Industry Reacts To President Trump’s Proposed $6 Billion Cut To HUD Budget


Housing groups reacted with shock and dismay last week when the Trump administration introduced a preliminary budget proposal that calls for reducing the U.S. Department of Housing and Urban Development’s (HUD) budget by about 14%, or $6 billion – part of President Donald Trump’s goal to cut domestic spending by $54 billion.

“Every day, the Trump administration reveals with their actions that they are willing to abandon and betray hardworking Americans and vulnerable families,” said Rep. Maxine Waters, D-Calif., the top Democrat on the House Financial Services Committee, in reaction to the proposal. “This shameful plan would slash funding that fights poverty, revitalizes neighborhoods, helps the homeless and makes housing more affordable, safe, decent and accessible for low-income Americans, veterans and persons with disabilities. This proposal would destroy families, neighborhoods and whole communities.

“If Donald Trump really cared about struggling Americans, he would be increasing funding to these critical programs, not planning brutal cuts,” Waters added. “Make no mistake – this plan would result in more people living on the streets.”

The proposed cut, if implemented, would reduce funding for public housing, HUD staff and housing vouchers, according to an article in the Washington Post. It would also eliminate funding for Community Development Block Grants.

However, specifically which programs will be impacted is yet to be determined. In addition, HUD’s leadership and others close to the budget process are cautioning that this is just a preliminary proposal and that negotiations are ongoing. The final cut could be significantly less than proposed.

In reaction to the outcry over the proposed cut, Ben Carson, the new director of HUD, reportedly sent a reassuring email to HUD staff, stating, “Starting numbers are rarely final numbers.”

“Please understand that budget negotiations currently under way are very similar to those that have occurred in previous years,” Carson wrote in his email to staff. “This budget process is a lengthy, back-and-forth process that will continue.

“It’s unfortunate that preliminary numbers were published, but rest assured, we are working hard to support those programs that help so many Americans, focus on our core mission, and ensure that every tax dollar is spent wisely and effectively,” Carson added.

Jereon Brown, deputy assistant secretary for HUD, issued a similar statement, saying, as per the Washington Post report, “This is a lengthy, back-and-forth process that will continue for at least the next two weeks. Normally, starting negotiation numbers are rarely final budget numbers.”

Although some people in the mortgage industry are concerned that the proposed cuts – if approved as is – could have a severe impact on HUD’s operations, which, in turn, could have a negative impact on home sales and purchase origination, others say HUD is an over-funded agency and point out that there is fat that can be trimmed from just about every government agency’s budget.

Perhaps giving credence to the argument that HUD’s funding should not be cut is a recent report from the Office of Inspector General (OIG) for HUD asserting that there has been a lack of oversight into borrower-financed down payment assistance programs for Federal Housing Administration (FHA)-insured loans, thus putting borrowers and the FHA’s flagship insurance fund at unnecessary risk.

According to the OIG report, HUD “failed to adequately oversee” billions of dollars in loans that may have “questionable down payment assistance,” thereby putting the FHA’s Mutual Mortgage Insurance Fund at risk because of borrowers with higher than market interest rates.

Recent OIG-conducted audits of lending programs in which borrowers are allowed to finance their down payments through an increase in their mortgage interest rates, as part of programs administered through housing finance agencies, found that HUD “failed to adequately oversee more than $16.1 billion in FHA loans that may have been originated with borrower-financed down payment assistance to ensure compliance with HUD requirements,” according to the report. The report further shows that from Oct. 1, 2015, to Sept. 30, 2016, HUD guaranteed nearly $12.9 billion in FHA loans that “may contain questioned assistance.”

“I think it’s generally a good thing when any organization, particularly a government organization, imposes budget cuts or expense reductions,” Matt Clarke, chief operating officer and chief financial officer for Churchill Mortgage, told MortgageOrb. “I believe that because, typically, costs are incurred slowly and over a longer period of time – usually from unnecessary activities, positions or other expenditures. These costs force leadership to critically evaluate the books and identify where additional savings can be created. Practically speaking, this is a sound approach to financial management that doesn’t have a material impact on the level of service being provided.”

Coming at the issue from another angle, Jeff Bode, CEO of Mid America Mortgage, said he is “absolutely opposed to cutting HUD’s budget,” mainly because “the technology at both FHA and Ginnie Mae is in shambles” and also because “Ginnie Mae is grossly understaffed to manage the risk involved in its portfolio.”

“This is beyond my expectations of what the Trump administration would do,” Bode told Orb. “[The] FHA and Ginnie Mae are running their technology on duct tape and bailing wire, which poses real long-term risk. I have no idea what areas of HUD are being cut, but there are many basic infrastructure problems at HUD that could not be repaired in prior budgets due to a shortage of funds.

“My gut feeling is that this will involve a great deal of cuts to Section 8 housing,” Bode added. “I am not that well-versed on the economics of rental housing, but my thought is this would be very rough on lower-income Americans – but that is outside my scope of knowledge.”

Despite Carson’s reassurances, Bode said he has doubts that the proposed budget cuts will be adjusted.

“Housing has become so much more complex – and the mortgage industry needs the resources to ensure we do not revert to the same risky behavior that led to the mortgage crisis,” Bode said. “I am not a big fan of the massive penalties that were levied on lenders in the past few years – and I would like to see enhanced technology to manage HUD. That won’t happen with this proposed budget.”

However, Bode also said that if the cuts were implemented “as is,” it could be “problematic in the long run.”

“I’m not sure if we would see issues within the next five years, but down the road, the problems will reveal themselves,” he said.

When asked what he thinks the impact would be on the mortgage market and on the housing market, Bode said, “In the short run, lenders would be more aggressive in their behavior, making riskier loans that would cause losses to the FHA insurance fund.”

Given HUD’s role in overseeing and insuring the home equity conversion mortgage (HECM) reverse mortgage program, there is also a question as to whether the proposed cut might impact the reverse mortgage industry.

John Button, president of ReverseVision, said in his view, the proposed cuts “will impact those [consumers] least able to seek alternatives at a time when they are likely to be experiencing economic challenges from changes in other programs.”

“The timing may not be the best,” Button told Orb.

He added that, “Once specific programs are identified for elimination or reduction, then the impact will become clear.

“Congressional supporters will emerge for those programs and urge the restoration of funding,” Button said. “So, I do expect the amount of the cut to be diminished. In abstract terms, it is relatively easy to agree on a lower budget, but when that’s translated into specific programs that your constituents and neighbors depend on, it gets much tougher.

“Right now, HUD seems to expect reductions in various public housing and community development grants,” Button added. “While I don’t expect major impacts for the mortgage lending industry, HUD does also seem to be planning for staff reduction. This could affect lending programs, including the HECM program, where ongoing support and necessary regulatory work could be impacted.”

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