WASHINGTON - HUD officials this week initiated a six-month study of the beleaguered Federal Housing Administration in an effort to reinvigorate it and improve its ability to provide credit enhancement for affordable housing projects.

"We must commit to revitalize FHA," Housing and Urban Development Secretary Henry Cisneros said in a statement on Tuesday. "There remain many housing needs in this country that the private market is not meeting - particularly the home ownership and affordable housing needs of low- and moderate-income Americans."

Cisneros said he has asked FHA commissioner Nicolas Retsinas to spend the next six months meeting with state and local governments, builders, realtors, mortgage bankers, and other housing market participants to find out how the agency can be reorganized to remove bureaucratic barriers and transform it into a more entrepreneurial agency.

Retsinas plans to talk to are more than 40 organizations, including the National League of Countries, the Association of Local Housing Finance Agencies, and the National Council of State Housing Agencies.

The FHA has been wracked by problems over the last decade, the most serious of which was the failure of its co-insurance program in the 1980s. Under the Reagan Administration, HUD permitted private lenders to co-insure multifamily loans, but defaults were high because underwriting standards were lax and many unfit borrowers were lent money.

When Retsinas was named commissioner last year, he ordered a thorough accounting of the agency's housing insurance programs and found, among other things, that $12 billion, or 27%, of the agency's insurance in force was at risk.

Since then, HUD has tried to repair the agency through two new programs: one to sell off troubled loans in the FHA's portfolio, and the other to test the idea of allowing state and local housing agencies to share the agency's insurance risk on multifamily housing loans.

But this week Cisneros said more work is needed to improve the FHA. He said Retsinas has identified three major management problems at the agency. First, managers need additional decision-making authority. Second, they do not have sufficient control over essential resources. Third, they need to be made more accountable for the actions they take.

"FHA needs to become a first-class financial institution with the tools used by the best-managed businesses and organizations," Cisneros said. "FHA will be a major test of [the Clinton] Administration's commitment to reinventing government."

Housing industry lobbyists said they welcome the effort to improve the housing agency.

An overhaul of the FHA is needed because "its share of the market for financing has fallen significantly in the last couple of years, particularly in the multifamily area," said Peter Bell, the executive director of the National Housing and Rehabilitation Association. "There's been a lot of staff attrition, morale has been low, and there has not been the investment and training to build the capacity of young people there."

With much of the nation's affordable housing stock old and in need of repair, there needs to be readily available credit for refinancing and rehabilitating those properties," said Bell, whose organization will participate in the study. "Without FHA credit enhancement, it's very difficult to find investors willing to commit long-term fixed-rate funds for that type of housing."

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