Once Congress finishes its work on tax reform, its sights may set squarely on revamping the housing finance system.

The future of Fannie Mae and Freddie Mac has long been a topic of debate, but it’s also important to look at key improvements that would strengthen the Federal Housing Administration (FHA), says Carol Galante, who recently served as FHA commissioner during the Obama administration. To spark the conversation, Galante has released a paper outlining several key proposals.

Carol Galante
Carol Galante

“It’s important that as we make changes to the government-sponsored entities that we be careful that we don’t do things that inadvertently have an impact on FHA and some of the other government programs,” she tells Affordable Housing Finance. “We wanted to shine a light on that. We’ve got to think about these systems and how they work to complement each other or how they could work in competition and come up with the right interplay between them. That’s No. 1.”

Galante adds that she wanted to open the door to an exchange of ideas about how to improve the longtime federal agency that’s been a key component of the housing finance system. Nearly one in five mortgages used to purchase a home is FHA-insured. The agency’s multifamily insurance also facilitates liquidity for the rental housing market and is a stable source of capital for affordable housing development.

“I’m sure not everybody will like everything that I have to say about what we should do,” Galante says. “It was meant to say we need to get in a room to share different opinions than what I’ve put out there.”

Faculty director of the Terner Center for Housing Innovation at the University of California at Berkeley, Galante offers seven recommendations, including refining FHA lending to better target low-income households, equipping the agency with temporary emergency powers to suspend FHA insurance programs or make emergency modifications to regulations, and providing budget flexibility.

In Mission Critical: Retooling FHA to Meet America’s Housing Needs, she notes that the agency lacks control of its budget and the support services it relies upon. As part of the broader Department of Housing and Urban Development budget, FHA’s budget is subject to the federal appropriations process and its receipts (revenue) are not retained by the agency and cannot be used to cover administrative expenses but are instead utilized as budget offsets for other federal programs.

The former commissioner proposes that FHA receive a baseline appropriation that is supplemented by retention of a portion of the revenue it generates from its mortgage-insurance activities.

This may be the boldest proposal, admits Galante.

“It will be difficult to really ensure that the FHA, which is (part of the) government yet it’s running a business, to be on as solid footing as it needs unless it can use for its own administrative expenses some of the money that it generates from the business it does,” she says. “It’s not able to do that right now.”

In president Donald Trump’s fiscal 2018 budget request, FHA’s total budget request for salaries and expenses and administrative contracts is approximately $530 million. Under Galante’s recommendations, this appropriation could be cut to approximately $265 million. The remaining resources needed for FHA’s operations would be funded by retaining a portion of the receipts it generates from mortgage insurance premiums. From fiscal 2012 to fiscal 2016, FHA averaged mortgage insurance premium revenue of $11.3 billion per year. The proposal would require FHA to retain less than 3% of its revenues to fully fund its operations at levels commensurate with its staffing, procurement, and information technology needs, according to the report.

“In addition to this new budget methodology, both FHA’s appropriated and self-generated funds should be separated from the rest of the HUD budget so that it can be assured that all funds remain under its control and are not used as budgetary resources or offsets for other HUD programs,” says the report.

Mission Critical: Retooling FHA to Meet America’s Housing Needs is co-authored by Nathan A. Shultz.

To continue the conversation, Galante is planning to convene a roundtable discussion next year in Washington, D.C.