FHA/HUD: Fee Stooges

stooge [stooj] 

noun: One who allows oneself to be used for another's profit or advantage; a puppet.

verb: Act as a stooge, in a compliant or subordinate manner; "He stooged for the flamboyant Senator."

Source: Dictionary.com

Note: The language in the 'verb' example is not mine, but that at Dictionary.com

In my posts at MortgageNewsClips.com, I post both serious macro or housing-market related pieces and humorous, "creative" posts.

The title of the current piece - "Fee Stooges" - immediately conjures up images of Moe, Curly and Larry. As a kid, I watched the Saturday morning TV shows that featured (to quote Wikipedia) "physical slapstick comedy punctuated by quickly-delivered one-liners, within outrageous storylines." (Image source: The Three Stooges® Official Website)

You might then conclude that this piece must be one of those "creative, strange" ones. If so, you'd be wrong. 

This piece, in fact, is one of my most serious, since it focuses on the character of the bailout effort, and picks out one (of the many) ways that the government continues to distort and confuse the market even as it insists that it is providing solutions.

It's unfortunate that the term "stooge" has largely vanished from the vernacular, perhaps because of the association with Moe, Curly, and Larry.

Nevertheless, I'd like to respectfully suggest that:

1. “Stooge" (see definition at Dictionary.com) perfectly describes the way that FHA/HUD has behaved with the increased politicization of the mortgage market, as the housing and equity markets have collapsed;
2. If (or as) the recent FHA/HUD de-emphasis of risk-based pricing spreads to the GSE's (Fannie and Freddie), this will compromise efforts to put all of the mortgage-market lynchpins on a more business-like basis. It will also prevent the management of FHA/HUD from obtaining any appreciation for the risks it is assuming as GNMA's grow to take an ever-increasing share of the mortgage market; and
3. There is still time for FHA/HUD to roll-out a pricing system that gives them at least a partial understanding of the risks that they, and the taxpayer, are assuming.

Ancient History: May 2008

In May of 2008 the Bush Administration proposed that government-backed loans reflect risk-based pricing, and that the new pricing roll-out would coincide with the expansion (to serve more delinquent borrowers) of FHA loan programs. Source: Inman News. 

Borrowers with good credit would have paid less, and those with poor credit would have paid more. The Administration wanted to ensure that claims on bad loans would have been covered, or funded, by borrower-paid premiums, rather than the taxpayer, and HUD issued a statement with the following language:

By charging different premiums, FHA will operate like most other insurance companies. This premium structure will preserve lower premium costs for FHA's traditional borrowers, including low-income and minority families who have a strong credit history and save for a down payment.

So far, so good. Let's fast forward a bit.

The Middle Ages: August 2008

Bu August month-end, the FHA announced that it would discontinue the risk-based pricing programs that had been announced in May. In a story dated 28 August, Inman News described how the FHA dropped key components of the risk-based pricing proposal:

Bowing to Congress ... [and the questioning] of some lawmakers... after Oct 1, the upfront premium charge for purchase mortgages and full-credit qualifying mortgages will be [the same fee] ... regardless of the borrower's credit.

The Modern Era: September 2008

At the end of September, UBS' Mortgage Strategy team took a close look at 2008 GNMA originations, as a share of the total mortgage market.

What they found was astonishing: GNMA's share of market issuance increased to 35% of MBS issuance, the highest percentage in roughly 20 years. One year ago, in contrast, GNMA's share had been only 9% (the remaining 91% had been shared by Fannie and Freddie).

The UBS team carefully "peered under the hood" of the Agency MBS pools, and they suggested that the fees charged by Fannie and Freddie for "risk-layered" borrowers (reflecting the borrower's FICO and LTV) had driven these riskier borrowers into the FHA loans that were pooled into GNMA's.

Based on an idealized "risk-layered borrower profile", UBS compared the relative costs to that borrower of an FHA/government loan program with that of a conventional (Fannie/Freddie) loan program. This is what they found:

The UBS team suggested that "weaker credit" borrowers' choice of the cheaper FHA loan program accounts for much of the surge in GNMA issuance.

Or to put it another way, if the fees charged on conventional loans are "correct", in the sense that they reflect the risks of these weaker credits, then the taxpayer is providing FHA borrowers with a substantial rate subsidy.

Possible Future?

I understand why, in a weak housing market during an uneasy election year, the Congress might elect to throw out the FHA's new risk-based pricing proposals to demonstrate to voters that they are a) concerned, and b) "doing something".

But by completely eliminating the new risk-based pricing fees the FHA is also destroying any chance that the FHA might have had to determine if the proposed fees were "high enough" to cover borrowers' risks. Perhaps they were "too high"? How will the FHA know?

There is, of course, a "middle ground". Rather than eliminate the risk-based pricing, re-introduce the fees, but have the fees paid by the government, rather than the borrower. In effect, bring back former Vice President Al Gore's "Social Security dedicated 'lock box' " concept, for mortgage-land.

While I shudder to make a mortgage closing statement any more complicated than it already is, perhaps a line could be added to the statement, suggesting that:

Your elected representatives in Washington [list ]  have paid the following fees for you: [$x,xxx.xx]

Remember them in November.

By relieving borrowers' of their individual obligation to pay these fees, this modest proposal does nothing to discourage the "over-utilization" of what would still be a subsidized loan program. But at least it lets the FHA know if their risk assessment tools have any validity or accuracy.

Comments

[rm:]

[In May of 2008 the Bush Administration proposed that government-backed loans reflect risk-based pricing, and that the new pricing roll-out would coincide with the expansion (to serve more delinquent borrowers) of FHA loan programs.]

The problem with this is it contradicts the stated goal of most politicians, which is to "stabilize housing prices."

stabilize [stey-buh-lahyz]

-verb

1. to make or hold stable, firm, or steadfast.
2. Government. to aritificially inflate or prop up [syn: backstop]

If borrowers are required to pay an appropriate risk-based premium, then they won't be able to pay as much for a home, and once again, prices will fall.

So we can't have any of that, understand?

2008 Nov 02 08:45 AM

[Ira Artman:]

You have captured policy problem perfectly and precisely with your ironic comment.

Does government, in this case, attempt to act as an efficient allocator of public capital, or is it simply Santa Claus? I guess - for now - it's the latter.

Where's my stocking?

2008 Nov 06 06:37 AM