Opinion: Holistic approach needed to fix vital federal mortgage programs

The following Op-Ed by CHLA Board Member, Deborah Sturges, appeared in National Mortgage News on May 17, 2019.

By Deborah Sturges

In late March, the
Trump administration sent a memo asking the Department of Housing and Urban
Development and Treasury to develop plans and recommendations on housing
finance reform, focusing on key federal mortgage programs that they oversee,
such as the Federal Housing Administration, Ginnie Mae, Fannie Mae and Freddie

These programs are
vital to firms like my own, Hallmark Home Mortgage; which, like countless other
community-based independent mortgage bankers, rely on to create homeownership
opportunities. These programs are especially crucial for qualified minority,
rural, low-income, and other traditionally underserved borrowers.

At a recent roundtable
hosted by the Community Home Lenders Association on these mortgage programs, we
offered recommendations for improvements to the FHA. Heading the list was the
importance of eliminating the FHA’s “life of loan” premium policy.
Enacted in 2013, this policy replaced the previous policy in which premiums
expired when a loan paid down to a 78% loan-to-value ratio.

Life of loan premiums are
unfair to FHA borrowers. Consider a family that Hallmark recently originated a
$200,000 FHA loan for. That family is scheduled to pay $19,000 in FHA premiums
by the time the loan pays down to 78% LTV — almost 10% of the home’s value and
many times over the risk that loan poses to the FHA. But under life of loan,
the same family will pay an additional $15,000 over the remaining mortgage
term. This truly undermines the asset building benefit of homeownership.

The life of loan
policy is also financially harmful to the FHA, causing it to lose good quality
loans and the revenue they produce. A January CoreLogic report found that the
FHA has lost over 500,000 quality loans when “borrowers with good credit
history and at least 20% home equity can eliminate their mortgage insurance
premium.” After life of loans went into effect, the percentage of refinanced FHA loans that
FHA retained fell from 50% to around 15% today. We even see lenders and
insurers market life of loan as a reason to refinance out of FHA.

Life of loan is also
harmful to Ginnie Mae, which just issued a request for public comment on
concerns about increases in prepayment speeds — a problem that FHA life of loan
clearly exacerbates.

CHLA also released recommendations
to modernize FHA, including: (1) allowing a higher pay scale to allow the FHA
to retain skilled employees (an option other agencies like the FHFA and the
FDIC have), (2) allowing FHA to use $25 million a year from its annual $7
billion in net profits to accelerate modernization of FHA IT, and (3)
modernizing the FHA’s underwriting guidelines to
keep pace with the gig economy and to match flexibilities that Fannie Mae and
Freddie Mac have implemented.

The homeownership
achievements of the FHA, the Rural Housing Service and the VA would not be
possible without Ginnie Mae to securitize the loans. Here, too, balance is
needed. In a report on Ginnie Mae that CHLA released in January, CHLA commended
Ginnie Mae for actions it took to prevent churning of loans and its focus on
the risks of large issuers. But CHLA warned against actions that would drive
smaller issuers out of the program and are not justified by the risk they pose.

The CHLA roundtable
also explored the key role Fannie and Freddie play in our mortgage markets.
Their recovery in the last decade has been remarkable. They have paid back
their 2008 federal advance, plus an additional $85 million in profits for
taxpayers. Also, major reforms have taken place, including ending the
pernicious volume discounts under which the GSEs gave favorable pricing to
large lenders like Countrywide and Washington Mutual, the end of no-doc loans,
risk sharing to bring in private capital, and shrinkage of MBS portfolios and
the interest rate risk they entailed.

The remaining steps
are clear. The artificial profit sweep should be terminated, so Fannie and
Freddie can rebuild capital. Other administrative steps should be taken to move
towards the end of conservatorship, with the concurrence of Congress.

For all these reasons,
the administration is to be commended for putting the focus on a holistic
approach to making sure we have a housing finance system that helps Americans
achieve the dream of homeownership, while promoting competition and protecting

The 2008 housing
crisis was an example of what happens when we get this fine balance wrong. With
careful and concerted forethought on the aforementioned matters, we should
never have to experience a devastation like 2008 again.

Deborah Sturges

Sturges is president/CEO of Hallmark Home Mortgage in Fort Wayne, Ind., and is
a board member of the Community Home Lenders Association.