FHA Premium Issue Sure to Challenge New HUD Chief

WASHINGTON — One of Julian Castro's early challenges as head of the Department of Housing and Urban Development likely will be how he handles industry calls to lower Federal Housing Administration premiums.

The San Antonio mayor, who won Senate confirmation Wednesday as the new HUD secretary, is bound to face lobbying from banking and housing groups that view lowering FHA premiums as the answer to improving loan affordability. (He was confirmed by a vote of 71 to 26.)

Many expect HUD to avoid such a move, and instead push for lenders to reduce their self-imposed credit overlays that limit lending.

Both Shaun Donovan, Castro's predecessor, and FHA Commissioner Carol Galante have resisted calls to lower premiums. But the lobbying effort is expected to continue.

"Based on what I hear in conversations with mortgage and real estate executives, lowering premiums needs to be part of the solution," said mortgage industry consultant Brian Chappelle. "While FHA proposed steps will help, they simply do not go far enough."

Last year's actuarial report showed the FHA's Mutual Mortgage Insurance Fund was undercapitalized, triggering a $1.7 billion infusion from the Treasury Department.

However, according to David Stevens, head of the Mortgage Bankers Association, some projections suggest the upcoming MMIF report due out in November could show the fund's capital ratio being above the critical 2% threshold. Stevens said that would give Castro an opportunity to make at least a modest reduction in premiums.

With concerns about the weak housing market recovery and access to credit, "I won't be surprised if he considered something fairly soon after the November report assuming it provides good news," Stevens said in an interview.

Another question mark about Castro's assuming leadership of HUD is whether the department's ties to the administration will remain as strong as they have been under Donovan, who is awaiting Senate approval to direct the Office of Management and Budget.

"You had a very aggressive and active HUD secretary with Donovan," said Ed Mills, a policy analyst at FBR Capital Markets. "It is unusual for HUD to have this much importance to an administration and a secretary who is really close to the president."

Coming to HUD after being mayor of the seventh largest U.S. city, Castro is expected to focus on community planning and development issues.

But the FHA's fragile finances will be a difficult issue to ignore.

HUD raised FHA premiums over the past several years to stem the rising losses on defaulted loans in the aftermath of the housing bust and economic recession. The agency currently charges a 175 basis point upfront premium and a 135 basis point annual premium, the highest for both in the 80-year history of FHA single-family program.

But since July 2013, originations of FHA-insured single-family have fallen nearly 20%, with loan affordability emerging as an obstacle.

Due to litigation and regulatory risk, lenders are mainly focused on borrowers with high credit scores, which limits access to minority and median income borrowers.

Galante has developed specific programs to help marginal borrowers benefit from the FHA. One is called "Back to Work," which is designed to help families where the breadwinners have lost their jobs, resulting in foreclosure. If they are employed again, demonstrate financial recovery and complete housing counseling, they can be eligible for an FHA mortgage under the program.

FHA is also developing a program known as Homeowners Armed With Knowledge, or HAWK. This program would lower FHA premiums for first time borrowers that complete a rigorous housing counseling program.

Community Home Lenders Association executive director Scott Olson noted that program like HAWK are constructive in terms of helping to reach qualified borrowers. "But we believe substantive premium reductions are also needed at this time, in order to accomplish that goal," he said.