Getting FHA Back in the Condo Market

For several years I’ve been involved in a push to get the Federal Housing Administration (FHA) to update the Agency’s condominium rules. This has been a long-term effort fraught with fits and starts, built on a foundation of bureaucratic inertia.

This has always been an access to credit issue for me. Unless a condo building is approved by FHA, no one in the building can be approved for an FHA-insured mortgage.  For many, an FHA-insured mortgage is quite literally the key to household formation and wealth-creation.

This is particularly the case for first-time buyers and minority borrowers. No FHA condo approval makes the path to homeownership more narrow and difficult than it already is for these who want to purchase a home in a condominium.

I want to share two charts that I believe make a clear case why reforming the FHA condominium approval process is important for condominium homeowners and homebuyers across the country.

The first chart (a map, actually) shows the approximate location of each FHA-approved condominium in the lower 48 states as of March 2018. More than 50 percent of FHA-approved condominiums are concentrated in a handful of states.

Source: FHA

If you live in two housing markets in California, along the North East’s Acela Corridor, or a few hot spots in between, you may can find a condo that is FHA-approved. Live anywhere else and you’re out of luck.Consider West Virginia. As of June 5, 2018, only two condominiums in the state are FHA-approved, with just 36 condominium units eligible for FHA-insured mortgages.

There are 132 FHA-approved condominiums in the state of Texas, which is almost equal to the number of FHA-approved condominiums in Washington, D.C.! Florida, the king of condos, has only 124 with an FHA approval. My home state of Louisiana has a grand total of 13 FHA-approved condos.In 2017, 50 percent of FHA-approved condos were in just 5 states, with 20 percent in California alone. This doesn’t look like a program meeting a duty to serve national credit markets.

Go further down the rabbit hole and it only gets worse.In May 2017, 10,009 condos were FHA-approved. As of June 2018, that number stands at 9,820. FHA’s stop-gap condo policies put in place during the Great Recession (which remain largely in place despite congressional instructions to the contrary) precipitated the run-off in FHA-approved condos.

Over the past 2 years more than 3,500 condominiums have opted against renewing FHA-approval. This awful retention rate should tell policymakers something is horribly wrong.The second chart illustrates the harsh impact these policies continue to have on consumers seeking an FHA-insured mortgage to buy a condo unit. The data show FHA essentially vanished from the condominium market beginning in 2011.

Source: FHA Outlook Reports, 2001-2012; FHA Production Reports, 2013-2017

When condo homeowners and homebuyers needed FHA to be a counter-cyclical force during the housing crisis, FHA walked away from the market. This is still the case today.Note the sharp and sustained reduction in the number of condominium unit mortgages insured by FHA in the years following 2010. In 2017, condominium unit mortgages accounted for only 2.5 percent of all mortgages insured by FHA. These data tell me that FHA’s condominium approval rules are having a profoundly negative impact on the Agency’s ability to serve first-time homebuyers and minority borrowers in the condominium housing market.We are well into the 7th year of FHA’s pullback from insuring condominium unit mortgages. What can be done?

In 2016 the Obama Administration proposed a new FHA condominium rule. On balance, the proposed rule is an attempt to make FHA a more reliable partner for condominium associations during and after the approval process. The Obama Administration didn’t get this rule over the finish line and it was caught up in the transition and the Trump Administration’s regulatory review.HUD officials continue to vow condos are among the highest of Secretary Carson’s priorities.

A senior FHA official recently testified at a House Appropriations Subcommittee hearing that the Agency is hard at work and hopes to get a condo rule finalized by year’s end, at the latest.But mostly, I’ve been told nothing substantive would happen on condos until FHA had a Senate-confirmed Commissioner. We checked that box last month and this week Brian Montgomery is back at work in his old office on HUD’s 9th Floor.

I’m choosing to believe the condo rule is at the top of his to-do list.

The New Orleans Times Picayune reports that debris removal in several parishes following the Great Flood of 2016 in Louisiana began today. As tens of thousands of homeowners and businesses gut their properties, removing flood debris is a major step in community recovery.

An often overlooked obstacle to recovery can be FEMA refusal to reimburse local governments for the cost of debris removal in homeowner associations. FEMA often classifies homeowner association streets and canals as private property. Under this classification, a local government that removes disaster debris from a homeowner association may not be eligible for FEMA reimbursement for these disaster response costs.

A finding by FEMA that homeowner association streets and canals are private property means homeowners are solely responsible for the expense of removing debris from their community.

In large-scale disasters such as the Great Flood of 2016, local governments may petition FEMA for a determination that debris removal from homeowner associations is in the public interest. To make such a request of FEMA, local governments must certify that destruction within the community is widespread and that disaster debris in homeowner associations is a threat to human health and safety and community recovery.

If FEMA concludes that debris removal from homeowner association streets and canals is in the public interest, FEMA requires local governments to show permission from homeowners to remove disaster debris. Additionally, FEMA may also require local governments to prove a pre-existing legal obligation to remove disaster debris from homeowner associations. This may be in the form of a contractual agreement between the homeowner association and the local government or an obligation arising out of ordinance or statute. FEMA does not consider a trash removal contract to meet the pre-existing legal obligation standard.

U.S. Representatives Mark Sanford, Steve Israel, and Jerrold Nadler have introduced legislation that eliminates bureaucratic obstacles to disaster recovery in homeowner associations. H.R. 3863, the Disaster Assistance Equity Act, ensures that local governments can meet the disaster response needs of homeowner associations in the same manner as all other neighborhoods in their communities.

If your homeowner association has been denied federal disaster debris removal assistance, please contact Community Associations Institute for more information on H.R. 3863 and the actions you can take to jumpstart recovery in your neighborhood.

For more information on disaster assistance for homeowner associations, visit the Community Associations Institute website on disaster assistance. For a deeper look at the issue, read the Community Associations Institute white paper, Federal Disaster Policy and Community Association Homeowners.

Email government@caionline.org to share your neighborhood’s disaster recovery story and if your homeowner association has been ruled eligible for debris removal assistance.

 

Additional resources for homeowner and condominium associations—

»      FEMA—Apply for Disaster Assistance

»      The Community Association Guide to Appealing a FEMA Disaster Assistance Denial

HUD Secretary Julian Castro’s February 11 Financial Services Committee debut was painful. Questions of issue command raised by the Secretary’s Daily Show appearance were clearly answered within 20 minutes of the committee being called to order.

Committee Republicans made their points quickly and effectively: FHA is far below its statutory capital requirement, in violation of the law as they see it, and in no financial condition to reduce mortgage insurance premiums.  The only Democrat to offer an effective rebuttal was Rep. Capuano, but it wasn’t enough. The Secretary failed to defend FHA or even come armed with basic facts about the performance and condition of FHA’s book of business.

You knew it was a bad day when NAR released a statement at the hearing’s conclusion offering a robust defense of the FHA premium cut. MBA’s David Stevens followed suit, sharing his thoughts  in The Hill.

***

Two weeks later, Secretary Castro found himself back on Capitol Hill in front of a different congressional committee. That committee found a different Secretary Castro.

The Secretary Castro who testified before the House THUD Appropriations Subcommittee on February 25 was knowledgeable, in command of facts and program details, and generally acquitted himself well. While members did not question him as aggressively as FSC Republicans, this time the Secretary responded when pressed.

It is hard to see a Cabinet level official fall so flat at the beginning of their tenure and HUD, in particular, needs steady-handed leadership.

I think it fair to say that members of both parties lost some measure of respect for the Secretary and he must acquit himself well in his next Financial Services appearance. Based on this most recent performance I think the Secretary is well on his way to recovery.

***

One final observation. It was good to hear members asking questions of the Secretary on housing policy that had nothing to do with housing finance. There was substantive discussion on targeting housing vouchers; Moving to Work; Jobs-Plus; and the HOPWA funding allocation formula, just to name a few.

You don’t see those debates in Financial Services.

Rep. Baker: “Come on, can’t you vote for this? It’s just a study.

Rep. X: “We just approved a big flood control project back home. I’d love to help you out. I’m sorry, I just can’t.”

The politics of flood insurance in less than 40 words, according to my recollection.

***

The bill in question was H.R. 4320 (109th Congress). As introduced, H.R. 4320 expanded mandatory flood insurance purchase requirements from the 100-year floodplain to the 500-year floodplain. The bill took fire from all directions.

Chairman Oxley, who included the mandatory purchase expansion at the Bush Administration’s request, retreated. He asked Rep. Richard Baker to offer an amendment to strike the 500-year floodplain standard from the bill and replace it with a study. The study would be conducted by FEMA, which would report results and policy recommendations to the committee.

Even the FEMA study was toxic and an acrimonious debate ensued with committee members openly questioning FEMA’s ability to conduct an impartial study. There was disagreement over what exactly should be studied and if the committee was interested in receiving policy recommendations.

The eventual outcome? By a vote of 34 to 31, which splintered party discipline among both Republicans and Democrats, a substitute study amendment was approved. Under the substitute, GAO, not FEMA, would examine a 500-year mandatory purchase requirement and report its findings, without policy recommendations, to the committee. The underlying bill eventually died and the study never conducted.

***

If a simple study on expanding flood insurance coverage requirements caused such acrimony and division in the Financial Services Committee in 2006, what changed in the intervening 6 years that led to the Biggert-Waters Act?  How did members get from arguing about a study to almost unanimously passing Biggert-Waters?

Senior members of House Financial Services retired or were defeated. Reformers moved up the line of seniority. The NFIP’s debt burden couldn’t be ignored. Industry was desperate for a 5-year NFIP reauthorization. Against this backdrop, Biggert-Waters became law of the land on July 6, 2012.

About 250 days later Rep. Steven Palazzo was the first to introduce legislation reducing most Biggert-Waters premium increases. All it took was half a year, barely enough time for the ink on Biggert-Waters to dry.

In what is by any measure a spectacular shift, the House is now set to eliminate some Biggert-Waters premium increases and slow down most others. The issue has become such a high priority that Majority Leader Cantor has personally intervened, committing to bringing legislation to reform Biggert-Waters directly to the House floor.

And this brings us back to the conversation between Rep. Baker and his colleague on the 500-year floodplain study amendment. Baker simply couldn’t convince members to go along with a study they thought might somehow lead to more properties being required to buy flood insurance. Now that members are facing this as a real possibility, they’re saying, “I’ve made a huge mistake.”

Is this all that surprising? No.

***

What I find most interesting in this story is the decision of Majority Leader Cantor to circumvent the committee process and bring a flood insurance bill directly to the House floor. The House Republican Conference prizes regular order and quite frankly, it is unusual for Leadership to interfere with an A-committee chairman’s jurisdiction.

There are political reasons for this interference that involve a Senate race in Louisiana. There are another 235 reasons in the form of cosponsors for Rep. Michael Grimm’s Biggert-Waters reform bill, too.

Here’s the thought I keep coming back to—why is it that Leadership and the Republican rank-and-file are unwilling to wait on Chairman Hensarling? One legislative disagreement does not a trend make or precedent set, but the fact still remains that Leadership has seized the reins on this issue.

Consider, too, that flood insurance is not the most controversial financial services issue facing House members at the moment. If members thought they are being lobbied aggressively on Biggert-Waters, they should wait until GSE reform is brought to a vote.

Biggert-Waters has been little more than a warm up for the housing finance industry. I don’t mean to oversimplify or drift into hyperbole, but this fight has strengthened industry relationships with rank-and-file Republican members in very basic, important ways. Industry roots in member districts have only grown deeper and lists to support a persistent, guided campaign of visits, phone calls, emails, and social media have been grown. It’s like how every member of Congress used to keep a very close eye on their yard sign campaign chair. It’s hard to understate the importance of voter lists and voter contacts.

Now, it’s a grave mistake to underestimate Chairman Hensarling and truthfully, the GSE reform fight was always going to make Biggert-Waters seem like child’s play. Further, I have to believe the Leadership’s intervention in Financial Services Committee jurisdiction is limited to this one issue. But that it occurred at all, and the implications for the next big housing vote—that’s the real story.

The Bride: You and I have unfinished business.

Bill: Baby, you ain’t kidding.

Kill Bill, Vol. 2

For years housing finance reform was contentedly filibustered by white paper in the public square. On Tuesday, July 23rd, this long-running, polite discussion was rudely interrupted by a House committee chairman who presented his ideas for reform and then had the audacity to press them to a vote.

Chairman Hensarling, tired of the seemingly endless discussion, moved the Protecting American Taxpayers and Homeowners Act, or PATH Act, out of the Financial Services Committee. By taking this step, Hensarling advanced and focused the housing finance reform debate in ways we haven’t seen in quite a while.

Everyone has an opinion on this. Mine is that a vote somewhere, on something, was way overdue.

***

If you’ve been to the breakfast discussions, policy conferences, committee hearings, or paid casual attention to the PATH Act mark up, you know that policymakers of all political stripes say housing finance reform is the unfinished business of the Dodd Frank Act. To be fair, there are many legitimate reasons why this issue was left on the Dodd Frank cutting room floor and there are any number of clichés that are apropos when it comes to illustrating why most were content to push the discussion to another day.

 

Chairman Hensarling’s contribution to the housing finance reform debate is substantial in that he took ownership of an issue that other policymakers in leadership positions willingly allowed to languish. Chairman Hensarling moved members of Congress from just talking housing finance reform to actually voting on it. That’s no small feat and it is leadership.

Rep. Waters will not support the PATH Act and has lampooned it as the Path to Nowhere Act. Yet, Rep. Waters acknowledged the need to move forward. The majority of committee members seemed genuinely interested in a debate on housing finance reform legislation and in getting started on a long overdue process.

Many label the PATH Act a futile exercise in ideology and perhaps that’s what it ends up being. But no matter how Chairman Hensarling’s bill is viewed, it is serving an important purpose. This is why the PATH Act needs to take the next step in the legislative process and move to the House floor.

Speaking of taking the next step, the Corker-Warner bill needs to show it can keep pace. I’m sure the bill’s supporters are looking forward to their day in committee, but that day has yet to come. The PATH Act may not become law in its current form, but it has gotten out of committee. Corker-Warner needs to catch up.

***

I know there are many who want to use the five-point-palm-exploding-heart technique on the PATH Act. If they truly support housing finance reform and understand the process, they’ll know that trying to kill the bill at this stage sacrifices long-term goals for a short-term political win.

It is important that House Republicans have a discussion and vote on their ideas for housing finance reform. It is important for House Democrats to present, defend, and have a vote on their alternative. That is the legislative process and the House needs to be given opportunity to work its will. A similar process needs to play out in the Senate so we see the kind of legs Corker-Warner has.

I can only imagine the amount of money that will be spent, and overtime worked, during the August recess on this issue of housing finance reform. After all, I’ll be busy with it myself. That’s an important part of the legislative process, too. Members need to hear a variety of constituent views on the intersection of housing finance policy and daily life.

I just hope that when Congress returns in September, members and Senators are still willing to pursue a long-term solution to our housing finance policy problem.

Look, sir, you have to realize something. My father was a revolutionary in 1910. I was born in 1909. I was left alone with my mother, Doña Rosenda, may she rest in peace. I wanted to be a writer. After a while, I became disillusioned. I dedicated myself to what was coming, not what had gone before. That is your task, sir. To understand what it is that remains and not what has gone before. 

Don Rodrigo Pola to Abelardo Holguín, from Carlos Fuentes’ Adam in Eden

This is a tale of two hearings on one topic. Our first hearing was on May 21st and our second on June 18th. Our topic is the Qualified Mortgage rule.

I’ll come to my point quickly. The dynamic that gave us Dodd-Frank has changed. Not for everyone, of course, but definitely for some.

* * *

Finding a seat in 2128 Rayburn on May 21st for a subcommittee hearing on the CFPB’s QM rule was much easier than I expected. In my mind the hearing summary was mostly drafted. Republicans attack the CFPB and the QM rule while Democrats offer a spirited defense of the same. Details to be filled in with any back-and-forth between Rep. McHenry and the two CFPB witnesses.

My first indication I was slightly presumptuous was opening statements. Everyone seemed to have a problem with the QM rule and most were not being particularly polite. Questions were even more intriguing. Responses from the two CFPB witnesses baffling. For the first time, the CFPB was taking direct fire from both Republicans and Democrats.

I emailed a banking lobbyist to congratulate him on a job evidently well done. Even they were surprised by what was unfolding.

The besieged CFPB witnesses seemed unprepared for bipartisan criticism of their agency’s signature achievement. Rather than going on offense, the witnesses went into a defensive crouch frustrating even the friendliest of questioners by speaking in voices so low and soft that members couldn’t hear their long, winding answers to simple questions.

I turned to a friend and said “They must not speak in loud voices at the CFPB.” The response was, “Or prep their witnesses. Did you see how frustrated Capuano was?”

Yes I did. I saw how Rep. Capuano probably went farther in expressing concerns about the QM rule just so the CFPB witnesses would get his point, which roughly translated was, “Your performance today doesn’t inspire confidence.”

Now to the June 18th hearing that ended up more interesting than the first.

Prepared to hear bipartisan criticism of the QM rule this time, what was interesting was how members chose to talk at or around the rule, which drew important contrasts. Suffice it to say that Ranking Member Waters doesn’t have party discipline on QM just yet.

Witness testimony could be summarized as complimentary of the CFPB, Director Cordray, and the QM rule followed by a litany of reasons why each witness’ sector of the mortgage industry should be exempted from the QM rule. When witnesses weren’t pleading for their exemption, they offered helpful suggestions on how the rule must be changed and implementation delayed.

Members were listening and agreeing. Not on everything, but on enough.

The Center for Responsible Lending’s Michael Calhoun, the only witness to defend the QM rule, grew more exasperated as bipartisan softballs were lobbed to industry witnesses. When he could get a word in, Mr. Calhoun argued against the industry’s preferred solution, H.R. 1077, the Consumer Mortgage Choice Act, saying the legislation would harm borrowers and allow mortgage fees to double. He went on the offensive against the title insurance industry, particularly lender-affiliated title companies. Mr. Calhoun spoke passionately about the need to ensure low points and fees.

For the most part, it seemed as if no one was listening to Mr. Calhoun. Except, as it turned out, for Rep. David Scott (D-GA), who said—

“Mr. Calhoun earlier made a statement that I totally disagree with and that is on his issue of the need for H.R. 1077. Let me assure you, Mr. Calhoun, we desperately need H.R. 1077.”

Rep. Scott, a lead cosponsor of H.R. 1077, had no interest in hearing Mr. Calhoun respond, turning over the remainder of his time to the NAR and MBA witnesses to extol the virtues of his legislation. Mr. Calhoun must have doubled checked his calendar to make sure it wasn’t 2004 again.

Rep. Scott, along with a lot of his colleagues, is dedicating himself to what is to come, not what has gone before.

* * *

The members who passed the Dodd Frank Act don’t want to go back to the Wild West of originate to distribute, but they like originate to hold in portfolio or originate to distribute with risk retention. Some may have a penchant for the occasional covered bond. You don’t get much of these without originations.

This is the CFPB’s challenge. Understand a shift has occurred. Understand that Americans are looking to a what’s next that’s pretty reasonable.

I think I have this thing where everybody has to think I’m the greatest, the quote unquote “Fantastic Mr. Fox.” And if they aren’t completely knocked out and dazzled and slightly intimidated by me, I don’t feel good about myself. — Mr. Fox, from Wes Anderson’s Fantastic Mr. Fox

Thanks to Iowa we are finally in the actual contest. There will be winners. There will be losers. And there will be losers who’ll tell us they won. The end can’t come quickly enough.

In looking the field over, most everyone has a problem with everyone. Contrary to what we would like to believe, no one is perfect. No one has been right on every issue. No one will make only the right decisions in the future. We know this about the candidates because we know it about ourselves. Yet Republican primary voters seem lost as they look for someone better than they are. An inspiration who is larger than life, a little intimidating, and who is always, definitively, right.

Republicans want their own Fantastic Mr. Fox.

Is that really what America needs? Another Mr. Fox? Do we need a Republican nominee who packs stadiums and outdoor parks; who tells us to our faces that Americans are a good and decent people but behind closed doors calls us bitter; who lectures rather than listens?

* * *

I know a small business owner who started a clothing boutique right in the middle of the recession. An exceptionally accomplished person both academically and professionally, she wanted to do something different. To follow a dream with no guarantee of success. After a more than a year of careful planning, navigating local, state, and federal regulations, and laying out her own capital, she opened her store. That is inspirational.

I know an architect in the Pacific Northwest who helped his firm survive the devastating downturn in construction. Firms larger and smaller than his failed. He and other principals in the firm cut their pay to avoid the most severe layoffs. A relentless pursuit of work—privately and publicly funded—saved the firm, which is now well positioned for the recovery. That is inspirational.

I know of a small clothing designer in New Orleans whose main overseas supplier increased costs to the point she no longer could afford to have her product manufactured. Rather than close her doors, the designer took her appeal public, securing sufficient funds to purchase her own looms and manufacture her product in New Orleans. That is inspirational.

Republicans don’t need a nominee who will inspire us. We need a nominee who is inspired by us.

* * *

You have similar stories about people who have inspired you. These experiences make the case for a nominee who actually knows what it’s like on the job creation side of the economic ledger and is inspired by risk takers.

We also have examples of families and businesses that didn’t survive these past three years. These stories make the case for a nominee who has the proven ability to promote economic growth. Few things inspire confidence and stability like a paycheck.

Mr. Romney was recently named “Mr. Good Enough” on the editorial pages of The Wall Street Journal. The line that grabbed my attention was “Mark this down as the triumph of strategy over inspiration.” What is wrong with that?

Do shareholders prefer inspiration over profits? Do voters prefer fire in the belly of their candidate over food in their own? Do we simply want a sideshow; an emotional appeal that can be summed up as “USA is A-OK?” Not even Rome was saved by bread and circuses.

If you need inspiration, take a good look around you. And if you’re tired of Mr. Fox, take a look at Mr. Romney.

New Orleanians use the storm and Katrina not only to indicate the primary meteorological incident, a hurricane; the terms additionally encompass the levee breaches, the ensuing flood, the resulting deaths, the rescue efforts, the governmental blunders, our extended—sometimes permanent—stays in the diaspora, the near-death of our city, Hurricane Rita, which arrived three weeks after Katrina, and in many cases every day that has passed since August 29, 2005.

Sara Roahen, Gumbo Tales

On April 1st I was running late for a hearing on flood insurance reform. There was only one witness; Craig Fugate missed an earlier hearing to monitor the tsunami that had so recently overwhelmed Japan. This was a make-up hearing taking place on a beautiful Friday morning and there were plenty of empty seats up on the dais and in the audience. I took a seat near a friend.

FEMA Administrator Fugate is a man who inspires confidence, at least in me. He was forthright, matter-of-fact, and didn’t hesitate to answer questions directly. My favorite moment in the hearing was Fugate’s takedown of his fellow Floridians who have set up federal taxpayers to take the fall for their oversubscribed, underfunded state property insurance program. At least someone in the federal government gets the joke.

My friend and I hung around after the hearing, talking about the flood program. She said I seem to take the issue personally. It is personal and it should be for you, too.

Here’s why.

***

I believe it was the morning of August 30, 2005, that an official from Louisiana Citizens, the state run insurer of last resort, called the office asking for a $500 million emergency federal appropriation so Citizens could pay claims. In less than 24 hours the state run insurance program was insolvent. It was Tuesday; Citizens needed the money that week. They knew it wasn’t going to happen.

Soon afterwards, Louisiana homeowners discovered they were liable for every penny of the little more than $1billion in claims that Louisiana Citizens couldn’t pay out. To cover what was one of Louisiana’s largest bond issuances, every homeowners policy in the state was assessed an ongoing Katrina surcharge.

Armed revolt almost ensued. Almost. The legislature ultimately opted to spread the costs to all Louisiana taxpayers by allowing a state income tax rebate equal to the Katrina surcharge. According to the State Treasurer, the average rebate for the Katrina surcharge this past year was $136.59. And so the little known fact remains—Louisiana covered all losses in the Louisiana Citizens program.

***

How long did it take officials at the National Flood Insurance Program to have their Louisiana Citizens moment? When did they realize how hopelessly unprepared the program was to meet its obligations? It took them a couple of times to get the number right, but ultimately the NFIP had to ask Congress for permission to borrow around $20 billion from the Treasury.

Sara Roahen captures in one sentence the essence of Katrina; for the people who lived it, Katrina divides time. Katrina is how things were versus how things are. Bankrupted and currently $17 billion in debt, the NFIP is viewed by Congress in very simple and familiar terms from the Louisiana lexicon: pre-Katrina and post-Katrina.

The House Financial Services Committee is marking up yet another post-Katrina NFIP reform bill this week. The bill increases premiums, eliminates subsidies, improves flood insurance rate maps, and allows the NFIP to purchase private reinsurance. On the other hand, the bill delays the effective date of new flood maps for up to 5 years, gives local officials even more ways to suspend mandatory flood insurance purchase requirements for high risk areas, and expands NFIP coverage lines. The bill does all of this and more, but it doesn’t directly address the NFIP’s $17 billion post-Katrina debt problem.

Everyone knows the NFIP will never repay this debt. During the hearing Administrator Fugate said it was “unlikely.” So, what’s to be done?

Personally, I think the Louisiana Citizens model makes sense. If you benefit from the NFIP, you should pay its freight. If Louisiana can do it, I know the nation can, too. However, there is that risk of armed rebellion to contend with.

If we don’t want the people who use the NFIP to pay its debts, perhaps we should acknowledge that the American people are already paying for the debt and move it on the balance sheet. We don’t have to like it, but we can’t deny the post-Katrina reality—we own the NFIP’s debt. It is personal after all, isn’t it?

If we decide to pay the bill we need to make sure we only pay it once. The NFIP needs to act more like an insurance company rather than a government program in one very important way. The NFIP needs a minimum capital standard; it needs to have reserves the same way every other property and casualty insurance company in the country does. State regulators would never allow an insurance company with $1.2 trillion insurance in force to stay in business without any capital. Only the federal government (and Florida) does this.

The NFIP was never capitalized and so the program was never actuarially sound from its founding. In 2006, Senator Richard Shelby attempted to correct this problem by proposing that the NFIP maintain reserves equal to 1 percent of all risk exposure in force or effect in the program while eliminating most program subsidies. In exchange, the NFIP’s then $20 billion debt was to be taken on by taxpayers.

We look at the NFIP in post-Katrina terms, but the reality is today’s NFIP is still very much a pre-Katrina government program. A Shelby-style capital requirement is an important component of a realistic, long-term solution to maintaining the NFIP’s solvency and protecting taxpayers from future NFIP losses. Congress needs to eliminate subsidies and allow the NFIP to purchase reinsurance to cover catastrophic coverage, but nothing beats cash money in the bank.

I was enjoying a cup of coffee with a friend the other day whose only involvement in the housing finance system is that her family makes their mortgage payment on time every month. She told me about a family whose closing on a new home was canceled three times because the lender needed more than 45 days to document and approve their loan.

My thought was, “And this is how the housing finance system functions with hundreds of billions of taxpayer dollars greasing the gears.”

Fast forward to February 11th. The Administration released its report on options to reform the housing finance system.

On Capitol Hill, Republicans commended the Administration for its commitment to wind down Fannie Mae and Freddie Mac, but groused about the lack of a concrete plan. Democrats were happy that support for affordable rental housing featured heavily in the report, but didn’t exactly go out of their way to congratulate the Administration for its other ideas.

On K Street, the mortgage bankers were glad to see the Administration wants the government involved in the mortgage market. I’m sure private mortgage insurance companies were buying crates of champagne. Meanwhile, the Realtors asked the practical question, “How’s this all supposed to work?”

Battle plans are being drawn up in Congress and around the country as the countdown to the epic struggle over housing finance reform begins. What most folks should be realizing now (if they haven’t figured it out yet) is that reform has already started.

At a February 16th hearing in the Subcommittee on Insurance, Housing, and Community Opportunity, Federal Housing Administration Commissioner David Stevens couldn’t complete a thought without mentioning how FHA has ratcheted up the pressure on homebuyers and homeowners this past year.

First up was the announcement of a new 25 basis point increase in FHA’s annual insurance premium, which comes on the heels of two other premium increases. Next, Stevens listed ways FHA has pushed homeowners out of its programs by making them more restrictive. The icing on the cake was Commissioner Steven’s plea for Congress to allow loan limits to fall.

In response to a question by Rep. Dold (R-IL), Stevens said the primary goal of these policies is to substantially reduce FHA’s footprint in the housing market—specifically from 30 percent down to around 15 percent. And Stevens happily shared that it’s working. Citing a report by Inside Mortgage Finance, Stevens noted FHA’s market share from the 1st quarter of 2010 to the fourth quarter of 2010 declined from 24 percent to 14.8 percent.

That is housing finance reform in action now. Game on.

FHA isn’t the only one at the party though. The Administration has announced it will urge (require, actually) that Fannie Mae and Freddie Mac increase guarantee fees and increase minimum downpayments for loans it purchases. Conforming loan limits will be coming down, too.

Is this bad? No. In fact, this is likely the only way we can prevent giving Fannie and Freddie even more cash than we already are and stop FHA from being added to the list of government bailouts. And that’s what brings me back to my friend.

How is the average American family that still owns a home going to react when all of this hits them in a very personal and practical way? If you still have a job or still own your home, it’s not just because of sheer dumb luck. You had to have done something right in the years leading up to and during the financial meltdown. How are these people going to react to paying for the sins of others?

That question will be answered soon. Government support for the mortgage market is diminishing. The Administration’s report shows that trend will not only continue, but accelerate. Even if Congress does nothing on housing finance reform, the mortgage market will look a lot different in 12 to 18 months than it does today.

If the Administration gets it wrong this next year and runs into a public that’s not so sure it wants to put 30 percent down on a mortgage with a higher interest rate, what are the chances of structural housing finance reform making its way through Congress? The country can’t afford to simply swap one Fannie for another.

On January 18th, President Obama announced an executive order in the Wall Street Journal directing that federal agencies amend or repeal regulations unnecessarily impeding economic growth. The president wrote that the effort is intended to “…root out regulations that conflict, that are not worth the cost, or that are just plain dumb.”

The president’s announcement is welcome. It marks a substantial shift for an administration that spent its first two years in office trying to convince the nation that the federal government can successfully direct private economic activity. But is this anything more than a mid-term pivot to placate the business community? It won’t take long to tell.

The volume of pending regulation from laws passed by the 111th Congress is staggering by any measure. An early test of the president’s pro-business conversion will be how these new rules are written. If the administration’s old way of doing business is to change, the change should start right here.

Unfortunately, the president’s executive order doesn’t seem to be directed at the current rule-making binge. In fact, from his rhetoric, it seems clear that President Obama is not as interested in “…writing rules with more input from experts, businesses and ordinary citizens” when it comes to this spate of rule-making.

Even if the president limits the regulatory review to existing rules only, it’s hard to see how any administration can effectively review, in depth, the regulatory structure supporting federal government programs. Unless the Office of Management and Budget makes the president’s initiative a core priority in 2011 the executive order won’t be worth the paper it’s printed on. This means harassing Cabinet officials and other politically-appointed staff across the government to make the review a priority, something that OMB—backed by the White House—can do.

The cynic in all of us knows this is overblown pre-election year hype, right? You bet it is. But there is some real potential if Congress decides to get in on the act, too.

Can Congress really help the process along? Of course it can.

House Committee on Oversight and Government Reform Chairman Darrell Issa has already put significant pressure on federal agencies to justify how programs are operated. The topic of the House Financial Services Committee’s first hearing of the 112th Congress was the uncertainty that American businesses face due to the changing regulatory landscape.

The House and Senate Appropriations Committees can also have a major impact by requiring all federal agencies subject to annual appropriations to implement a rigorous regulatory review. The power of the purse has significant potential to make the president’s executive order have teeth.

What type of impact could a regulatory streamlining have on economic output? Dr. Chad Moutray, former Chief Economist for the Small Business Administration’s Office of Advocacy does a good job of telling us. Writing in the Washington Post, Dr. Moutray says that federal regulations cost the American economy $1.75 trillion every year. These costs are disproportionately borne by small businesses, which shoulder higher per employee regulatory compliance expenses.

While it is self-evident that regulation matters, Dr. Moutray helps bring this into focus by putting a price tag on how the federal government conducts business, so to speak. Even a casual review of the federal regulatory burden could have a substantial economic impact.

Why is this important? Small businesses employ just over half of all private sector employees. If employment is going to grow in 2011, this is where the growth will take place. Dr. Moutray’s regulatory price tag tells us that how we regulate does matter and it matters a great deal. This is why a regulatory review across the federal government can make a real difference in the economy.

Take the Federal Housing Administration as an example. FHA requires condominiums to meet certain standards before the agency will agree to insure mortgages on units in the development. This is good public policy. It protects condominium owners from poor management and it protects taxpayers from losses. As a result many condominium boards have adopted rules that mirror and enforce FHA program requirements.

That’s where the common sense stops. FHA has recently decreed that all condominiums that have adopted FHA’s own safety and soundness requirements are ineligible for FHA’s mortgage insurance programs.

Let me say that again: if a condominium adopts the same rules that FHA uses to qualify the development for its programs, FHA prohibits all owners in the condominium from receiving FHA-insured mortgages.

If you own a condo, that’s a big deal. FHA accounted for approximately 38 percent of all home purchase loans and 9 percent of mortgage refinances nationwide according to its fiscal year 2010 report to Congress.

Going back to President Obama’s editorial in the Wall Street Journal, FHA’s condominium rules seem to fit the bill for regulations that are “…just plain dumb.”

This is the type of regulatory nonsense that businesses across the country are subject to. The more of these types of regulations the president can eliminate the better. American businesses and workers (and condo owners, too) could use that kind of stimulus.

The president is on to something; Congress, it’s up to you to see he follows through.


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