Talking FHA with commissioner Montgomery: FHA's top official discusses the need for Congress to enact FHA modernization legislation, the surge in FHASecure refinancings, higher loan limits and the ins and outs of the RESPA proposed rule

Mortgage Banking, June, 2008 by Robert Stowe

Brain D. Montgomery has served as assistant secretary for housing-federal housing commissioner since 2005. As head of the Federal Housing Administration (FHA), he oversees the nearly $400 billion FHA insurance portfolio. He also oversees the Department of Housing and Urban Development's (HUD's) regulatory responsibilities in the areas of the Real Estate Settlement Procedures Act (RESPA), the housing mission of the government-sponsored enterprises (GSEs) and the manufactured-housing industry.

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One of the commissioner's primary initiatives has been the development and promotion of legislation designed to modernize FHA. The first effort at a modernization bill, which originally passed the House of Representatives back in June 2006, is primarily focused on increasing borrower flexibility through both policy and programmatic changes. Proposed changes include increased loan limits, updated down-payment-assistance options and a risk-based premium structure.

Montgomery came to HUD from the Executive Office of the President, where he served as deputy assistant to the president and Cabinet secretary from January 2003 until April 2005. While serving in the White House, he contributed to the policy process on a wide range of issues, including the administration's efforts to boost homeownership, increase access to affordable housing and reform RESPA and the oversight of the GSEs.

In early May, he received the prestigious Robert J. Corletta Award for Achievement in Affordable Housing. The award, presented by the National Association of Home Builders (NAHB), Washington, D.C., recognized Montgomery for his commitment to creating more affordable housing opportunities and solutions.

He also served as deputy assistant to the president and director of advance from January 2001 until June 2004. Montgomery headed up a White House working group to monitor all facets of the Space Shuttle Columbia accident investigation.

Mortgage Banking caught up with Montgomery at his HUD office in Southwest Washington, D.C., in late April.

Q: The most important recent event for FHA is the temporary increase in the loan limits. We are now seeing the initial results of that. From where you sit, can you tell us how this is affecting volume? What is the potential for expanded market share for FHA for 2008?

A: The mortgagee letter went out [in mid-March]. But, as you know, lenders have their internal systems and [information technology (IT)] systems, and it takes a while to stand it up and get it into play. So, I think we're just now seeing a lot of those [early] loans closing. You did touch on a good point--the loan [limits]. While the high-cost states get a lot of publicity, because FHA was barely a blip on the radar screen [in those states], the stimulus [legislation] did float all the boats. It raised the loan limits even in states like Missuri and Texas and Georgia to $271,050. (Previously the floor for loan limits in the great majority of markets was set at $200, 160.]

If you look at the market as a whole--roughly 3,300 counties in the country--only 75 counties are at the highest limit, which is $729,750. There are roughly 600 to 650 counties that are somewhere between $271,160 and $729,750. For the vast majority--almost 2,600 of the 3,300 counties--[the loan limit is set at] $271,050. So that's a long way of saying [that while] we are, of course, seeing a spike in numbers [of loan applications] across the spectrum ... we continue to see more in our traditional counties, in the South and the Midwest.

Q: Will the higher loan limits help in states with high housing costs?

A: If you talk to lenders in California, [the Washington, D.C., area], New York and Connecticut, FHA was almost an afterthough to them. [In these markets, the higher loan limits will] have an appreciable impact. But remember where we were. FHA percentage of loans [in California, for example] had dropped to as low as 3 [percent] to 3.5 percent. [As for] market share, we don't view it in a sense that we are a business, [where the thinking is] 'Hey, we're selling Fords; they're selling Chevrolets.' I strike that contrast because we always look [at which type of loan will be in] the best interests of the borrower [rather than trying to grow market share]. If it's a conventional loan, [that's] great. If it's an FHA-insured loan, [that's] great, too.

Q: What types of loan refinancing are available for strapped borrowers? Many have little or no equity in their homes and they can't get mortgage refinancing elsewhere, so they are coming to FHA.

A: All along with FHASecure, we said we would be making improvements. But it's key for everybody to understand that we have to balance policy against actuarial soundness. We're a self-sustaining insurance fund. If you want to improve something or expand its reach, we have to run modeling--actuarial modeling--and we have to see how it will perform. We have a wonderful database of 35 million loans or so. So we can model how just about anything is going to behave, although certainly it's not an exact science. We thought the original FHASecure was good, in that, OK, you had six months current up until the reset and then you fell behind. But [we] got a flurry of publicity around FHA [last September, leading to far more demand for FHASecure than we originally expected].