The House has approved legislation that could allow the Federal Housing Administration to hire additional staff and upgrade its technology to handle increased demand for its mortgage guarantees and combat fraud and lax underwriting.
HR 3146, the 21st Century FHA Housing Act of 2009, is a response to fears that increased demand for FHA-backed loans is taxing the FHA’s capabilities to oversee lenders, making the program more vulnerable to unnecessary losses.
With the demise of "private label" subprime lenders, the number of FHA-approved lenders grew more than fivefold in two years, from 692 at the end of September 2006 to 3,300 two years later, Kenneth Donohue, inspector general of the Department of Housing and Urban Development, testified at a Congressional hearing this summer (see story).
"The integrity and reliability of this crop of program loan originators is, in our view, unproven, and in light of the aggressive recent history of this industry, may pose a risk to the program," Donohue warned, noting that HUD was investigating several FHA lenders who were active in the subprime market during the boom.
Donohue testified that past audits have found significant lender underwriting deficiencies, inadequate quality controls, and other "operational irregularities," at FHA. Some lenders have been allowed to reacquire their FHA approval despite past abuses, he said.
FHA is not entirely to blame, as the agency has been underfunded and undermined by "industry-led initiatives to diminish its authority," Donohue said.
"The FHA cannot keep pace with an industry that is increasingly technology-driven, and it cannot use its revenues to invest in any new technology," Donohue warned. "Many of its deficiencies could be mitigated with additional resources dedicated to systems and staffing enhancement."
HR 3146 could allow Federal Housing Commissioner David H. Stevens — the former president and chief operating officer of Long & Foster Cos. — to implement such changes.
In order to attract workers with the necessary skills and experience, HR 3146 would allow HUD to hire FHA officers and employees as it "considers necessary," without regard to government pay-rate schedules. …CONTINUED
Compensation for those new hires would be comparable to what officers and employees of the Federal Housing Finance Agency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corp. receive.
The bill would also allow HUD to use money "as may be made available" to ensure that an "appropriate level of investment in information technology is maintained." FHA could use as much as $72 million in premium fees a year to make those purchases, but only if premium fees exceed assumptions prepared by the Office of Management and Budget, the bill stipulates.
HR 3146 would also require HUD to conduct an ongoing review of mortgages originated in the past 12 months where the borrower has become delinquent by 60 days or more within 90 days of taking out the loan. The review would determine which loans should never have been originated or insured in the first place, and identify lenders with high incidences of such delinquencies.
The bill would appropriate funds to provide 90 additional full-time employees or hire contractors to carry out the reviews for four years.
"Like most Americans, I am tired of hearing about more waste, fraud, and abuse in Washington or around the country," said the bill’s sponsor, Rep. John Adler, D-N.J., before it was passed. FHA, Adler said, "must be given sufficient resources to maintain the ability to enforce high underwriting and oversight standards and operate safely and effectively."
Adler and bill co-sponsor Rep. Christopher Lee, R-N.Y., are members of the House Financial Services Subcommittee on Oversight and Investigations, which heard Donohue’s testimony.
"We were fortunate enough from the hearings to understand some of the challenges that FHA has had in terms of technology, and the fact that we really haven’t funded this program to its fullest extent by not having enough staff in support of FHA," Lee said.
The potential for fraud, waste and abuse has risen, Lee said, and "taking a piece of legislation like this and moving it forward is incredibly important."
The bill received bipartisan support in the House, passing in a voice vote, and is likely to have support from both parties in the Senate. …CONTINUED
Much of the concern about FHA’s vulnerability to fraud and lax underwriting stems from a review of FHA’s Mortgagee Review Board requested by Sen. Charles Grassley, R-Iowa. HUD’s Office of the Inspector General found the board rarely sanctioned lenders, and that sanctions and fines were often reduced or waived. The board rarely cited lenders for violations that might cost them their FHA lending authority, the review found.
In a statement, the Mortgage Bankers Association expressed industry support for the 21st Century FHA Housing Act.
Providing more resources for staffing and technology at FHA will allow the agency to "continue to play its critical role in helping borrowers who may not have sterling credit or are unable to make a large downpayment," MBA Chairman David Kittle said in a statement. Kittle said FHA "needs to be able to hire and retain top-quality staff and utilize 21st century technology if it is going to meet the growing demand for its products and adequately manage risks to its programs."
HR 3146 also states that it is "the sense of Congress" that HUD, the Treasury Department and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, should use their authority under the Emergency Economic Stabilization Act of 2008 and the Housing and Economic Recovery Act of 2008 to provide financial support and assistance to warehouse lenders.
Nondepository lenders that utilize warehouse lines of credit account for as much as 40 percent of all residential mortgage loans in the United States, and nearly 55 percent of FHA loans, the bill said. Since 2006, warehouse lending capacity available to the mortgage lending industry has declined by nearly 90 percent, to between approximately $20 billion and $25 billion.
The government could expand the amount of credit or lending capacity made available by qualified warehouse lenders by making direct loans or providing guarantees, credit enhancement and other incentives, the bill said.
The MBA’s Kittle welcomed the House’s input on the matter, saying the group was "gratified to see Congress go on record in stating that HUD, Treasury and the FHFA ought to use their existing statutory and regulatory authority to help solve the crisis in warehouse lending."
The MBA also welcomed the House’s passage of another bill, HR 3527, which increases FHA multifamily loan limits for high-rise apartments with elevators. The increased limits will make it possible for developers to obtain financing to build and rehabilitate high-rise housing, MBA said.
The MBA hopes the Senate will consider both bills quickly, Kittle said.
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