professor of economics
ne w york university
by david robinson
The Federal Housing Administration (FHA) has experienced substantial losses to its Mutual
Mortgage Insurance Fund (MMIF) and faces a likely government bailout, according to Andrew
Caplin, professor of economics and co-director of the Center for Experimental Social Science
at New York University. He and several co-authors noted as much in a recent study using Los
Angeles County data (
sctsm.in/w15802), and he said so in testimony (
a House Financial Services Subcommittee this past March. He tells us more.
What is your primary concern with FHA?
FHA’s actuarial report [for fiscal year 2009], stating that government support won’t be needed,
is extraordinarily compromised. The losses to the MMIF are much higher than the FHA states.
Why [FHA hasn’t] apologized and redone the numbers is beyond me. At some point, FHA will
have to go to Congress for money.
How has the FHA responded to your study and testimony?
[FHA officials] say our study is flawed. They state that other studies have been done and that it
can’t be confirmed that FHA is going to go bankrupt.
In your House-subcommittee testimony, you stated that FHA must change the
way it determines potential losses. How?
To build a better loss model, the FHA needs to correctly identify streamline refinances, get
the initial [loan-to-value ratio] correct on these refinances, use less-biased measures of home
value, and incorporate delinquency and modifications that are ongoing — which are early warnings on future losses. When all four modeling changes are made, we will have a legitimate
Do you consider the FHA’s recent actions, including the addition of a chief risk
officer and changing some key underwriting guidelines, to be partial solutions?
[FHA must] show that the particular measures are important. As yet, [FHA has] no demonstration of their quantitative significance. Indeed, [FHA] cannot do this at present, given [FHA’s]
limited knowledge of the trajectory of losses.
How do we avoid an FHA bailout?
FHA has to ensure that the existing mess is sorted out. The large mass of at-risk mortgages will
be defaulting in large numbers in the coming years unless there is a very shocking turnaround
in the economy and the housing market. [FHA has] to get modern regarding risk assessment
and evaluation. Be more innovative, for example, in the form of shared-equity finance.
We’re looking to make sure that when the problem occurs — the need to use taxpayer funds for
a bailout — FHA can’t say it was “shocked” [or] that [the bailout] was unpredictable. A bailout
is inevitable. The question is how to demonstrate better control so that this will not be needed
in the future.
David Robinson, former editor of Mortgage Originator magazine, is a California-based writer and editor. For questions
or comments about this article, e-mail firstname.lastname@example.org.
… in June’s Scotsman Guide
What your clients should know •
before buying a former meth lab
How to embrace the latest •
industry rules and regulations
Leveraging the new •
Spotlight looks southwest to •
… and much more.
Online? Check out current and past editions of
Scotsman Guide at scotsmanguide.com.
TIP OF THE MONTH
Know REOs’ loan limits
When helping clients finance distressed-and real estate owned (REO)-property
purchases, remember that government
agencies often are more willing to finance
these purchases when they meet con-forming-loan limits. Also, although many
banks attempt to sell their REO portfolios
of single-family residences at 90 percent
to 95 percent of the loan principal, REO
properties often sell more quickly when
they are anywhere from 40 percent to 65
percent of the quick-sale value, depending on the region.
— HUGH LARRAT T-SMI TH, TRIMINGHAM INC.
Whether or not you deliver loans to Fannie Mae yourself, you should be aware of Fannie’s new appraisal-related initiative called the Collateral Data Delivery
(CDD) program (
sctsm.in/FanCDD). In essence, Fannie
Mae is signaling the end of the paper-based loan file,
starting with the appraisal.
Under CDD, appraisals must be delivered to Fannie in
electronic form at least 24 hours before delivery of the
loan. This requirement is set to start mid-year — though
no sooner than July 1 — if all things remain on schedule.
Freddie Mac is said to be planning a similar system,
though no timeline has been announced for it.
The CDD system generates a unique identifier for each
appraisal file. This will allow Fannie to correlate the
electronic appraisal with the loan file instantly upon its
delivery. The CDD creates a data warehouse for this essential valuation information and makes it available on
demand before the loan is purchased. This means Fannie can refuse the loan if it doesn’t like the appraisal for
some reason — and you can bet Fannie will be checking
thoroughly for patterns, trends and red flags.
Although this new system could complicate life for
mortgage brokers, it’s not a bad thing for the industry
as a whole, in terms of instilling transparency and investor confidence. It also means Fannie will be more
interested in digital files and less interested in seller or
servicer assurances regarding loan quality.
It seems only a matter of time before all loans are submitted this way in their entirety. After all, appraisals are
almost always created electronically with a loan-origination system (LOS) and then copied, costing them
their digital integrity.
But with the CDD, each data element can be sliced,
diced and compared to other fields in the loan file via
automated analysis. And discrepancies in that analysis
could bring problems.
Because your lenders will be delivering files to Fannie
electronically, they will expect the files to be flawless
when they receive them from you. How often does the
information in the closing package match the data in
your LOS file?
Meanwhile, the CDD means investors likely will be
more satisfied with data integrity in loan files. This
will eventually bring back a number of them, which is
a good thing.
Griff Straw is president of Solidifi U.S., a leading technology-enabled appraisal-management company and provider of col-lateral-risk-management and data-analytic services. He writes a
monthly column on valuation issues for Scotsman Guide. Straw
is a 30-year mortgage banker, a former Freddie Mac technology
executive and a Mortgage Bankers Association Master Faculty
member. Reach him at email@example.com or (703) 496-7579.