When we have a gala later this year for the Annual Unintended Consequences Awards, the Department of Housing and Urban Development is sure to be a leading nominee in the "Overall Body of Work for a Federal Department" category. Though I will give HUD a nod for at least recognizing the rising voices of opposition to its frequent missteps as they have developed a pattern of releasing "Myth vs. Fact" documents. Their myth memo for the mortgage settlement was a real strong effort towards securing the AUC Award, and now they have followed on with a recent release for comments on the Federal Housing Administration's struggles.
Former Fannie Mae chief credit officer Ed Pinto went through their 19-point "Myths and Facts Regarding the FHA Single Family Loan Guarantee Portfolio" document and pulled out a few of the most egregious comments. Here are some of his notes. (And bear in mind his four principles for FHA reform: 1) Utilize generally accepted accounting principles, and set rigorous disclosure standards; 2) Establish and maintain loan loss and unearned premium reserves; 3) Establish and maintain a minimum capital requirement of 4 percent of amortized risk in force; 4) Fund a countercyclical premium reserve.)
HUD Lables As Myth: FHA would be declared insolvent by state regulators were it a private mortgage insurance (MI) company.
HUD’s response does not deny the truthfulness of this statement. Instead HUD points out FHA’s counter-cyclical role. Yet during the boom HUD used FHA and other agencies and policies to lead a self-described “revolution in affordable housing”. The central policy of this revolution was the near elimination of downpayments, a pro-cyclical policy in the extreme. HUD seems to espouse a policy of being pro-cyclical in booms and counter-cyclical in busts.
Elsewhere HUD points out that the FHA’s access to funding from the Treasury Department makes complying with private sector standards unnecessary. This may be comforting to HUD, but the Congress and taxpayers deserve more than HUD’s assurances that all will be well. The FHA is the third largest financial guarantee entity in the United States, surpassed only by Fannie Mae and Freddie Mac (the GSEs). Yet it continues to operate under fiscal standards that can only be described as Byzantine.
Consider the experience with the GSEs. In July 2008 the GSEs were given a clean bill of health by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO, now FHFA). In a statement, OFHEO Director James B. Lockhart opined: "OFHEO has been monitoring and continues to monitor closely Fannie Mae, Freddie Mac, and the mortgage and financial markets. As one would expect, we are carefully watching the Enterprises’ credit and capital positions. As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets."
During the month of August 2008, the Department of Treasury hired Morgan Stanley to undertake an independent review of the GSEs.
The taxpayers know all too sadly the outcome of this review—the very next month the GSEs were placed in conservatorship by FHFA with the bailout bill now approaching $200 billion.
The questions relating to FHA’s current safety and soundness are substantive. A review similar to the one undertaken with respect to the GSEs in 2008 is undoubtedly needed. Under private accounting principles FHA likely has a current net worth of -$13.5 billion and an overall capital shortfall under its mandated 2 percent standard of over $32 billion. This is clear evidence that FHA’s current capital is woefully inadequate today.
There is hope that this critical review will take place. On March 27, 2012 the Financial Services Committee of the U.S. House of Representatives without objection from a single Republican or Democrat agreed to H.R. 4264: “The FHA Emergency Fiscal Solvency Act of 2012.”
Section 15 mandates that the Comptroller General of the United States provide for an independent third-party one-time safety and soundness review of the FHA “in accordance with generally accepted accounting principles applicable to the private sector.”
HUD Lables As Myth: FHA should hold capital levels like a private MI.
HUD bases its entire response on the erroneous statement that private MIs must “isolate their older’ weaker books of business from any recent and healthier year-by-year activity.” This is not true. Like the FHA, each MI consolidates all its annual books of business in computing a single capital position. Further, the private MI industry has raised or received over $10 billion in new capital since September 2007, none of which was segregated by book year.
FHA should not be allowed to operate is an unsafe and unsound condition, while it unfairly competes with a private sector that has invested and continues to invest real capital. As is noted below, FHA and other government guarantee agencies should credibly begin stepping back from markets that can be served by the private sector and return to a traditional 10 percent home purchase market share. If this were done, more not less capital would enter the market.
HUD Lables As Myth:FHA masks expected losses by using overly optimistic assumptions regarding future home prices.
HUD appears to agree with this “myth,” but uses the excuse that the projections used in the November 2011 Actuarial Study date from July 2011. No publicly traded company would be allowed to hide behind such an excuse. Again there is hope that HUD’s disclosures will be held to a similar standard as applies to the private sector. Section 16 of the above referenced H.R. 4264 also sets disclosure standards for HUD with respect to FHA:
1. Disclosures must provide meaningful financial information and other information that is timely, comprehensive, and accurate;
2. Disclosures must not contain any material misstatements or misrepresentations;
3. Disclosures must make available all relevant information; and
4. Disclosure must not have material omissions that make the contents misleading.
The Congress and taxpayers deserve nothing less than timely, comprehensive and accurate disclosures from a trillion dollar financial entity. While HUD is to be commended for taking steps to increase premiums, eliminate incompetent lenders, and tighten some underwriting standards, it has done little to:
- Address the urgent need to move forward with housing finance privatization; and
- Credibly undertake a return to FHA’s core mission to provide sustainable lending to low- and moderate-income and minority borrowers. Today 90 percent of all mortgages are guaranteed by the Government Mortgage Complex (GMC), consisting of Fannie, Freddie, Ginnie/FHA. Ginnie/USDA, and Ginnie/VA. Clear and credible steps must be taken to step back from the GMC’s market domination. Yet even as FHA takes steps to reduce its share, much of the slack is merely taken up by Ginnie/USDA and Ginnie/VA.
Follow Ed's regular FHA missives here.