Editor's Letter
APARTMENT FINANCE TODAY • SEPTEMBER 2007
Free the FHA from its Cage
Federal Housing
Administration (FHA) modernization
is a phrase that’s
been bandied about over the
years, but this time, the need
to reform the FHA is urgent.
As the subprime mortgage industry
meltdown deepens, sending shockwaves
through the world’s credit markets, the
need for a stabilizing force in the mortgage
industry is clear.
As currently constituted, the FHA
simply cannot respond to today’s market
forces. The regulations governing the
agency make new product implementation,
or modifications of existing products
or processes, an extremely slow
process. And its ability to process loans
likewise suffers from its lumbering
structure.
A great example of how the FHA’s
structure hampers its competitiveness is
the Preservation Approval Process Act of
2007. Last spring, the FHA mandated
that companies applying for multifamily
mortgage insurance had to use an electronic
system set up to speed deal cycle
times. But technical glitches routinely
caused long delays, sometimes of up to
six months.
So this spring, legislation was crafted,
approved by the House and Senate,
and signed by President Bush to allow
the FHA to again process paper applications.
In private industry, that decision
could be made in an instant, instead of
requiring an act of Congress.
To make matters worse, the FHA is
perennially under-funded. Though it’s
one of the few federal programs to turn a
profit every year, it has to rely on an
appropriations process where it competes
for funds with other Department
of Housing and Urban Development
(HUD) agencies. This leads to underinvestment
in technology, and hampers
the agency’s ability to attract top talent.
As it stands, the FHA is losing intellectual
capital at a staggering rate: Two-thirds
of HUD senior staff is eligible for
retirement, and the agency can’t replace
them effectively because its budget is
frozen under the federal government’s
“continuing resolution.”
The only hope for the FHA is some
move toward privatization, where the
agency is a wholly owned government
corporation within HUD, and run by a
CEO to make it function more like a private
enterprise, while still retaining its
mission to serve the underserved.
The FHA should model itself on
Ginnie Mae, a government-owned corporation
within HUD. The regulations
that govern Ginnie Mae are relaxed in
comparison, allowing it to use funds in
its reserves for technology improvements,
as well as to hire contractors, and
hire and train knowledgeable staff.
As a government-owned corporation,
the FHA could introduce products
in a timely manner, invest in infrastructure
to speed deal cycle times, and
attract the same level of expertise its
competitors have the funds to employ.
Such a radical restructuring may be
years off, since our current government
seems more interested in rebuilding
Baghdad than our blighted inner cities.
While the political will may not be there
now, here’s hoping that in my lifetime,
the FHA is freed from its bureaucratic
cage.
What do you think? APARTMENT
FINANCE TODAY would like to hear your
solutions for the way forward at the
FHA. If you have an idea about how the
agency can be reformed, email me at
jascierto@hanleywood.com.
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