of their borrowers, they’re going to be the first canary in the coal mine, if you will, in terms of what the broader implications are going to be,” Calabria told CNBC.
But Montgomery said he isn’t too concerned yet about the effect of the COVID-19 pandemic on FHA’s borrowers, adding that his agency has been the “hallmark” of younger, first-time and minority homebuyers.
“We've had borrowers who've always—if you do a comparison to the conventional—are younger again, and just don't have the credit quality of those served by" Fannie and Freddie, he said. “That's the way it's been for a long time.”
Still, the FHA has made some changes during Montgomery’s tenure to protect its mutual mortgage insurance fund from losses. Before the pandemic, the agency revised a scorecard used by originators so that borrowers with "multiple risk factors" must be manually — instead of automatically — underwitten. And thanks to a strong housing market preceding the current downturn, the FHA had been able to amp up its reserves.
The FHA’s 2019 annual report to Congress showed that the MMI fund's capital reserve ratio was 4.84% during fiscal year 2019, marking a high not seen since 2007 and representing a substantial increase from 2.76% the previous year. The MMI fund is required by law to maintain at least a 2% capital reserve ratio.
“We all want this to end sooner rather than later," Montgomery said of the pandemic crisis, "but I think we've got sufficient capital reserves to weather a pretty deep storm if we have to.”
But the FHA is still examining other steps it might take to mitigate risk, including looking at whether or not it should raise premiums, he said.
“We always look at our premium structure relative to the risk,” Montgomery said.
Montgomery also said there are “some things around the edges” that the FHA is asking Congress to consider in a subsequent stimulus package, but declined to say what that might include.
“We have a list of things — nothing major at this point — that we might be looking to get a little more flexibility with, again, just not knowing how long and you know, how deep and how wide this pandemic may go,” he said.
The coronavirus crisis does complicate some of the agenda items that the FHA had planned on working toward, Montgomery said, most notably housing finance reform.
HUD submitted a report on housing finance reform to the White House in September outlining how it envisioned its role in a future system in tandem with Fannie Mae and Freddie Mac. The suggestions included establishing the FHA as an autonomous agency within HUD and technological updates to the agency.
“Housing finance reform … is obviously going to hit the pause button ... somewhat during this time because we're focused on the obvious crisis before us and how that impacts borrowers,” Montgomery said.
That September report also recommended that the FHA refocus its core mission on its historic role of serving low- and moderate-income borrowers. Many observers believe that core mission has been lost since the 2008 financial crisis.
“I could see firsthand how the rise of the subprime market back then was really at the expense of what are FHA's traditional borrowers,” Montgomery said.
FHA stepped in during the financial crisis and expanded its loan book considerably after Fannie and Freddie entered conservatorship in 2008 and shrank their market share. Although the agency is not expected to repeat that growth this time around, Montgomery said it would do whatever it can to play a countercyclical role amidst the economic uncertainty.
“We're here to make sure that in good times and bad people can buy a home, refinance, take out a reverse mortgage,” he said. “We're not chasing any sales goals or volume here.”
If the private market can’t serve low- to moderate-income borrowers, “we're here to make sure that we can do what we need to do,” he continued. “And sometimes that means our volume grows and sometimes it means it contracts.”