TheMReport — News and strategies for the evolving mortgage marketplace.
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22 | M R EP O RT COVER STORY ownership is now around 36%. We would like to see an increase in these numbers across the board, especially in African American homeownership, which is lower across the entire housing market. There have been some studies done by the Urban Institute and others on this topic, and under the direction of the Secretary, we conveyed an internal team a few months ago to focus on this demographic. We have begun rolling up our sleeves and looking at these num- bers. The Urban study was help- ful, but we have some of our own beliefs about it. The key thing here is that we want to make sure that any homeownership—minority or otherwise—is approached respon- sibly and in a sustainable manner. We want to make sure folks are ready for homeownership before we have them make a major investment, which hopefully puts them on a trajectory to continue to grow their personal wealth over their lifetime. M // How is FHA working to protect taxpayers from further exposure to risk? MONTGOMERY // We were able to bring in Keith Becker, who had retired from Freddie Mac as a senior credit officer, to be our Chief Risk Officer. We have a great risk team at HUD, but having somebody at the very top, and who served a similar role at Freddie Mac for many years, is extremely helpful. He has brought some ideas to the table that pro- vide an additional perspective. There were some signs of stress on our portfolio for the loan cohorts from mid-2016 to earlier in 2019, after the previous admin- istration eliminated from FHA's TOTAL Mortgage Scorecard what they called Review Rule 14, which required lenders to perform addi- tional underwriting on mortgages where the borrower's credit score was below 620 and with a DTI around 43. In August of 2016, they pulled the rule out of the TOTAL Scorecard technology so that more of these mortgages would be allowed without manual under- writing. Those cohorts, since around September 2016, were modeled on a 1.4% capital ratio. As you know, Congress requires us to be at a 2.0% capital ratio. Not everyone understands the intricacies of the FHA's finances and the actuarial accounting, but they do under- stand that 1.4% is less than 2%. So, we had to make some changes to the TOTAL Scorecard algorithm. Another area of focus is cash- out refinances. It's just grown as- tronomically. They'd gone up 250% over the last several years. While refinances can be a good thing, we felt strongly that people were refi- nancing from a conventional to an FHA mortgage because they got better terms. We were becoming a de facto ATM. We also want to make sure people preserve the equity on their home responsibly, because we have a fiduciary duty to the other folks whose mortgages are insured within our Fund. Some of the consumer groups have reached out to us, and we walked them through why we were doing what we were doing. I call it attenuating the dial. When I first took over this position during the Bush administration in 2005, the FHA insurance fund was about $350 billion, which I used to think it was a lot of money. It's over $1.4 trillion now, approxi- mately $1.3 trillion of which is for our Single-Family portfolio. M // You've mentioned technology as a focus since you initially returned to FHA under the Trump administration. How are you progressing on that front? MONTGOMERY // The previ- ous administration did some substantial technology upgrades, such as implementing the Loan Review System, which included our Defect Taxonomy. However, the "internal plumbing" of HUD's technology has not been updated in generations. So, we felt that we needed to do something with that. In some respects, by not having the funds to do the upgrades we needed for so long, it's going to allow us to leapfrog over a 20-year gap of technology improvements. We felt that we needed to get off the mainframes that we have had, not just within FHA but within all of HUD. Those main- frame migrations are expensive and time-consuming, but we needed to move to a cloud system with a single portal and point of entry, from origination to claims, and providing more electronic capability for e-closings and e- mortgages. We eventually want to get away from paper entirely, although that'll take a while. We're looking to do robotics processing automation within claims. We are using this tech- nology to build out our forward mortgage claims technology, and then to handle HECM claims. That technology just barely existed a few years ago, but we've already been deploying it elsewhere in HUD. We're excited that we're able to be more efficient, have fewer errors, require fewer workaround solutions, and to better monitor the risk. It'll take several years to get it done, but we're moving along at a good pace. We have a very long check- list. We have a tremendous CIO, David Chow, and a tremendous CFO, Irv Dennis, who retired from E&Y after 36 years and was going to go teach at Ohio State. Next thing you know, he's our CFO. He's been helpful in ways I can't even describe. We have a fantastic team in place. M // Beyond the technological challenges, what other policies and procedures have you worked to streamline within HUD and FHA? MONTGOMERY // Servicing is a big area, and that's why we wanted to attract some former GSE employees. FHA is an outlier for several reasons, and some of them make sense, and some of them don't. But we thought if there's a way to better align some of those programs and procedures, that makes sense, whether it's loss mitigation, disaster recovery, con- veyance, and so on. It's two dif- ferent models, but there are ways we can better align with what the GSEs are doing. [Editor's note: In October 2019, HUD announced significant changes to how HUD will handle matters related to the False Claims Act, with Secretary Benjamin Carson telling CNBC's Squawk Box, "We revised the annual eligibility certifications, the loan limit certifications, and the defect taxonomy so that we even out things." The segment below represents FHA Commissioner Montgomery's thoughts on the issue prior to that public announcement.] There are also opportunities around our loan-level certifications, our annual certifications, the defect taxonomy, and the False Claims Act. We want to bring a little common sense to when the False Claim Act is the most appropriate use of the government's enforce- ment abilities. It has had the effect of driving many of the depositories out of the FHA program. As recently as 2010, almost half the FHA's partners were depositories. Today, it's about 13%. We need to find some balance. To have the largest depositories in this country not participating in a nation's flagship homebuying program, that doesn't sit well with me. We have the end goal of trying to bring a little more structure to the process. "It is not our goal to encroach upon the private sector, or certainly the conventional market, and private mortgage insurers have a significant role to play with the GSEs, but we want to make sure FHA is there in the good times and the bad."