In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, December 05, 2007

FHASecure, OK. FHA Modernization, Not OK.

by Tanta on 12/05/2007 11:17:00 AM

Much has been said and debated about the Hope Now Alliance and Treasury Secretary Paulson’s comments last week thereon. Accrued Interest has a good post on the subject, which I take in part as kind of a nudge to explain some of my discomfort with the proposal. I’m working on a longer post addressing the question that seems to bother people the most, namely the question of the extent to which this involves the government changing the terms of existing contracts, or providing protection from liability for servicers who might be accused of violating contracts. That’s a big issue and in many ways a highly technical one, so it may take me a while to deal with it.

In the meantime, though, I wanted to point out one large problem I have with Paulson’s remarks, and a news item this morning gives me a great excuse to do so:

NEW YORK, Dec 5 (Reuters) - Countrywide Financial Corp's (CFC.N: Quote, Profile , Research) chief executive called on the U.S. Congress to temporarily raise the maximum size of mortgages that Fannie Mae (FNM.N: Quote, Profile , Research), Freddie Mac (FRE.N: Quote, Profile , Research) and the Federal Housing Administration may buy or insure by 50 percent to $625,000.

In an opinion piece in the Wall Street Journal on Wednesday, Chief Executive Angelo Mozilo, whose company is the largest U.S. mortgage lender, said the increase from $417,000 should be implemented for up to a year.

He said this would go a long way toward alleviating a nationwide housing crunch, which analysts expect to pinch borrowers and lenders throughout 2008 and probably beyond.

"It should be enacted as part of a broader package of reforms to ensure that these linchpins of our mortgage system can aggressively support the housing market in a time of need, and that the appropriate controls and oversight are in place to protect taxpayers," Mozilo wrote.

Mozilo had previously called for the cap to be raised to as much as $850,000.
You may recall that Bernanke, in a fit of exuberance, had suggested at one point that the GSE limit be raised to $1,000,000. Like most people, I pretty much instantly discounted that as a real possibility. Apparently even Angelo Mozilo has been forced to back off from $850,000 down to $625,000, and only on a temporary basis, at that. I suggest to the powers that be that continuing to ignore this sort of thing is working: wait til they get down to about $420,000, and then close the deal.

But I do not trust Henry Paulson one little bit when it comes to ignoring this sort of thing. This is from Paulson’s speech to the OTS’s National Housing Forum, part of his remarks on the Hope Now proposals:
We in the federal government are also taking steps. This fall, HUD initiated "FHASecure" to give the FHA the flexibility to help more families stay in their homes, even those who have good credit but may not have made all of their mortgage payments on time. An estimated 240,000 families can avoid foreclosure by refinancing their mortgages under the FHASecure plan.

The Administration is taking action to help homeowners, and Congress must do the same before it leaves for the year. Since August, the President has been calling on Congress to pass his FHA modernization proposal which, by lowering the down payment requirement, increasing the loan limit and allowing risk-based pricing, will make affordable FHA loans more widely available. The Administration's proposed bill would help refinance another estimated 200,000 families into FHA-insured loans.
FHASecure and “FHA Modernization” are horses of a different color. “FHASecure” is HUD’s response to the subprime refinance market meltdown; it is a way to offer refinances for a specific class of borrowers facing exploding ARM resets. It still requires a minimum of 3.00% equity, and it does not involve an increase in the maximum mortgage amount. You can read about the details here.

FHA Modernization” is the kind of thing that got us into this mess in the first place. It is disingenuous of Paulson to say that Bush has been asking for this “since August”; he has been asking for it as far as I know since his first presidential campaign in 1999 (when the whole “Ownership Society” thing got launched). Only someone drinking too much bongwater, in my view, can think that now is a good time for FHA to start taking the oversized no-down loans (with casual appraisals) that are blowing up in the conventional sector. The Bush administration simply treats “FHA Modernization” like tax cuts: they’re good when the economy is good, they’re good when the economy is bad, they’re good when the economy is indifferent. They’re good; it’s a religion. Using the cover of the current crisis to sneak in permanent changes to the base FHA programs, changes that would allow future purchase transactions of the sort that we need FHASecure to bail out, is playing politics. Bad on Paulson.

Do note that FHA loan limits are now, and would be under “modernization,” tied to some percentage of the GSE conforming limit. This means that any change to Fannie and Freddie’s loan limits are an automatic change to the FHA limits. The “modernization” proposal would increase “lower cost” area limits from 48% to 65% of the conforming limit, and “higher cost” areas from 87% to 100% of the conforming limit. Therefore, the combination of “modernization” and—should it occur—increases in the conforming limit could very rapidly increase FHA loan amounts, at the same time that it relaxes appraisal requirements and lowers down payments. If Mozilo’s proposal were enacted along with FHA Modernization, the FHA limits would go to $406,000 (lower cost areas) and $625,000 (higher cost areas). Without “modernization,” the FHA limits would still increase to $300,000 and $546,000, respectively, unless there were a specific limitation in the bill holding the line on FHA limits. Those are pretty big loan amounts for a program that currently allows 97% financing and that is lobbying for the ability to offer 100% financing.

So far, cooler heads seem to be prevailing on the question of raising the conforming limits. So far. This is what Lockhart had to say on the subject to American Banker (subscription only):
"From the Fannie and Freddie side at this point, they should really stick to their knitting, given their capital constraints and given their lack of experience in the jumbo market," Office of Federal Housing Enterprise Oversight Director James Lockhart said in an interview last week. "From my standpoint, they have their hands full in the conforming loan market, and they're doing a good job, and if they're going to go anywhere, I think it should be to help out more in the affordable [housing market], because that's part of their mission."
If Fannie and Freddie don’t belong in the jumbo market, then FHA certainly doesn’t.

My position has always been that the only really good thing about a full-blown credit crisis is that it creates a context in which restrictive legislation that would normally get successfully fended off by industry lobbyists can get passed, as part of the price tag of various bailout or pseudo-bailout efforts. In other words, you can kick them while they’re down. Changes to bankruptcy law to allow cram-downs is a great example of this, as are the state laws seriously curtailing or outright prohibiting stated-income lending. Those aren’t the kind of regulations you get when the punchbowl is still full.

Using the current crisis as an excuse to sneak through more irresponsible “innovation” is making a bad situation worse. The best thing you can say about FHA and the GSEs over the last several years is that while they took on some real risk—everyone did—they did not—they could not—participate in the worst of the excesses. It was left to the purely private sector to go where the agencies would not go; they went there; we got a postcard; it’s not a pretty one. So the agencies will have to be part of the cleanup. Programs like FHASecure and the GSEs’ various near-prime or “expanded approval” refinances for troubled loans are out there, and will save as many loans as they can save. I can live with that, personally.

What I don’t intend to live with is changes to the agencies’ statutory and charter limits that put them in the front of the next bubble. Put down your coffee and any sharp objects you happen to be holding, and read this interview from August of 2006 with Brian Montgomery, FHA Commissioner (and former “director of advance” for Bush-Cheney 2000):
Q: When we spoke about a year ago, on your 34th day on the job, you noted your vision for FHA and the things about FHA that you wanted to improve. Has your vision for FHA changed or evolved during your first year as FHA commissioner? What do consider your biggest accomplishment at FHA within the past year?

A: I'll tell you that the vision is pretty much the same, as far as what we need to do to make FHA viable again. I'd even go so far as to say that it's been strongly reinforced by the many speeches that I give around the country and the many home-ownership events and ribbon-cuttings where I'm actually getting to meet some of the families who've been able to purchase their first home because of FHA. Getting to see the excitement on their faces tells us we're doing the right thing.

I'd also say that, speaking relative to the industry, when we embarked on this quest to modernize FHA, we worked closely with many industry partners, including the MBA [Mortgage Bankers Association]--in particular, at their conference [92nd Annual Convention & Expo 2005] down in Orlando.

Kurt [Pfotenhauer, MBA's senior vice president, government affairs] and others had set up a roundtable of about 25 small to medium-sized FHA lenders, and what was going to be about an hour-long sit-down ended up being an hour and 45 minutes where they all gave me their input on how FHA should be.

Every one of them essentially gave me an earful--in a pleasant way, mind you--but every one of them would start off [by saying], "I started out in FHA" and "I cut my teeth in FHA or my partner did."

It was good for me to see--again reinforcing that our industry partners firmly believe that FHA needs to play a large role in today's mortgage marketplace--that we're definitely heading down the right path. I haven't met anyone yet who said, "We think FHA has outlived its usefulness." Quite the contrary--they all tell us we're doing the right things.

As far as a biggest accomplishment, I would say modernizing some of the ways we do our business relative to our procedures and processes. Some of the feedback we've gotten from the industry, because we rely on the industry and we're partners in all of this, [include] improvements in how we do appraisals.

Some previously called [our rules for appraisals] "unique," some called them "onerous" and some [called them] things worse than that, and we just thought maybe in today's hurry-up world it's not so important to go back two or three times to make sure a cracked window pane is fixed or maybe the tear in the carpet has been adequately repaired. Now, if it's something structural, that's a different story.

I think [another accomplishment would be a] lot of those common-sense solutions--the lender insurance initiative [FHA's Lender Insurance Program, introduced by HUD in September 2005], that now about half our loans are using lender insurance, but we were about the last entity out there to send the thick case binders back and forth as our only means of really processing loans.

We decided that it was time for us to come into this century and do what everyone else was doing--just hitting the "send" key.
That's the Bush administration in a nutshell: give happy speeches, see happy faces, hit "send." The fact that they're still pushing hard for this even "post-turmoil" tells me that it has nothing to do with "Hope Now," and everything to do with "Just Keep Hoping."