Industry Representatives Address FHA’s Role in the Market

The ""Senate Committee on Banking, Housing and Urban Affairs"":http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.List&Month=0&Year=2013 continued a series of hearings on the Federal Housing Administration (FHA) Thursday morning. Representatives heard from various members of the housing industry, who expressed their opinions of FHA's recent performance and ongoing role in the market.

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Six panelists discussed the appropriateness of FHA's countercyclical role in the housing market in recent years, with special attention to loan limits and FHA's market share.

""Several years into the economic recovery, the FHA market footprint is still enlarged relative to the historical norm, and the agency faces challenges managing risk,"" said Phillip Swagel, professor of international economic policy at the University of Maryland School of Public Policy, who formerly served at the Treasury.

FHA ""displaces private sector activity, while providing backing for some houses worth more than $700,000 â€" a level at odds with its mission,"" Swagel said.

To address this, Swagel suggested that FHA reduce its ""loan limits"":http://dsnews.comarticles/fha-releases-2013-loan-limits-2012-12-13?no_redirect=true to shrink its market share and focus on those who need assistance the most.

Swagel also mentioned the importance of reforming the GSEs in concert with FHA. In a scenario in which the GSEs heightens their standards and the FHA does not, borrowers will flock to the FHA, increasing FHA and taxpayer risk, according to Swagel.

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""It is vital to take immediate steps to stabilize and refocus FHA,"" Swagel said.

Just as Swagel and other panelists questioned the appropriateness of FHA's presence in the high-end home market, Gary Thomas, president of the ""National Association of Realtors"":http://www.realtor.org, pointed out that some feel the FHA has overstepped its boundaries in lending to an increasing number of borrowers with high credit scores.

They feel lending to these highly-eligible borrowers does not fit into the FHA's mission of serving underserved markets.

However, Thomas countered, ""if they are denied a loan in the private marketplace, where else can they turn?""

""That is exactly FHA's role â€" to lend to the underserved,"" he said. ""As hard as it is to believe, borrowers with credit scored below 760 may be underserved by the private market.""

Thomas defended the FHA's recent, expanded role in the market, which he said was necessary.

The general sentiment throughout the hearing was that FHA's current role in the market is not necessary in the long-run.

""FHA has been and remains a valuable part of the housing finance system,"" said Teresa Bryce Bazemore, president at Radian Guaranty, Inc.

""In the past few years, however, FHA has overtaken the mortgage insurance market due to increased loan limits, inadequately-priced FHA premiums, and permissive FHA underwriting,"" she said.

However, Thomas stressed that private capital has not yet fully re-entered the market, and FHA's role should be reduced slowly.

A couple panelists, including Sarah Rosen Wartell, president of the ""Urban Insitute"":http://www.urban.org/, also expressed concern at FHA's lack of ability to change policies quickly to adapt to the market.

Wartell said some of FHA's inflated costs in recent years were unavoidable due to declines in the market. However, ""some of these costs might have been avoided if FHA had more analytic capacity and additional tools and authorities to act nimbly to manage, price, and mitigate risk,"" she said.