Birdwatchers would say that the difference between a hawk and an eagle is size: a hawk is smaller. In the case of housing finance, the difference might not be as straightforward. The Federal Housing Administration’s Mutual Mortgage Insurance Fund (FHA), whose authorized lenders are commonly known as “full eagles”, recently announced a counseling and homebuyer initiative for first-time homebuyers called “HAWK” (Homeowners Armed with Knowledge).[i] HAWK raises coordination concerns within a housing finance context that remains more than 90% U.S. Government-backed and where FHA’s service footprint overlaps greatly with MGIC and other private mortgage insurers (MIs). While this is a good-faith effort to encourage borrower financial education it could have unintended consequences.
What is HAWK?
HAWK is a counseling and homebuyer education pilot that rewards pre-contract, pre-closing, and post-closing efforts by first-time homebuyers through reductions in the FHA’s mortgage insurance premium rates – a 50 basis point reduction in the upfront rate for pre-contract effort, a 10 basis point reduction in the annual rate for pre-closing effort, and a further 15 basis point reduction for post-closing effort and avoiding any loan delinquency of 90 days or more within the first 18 months of the loan. HAWK will be implemented by FHA in two phases. The first phase will take 12 months and includes a limited number of loan originators, counseling agencies, and borrowers. The second phase will be launched in the second year and includes a larger number of participants, limited only by unspecified program caps. HAWK is expected to last four years for first-time homebuyers (although the premium reductions are for the life of the loan). FHA intends HAWK to improve loan performance, reduce claims, improve consumer skills, and provide access to sustainable home mortgages. Truly the HAWK could become as large as the (FHA) eagle, and what could be wrong with that?
HAWK encourages participation through premium rate reductions at a time when FHA still has a negative capital ratio. The borrower incentives are specific, the benefits to FHA are not, and there is no explanation for the amounts of premium reduction chosen. Or as HUD puts it, “[w]hile HUD expects positive results from this initiative, actual outcomes can only be determined after pilot implementation.” The financial effect of HAWK on the FHA is not estimated which, even after accounting for differences between FHA and state-regulated MIs, could prove costly for the still recovering FHA.[ii] In the meantime, a borrower not interested in FHA solvency but interested in the best mortgage insurance bargain might choose FHA over MI based on rate reductions offered. In short, HAWK’s financial incentives deserve more thought.
HAWK is well intended but vague and confusing. The vagueness stems from a lack of detail regarding important design issues – who pays for the counseling and homebuyer education, how many loans will be included in HAWK, and what is the relative balance between preserving operational flexibility and producing robust empirical results – that make HAWK appear less like a research pilot and more like an effort to reduce FHA premium rates. The confusion stems from the need to harmonize HAWK with an ongoing demonstration research project (Demonstration) on the effectiveness of pre-purchase counseling on mortgage preparedness, homebuyer outcomes, and loan performance being undertaken by HUD’s Office of Policy Development & Research. The Demonstration has to be adjusted to coexist with HAWK, when arguably the better research path would have been to complete the Demonstration and expand its scope in subsequent efforts.
Housing policy coordination
Recently Ted Durant of MGIC noted the ongoing Government support of the U.S. residential housing finance market.[iii] This support makes sense if it is coordinated; otherwise, policy actions could work at cross-purposes. In the case of HAWK, the justification for the effectiveness of counseling is based in considerable part on research done by Freddie Mac and Fannie Mae (GSEs). Neither the GSEs nor the Federal Housing Finance Agency (FHFA), their regulator and conservator, has expressed interest publicly in a HAWK-like pilot despite a strong emphasis on maintaining (and more recently expanding) credit access.[iv] If counseling and homebuyer education is supposed to have multiple benefits, the hypothesis should be tested by FHA and the GSEs.
The Government Accountability Office (GAO) earlier this year updated its assessment of financial literacy programs and activities undertaken by the U.S. Government.[v] The GAO recommended greater coordination among participating agencies to improve allocation of resources and strategic effectiveness. HAWK reminds us of similar concerns and opportunities in housing finance. The specific value of counseling and homebuyer education on default loss avoidance is an important question that deserves further analysis within a rigorously designed study that includes all portions of the Govt-supported housing finance system. MGIC believes that the efforts of FHA and MIs should be complementary to meet the needs of low down payment borrowers. Therefore, MGIC supports a more collaborative approach as the U.S. housing finance system continues to be rebuilt and reformed. The scope and aims of HAWK should be refined further before it is permitted to leave the policy nest.
What are your thoughts regarding HAWK? Please share in the comments.
[ii] http://www.gao.gov/products/gao-13-722. FHA has not met its statutory 2% capital ratio since 2009.
[iv] See, e.g., http://www.fhfa.gov/Media/PublicAffairs/Pages/Watt-Brookings-Keynote-5132014.aspx (Director Watt introduction of FHFA Conservatorship Scorecard and Strategic Plan); http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2014Scorecard051314FINAL.pdf (Scorecard); http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2014StrategicPlan05132014Final.pdf (Strategic Plan); and http://www.fhfa.gov/PolicyProgramsResearch/Policy/Documents/GfeeRFI060514F.pdf (request for input on GSE guarantee fees).FHA, GSE, GSEs, HAWK, Homebuyer, Homebuyer Education, Top Content