For many first-time and low- and moderate-income home buyers, a loan insured by the Federal Housing Administration is the best product to finance a home purchase. The 3.5% down payment requirement makes FHA-insured loans an important financial tool, particularly at a time of low home affordability, helping more buyers achieve homeownership. Yet many sellers and their agents may decide not to accept offers from FHA buyers based on pervasive myths about such financing, and that can have the effect of creating another barrier to homeownership for underserved consumers.
Federal Housing Commissioner Julia Gordon is on a campaign to dispel misperceptions about FHA loans, such as the belief that they have unreasonable property condition requirements. At the REALTORS® Legislative Meetings in May, Gordon implored real estate professionals to get educated on FHA financing so they can accurately explain their benefits to clients.
Gordon recently sat down with REALTOR® Magazine to discuss how FHA is broadening access to homeownership, not only through its traditional loan products but also by enhancing its property rehab programs and expanding housing counseling resources.
Q: High home prices and mortgage rates, as well as low housing inventory, are sidelining many buyers. What steps is FHA taking to expand mortgage access and make its loans more competitive with conventional financing?
A: The FHA’s role is to serve borrowers who are not served by the conventional market. Homeownership is very expensive right now. So, we’re looking at what areas we can lean into that offer promise for lower-income families. One of the most exciting policy changes at FHA is being able to factor in positive rental payment history in the underwriting and eligibility process. We serve a lot of people who don’t come with a robust credit history. Looking at rental history can help get more households into homeownership.
We’re also concerned about inventory on both the homeownership and rental side. While exclusionary zoning is one of the most important issues we’re facing in this industry, it currently appears more possible to rezone for accessory dwelling units than larger multifamily buildings. People who have a home that has an ADU can build wealth by renting it out, and ADUs also have the benefit of creating more affordable units. That's especially important in places where teachers or first responders otherwise can't afford to live. We hope soon to release a policy that enables existing or potential income from an ADU to count toward income requirements for underwriting purposes.
We’re taking a similar look at manufactured homes and factory-built homes. The cost of production is lower for these homes, and they tend to be more affordable. Modern technology also is enabling them to be almost indistinguishable from site-built homes. We want to make sure we have financing products available to support them.
Earlier this year, the FHA reduced its mortgage insurance premiums, which is estimated to help borrowers save $800 annually. It was a move that NAR strongly supported. Could there be any future reductions?
When I came into this position in May 2022, it was quite clear that the FHA had a significant financial cushion. We didn't have to keep stacking up funds for a rainy day. By reducing the pricing to better match our risk, we could reduce costs and make it easier for people to qualify for a loan or pay monthly bills.
Now that we've made that change, we plan to wait and see how we're doing. Volumes are lower right now, and that could persist for some time. Also, we’re seeing the lowest inventory levels ever in our time. So, let’s see how this reduction plays out. Let’s see how borrowers perform. Let’s see what happens with rates. But one thing we’ve done is create a template for how we look at our premium levels and whether they need to be adjusted in the future.
The FHA’s 203(k) program enables buyers and homeowners to add renovation costs to their mortgages. Can you explain how this loan program helps revitalize existing housing stock?
The average age of our housing stock is reaching 50 years old. If we’re not replacing the boiler, the HVAC system and fixing the roof routinely, that house is going to go offline. We really need to be focusing on the aging of homes much more than we are. We are working with the National Association of REALTORS® to try to distribute more information about the 203(k) program. At the same time, we’re looking to see how we can improve that product. For all of FHA's products, it's important to realize that both the loan limits and product features can get out of date, and they need to be revisited regularly if they are not indexed in some way.
The FHA also recently increased its price threshold for large multifamily loans, which could foster greater development and ease the inventory shortage. Can you talk about the significance of this change?
Increasing the threshold enables us to improve efficiency and reduce costs for multifamily sector at a time when we need more affordable rental homes. We know that a lot of luxury rental homes have been built. But in affordable housing, we continue to face a shortage. For the lowest-income households, the shortage is dire. We need to continue to push on the supply in the affordable multifamily space, where so much of our FHA business is. This change seemed like a great way to make sure we were keeping pace with the economic environment.
More supply, ultimately, is good for everybody. But we also need to build it in a way that the economics work out and to preserve affordability for existing buildings. So, we need to repair, maintain and update buildings to make them more energy-efficient and climate resilient.
You said at the REALTORS® Legislative Meetings that real estate professionals and the FHA need each other. Can you expand on that?
We want to make sure that practitioners understand FHA mortgages are good loans. The fallout rate is no different than that of a conventional mortgage. FHA borrowers are well-qualified borrowers who perform well over time. And we hope you will join us in dispelling some myths that have arisen about FHA mortgages. There’s a lot of outdated information, like what the minimum property requirements are. It’s really important to be current on what is actually required because it may not be as big of a deal as you think.
Real estate professionals are on the front lines. When people start thinking about buying a home for the first time, they’re depending on their agent as a gatekeeper. So, it’s important that we work together and that we continue to push out information that’s easy to understand. Through our Office of Housing Counseling, we’ve rolled out a new public campaign called “Let’s Make Home the Goal” to raise awareness about the value of housing counseling. It’s aimed at reaching underserved home-ready individuals and families. We’re focused on delivering culturally and linguistically appropriate information for communities that often have been left out of homeownership. We believe that both pre-purchase and post-purchase housing counseling is a critical tool, especially for first-time buyers. It’s an opportunity for home buyers to learn about the process from a disinterested party and make sure they’re getting into the right loan at the right place.
With a fragile economy—high inflation, uncertainty in the banking sector and an uptick in foreclosures—some people fear a major slowdown in the housing market. How are you preparing for any potential disruption?
We’re here to fill a particular gap in the market, regardless of what the total volume picture looks like. Yes, the slowdown is already here. FHA is experiencing the same volume decreases that the rest of the market is experiencing. But we’re continuing to serve the type of borrowers that we want to be serving. And we stand ready to act as a countercyclical force, as we have time and again, when economic conditions threatened to constrain liquidity in the mortgage market.
When you run into any kind of economic headwinds, you also want to make sure the people who already have a house can keep that house. Our rate of serious delinquency continues to remain somewhat elevated from pre-pandemic levels. But we have done an enormous amount of work to create better home retention options, like a monthly payment reduction, for servicers to offer borrowers when they are delinquent or need help. There will be some people who will face a hardship that they can’t overcome. But those families should be able to be served through a short sale or a deed in lieu rather than going through foreclosure. Foreclosure is just a loss for everybody.
What are the FHA’s priorities over the next year?
We are at that time in the trajectory of the Biden administration where we have very long to-do lists. We’re very focused on pushing many priorities forward over the next year, like the 203(k) and FHA Title I program revisions, continued expansion and modernization of manufactured housing, and enhancing our ability to provide home buyers with access to quality FHA-insured mortgages. We also will continue to focus on loss mitigation and home retention solutions so that buyers who use an FHA-insured mortgage are able to maintain homeownership over the long term.
It’s tempting in this position to not take any risks—to have this job and just keep things running smoothly and not address crises. But I think that’s why it’s so important that President Biden chose to put someone in this position who comes from a background of advocacy on behalf of consumers. I did not come here with the intention of surviving a few years and then leaving.
Is homeownership still a critical piece of the American Dream? Do you believe that it is achievable for most Americans?
Homeownership is still the asset class that most effectively helps families change their economic circumstances. It’s the only sophisticated financial product available to a lower-income family where they can use the power of leverage. A mortgage is an instrument that allows households to access an interest rate that is good relative to other financial products and where they can own an asset that serves as their home. It creates stability for families. Homeownership is also associated with other positive outcomes, whether it’s health, education or public safety. Even as we’re at a point now where I think homeownership is as expensive as it has ever been relative to incomes, the drive is still there. This is what people aspire to have.