As policymakers mull the future of U.S. mortgage policy, Federal Housing Finance Agency chief Edward DeMarco sees a potential starting point in an entity he does not regulate: the Federal Housing Administration.
As part of an update on recent FHFA activities, DeMarco, the agency's acting director, told a gathering of policy leaders that figuring out the FHA's role in a future housing finance system could help frame the debate over the extent of the government's long-term involvement in mortgage lending.
"One potential place to start is by clearly defining the role of the traditional government mortgage guarantee programs like the Federal Housing Administration," DeMarco said in a speech to the Exchequer Club. "If policymakers begin with the role FHA should play in the future in terms of what borrowers would have access to this program, and what structural changes might be needed, then it would be easier to consider the government's role in the remainder of the mortgage market."
DeMarco, who has at times butted heads with the White House over mortgage-related policy, said he essentially will stay on the job if the administration will have him. He also sounded optimistic on recent positive signs about the housing recovery, and touted a sharp rise in homeowners helped this year through a government refinancing program compared to 2011.
"In the first nine months of this year, 75% more borrowers benefited from" the Home Affordable Refinance Program "than did in all of 2011," DeMarco said. "It is possible that the program could reach nearly a million borrowers, or more, by the end of the year. In addition, over 40% of the HARP refinances in 2012 have gone to underwater borrowers, and an increasing percentage of HARP refinances in 2012 were for shorter term mortgages that help borrowers build equity faster."
But DeMarco reiterated that the government should be cautious about the amount of subsidies it provides to the mortgage market in any future housing scheme.
Following his remarks on the FHA, which provides an insurance guarantee on privately-originated mortgages, DeMarco said the FHFA is not the only agency with the potential to help steer mortgage activity away from the U.S. government.
"FHFA is taking a number of steps - whether it is increasing guarantee fees or pursuing risk sharing alternatives - that have the potential to transfer some credit risk to the private sector," DeMarco said. "We will continue to try to make progress in this area, but if policymakers are serious about limiting the government's role, more direct actions may be needed to have significant near-term effects."
DeMarco provided little detail on what he thinks should be the result of discussions about the FHA's future, though in response to an audience question he suggested one issue policymakers should address is the size of FHA loan limits, which in certain high-cost areas are higher than the conforming loan limits imposed by Fannie Mae and Freddie Mac.
Generally, DeMarco said the government should answer the question, "What is the public purpose of having American taxpayers providing explicit guarantees?" as well as who are the appropriate beneficiaries of such a subsidy.
DeMarco said improvements made to HARP last year - intended to make the program available to a larger pool of borrowers - have begun to pay dividends. Through September, he said, over 700,000 homeowners have been able to refinance loans through the so-called HARP 2.0.
"We continue to meet with lenders to ensure HARP is helping underwater borrowers refinance at today's historical low interest rates," DeMarco said. "As we continue to gain insight from the program we will continue to make additional operational adjustments as needed to enhance access to the program."
But he said the heavy involvement of the U.S. government in housing finance - illustrated by the extended federal conservatorships of Fannie and Freddie - is still reason for pause.
"Today, the government touches more than 9 out of every 10 mortgages. With this in mind, it is essential that we transition the mortgage market to a more secure and sustainable and competitive market," DeMarco said. "The conservatorships of Fannie and Freddie were never intended to be long-term solutions. They were primarily meant as a 'time out' for the rapidly eroding mortgage market - an opportunity to provide some stability while Congress and the administration decided on how best to rebuild our housing finance system."