The FHA is stuck in the horse-and-buggy era

The Federal Housing Administration is the dominant source of affordable single-family mortgage loans for first-time homebuyers and for underserved and minority borrowers, helping eligible borrowers with low down payment needs or credit blemishes buy a home. At a time when home prices are skyrocketing and mortgage rates are climbing, FHA is needed more than ever.

FHA’s Annual Report spells this out clearly. Last year FHA insured 1.433 million mortgages, totaling $343 billion. About 85% of all FHA home purchase mortgages went to first-time homebuyers and 17% of FHA loans last year were to Black borrowers, compared to 6% for the rest of the mortgage market. Twenty-five percent of FHA loans went to Hispanic borrowers, compared to 10% for the rest of the mortgage market.

FHA is also a profitable and successful business. The 2023 HUD budget projects that FHA will make a net profit for taxpayers of $8.8 billion this year. And FHA’s MMIF Fund strength is at historic levels, with a Capital Reserve ratio of 8% — four times the statutory minimum requirement.  

So why is FHA not run more like a business? The way FHA is funded and constrained by laws, rules and other operational limitations is analogous to FHA living in the horse-and-buggy era in an age where we are starting to see driverless cars.

Therefore, the Community Home Lenders Association is calling on Congress to adopt authorizing and appropriations provisions to modernize the way FHA does business. Some of the proposals we advocate come from recommendations in a 2017 UC Berkeley paper by Carol Galante, FHA Commissioner during the Obama Administration.

Information Technology The first priority is IT upgrades. Testifying in Congress in 2019, then FHA Commissioner Brian Montgomery pointed out that FHA “runs off 15 different systems, some of which are more than 40 years old. FHA’s technological backbone uses an antiquated programming language developed more than a half century ago. Frequent system failures and other technology service breaks result in costly delays, increase FHA risk exposure. . .”

How has this happened? FHA relies on annual appropriations for administrative costs. As a result, instead of doing comprehensive upfront IT systems overhauls, FHA gets modest amounts each year, and is forced to focus on Band-Aid solutions to IT problems. That amount that does get funded has to vie for time and attention with other HUD IT procurement and get in the queue for the contracting to carry it out. This is inefficient for taxpayers and puts FHA at risk. No business would be run this way.

States and localities have for decades used lease-purchase certificates of participation financings — with investment grade ratings — to fund things like IT systems and buildings. FHA should be given some form of financing authority to fund critically needed IT modernization now, using future appropriations to pay back the debt.

Pay Parity
Personnel is another area where FHA operates with one hand tied behind its back. Historically, FHA has all too often been a revolving door of staff that leaves just when they are most experienced and qualified — lured away by higher pay that FHA can’t match under their basic government pay grade cap. Every other comparable federal financial agency — such as the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation and National Credit Union Association — permits a higher pay scale, to allow these agencies to compete with the private sector to retain qualified personnel. Congress should authorize the same for FHA.

Direct Spending Authority
FHA administrative expenses are another problem. Despite churning out billions of dollars of profits each year to taxpayers, FHA arguably goes hat in hand begging to Congress each year for sufficient administrative funds to run the program.  

The 2017 paper had a simple solution: “FHA’s budget should be devised by receiving a baseline appropriation . . .  plus retaining a portion of the premium revenue it generates each year. . . for administrative and personnel expenses.”  

Flexible Contracting AuthorityThe need for oversight and controls on federal contracting is understandable. But the maze of statutes and regulations governing FHA contracting limit its ability to fully address its administrative needs not being met by FHA employees and systems. More flexibility is clearly appropriate — particularly in times of crisis or market stress.

The Ginnie Mae Model
CHLA supports the principle that the FHA Commissioner should report to the HUD Secretary and thereby be politically accountable. But FHA should be operated less like a garden variety government agency and more like the sophisticated mortgage loan program that it is.  

Congress should take a look at the Ginnie Mae model. Ginnie Mae still answers to the HUD Secretary, maintaining political accountability. But Ginnie Mae operates more like an independent agency, and runs itself more like the private sector enterprise that it — and FHA — are. 

Back in 1993, House Republicans introduced H.R. 1123, a bill calling on FHA to upgrade its computer systems and explore the appropriate use of independent contractors.  In 1997, Rep. Bruce Vento, a Democrat, introduced H.R. 2975, a bill to make FHA an independent corporation.  These ideas are not new.  

But decades later, nothing ever seems to change when it comes to creating a more efficient, more modern FHA. There is a simple reason for that. There is no real political upside to this good government approach, no partisan Congressional gain from doing the tough work to make FHA work better.  

And while trade groups like CHLA whose members originate FHA loans would benefit from a more efficient FHA, it will take time and effort to do this, and so will not have the more immediate impact of our other policy priorities like cutting FHA premiums or streamlining the FHA condo approval process.

But continued inaction has a substantial hidden price, spread among all stakeholders. When FHA is not run as efficiently as it could be, minority and underserved homebuyers, taxpayers, and mortgage lenders all bear the cost.

The imperative is clear:  it’s way past time to modernize FHA to meet the needs of the 21st century.