Julian Castro, nominated in May to serve as secretary of the Department of Housing and Urban Development, is set to take over at a critical time for the agency as the housing recovery sputters.
After five years of focusing on stemming a record wave of home foreclosures, HUD faces a new crisis as tighter standards cause home lending to slump to a 17-year low. The Federal Housing Administration, a mortgage insurer run by HUD that helps lower-income borrowers buy houses, is on pace to back only 500,000 loans for purchases this fiscal year, about half the number in fiscal 2010.
Castro, 39, a third-term mayor of San Antonio who has said little publicly about the mortgage crunch and U.S. housing policy, faced questioning in his Senate confirmation hearing today. The real estate industry is calling for the FHA to make changes to boost lending.
“We need to step on the housing accelerator again because there is widespread concern about access to credit,” said Brian Chappelle, a former FHA official and partner at Potomac Partners LLC, a consulting firm for lenders in Washington. “Tens of thousands of creditworthy people aren’t getting mortgages.”
Raised by a single mother in San Antonio, Castro graduated from Stanford University with a bachelor’s degree and Harvard Law School. He was thrust into the spotlight in 2012, giving the keynote address at the Democratic National Convention.
As mayor of San Antonio, Castro’s work on housing has centered on increasing the number of affordable rentals and redeveloping neighborhoods plagued by crime and joblessness. Under his leadership, San Antonio was one of only two cities nationwide that secured funds from both HUD and the Department of Education for local revitalization efforts. San Antonio got a total of $54 million.
At the hearing, Castro said he plans to navigate between helping lower-income homebuyers and avoiding the kind of financial stress that led to a bailout of the FHA in 2013.
“My perspective, whether it relates to requirements for down payments or other measures, is that we achieve this balance to stay within the historic mission of the FHA to ensure that first-time homebuyers, that folks of modest means who are creditworthy, that they have the opportunity to reach the American dream of homeownership,” Castro said. “But at the same time that we have policies in place that ensure what happened a couple of years ago doesn’t happen again.”
Industry groups that support Castro’s nomination, including the National Association of Realtors and the Mortgage Bankers Association, said he should focus on increasing homeownership once he gets to Washington and begins overseeing the FHA’s $1.1 trillion of loan guarantees.
“His vision for strong communities and affordable housing is especially appropriate for HUD, which has helped make the dream of homeownership a reality for millions of Americans,” NAR President Steve Brown wrote in a June 12 letter to the Senate Banking Committee, which conducted today’s hearing.
Castro is likely to be approved by the Democratic majority in the Senate, Democratic leaders said. He will replace outgoing HUD Secretary Shaun Donovan, who has been named to lead the Office of Management and Budget.
Castro will walk into a standoff between his agency and industry groups such as NAR, which are pressing HUD to relax premium increases instituted after the housing bubble burst. Losses of more than $50 billion caused FHA to take a taxpayer subsidy of $1.7 billion last year, the first in its 80-year history.
The FHA was created in the wake of the Great Depression to help first-time buyers and others without significant savings own a home. Its insurance guarantees that lenders won’t suffer losses on mortgages with down payments as low as 3.5 percent.
The agency finances its efforts by charging borrowers an upfront premium and monthly fees. Steady increases in those charges since 2008 have raised costs for a borrower with a $150,000 mortgage by more than $100 a month.
Industry groups estimate between 125,000 and 375,000 renters have been priced out of FHA loans by the increases. Now, with the agency’s finances improving, “FHA should be able to make some changes to the record-high premium structure,” NAR Vice President Joe Ventrone said.
FHA officials have said the agency’s finances are still too precarious for a reduction in the charges. Last month they announced a program to cut premiums by about $300 a year for homebuyers who undergo housing counseling, and said the effort could reach about 100,000 borrowers in its first year.
The program makes a 50-basis-point, or 0.5 percentage point, cut in the upfront premium, which is rolled into the long-term cost of the loan. It cuts only 10 basis points in the annual fees, which have a greater impact on borrowers’ monthly debt costs and eligibility for loans, Chappelle said.
“It helps,” he said, though “they really need to restructure it if they want to have an impact.”
As HUD secretary, Castro also will face a related challenge -- convincing lenders to originate mortgages for Americans with less-than-perfect credit. U.S. lenders made $226 billion in mortgages in the first quarter, a 17-year low, according to the Mortgage Bankers Association.
Borrowers with credit scores that would have qualified for an FHA loan prior to the 2008 housing crash are now being deemed unqualified by lenders who are exercising more caution. As a result, entry-level buyers are kept out of the market.
FHA allows a minimum FICO credit score of 580 on a scale of 300 to 850; the average score for an FHA borrower today is 684, up from 657 in 2008. For loans backed by government-run mortgage financiers Fannie Mae and Freddie Mac, the average is even higher: around 740.
Lenders are wary of riskier borrowers because the firms are forced to eat the costs of bad loans that the FHA determines don’t meet its underwriting standards. The Department of Justice has recovered hundreds of millions of dollars in settlements from banks including JPMorgan Chase & Co. (JPM) and Bank of America Corp. for improperly originating FHA loans during the housing bubble. Investigations into other lenders are ongoing.
While the HUD secretary doesn’t direct the investigations of old loans, Castro could work to improve the agency’s review process for new loans so lenders are reassured that they won’t be subject to unexpected enforcement actions, said Tim Rood, chairman of the Collingwood Group, a Washington-based housing-policy consulting firm.
“The threat of these ambiguous and ever-further-reaching enforcement actions does come with a price,” Rood said. “You’re going to have a lot less lending, a lot tighter lending, a lot more expensive lending -– all the things that work completely contrary to the administration’s and presumably Castro’s objective of expanding credit.”
The shift in leadership at HUD comes as regulators are playing an increasingly central role in determining credit availability.
Congressional efforts to overhaul the nation’s housing finance system aren’t expected to move forward this year. Any policy changes will be largely under the control of the administrators of FHA and the Federal Housing Finance Agency, which oversees Fannie Mae (FNMA) and Freddie Mac. The two companies buy loans and package them into guaranteed securities.
With FHA insuring about 15 percent of new home loans, and Fannie Mae and Freddie Mac backing another two thirds, the rules governing what loans they will guarantee can have a far-reaching impact on the market.
At FHFA, former North Carolina congressman Melvin L. Watt took over the job of director in January and has been focusing on easing credit. In May he announced that he is loosening the rules under which banks are forced to buy back loans with origination flaws.
Castro will also have to address the remaining overhang of the housing meltdown, especially in states such as Florida and Nevada where home prices haven’t recovered. HUD, which ends up owning the foreclosed houses backed by FHA loans, is helping homeowners with loan modifications and selling some troubled mortgages to investors who agree to aid borrowers.
Lenders started foreclosures on 49,240 homes in May, a decrease of 32 percent from a year earlier and the lowest level since December 2005, according to data compiled by HUD. Demand for the government programs to support troubled borrowers has also waned. New enrollments in the Home Affordable Modification Program, which allows delinquent borrowers to lower monthly payments, have slowed to 10,000 a month, about half the rate from two years ago.
President Barack Obama noted the changes in the housing market during the May 23 press conference where he announced Castro’s nomination.
Compared to five years ago, “home sales are up 35 percent,” Obama said. “New foreclosures are down by nearly half. And while we’re not anywhere near where we need to be yet, millions of families have been able to come up for air because they’re no longer underwater on their mortgages.”
Obama then introduced Castro, who recalled that his mother of Mexican descent had raised him and his twin brother Joaquin in rental housing because she couldn’t afford to buy a home.
“It was there that both of us got a sense of what is possible in America, and an understanding that just because you were of modest means does not mean that your aspirations or your opportunity ought to be limited,” said Castro at the White House. “And it certainly means that you can have the talent to succeed and achieve the American Dream.”