The Revitalization of FHA

Outline of Remarks
by
Kenneth G. Lore
Swidler Berlin Shereff Friedman, LLP

Millennial Housing Commission
May 14, 2001 

1.	Revitalization for What? - Need to Define FHA’s role

a.	What has been the historic role of FHA?

i.	During the first decades of FHA’s existence, it pioneered the creation of a standardized, long-term, fully-amortizing mortgage.
ii.	At that time, FHA filled a huge void; there were no other mortgage finance institutions that could assume such a leadership role.
iii.	In recent years FHA has not played a significant leadership role, in large part because many other institutions - State HFAs, Fannie Mae, Freddie Mac, etc. - have been created and have become major factors in shaping mortgage finance.
iv.	Another essential function for FHA:  provision of credit when credit availability is insufficient, either nationwide or in certain areas.

a.	What role should FHA play in the future?

i.	Use of FHA insurance to promote policy goals - FHA can once again assume a leadership role by facilitating loans to address identified unmet needs:
(1)	Financing of facilities that address community needs, such as:
(a)	commercial facilities
(b)	child care facilities
(c)	employment training facilities
(d)	parks and recreation
(2)	Section 220 permits insurance to include such nondwelling facilities - update and expand the statute to increase its utilization?   
(3)	Targeting of FHA insurance to promote planning goals, such as:
(a)	moderate-income housing in high-growth areas
(b)	in-fill housing that furthers “smart-growth” policies
(c)	innovative approaches to housing for the elderly
(4)	Making loans which may have higher risk (or are perceived as having higher risk) in underserved areas, and loans for underserved markets, such as:
(a)	1-4 unit rental housing
(b)	small projects
(c)	rural projects
(5)	Where a targeted, underserved need is identified, FHA should have the flexibility to provide insurance that is tailored to meet the need.
(a)	example:  predevelopment financing to provide seed capital for difficult projects.    

1.	How Can FHA Regain its Leadership Role?

a.	Without necessarily giving up its “retail” loan underwriting activity (i.e., “traditional” FHA underwriting), the best opportunity for expanding FHA’s role is in partnering with State FHAs, GSEs, etc. in pooled insurance, risk sharing and other such arrangements.    

a.	Currently, FHA plays a passive role in project selection, i.e., lenders come to FHA with the projects they want insured; is there a way for FHA to actively seek out projects that would further governmental policy goals?

i.	For example, FHA could issue a NOFA announcing the availability of insurance authority for loans that would meet a specified need.  

a.	Key role for FHA: providing mortgage insurance to make other Federal, State and local assistance more effective.

i.	How to strengthen this role: greater coordination with other programs within HUD and with other agencies to promote governmental initiatives, e.g., providing FHA insurance as part of a package of assistance.
ii.	Role as facilitator for tax credit projects - adapt underwriting guidelines to realities of tax credit financing, e.g., phase -in of tax credit equity over time.   

a.	Seek out other “niche” roles for FHA, such as:

i.	pool insurance for CRA consortium loans
ii.	rehabilitation loans
iii.	loans for small projects (individually or pooled)
iv.	mezzanine financing for projects with or without FHA-insured first mortgages.         

a.	Portfolio management - need for more resources to preserve and upgrade existing projects.

i.	Availability of grant assistance would induce owners of older assisted projects to keep projects within FHA
ii.	Relaxation of restrictions on distributions would also deter opt-outs.
iii.	Need flexibility to use insurance funds before default. 

a.	Changes to FHA’s structure

i.	Advantages of making FHA into a government corporation:
(1)	Flexibility to change programs without statutory amendments or regulations - ability to respond to changing markets, develop pilot programs and adapt loan products to identified needs.
(2)	Ability to compete with private sector and GSE’s for employees with up-to-date skills and market knowledge.
(a)	Legislation would be required to provide flexibility in hiring and compensation outside of normal civil service procedures and pay scale.  
(3)	Greater flexibility in hiring outside contractors.
ii.	While FHA would benefit from greater operational independence, from a policy standpoint it should aim for a greater role as a facilitator of other government programs.
iii.	Combine FHA with GNMA to encourage greater coordination, both in program design and in day-to-day operations ( i.e., the securitization process).
iv.	By maintaining FHA as a government corporation within HUD, FHA can obtain many advantages of privatization without giving up its key asset, the full faith and credit guarantee, and without diminishing the status of HUD as a cabinet agency.

a.	Changes to FHA’s internal structure and management

i.	Field office organization - reduce number of offices and assign specialized functions to specific offices.
ii.	Create counsel’s office within FHA.
iii.	Increase funding for training.
iv.	Increase funding for technology to further automate project monitoring and reporting, underwriting, previous participation clearances, etc.      

1.	Need for Greater Insulation from Annual Budget Process and Undue Legislative Constraints

a.	Cases in point: the current credit subsidy problem and statutory mortgage limit constraints.

i.	Change methodology for credit subsidy calculation.
(1)	One approach: pending legislation that would allow programs with negative credit subsidy to offset programs with positive credit subsidy.
(2)	In order to encourage lending for underserved markets that might have greater risk, it may be necessary to “cordon off” credit subsidy for such projects or provide a special allocation of funds (e.g., from insurance fund surpluses).   

a.	Uncertainty over appropriations for subsidy contracts adds to reluctance of developers and lenders to participate in programs.

i.	Amend Budget Act to stretch out the budget scoring for long-term contracts? 
ii.	Alternative approach - develop an insurance product to cover the nonappropriation risk. 

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