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

So, I continue to implore at every opportunity Congress to pass FHA reform. I appreciate there's a lot of other discussions about foreclosure prevention--which, again, we've been leading that charge, too. Both parties want to help struggling homeowners [facing foreclosure]. There's no doubt about that. Everybody wants to do that. I know we disagree on how to do it. While we can disagree on that [issue] and continue to work it out, let's finalize [and pass FHA reform, which is something] we know we all agree on.

Q: How is the down-payment issue shaking out in FHA reform?

A: We wanted to build a new risk-based pricing [system for FHA insurance]--something the other side of the aisle agreed with us and actually still agrees on, but [they] call it something a little different. But we realized back then maybe having a zero-down product might have made sense--especially if you could price for it. Remember, we're a one-size-fits-all premium structure now. We learned something going forward. [In 2006] we were positioning a sensible zero-down-payment 1 [product] against the seller-funded [down payment], where you're not paying for your own gift. But guess what? We changed our minds. We saw the way zero-down loans were being done and decided that maybe it's not the best time now to be pushing zero-down. So, a year and a half ago or so, we backed away from the zero-down. Now the Frank bill still has a zero-down provision for first-time homebuyers. The new Senate bill raises it to 31/2 percent.

Q: Where do you think the FHA loan limits should be relative to the Fannie and Freddie loan limits?

A: We always characterized FHA as a program for low-to moderate-income families, and that's normally where it settles out. [While we need a higher loan limit in places with higher home prices], my personal opinion is that where we are right now--$729, 750-is just too high. [Even so,] we need to be mindful of [the working-class families] in those states and those areas--those 75 counties with higher home prices.

Q: What are some of the potential benefits of the proposed new RESPA regulations?

A: I think I would put at the top of the list the standardized Good Faith Estimate. We've had a couple bites at this apple. Pre-dating my arrival here, the original RESPA proposal was withdrawn. We came back at it again after a bunch of roundtable testing [sessions], and we settled on what I think is a very robust and very informative four-page disclosure. Now, some will say--I think one of the exact quotes I heard from one lobbyist [was,] "It's overly complex, complicated and confusing." I can certainly appreciate why they offered that quote, but the testing didn't bear that out. The consumers--and we did extensive testing of 1,400 to 1,500 people all around the country--liked the Good Faith Estimate.

Q: Could you explain why consumers found the Good Faith Estimate helpful?

A: They liked the fact it was standardized [instead of getting a different form from every lender]. Everything the borrower needs to shop--and we want to encourage borrowers to go shopping for the best deal--is really on the first page. The second page goes into greater detail of what's on the first page. The third and fourth pages do things that sort of spell out the relationship between upfront costs and interest rates and things of that nature ....