From the day President Donald Trump re-occupied the White House, he has said he wants to lower the cost of housing and expand the housing supply. But deep cuts at the Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) in the name of efficiency will accomplish neither of those goals, according to new reports from the bipartisan Urban Institute.
“These cuts could hobble the housing finance system—reducing housing affordability and supply—and decrease government revenue, as income from FHA premiums offsets the costs of other programs,” one report maintains. Cuts not only place “Ginnie Mae’s core operations at risk,” says the other, they increase the chances that taxpayers will have to assume the debts of private sector issuers of Ginnie Mae’s mortgage-backed securities.
The FHA research paper is authored by Laurie Goodman, founder of UI’s Housing Policy Center, plus research analysts Amalie Zinn and Katie Visalli. The Ginnie Mae report is written by two former Ginnie Mae presidents, Alanna McCargo, the agency’s most recent leader, and Ted Tozer, who led the GSE for seven year during the Obama Administration.
“Both entities largely pay for themselves through their fees,” Goodman points out.
While it is not known which FHA staffers will be lost, any cuts the size of what has been reported in the popular press “could have huge effects on the housing industry,” Goodman and her researchers warn. “Cutting staff is not the path to the administration’s goals...Cutting staff is likely to cause problems, not solve (them).”
By many measures, the FHA is a success story. It consistently makes a profit for the government and has a strong reserve, she writes.
“While there may be inefficiencies within FHA and it could likely benefit from technological advancements, staffing reductions prior to such investments are likely to cost taxpayers far more than they save and could undermine the efficiency of the housing finance system.”
The paper suggests that staffing cuts are more likely to come from FHA’s servicing wing then from the origination process. While originations are largely automated, servicing is labor-intensive. Consequently, cuts there could put the stream of borrower payments at risk. Similarly, it says, cuts in the foreclosure sector would lead to losses in revenue and create “serious” liquidity risks for lenders and servicers.
“Staffing cuts, especially cuts to staff members with specialized knowledge of these complex processes, could increase the time it takes to assist borrowers and pay lenders incentives or claims. Increases in the waiting time to recover losses will reduce servicer liquidity in the short term and increase their likelihood of bankruptcy. In response, originators may increase mortgage rates, putting home ownership further out of reach.”
Ginnie Mae is a much smaller agency. But it, too, plays a huge role in the housing ecosystem by transforming low-cost capital into mortgages. However, cutting staff would disrupt the substantial profit it returns annually to taxpayers, the McCargo-Tozer paper warns.
Specifically, the ex-Ginnie Mae presidents write, any contraction in mortgage availability as a result of reduction in workforce at their former agency would lead to higher costs for borrowers, reduce credit availability, a deterioration of credit quality and perhaps even less competition among lenders.
Alanna McCargo is now a housing policy adviser; Tozer, a nonresident Fellow at the Housing Finance Policy Center.
Like many government agencies, the paper points out, Ginnie Mae’s core functions are executed through a combination of staff and contracted services. Proper levels of staffing and support contracts are integral to operating more than $2.6 trillion in taxpayer guarantees and an associated securitization program.
As it is, only four senior managers remain in place out of nine positions – the chief risk officer currently doubles as acting president -- and the risk that cuts to critical career staff and outsourced functions “will lead to delays or mismanagement has grown,” McCargo and Tozer argue.
But there are better ways, the two papers offer. As for the FHA, Goodman says the agency could be made more efficient by investing in better systems to automate complex processes and to reduce the labor and time it takes to effectively meet lenders’ and borrowers’ needs.
And for Ginnie Mae, policymakers must recognize that the agency is “a pillar of the US financial system – a government corporation structured to generate revenue and ensure market liquidity.” To do otherwise, the paper warns, “could have real consequences for the stability of the housing finance system.”
