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 email@example.com.