Housing industry experts threw out various suggestions to the members of the House Financial Services Committee advocating for solutions under the banner of Federal Housing Administration reform.
The consensus met by many of the panelists was dividing market risk with private companies in order for the FHA to reduce loss exposure and focus on operational, structural and programmatic changes.
More importantly, experts addressed the solvency of FHA, amplifying creditworthiness an important element to agency reform.
With the markets now reacting to Obama’s 2014 budget and news that the FHA could end up drawing from the Treasury for the first time ever, reform solutions proved to be more urgent than ever before.
Kevin Kelly, vice chairman of the board for the National Association of Home Builders, supported market risk division between FHA and the private sector, which could reduce or eliminate participation by smaller mortgage lenders, who would have difficulty meeting the eligibility criteria for the program.
“A change of this nature would also impact the Ginnie Mae mortgage-backed securities program by Ginnie Mae’s exposure to counterparty risk and would likely require significant changes at the end as a result,” Kelly said.
On a similar note, David Stevens, president and CEO of the Mortgage Bankers Association, pushed for the transformation of Ginnie Mae to be as active and responsive as private sector entities.
As a result, improving the government-owned enterprise’s ability to respond to an increasingly complex market and risk environment should be a top priority, Stevens urged.
“MBA has long advocated that in order for Ginnie Mae to operate in it most efficient and effective manner, it must have greater ability to act as a private corporation. Providing Ginnie Mae with flexibility regarding hiring and procurement would allow the agency to be more effective in responding to potentially significant risk events,” he explained.
Meanwhile, credit risk sharing between FHA and private mortgage insurers is another initiative Congress may consider for reform because credit risk-sharing could be designed to place private capital in a first loss position instead of taxpayers, suggested Adolfo Marzol, vice chairman of Essent Guaranty.
As a result, there are two broad alternative approaches to risk-sharing including reinsurance, which would be direct risk-sharing between FHA and private MI, similar to how the GSEs are moving forward in their expanded risk-sharing initiative.
“This approach has the benefit of minimizing impacts on primary market participants and has the potential to be implemented more quickly,” Marzol said.
The other alternative is coinsurance, which would combine mortgage insurance and FHA risk sharing with the objective of deploying the risk management capabilities of MI companies in loan underwriting and claims management.
“This is analogous to how private MIs work today with the GSEs for new loans with LTV above 80% that require MI, where borrowers must meet underwriting and eligibility criteria acceptable to both the GSEs and private MI,” Marzol explained.
