Joseph Gyourko’s recent white paper, entitled “Rethinking The FHA” begins with a bold statement: “The Federal Housing Administration (FHA) has failed by any reasonable metric.” Reverse Mortgage Daily uses the term "radical" when it comes to highlighting Gyourko's concepts in the paper, stating that FHA reform has been bandied about in the past, but nothing quite so intense as what Gyourko outlines.
“Their main mutual insurance fund is underwater. They don’t have enough resources to pay off expected losses,” said Gyourko, a Martin Bucksbaum Professor of Real Estate, Finance and Business & Public Policy at The Wharton School of the University of Pennsylvania. “Ultimately, we’re going to have to pay off those losses, so they’ve failed in a financial sense. I think, perhaps more importantly, they have too many defaults. Their long-range default rate is over 12 percent.”
Gyourko’s plan calls for the FHA to be completely phased out over the course of a few years to be replaced by a “subsidy scheme” that would be subsidized by matching funds from the United States government.
“We need much-better underwriting and risk-taking,” Gyourko said. “The damage is already done. I don’t think we’ll be able to maintain the underwriting discipline throughout the housing cycle. There are a number of political reasons why I believe we won’t be able to enforce a more stringent underwriting program, that’s why I propose phasing them out. The main problem with the FHA is there’s no equity. My proposal has borrowers providing 10 percent of the downpayment, if prices fall, they still have time for equity.”
Gyourko’s paper states, “It is running an insolvent mortgage insurance guarantee platform with a total risk exposure equal to about seven percent of national output, and has shown itself unable to discipline its underwriting process to prevent a much too high share of its intended beneficiaries from achieving sustainable homeownership. For FHA to be broke on a program of this scale and to be failing at such a core part of its policy mission cannot be categorized any other way.
“The Moody’s report essentially says that the FHA saved the housing market. In 2009, the FHA provided mortgage prices that estimates had around 30 percent default rates. That’s incredibly high. By providing liquidity and providing more secure households, a default rate is kept lower. I disagree with Moody’s economic logic, I don’t think it’s dishonorable, I just don’t agree with it.”
Money News reported that Gyourko’s presenting of his paper was met by a gathering split down the middle. While some agree with Gyourko that the FHA is, essentially, insolvent, others declare the FHA an unmitigated success. Gyourko, who has studied the FHA a great deal over the years, highlighted the fact that the FHA has seen a six percent rise in delinquency, the highest since 2011.
“Eliminating anything completely ingrained in the delivery process from origination to servicing to secondary markets for nearly four generations assumes that market behaviors can be predicted or even channeled—they cannot,” said Mark Dangelo, president, MPD Organizations. “Without a final solution to the GSE debacle, a robust private secondary market that promotes not only gains but an ability to sustain losses and an open market that accepts new forms of fixed incomes securities, the elimination of an agency regardless of material flaws is like telling an alcoholic to just quit drinking—why not just stop breathing?”
Reception of Gyourko’s paper has been mixed, as some are staunch supporters of the FHA, while others are celebrating the notion of eliminating the organization in order to provide better-subsidized equity. “By eliminating the FHA, I think we’ll have a more stable, safer housing situation with fewer defaults,” Gyourko said.
Robert Ottone is an assistant editor with National Mortgage Professional Magazine. He may be reached by phone at (516) 409-5555, ext. 314 or e-mail [email protected]