WASHINGTON — In many ways, Housing and Urban Development Secretary Ben Carson has spent his first year in office trying to convince lenders that they won’t be harshly penalized if loans guaranteed by the agency go bad.
Based on the industry’s outlook, however, he still has a long way to go.
Bankers are still stung by the hefty fines assessed by the Department of Justice for Federal Housing Administration loans that went bad during the financial crisis.
"There are lots of fixes that need to be made at HUD," said David Stevens, president and chief executive at the Mortgage Bankers Association "A lot of lenders have left the FHA program due to enforcement risk and the huge cost of servicing defaulted [FHA] mortgages.”
Over the past few years, the number of False Claim Act cases against mortgage lenders has gone down. And the Justice Department appears to be wrapping up many of its ongoing cases.
The Justice Department is “not bringing any new ones at the moment,” said Phillip Schulman, a partner at Mayer Brown in Washington.
But it continues to settle old cases, and that continues to worry lenders. The most recent one was Dec. 8, in which Iberiabank paid $11.7 million over claims that went back to 2014.
"I do think these kinds of cases will slow down in 2018," Schulman said. And "HUD would like to get many of the big banks back into the FHA program.”
Still, he said, lenders can’t “take comfort from a DOJ slowdown.”
"The requirements are still the law and there will be consequences for violators,” he added. “As the Justice Department pulls back on False Claims cases, we may see an increase in enforcement by HUD against bad actors.”
Ed Mills, a policy analyst for Raymond James, doubts banks will move back into the FHA space.
"There is a long-tail risk when it comes to FHA originations due to the False Claims Act,” he said. “You might be comfortable with President Trump in the White House,” but it could be a different story if a Democrat, like Sen. Elizabeth Warren of Massachusetts, succeeds Trump.
"On the margin, people could get more comfortable with FHA," Mills said. "But it is not going to get the banks to re-engage at a level that really moves the needle.”
However, bankers might also feel more comfortable with Republicans running the Justice Department and Brian Montgomery running FHA again. (He previously served in the role between 2005 to 2009.)
Montgomery is in line to be the new FHA commissioner, although he was not confirmed prior to the Senate's adjourning for the year.
The Mortgage Bankers Association is hoping HUD will make changes to the loan-level certifications that FHA lenders have to sign, which can lead to enforcement actions. The trade group also wants Montgomery to fix the default management process that makes FHA servicing so expensive.
"I think Brian will be hugely valuable in helping to address those concerns," said Stevens, a former FHA commissioner.
Yet community banks have largely steered clear of the FHA single-family program, according to Ron Haynie, senior vice president at the Independent Community Bankers of America.
"Most community banks are not HUD-approved mortgagees, and most community banks that are HUD-approved, don’t service FHA loans and don’t want to," Haynie said. "That could change, but I think at least for now, it’s the larger players that will get back in or increase their FHA business."
Carson recently said the False Claims Act "should not be used as a hammer” in the case of origination deficiencies.
Schulman said that HUD wants to bring back lenders to the FHA, but that it won’t occur absent changes.
“That won't happen until FHA refines its loan certification requirements that the banks can be comfortable with," Schulman said. “That is likely to happen next year.”
Under Carson and Montgomery, "FHA will usher in a lot of improvements" to programs, said Brian Chappelle, a consultant and co-founder of Potomac Partners.
For example, HUD is trying to improve its condominium program, which would be a "big help to first-time and lower-income homebuyers," Chappelle said.
Carson has also indicated he wants to pull the FHA reverse mortgage program out of the FHA Mutual Mortgage Insurance Fund, which would financially strengthen the traditional single-family program.
However, there is an effort in Congress as part of housing financing reform to focus the FHA mainly on first-time homebuyers. "That would be devastating for future FHA borrowers," Chappelle said.
As with any insurance program, the FHA has to spread the risk within certain parameters. FHA first-time buyers perform worse than repeat buyers, and borrowers with higher loan balances perform better than those with lower loan balances.
Currently, all borrowers pay the same mortgage insurance premium rate, so FHA homebuyers with a $500,000 balance are subsidizing first-time borrowers with smaller loans.
"If Congress limited the FHA program to first-time buyers, the net result would be that insurance premiums would have to be increased significantly to protect the taxpayer from risk,” said Chappelle. “Thereby denying homeownership opportunities to tens of thousands of FHA borrowers each year.”
