An important federal program to help consumers who cannot qualify for fixed-rate mortgages is grinding to a halt, just as the housing market is entering its seasonal peak.
The Department of Housing and Urban Development said Friday that its FHA program was about to hit its statutory limit for adjustable-rate loans in fiscal 1998. HUD said adjustable-rate loans with application dates later than today or closing dates later than April 30 will not be insured.
The agency could ask Congress to expand the authorization, but it is said to be preoccupied with a separate political battle to increase the size of loans it can guarantee.
A spokesman said that "both issues are of concern to the department" and that it is not focusing on one more than the other. Although the department has apprised legislators of the situation with adjustable-rate loans, it "has not asked Congress to take any action," the spokesman added.
Meanwhile the home-buying aspirations of many low- and moderate-income borrowers are on hold, and on Wall Street, the liquidity of the market for Ginnie Mae securities backed by such loans is in doubt.
The situation is especially awkward for lenders.
"We're in between the customer, who doesn't know anything about this, and Wall Street, who we've sold the security to. It's put the industry at risk," said William J. Denton, vice president for secondary marketing at PNC Mortgage. The situation is "one of those curve balls that no one likes to see."
Ginnie Mae ARMs are geared to people who otherwise would not qualify for a mortgage, Mr. Denton said. "In the event that the FHA truly has exhausted its authority, this will be a big blow to the housing business," he said in an interview before last Friday's announcement.
PNC, like other lenders, has a pipeline of loans that have yet to be submitted for insurance, he said. The subsidiary of PNC Bank Corp. had temporarily suspended new applications for FHA one-year ARMs before the announcement. A spokesman at Norwest Mortgage Inc. of Des Moines said the Norwest Corp. unit discontinued offering the Ginnie Mae ARM product through its wholesale and correspondent channels as of March 6, but will continue to offer the FHA adjustable loans through its retail channel. Norwest said it is willing to hold loans that cannot be insured until October 1998, when insurance becomes available.
HUD said it insured 168,462 adjustable-rate mortgages, close to 71% of its fiscal year 1998 limit, as of March 15. The National Housing Act stipulates that the number of adjustables the FHA can insure each fiscal year may not exceed 30% of the mortgages it insured during the previous year. In 1997, the FHA insured 790,359 mortgages, creating a cap of 237,107 adjustables for this fiscal year.
When the cap has been reached, HUD will return ineligible applications to lenders. Lenders may choose to resubmit them as of Oct. 1, the beginning of fiscal 1999.
The cap can be lifted by Congress. In a March 30 letter to Andrew Cuomo, secretary of HUD, Rep. Rick Lazio, R-N.Y., chairman of the House Subcommittee on Housing and Community Opportunity, requested HUD's recommendations concerning the statutory limitation of adjustable-rate mortgages. But a source on the Senate Committee on Banking, Housing, and Urban Affairs said that "HUD certainly has not indicated that it wants to increase the cap at this point."
In 1997, HUD also reached its statutory limit in late August. The backlog of loans that accumulated while FHA could not insure the additional adjustable-rate mortgages led to a high volume of approvals during the first month of fiscal year 1998.
Prudential Securities has reported that a number of lenders- including Norwest, NationsBank Corp., Chase Manhattan Corp., Countrywide Credit Industries, and Fleet Financial Group- have already ceased or made significant reductions in processing applications for adjustable-rate mortgages from borrowers who would use the FHA program.
"Anything that impacts the liquidity of the market is going to be of concern to us and limit our ability to trade in these securities," said T. Anthony Coffey, a mutual fund manager with Franklin Templeton Group, San Mateo, Calif. Mr. Coffey manages two adjustable-rate mortgage funds that have close to a 6% allocation to Ginnie Mae ARMs.
The Ginnie Mae ARM TBA-or to-be-announced-market has probably been the most liquid and well-functioning market in the last few years, he added. He was referring to the market in which traders agree to buy and sell a type of security that meets basic requirements, but the actual securities are not identified until the settlement date. But Mr. Coffey said his portfolio is already "underweighted," so the impact on the funds will be minimal.
"If nothing is resolved we're going to see a complete evaporation of supply over the next few months, and I think unfortunately this will have long-term consequences," Mr. Coffey said.
The Bond Market Association is pressing the FHA to seek an increase in its fiscal year 1998 ARM commitment authority from Congress.
In a letter to Arthur Agnos, acting commissioner of the FHA at HUD, David R. Warren, chairman of the bond association's mortgage and asset- backed division, argued that a failure to act could have long-term consequences.
"Any disruption to the efficient operation of the secondary market represents a potential threat to primary market lending activities, including possible reductions in the supply of capital for mortgage financing and an increase in borrowing rates."
Investors may be less inclined to come back to the adjustable-rate mortgage market because of fears of periodic lapses in liquidity and overall uncertainty, added George P. Miller, vice president and deputy general counsel of the Bond Market Association.
"I think their confidence and outlook on the Ginnie ARMs sector of the market has been harmed," he said. "When an investor purchases securities, one of the things they are very interested in is that the security will remain liquid."
