Intent on increasing homeownership to a record 67.5% by the next presidential election, the Clinton administration is jockeying to let the government's FHA program insure bigger home loans.
The defunct Federal Housing Administration, conceived during the Depression as a way to build a national mortgage market, was for many years the lender of choice for minorities and first-time homebuyers with low and moderate incomes. Its mortgage insurance program, now run by the Department of Housing and Urban Development, encourages such lending by guaranteeing lenders that the government will repay 100% of the loan if a borrower defaults.
But the mortgage market has undergone a sea change since 1934, when the FHA was formed. There is no shortage of money to lend now that home loans are packaged into standardized securities and sold to investors around the globe.
And lenders, insurers, and investors-partly in response to political pressures-increasingly make and back loans to Americans who fall outside the upwardly mobile suburban mold.
"A quarter-century ago there was a very clear need" for FHA mortgage insurance, said economist Mark Zandi of Regional Financial Associates. "Mortgage credit was unavailable to lower-income households. But today mortgage credit is increasingly available to anyone who wants it or needs it."
Still, only 45.4% of African-Americans owned their own homes last year, compared with 72% of whites, and the gap is wider between Hispanics and whites. An expanded FHA program is critical to closing the gap, said Andrew Cuomo, Housing and Urban Development secretary, who is spearheading the administration's homeownership campaign.
Mr. Cuomo has asked Congress to give the FHA authority to insure loans of up to $227,150; the current limit is just over $170,000.
That would give the FHA access to loans as large as those purchased by Fannie Mae and Freddie Mac, the government-chartered but publicly held mortgage companies. Fannie Mae is opposing the increase.
"We're going to fight like heck this year" for congressional approval, Mr. Cuomo said in an interview last week. "If it doesn't pass this year, then we'll get it next year."
Low interest rates and a booming economy have pushed homeownership to record levels. But mortgage bankers, who have dominated the FHA market since its inception, say a bigger government role is increasingly important in a market dominated by credit scores and risk-based prices.
"The conventional market is very credit-score driven," said William W. Giambrone, president of Platinum Home Mortgage Corp. in Chicago. When credit scores dip below 620-and Fannie and Freddie require special caution in underwriting-many lenders "won't even look" at the loan as a candidate for sale to Fannie or Freddie.
Averse to risk, lenders send the loan through the FHA program, which does not have that kind of credit-score marker. For loans that exceed the FHA limit, they make premium-rate subprime mortgages to those borrowers, Mr. Giambrone said.
"I think that when we receive a caution, a high percentage of those loans will ultimately be denied" as Fannie and Freddie loans, said Henry V. Cunningham Jr., president of Cunningham & Co., Greensboro, N.C.
Loans above the FHA limit, which is $126,050 in Greensboro, would be made at subprime rates, Mr. Cunningham said. Raising the limit would help more people get prime loans at about 7% interest these days, rather than subprime loans at 9%, he said.
Just as important, mortgage bankers like the government's proposal because it would replace the confusing patchwork of FHA loan limits, which can vary from county to county, with a single national limit.
But critics of the FHA program say that by raising loan limits, the government would be poaching on the private market and taking on more risk.
The government maintains that the mix of business would be safer if the FHA insured higher-balance mortgages as well. Moreover, the insurance fund's reserves are high.
Under the FHA program, lenders make the loans according the government's credit guidelines, and submit them to the Department of Housing and Urban Development for federal insurance. The FHA insurance guarantees that lenders will get back 100% of the principal, even if borrowers default.
Lenders then bundle the loans into large securities, which are backed by Ginnie Mae, the General National Mortgage Association, and sold to investors on Wall Street. Ginnie Mae guarantees repayment to investors in case of default.
The process is similar to the way conventional or nongovernment loans are made, packaged into Fannie Mae, Freddie Mac, or private conduit securities, and sold to investors.
But lenders get a higher fee to service Ginnie Mae securities than Fannie and Freddie securities. To transmit monthly principal and interest payments from borrowers to investors, lenders are paid 44 basis points on Ginnie securities versus 25 basis points on Fannie and Freddie securities.
Lenders say the higher fee is justified because the higher-risk FHA borrowers are more labor-intensive to service, and because the average FHA- insured loan is smaller than the average conventional loan.
Detractors counter that the higher fee encourages lenders to steer borrowers to FHA loans, even when they could qualify for conventional loans.
Walter C. Klein Jr., chief executive of First Nationwide Mortgage Corp., Frederick, Md., said lenders make roughly the same profit on an average FHA loan as on a larger, average conventional loan.
He estimated that lenders make about $300 annually on an $80,000 FHA loan before allocating for overhead expenses, compared to about $280 on a $120,000 conventional loan.
That means lenders have to hold the average FHA loan on their books for two or three years before recovering the roughly $800 they may have invested in making the loan in the first place, Mr. Klein said.
And if FHA loans go bad, as they do at more than double the rate of conventional loans, lenders get back 100% of the principal amount but lose about $2,000 per loan in foreclosure expenses that the government will not reimburse, Mr. Klein said.
Rebutting claims that lenders have abused the program, Mr. Klein said, "It does not make sense for us to make a bad loan."
Like the servicing of loans not insured by the government, Ginnie Mae servicing is dominated by a handful of very large lenders, which originate FHA loans and also buy them from smaller lenders.
The largest among them is Norwest Mortgage. Mark Oman, chairman and chief executive, said his company likes the program, because it attracts first-time homebuyers and it opens the door to a life-long relationship with the borrower.
"One of our goals at all of Norwest is to try to attract 100% of a customer's business and keep them for life. Certainly we feel if we attract the first-time homebuyer and serve them well, we have a good shot at keeping them," Mr. Oman said.
"Raising the limit makes sense; standardizing the limit makes a lot of sense," Mr. Oman said. "I hope there's a rational compromise."