Brouhaha Erupts Over 'Homeowner Tax' to Fund FHA's Decrepit IT

The Federal Housing Administration could finally get something it desperately needs: funding to upgrade its outdated technology infrastructure.

But nearly a dozen housing and banking lobbying groups are objecting to funding FHA's crumbling infrastructure through a provision in an appropriations bill currently before the Senate.

On Friday, the Community Mortgage Lenders of America, a group of community banks and mortgage lenders, sent a letter to lawmakers saying the fee amounted to "a home ownership tax."

The group asked Barbara Mikulski, D-Md., and Richard Shelby, R-Ala., the chairman and ranking member of the Senate Appropriations Committee, to reject the provision in Senate Bill 2438. The provision would give the Department of Housing and Urban Development, which oversees the FHA, the authority to charge an administrative fee on every single-family FHA loan.

The fee is relatively small but is not limited to the 2015 fiscal year. The fee is expected to raise $30 million for FHA's technology upgrades by charging up to 4 basis points per loan, or roughly $40 for every $100,000 borrowed. A key concern for trade groups is that the fee is retroactive and would be calculated using the previous year's mortgage originations.

The House version of the bill, however, does not give HUD the authority to charge the new fee. The Mortgage Bankers Association, American Bankers Association and Independent Community Bankers of America, among others, sent a letter to lawmakers earlier this week objecting to the funding. The trade groups are concerned that the bill could be passed by Dec. 11 without opposition from House Republicans.

The brouhaha is just part of the near-constant objections by banks and mortgage lenders to any additional fees, changes or regulations that could upset the nation's fragile housing recovery.

David Stevens, president and CEO of the MBA, said there is "no question" that FHA needs the funding for technology. Stevens, a former FHA commissioner, said the fee to fund FHA's new quality assurance program should be limited in size, scope and duration to cover specific technology improvements.

"This creates a new unprecedented fee collection approach that has no end date and could be subject to mismanagement in the years to come," Stevens said. "There's no certainty that this money will see the light of day for actual systems enhancements."

Mortgage lenders are particularly peeved at the FHA, which is currently charging the highest mortgage insurance premiums ever. They have vociferously objected to the FHA's 1.75% upfront fee and 1.35% annual insurance premiums, claiming the costs have made it too expensive for low and moderate-income borrowers to buy a home. Many think HUD should find the money in its own budget or the FHA should use the billions it is collecting in premiums to pay for the technology upgrades.

For now, the FHA is still the only game in town for consumers who can afford a minimum 3.5% down payment. Fannie Mae and Freddie Mac, however, will be introducing 3% to 5% down payment programs by year-end.

Biniam Gebre, the acting FHA commissioner and an assistant secretary at HUD, said at a mortgage industry conference last month that the administrative fee was "a small ask to solve a big problem."

HUD has been asking for more technology funding for years. Gebre said the FHA's outmoded technology systems are a constant worry and frustration.

"The challenges are around budgets and IT systems that are 30 to 40 years old," Gebre told bankers last month. "I fear waking up one day and having our systems shut down because they're so old."

The fee will fund a range of quality assurance initiatives some of which have "IT implications," said HUD spokesman Brian Sullivan, in a request for comment.

The specific IT systems that would benefit from the proposed funding are unclear, but recent FHA technology initiatives include upgrades to legacy technology as well as the addition of new technology capabilities.

The Computerized Home Underwriting Management System, or CHUMS, is a key piece of IT infrastructure that serves as the FHA's insurance endorsement system of record. Current FHA plans call for the more than 30-year-old system to be replaced in "pieces and parts," including a recent migration to a new Oracle database management system, an FHA official said during an industry conference earlier this year.

Another system, the FHA's Insurance Accounting Collection Systems, was launched in 1989 to collect mortgage insurance premiums on reverse mortgages. A $32 million contract was awarded to replace that system in 2009. The new platform, called the Home Equity Reverse Mortgage Information Technology, or HERMIT, launched in 2012.

In January, the FHA implemented a long-awaited policy to begin accepting electronic signatures on most loan documents, and outlined a timetable to begin accepting full e-mortgages by accepting electronic promissory notes beginning in 2015. It is also in the processing of implementing a system to collect full electronic appraisal reports and developing an electronic case binder to replace paper-based files.

Paulina McGrath, chairwoman of the Community Mortgage Lenders of America, said the fee would price some potential homeowners out of the market, reduce home sales and crimp the lukewarm housing recovery.

"The proposed fee would in fact harm homebuyers as lenders will be compelled to pass the new fee onto homebuyers and the fee would thus become a federal tax on homeownership," she wrote in the letter to lawmakers.

Yet she acknowledged that the FHA needs the funding to implement its quality assurance process. That process is meant to strengthen the FHA's oversight of mortgage lenders and better manage the risks to FHA's Mutual Mortgage Insurance fund. The funding has a downside for banks and mortgage lenders in the form of greater scrutiny of loan files and more accountability for loan defects.

Industry trade groups want FHA's quality improvement program to be funded through HUD's budget. Absent an outright rejection of the bill's provision, the group wants lawmakers to revise the language so the fee would not be retroactively assessed. If the appropriations bill passes with the provision, it would into effect within 90 days, or by May 2015.