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HUD Chief Lays Out FHA Strategy

Donovan testifies before Senate committee

April 2, 2009

By staff

Loans insured by the Federal Housing Administration account for ten times more market share today than they did just three years ago -- and hundreds of hirings are planned to keep pace with the growth. As the secretary of the Department of Housing and Urban Development prepared lawmakers for increased spending at the agency, he said FHA will bolster its mortgage fraud resources. But he offered no hope for proponents of seller-paid down payment assistance.

FHA market share has gone from 3 percent of 2006 originations to 30 percent of current U.S. production, HUD Secretary Shaun Donovan testified today, according to a copy of his prepared statement. He was speaking before the U.S. Senate's Subcommittee on Transportation, Housing and Urban Development, and Related Agencies Committee on Appropriations.

Growth at the agency has occurred despite antiquated technology. The secretary warned lawmakers that although the $13 million in funding for fiscal 2009 allowed for 200 new employees -- more resources will be needed.

Among needed resources are secure state-of-the-art fraud detection and risk management systems. He noted, however, "Thanks to our fiscal year 2009 appropriation, we now have funding and an existing contract to begin testing the use of the fraud detection tool on the entire FHA single family portfolio."

Donovan also said automated underwriting needs analytic, market and technological enhancements. In addition, a centralized system needs to replace the different organizational standards currently utilized at four FHA homeownership centers.

Out of FHA's 850 office of single-family staff, 90 percent are devoted to risk management practices. All of its contract dollars are also committed to risk management. They monitor and assess FHA lenders and appraisers, ensure FHA compliance and analyze performance trends.

He highlighted how 90-day delinquency on FHA loans is only 7 percent compared to 23 percent on subprime mortgages. FHA benefited from limited exposure to high-priced California properties and highlighted the better quality borrowers the agency is now seeing as a result of tighter underwriting in the private market -- with average credit scores up to 680 last year from 640 in 2007.

Donovan took a swipe at the Bush administration, calling its priorities "penny-wise and pound foolish."

But he didn't depart from Bush's opposition to seller-funded down payment assistance, noting that foreclosures on those loans were three times as high as loans where borrowers provided their own down payments. While seller-paid DPA was used in 12 percent of outstanding FHA loans at the beginning of 2008, 30 percent of all foreclosures completed last year were tied to transactions involving such programs.

"The termination of this program should substantially reduce FHA loses on new originations in the years ahead," Donovan said.

The HUD chief acknowledged that not everybody should be homeowners.

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