Picking Ben Carson to run the Department of Housing and Urban Development looks like a rather unusual pick and mortgage lenders are hoping that he can bring new leadership to HUD, and hopefully, positive changes to FHA.
At least, mortgage industry experts believe that Carson’s close relationship with Trump could shed more light on critical housing and mortgage issues that affect the health of the economy.
According to a former commissioner of the Federal Housing Administration, that relationship will definitely raise the housing issue to the White House level.
Many in the mortgage business have compared the appointing of Carson to Ronald Reagan’s choice of Samuel Pierce, who was a lawyer with no housing experience, to be HUD chief in 1980. Reagan then selected a realtor to be the head of the FHA.
The Reagan team was given credit for getting FHA improved by introducing the direct endorsement program.
As the head of HUD, it is believed that Carson is going to focus on improving inner cities and urban areas. However, the mortgage industry is more concerned with FHA, which has a major impact on the ability of many Americans to buy a home.
In the last two years, FHA has seen a big rebound in its mortgage fund, and there are many calls to cut the premiums that borrowers pay, which would help to spur the economy. The downside of that is if the borrower defaults, the FHA has more exposure; FHA guarantees by insuring FHA mortgages. If the borrower defaults, the FHA will reimburse the lender approximately 90% of the loan balance.
This function is funded by the FHA mortgage premiums that borrowers pay.
- FHA mortgage rates remain competitive with conventional lending.
- The credit standards on FHA mortgages have for the most part been more flexible than traditional underwriting.
- FHA encourages low down-payment payment requirements for home buying
- FHA Allows high Loan to Value so people can refinance without much equity
Experts do not think that Carson will probably be involved in these types of FHA discussions; those may fall more in the sphere of the Treasury Secretary, who will be Steven Mnuchin.
One controversial issue is the mortgage interest deduction, which both Trump and Mnuchin have expressed discussing, so that broad tax reform can be enacted. However the mortgage interest deduction is considered a staple in the real estate industry, so most people don’t really believe the homeowners’ tax deduction will be removed.
Overall however, banks’ share of FHA lending has dropped for the last three years from 60% to 22%. FHA backed loans were popular in early 2015 when HUD dropped the upfront mortgage insurance premium by 50 basis points. That is when FHA saw its share of the market go from 34% to 40%.
Another area where Carson or whoever is appointed to head FHA could address is the fact that many banks do not want to take on FHA loans because late FHA cost a lot to service. Also, lenders are nervous about being sued under the False Claims Act.
It was reported that JP Morgan Chase pulled out of FHA loans in 2015 in part because of the threat of lawsuits and the expensive regulatory environment with FHA loans. The fact that in some cases FHA insures mortgages for people with bad credit makes some banks nervous. Nobody really knows if credit standards and FHA requirements will be eased under Carson.
Experts also say that Ben Carson and his FHA team can remove uncertainty with FHA mortgages around the False Claims Act. At this time, the language of the Act lets lenders to be sued if there is even a small defect in a loan, no matter how related it is to the risk of the loan. The penalty can be as high as three times the cost of the loan. Many mortgage companies expect more aggressive products for FHA home loan programs
Many big lenders have decided to move away from FHA lending because the risk of a damaging lawsuit is just too high.
To deal with this problem, Carson could direct the FHA commissioner to develop several levels of penalties that matches the level of error. Therefore, smaller mistakes would get a smaller penalty and the False Claims Act only would apply for major errors.
Under such a new, proposed system, lenders would be able to use better underwriting to guard against a risk of heavy penalty, and they could do more FHA-guaranteed loans.
Another big problem is that lenders with a lot of capital have left FHA lending because it is not cost effective for them to deal with defaulted loans. Carson could also deal with this problem be reducing the rules which cause the most problem for lenders.
These would include transferring the property from the mortgage servicer to FHA right away after foreclosure. This would allow the property to be sold more quickly. Further, the budget should be raised to repair a distressed property so that it can be sold faster.
Last, there should be servicer discretion and a longer timeline, where a slowdown in one part of the FHA process could be offset by doing something faster in another part of the process.
Mortgage lenders believe that if Carson were to take these steps, many big lenders would come back to FHA. But this is going to require more funding from Congress, and FHA will need an overhaul of its systems to take many of the most needed steps.
The Bottom Line
The FHA mortgage program is one of the best products available to many potential home buyers with average credit and limited down payment money. It would be very good for the US economy and for the housing market if the new HUD secretary revised many of the above FHA rules so that more lenders will offer FHA loans to potential buyers.