A revitalized FHA: expanding access to a safe mortgage solution.

The modernization of the Federal Housing Administration (FHA) is vital to America's housing market. As all segments of the mortgage market deal with the fallout related to subprime lending and the ongoing, critical need for affordable-housing solutions, it is time to take swift action.

With bipartisan support, a "new" FHA will open the door to homeownership, once again drawing on its rich history and its prominent role in mortgage industry innovation. After all, the FHA was a revolutionary concept when it was founded in 1934 at no cost to taxpayers.

Currently, a significant number of Americans will have to refinance due to their loans readjusting to higher interest rates. Couple that with higher housing inventories and cooling real estate markets and it is easy to see that many homeowners may face a difficult situation. In a June 4, 2007, article, The Washington Post estimated nearly 2 million adjustable-rate mortgage (ARM) loans would reset between this year and 2008.

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Department of Housing and Urban Development (HUD) Secretary Alphonso Jackson estimates that nearly 20 percent of all subprime loans are problematic. This, along with the need to help the new homebuyer, represents solid reasoning for revitalizing the FHA. A modern FHA can help those with modest incomes gain access to mortgage loans with reasonable terms, and would caps that limit the amount that adjustable-rate loan payments can rise when rates climb.

In my travels around the country and while delivering testimony to Congress on behalf of the Mortgage Bankers Association (MBA), everyone seems to support a revitalized FHA. A June 2007 survey conducted by Des Moines, Iowa-based Wells Fargo Home Mortgage Inc. found that "nearly 80 percent of Americans support legislation that would promote and protect the dream of homeownership by providing a safer, fairer and more affordable mortgage alternative to high-cost subprime loans," according to a June 14, 2007, HUD press release.

As Secretary Jackson stated in this release, "Americans want financially sound options ... real choices." They are "in support of an FHA that could help even more first-time home-buyers and people with moderate incomes have access to safer mortgages."

Before looking at the proposed legislation, it is important to understand the role the FHA has played over the years. According to HUD, the FHA was created in 1934 to stimulate housing. Its market share grew substantially during the 1960s. To date, the agency has assisted more than 34 million people in becoming homeowners.

As an innovator and protector of American citizens, the "FHA model represents the very best of what a government working with the private sector can and should do," said Assistant Secretary for Housing-Federal Housing Commissioner Brian D. Montgomery in an April 19, 2007, statement about FHA modernization at a hearing before the House Financial Services Committee's Subcommittee on Housing and Community Opportunity.

While the goal of the FHA to meet the needs of those seeking homeownership is still relevant, its approach has not been substantially modernized since its inception. FHA products and practices have not adapted to current market needs and evolving trends. Its products are complicated, its methods are outdated and its technology is antiquated.

Many lenders have stated that the FHA is too hard to do business with, and the transaction delays are unrealistic when compared with other financing options. With tough down-payment requirements and low loan-amount limits, those who might have sought help from the FHA in recent times instead turned to subprime loan options, which were more easily accessible.

Over the past decade, the FHA has steadily lost market share. An MBA and Research Institute for Housing America (RIHA) study in 2006 calculated that the FHA's market share fell from 16 percent to 5 percent, and its share of mortgage debt outstanding declined from 20 percent to 9 percent between 2000 and 2004. FHA's current market share is estimated at 3 percent and is rising modestly, benefiting from the subprime market correction.

That's not to say the FHA has not been beneficial--even in the program's current form. In 2006, it was calculated that more than 75,000 FHA-insured borrowers facing foreclosure were able to keep their homes due to the FHA's "toolbox of foreclosure prevention," and the rate of defaults on FHA loans has continued to shrink while default rates for other loans rise, according to Montgomery's April 2007 statement before the House Subcommittee on Housing and Community Opportunity.

Currently, MBA estimates that one-third of the FHA's originations are for minorities, and FHA is responsible for half of all loans to borrowers who earn less than $50,000 a year. For first-time homebuyers looking to qualify and for those needing an exit strategy from their subprime loans, the FHA can be that safety net. The FHA continues to be committed to sound financial management, and plays an essential role in the future of American homeownership.

One current proposal being considered in the House, known as the Expanding American Homeownership Act of 2007 (H.R. 1852), would align the FHA with today's market requirements. While not originally drafted as a response to the recent crisis in the subprime mortgage market, it is considered the "most substantive FHA reform legislation undertaken by Congress in over 15 years" (www.realtor.org, May 24, 2006) and, if enacted, it could help many stuck in subprime loans to safely refinance into a government-insured mortgage product.

The goal is to streamline and simplify the FHA mortgage process to align it more closely with traditional mortgage lending. The modernization measure includes raising the maximum mortgage amount that FHA will insure in areas such as California, the Northeast and other areas that have higher housing prices. For example, FHA's loan limit in high-cost areas will increase from 87 percent to 100 percent of the government-sponsored enterprises' (GSEs') conforming loan limit of $417,000.

The proposal also includes eliminating the 3 percent down-payment requirement and replacing it with a number of lower-down-payment or no-down-payment options. This addresses a large part of the first-time buyer audience. In 2006, 43 percent of this segment bought their home with no down payment, according to the National Association of Realtors. Changing the FHA process will level the playing field so that those who can least afford a mortgage now have a chance to receive a safe lending alternative.

The Harvard Joint Center for Housing Studies, Cambridge, Massachusetts, pointed out that the vast majority--nearly 66 percent--of first-time homebuyers between 2000 and 2010 will be minorities and will require the most affordable solution possible to finance their first home. That said, it is also important to redesign underwriting standards to allow for ethnic and cultural differences. For example, some minorities do not use credit and have different banking habits. Therefore, a FICO[R] score cannot be the key determinant for this type of homebuyer. Additionally, in some cultures that place an emphasis on extended families living together, there can be several family members, under the same roof, contributing toward payment of the mortgage. Investing in technology will allow for the creation of an underwriting system that will accommodate this growing segment of first-time homebuyers.

Modernizing the FHA will enable the creation of innovative loan products that keep pace with the rapidly evolving mortgage industry to help consumers. Changes have been suggested to improve the FHA's Home Equity Conversion Mortgage (HECM) program, which comprises 95 percent of all reverse mortgages, according to MBA, making it extremely important to senior homeowners.

In revitalizing the FHA, more money should be available for counseling from nonprofit agencies. It is essential that we continue to focus on increasing the financial literacy of consumers. We want to encourage homeowners to contact their lenders when they feel they might not be able to make their payment. In this way, we can help them to make alternate arrangements rather than face foreclosure.

To compete effectively and regain market share, the FHA needs to invest in recruiting talented industry professionals. Montgomery is a sterling example of the top talent that has already done a fantastic job revitalizing the FHA. Since Montgomery's confirmation in July 2005, the FHA has a new vitality and a renewed purpose. That said, it would be beneficial to give this top management team some latitude over products and programs to ensure the constant relevancy of the FHA to the real estate finance market. Clearly, a number of administrative processes must be streamlined to accommodate the suggested infrastructure changes.

Congress can empower the FHA with the authority it needs to provide consumers with affordable lending options. All of us must urge Congress to pass the Expanding American Homeownership Act of 2007 as well as a companion bill in the Senate, so more people can gain access to safe, prudent mortgage products while reducing their exposure to risk.

The FHA is instrumental in providing financing for immigrant and minority homebuyers. The FHA has a growth profile of 80 percent first-time homebuyers, 30 percent minority homebuyers and 60 percent below-median-income homebuyers, according to Mortgage Banking ("FHA Means Business--and Opportunity," by Allen H. Jones, Mortgage Banking, October 2006). With mortgage debt expected to increase to $20 trillion in the next 15 to 20 years, there is unprecedented opportunity for the FHA to thrive.

Recently it was announced that passage of the FHA reform bill will not happen until after Congress returns from its recess in September. While the House Financial Services Committee approved the reform bill on May 3, many also hope there will be an FHA reform bill introduced in the Senate as well. It is essential that we create a relevant program for government-insured mortgages because they have become more important than ever to homeownership opportunity. A revitalized FHA speaks to the future of the housing finance system and the people it serves.

John M. Robbins, CMB, is co-head and special counsel for Vertice, a new brand created for the combined entities of American Mortgage Network (AmNet) and Wachovia Mortgage Third Party Lending. Based in San Diego, he is also the current chairman of the Mortgage Bankers Association (MBA).

By John M. Robbins, CMB