80 Years and Counting: What Does the Future Hold for FHA?

Mike Marshall contributed to this post.

Little known prior to the 2008 financial crisis, the Federal Housing Administration is one mortgage market player that made it through the ordeal with its reputation intact and remains a central figure in the discussion over the future course of federal housing finance policy. First time homebuyers and those with limited ability for a down payment have relied upon the FHA, which does not make loans but insures them for lenders, to make them available in the private markets and more affordable for over 80 years. Established in the depths of the great depression, the FHA has a reputation for having stabilized markets in times of crisis, as well as provide the gateway for many families with limited means to become homeowners. The FHA’s role however, has evolved over time, moving from 8% of the market to over 30% in the financial crisis. Needless to say, the debate continues on what its future mission should be, in what form it should exist whether public or private, and at what level.

As the kick-off panel at BPC’s 2014 Housing Summit today, five current and former FHA heads met to discuss the past, present and future of the agency. All of them shared the belief that the FHA plays a critical role in the market, in good times and in bad.

Current FHA Commissioner Carol Galante believes that the FHA has a vital countercyclical role in smoothing out markets when the private markets pull back during hard times. She also believes strongly that now is the time to make necessary changes in housing policy to steady ourselves for future challenges. “If ever there were a moment in time to get this done it was and is coming out of crisis,” Galante said. “People did see the success of FHA. This is the time to make changes,” Galante insisted.

As part of the first panel of the Summit, Galante was joined by four former FHA Commissioners – Brian Montgomery, Nicholas Retsinas, John Weicher, and David Stevens. All appeared unanimous in their belief that FHA must upgrade its technology systems for the long term and to compensate its talent commensurate with the experience needed to run an agency with its level of responsibility.

While there is great comity over its history and its ability to sail through tough waters unscathed, there is still discussion over what its core mission should be going forward. Brian Montgomery, Vice Chairman of The Collingwood Group, LLC, said FHA is “needed in good times and bad times, with a record that both parties can be proud of” but also felt strongly about the mission of HUD not creeping past what it should be to becoming something more. “My view, my personal view, is the purpose of HUD is housing people who need it most. Every minute HUD spends talking about homeownership could be talking about issues like multifamily housing that are relevant to its mission,” Montgomery argued.

David Stevens, president and CEO of the Mortgage Bankers Association and former FHA commissioner under President Obama, highlighted the importance of the FHA in serving underserved minority communities. “In this market there is no competition without FHA. There would not be fulfilling the needs in minority communities,” Stevens stated.

John Weicher, director of the Hudson Institute Center for Housing and Financial Markets and FHA commissioner under President George W. Bush, said he thought that the question of whether FHA should be private was a nonstarter, “FHA is asked to commit the full faith and credit of the United States. If you have that ability you should be fully part of the government. Now, that has costs: being subject to Congress — not the most pleasant thing in the world; being subject to the executive office — also not the most pleasant thing in the world….We’ve done this before. We’ve been there. If we want to follow the path of Fannie and Freddie, [we] might well follow the path of Fannie and Freddie.”

Weicher said the mission of FHA is to serve people not being served in private market yet we are supposed to do it without losing money. “It is a balancing act, one might say tight rope high wire act.” Responding to questions about its size and market share, Galante responded, “Market share is not the goal. At het same time you want to be able to take on challenges and meet needs as they arise…so having a steady amount of business is vitally important.”

Nicholas Retsinas, current Harvard Business School lecturer in real estate, director emeritus of the Harvard Joint Center for Housing Studies was FHA commissioner under President Clinton. He believes the FHA’s major contributions have been liquidity and mobility in the housing finance system and housing as a major source of wealth creation in the United State with FHA “as the gateway to that wealth.” Retsinas drew laughs when deflecting criticism of FHA from those who say it is a dinosaur, “Yeah, it is. And dinosaurs lasted 100 million years,” he quipped.