WASHINGTON -- A decline in the Federal Housing Administration's home-loan business may pose a threat to the financial strength of its insurance fund, Assistant Secretary of Housing Nick Retsinas told Congress.

The volume and market share of FHA mortgages are shrinking as higher-equity borrowers and those who are refinancing choose private insurance over FHA insurance, Mr. Retsinas told the housing subcommittee of the House Banking Committee on Tuesday.

If the trend continues, the fund may not meet its capital requirements by the year 2000, he said.

20-Year Trend Reversed

The volume of outstanding single-family loans insured by the FHA has fallen for the first time in 20 years, from $301 billion at yearend to $289 billion on June 30, Mr. Retsinas said.

The FHA insured 13% of all new home loans in 1990 but only 5.6% last year.

By linking the shrinking business volume to the fund's stability, Mr. Retsinas may be "setting the stage for expansion of the program and possible proposals coming in the fall," said Ron J. McCord, president of American Mortgage and Investment Co. of Oklahoma City.

An expansion of the program would be good news for mortgage banking companies, long the dominant originators of FHA loans.

Mr. Retsinas said the FHA is working on initiatives, but he declined to elaborate. Industry sources have indicated in recent days that the FHA is looking at raising loan limits, offering new mortgage products, and entering risk-sharing partnerships with state housing finance agencies.

One short paragraph in Mr. Retsinas' testimony especially caught the eye of Republican members and their staff

In 1990, Congress set target capital ratios for the single-family insurance fund to make sure it would not need a government bailout.

The ratio is defined as the fund's economic value - premiums minus default losses and expenses - divided by total loans insured.

In his testimony, Mr. Retsinas said the targets - 1.25% by the end of fiscal 1992 and 2% by fiscal year 2000 - were "arbitrary to some extent."

Rep. Deborah Pryce, R-Ohio, asked Mr. Retsinas if that meant he thought the targets were too high.

"I am not suggesting this morning that we revisit the ratio," he replied. But "the higher that [capital] number is, the more difficult it will be to achieve that public policy mission."

Price Waterhouse & Co. said in a report this month that the ratio was 0.43% at the end of fiscal 1992 but would exceed the 2% goal for fiscal 2000.

But neither friends nor foes of a more activist FHA were buying Mr. Retsinas' disclaimer completely.

One staff aide to a minority member of the committee said that in labeling these standards arbitrary Mr. Retsinas was saying: We don't have a problem. If the standard were 0.5%, we'd be home free.

Mr. McCord, the mortgage banker, said he hopes Mr. Retsinas was "laying a foundation for further visitation of capital issues and the balance between public purpose and financial stability."

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