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Having Fitts at FHA.

Having Fitts at FHA

You have to recognize there's something different about her when she starts referring to the FHA as "a financial institution with about 7,000 people."

She's not typical Washington. She's too business school, Wall Street-bred to be a homegrown career government type or even your typical political appointee. Yet, here she is teaching HUD mid-level managers about how to prepare financial statements.

Her name befits this different sort of style - C. Austin Fitts. Fitts was HUD Secretary Jack Kemp's pick for the head of the FHA. She holds an MBA from the Wharton School - the University of Pennsylvania's premier business school. And her old stomping ground is Wall Street. Before becoming the first woman assistant secretary for housing/FHA commissioner, Fitts was a managing director and board member at Dillon, Read & Co., Inc. in New York. The Philadelphia native brings her own brand of management to the rather dreary halls of the HUD headquarters building. Even though she spent much of her career in finance on Wall Street, she is no stranger to government finance programs. She points out that during the last six years, about 95 percent of her time was spent working on the financing needs of government entities. She also served as a financial adviser to the city of New York during the serious budget crisis there several years back.

When asked about the culture shock of leaving the rather free-wheeling private sector for the heart of the federal government bureacracy, she replies that she's spent far more of her time working with bureaucracies than most people think. As far as bureaucracies go, she says, "I've seen worse than HUD."

She adds that "I came knowing I had a financial institution that needed a whole lot of work. It had a $300 billion portfolio and its condition was uncertain." But she noted that going into the job, "I thought things were worse than they are." She took the job with the attitude that, "My first job is to find out the facts."

so far, Washington ways appear not to have seriously dampened her enthusiasm even though there has been at least one rumor that had trouble dying about her intent to quit the FHA job. She says after running it down that it "was gossip." And she dismisses it with the appropriate Wall Street jargon for such groundless conjecture. She says convincingly that she's quite happy with the job she's got. "I think this is a wonderful job."

Fitts talks like a serious financial manager. In her first two months on the job, she says the FHA team drafted a four-year strategic plan. Then she said every "manager" was required to have a one-year business plan. The 150 "managers" by her definition working at HUD headquarters are also required to help prepare financial statements on their programs. Although financial statements are the daily bread of Wall Street, they are not exactly common knowledge for the typical career manager in many federal government posts. Fitts says that many people had to be taught what a financial statement should include. She says that inside HUD, this new management religion that she and the others on Kemp's team are fostering has resulted in a "huge cultural change going on." The essence of her management message is this: "I just want people to measure." When she first arrived, Fitts recalls, "We had no way to measure who we were helping and how much it cost for them to be helped" in the various programs HUD offered. But that has all changed. HUD is now measuring with a vengeance. A package of important FHA proposals that will determine how FHA programs will be run in the future is waiting on the outcome of an actuarial study that is supposed to tell HUD the current condition of the main FHA insurance funds. Fitts says that the study was set up to be done in two phases. The first phase was focused on measuring the actuarial condition of the MMI fund for the single-family program and the second phase was to cover the general insurance fund. The FHA commissioner says that study asks a series of questions. The first is, What is the current actuarial condition of those funds today, assuming that no future business were to be done - how would the portfolio perform over time? The second question the study asks is, "How do we have to conduct our operations so that we maintain our operations on a self-sustaining basis because the MMI fund is required to operate on a self-sustaining basis?"

Fitts says, "The point of the study is to determine under a group of economic scenarios over the next decade what the options are" to ensure that the FHA program will be self-sustaining. The choices that will be made will determine the future "terms and conditions" under which FHA insurance will be offered to borrowers. HUD will be deciding the new rules for the FHA single-family program and they will be looking at these aspects: "the loan limits and how they are measured." HUD will consider what the premium is and the refunding policies for the premium. And the third most critical component HUD will assess is, What should the down payment policies be, according to Fitts. She says they will weigh whether or not there should be a single down payment or a scale.

Once she and the other HUD top managers get these "policy options," she says, they will have the basic components from which to fashion the recommendations on the FHA programs.

Fitts says the timetable was to have a first draft of the policy options on the MMI fund internally circulating before the end of March. She declined to speculate on when a legislative draft of FHA program changes may finally go to Capitol Hill.

Fitts has a clear sense of her mission in this matter. "My job is to figure out what the facts are, and, therefore, what the options are. I always call them algebraic options." She implies that's no small undertaking. She offers no clues as to how long Kemp and his policymakers will take before releasing their actual recommendations. She deflects questions about the timetable by saying, "There is a real question about how long it's going to take the Secretary and his staff to really determine which [options] they want to consider." When asked about the first part of the study that examines the funds' financial outlook given the business already on the books, she offers tentative comments that indicate there is little chance the FHA program will be left to operate the way it has in the past. Fitts says, "I know that in the eighties, we have underwritten a lot of what my guess is going to be money-losing business. She quickly adds, "The only thing that I can say now is that I don't know whether or not the fund is sound. I do know if we continue to run the operation the way we run it now, it will be unsound."

The discussion turns to what the data is showing in terms of gaping differences in the performance of business from different regions. Fitts confirms that part of the proposals to revamp the FHA will be a move to adopt different underwriting standards for different regions to accommodate local economic conditions and credit risks. "We are going to propose - absolutely - regional underwriting." She said it was her "hope" to do something on regional underwriting "sometime this Spring."

Fitts, a true devotee of statistical analysis, says, "There are some areas where we lose as much as 50 percent of book value on the property disposition operation." She says that our estimate of what FHA lost in the Anchorage office in 1988 was approximately $70 million. Fitts adds that the agency has "a very large amount of the property there." She lays out the policy issues very emphatically when it comes to those kinds of regionally specific losses. "Some of those losses are unavoidable. It's our job to make sure there's liquidity in certain markets. We have a bad economy and you know, you can't help that. At the same time, should we be continuing in an area like that where we have an inventory of homes we can't sell? We're heating them, we're losing money because people are pulling their funding out. Should we continue to underwrite new construction? That's a very important policy question. If you're losing $70 million a year someplace, is that a good use of the taxpayer's money? That money can be used for something else."

Fitts maintains that in places where the economy has turned bad, HUD continues to make FHA loans available at the same, relatively easy terms elsewhere where markets are healthy. This has the effect of underwriting new construction activity where it probably should be tapering off. Fitts says, "In regions where you have severe recessions, we continue to underwrite too much new construction. We're taking very large amounts of loss on books of business that we just recently underwrote."

Fitts says a regional approach to underwriting would not just give FHA the power to tighten up on credit, "it would give us the power to loosen where that is appropriate." She acknowledges that HUD has a special role as the federal government's program to enable people to get a mortgage who would not be served by private sector insurers who promptly pull out of markets that are producing deteriorating business. "It is our job to be the lender of last resort and help to maintain stable markets. At the same time, there's a point at which what we're doing is not cost beneficial for the taxpayer. And since Jack Kemp has gotten here, what he has talked about again and again is, in a lot of the program judgments that we've made, let's use the precious money that we have in a cost beneficial way."

Fitts understands that lenders probably will view the idea of regional underwriting rules with dread because of the problems they've experienced with inconsistent policies being administered at the field office level. She recognizes that HUD needs to "make sure we have far better consistency" at the field office level. She says she's sympathetic with that concern and is spending time trying to head off management problems inside HUD that might lead to an "adverse selection" of lenders participating in FHA.

The property disposition losses appear to be a real Achilles heel for FHA. She says, "We are taking back far too much property and given the way we manage our property disposition operation, we are seeing very low claim recoveries on those." She added that HUD "markets properties in about the worst way possible. We close the property, put an FBI sign on them, change the locks so vandals can buy a key and then proceed to take out the plumbing."

Fitts says a task force inside HUD has been working on proposals to help market foreclosed properties better. She says it has about 25 proposals and she thinks most of them will be formally proposed. Fitts says the root of the problem is that HUD has simply too much property that it takes back. The numbers show it acquires and sells about 85,000 properties a year. Some things HUD might do short of foreclosure is to encourage pre-foreclosure sales, assignments and have direct endorsement (DE) lenders handle the disposition for compensation, Fitts says. She adds that HUD has to improve its disposition rate. The numbers show when you look at an "all-in" analysis that the losses would be less if HUD just moved the properties in and out faster by whatever means it takes.

Fitts says HUD is in a bind as to what it can do to push these homes out of its inventory faster. "We have a delicate balance between our fiduciary obligation to the fund and what we can do for the folks [in the homes who can't meet the payments.]" She added that when she first came to HUD, a lot of proposals to help HUD get rid of its inventory of homes were just sitting because they had been turned down by lawyers on the basis that they would hurt the fund.

Fitts also said that the property disposition efforts of the RTC will not help HUD to net the best dollars for its inventory. "FHA will be selling next door [to the RTC] with a large inventory in markets that are changing."

Fitts sees better accountability for correspondents as an issue that needs attention. She says HUD "isn't satisfied" with the way DE lenders are taking responsibility for the originations produced by their correspondents. She says she wants to work with the Mortgage Bankers Association and the main DE lenders to devise a better system for holding correspondents accountable.

Fitts sees the whole FHA program as having built-in regulatory overkill. She says the bad lenders are a very small minority, yet HUD "ends up designing the entire system to deal with that small group." As a result, "we take our good lenders, which are the majority, and drive them crazy." This is where she worries about quality lenders getting fed up and abandoning FHA business - her adverse selection theory. To try and treat some of these good lenders better, she speculates about allowing FHA lenders to have less documentation requirements on high down payment FHA loans.

If that sounds a little like the conventional market, Fitts counters any impression that she may be trying to convert the FHA into a private sector mortgage insurance shop. "We're not trying to take over the conventional market. We're not trying to compete with the conventional market, nor do we want to." She also tries to dispel any fears that she may be trying to bring too much private sector, managing-for-profits thinking to the federal government's flagship housing program. "Believe me, I'm not trying to say we should try to run this thing for a profit."

Even so, this New York import with a unique style is bringing new ways to Fourth and D Streets, Southwest in Washington, D.C. Perhaps the button that Fitts is fond of giving to visitors best explains the new attitude at FHA - the international ban symbol (a red diagonal line) superimposed over the word "whining."
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Title Annotation:Federal Housing Administration's C. Austin Fitts
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Apr 1, 1990
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