A turf war may be brewing between the Federal Home Loan banks and William C. Apgar, the assistant secretary of the Department of Housing and Urban Development.
At issue is a recent effort to discourage the banks from buying FHA loans through the banks' nascent alternative secondary marketing program.
Under a proposal floated last week by the Federal Housing Finance Board, which regulates the home loan banks, new limits would be imposed on the banks' ability to purchase FHA loans.
In an interview last week, Mr. Apgar, who is one of the three voting members of the Federal Housing Finance Board, explained the reasoning behind the proposed rule. "The banks' capacity to grow the FHA portion of their program was moving faster than that of their conventional mortgage portion," he said. "We wanted to encourage them on the conventional end, because that is where the real growth potential for the program is."
But opponents of the proposal see something else: a thinly disguised move by Mr. Apgar to protect Ginnie Mae, a HUD-controlled agency that buys almost all FHA and VA loans. By cutting down on the home loan banks' ability to purchase FHA loans, the argument goes, Mr. Apgar preserves the near-monopoly Ginnie Mae enjoys as a buyer in the market.
Under last week's proposal, which would eliminate the $9 billion cap on loans the banks can buy under the Mortgage Partnership Finance program, the board also proposed essentially limiting FHA loans to one third of the mortgage loans each bank invests in. The banks could go past the cap, but not with bond debt.
But sources at the Home Loan banks said the proposal's design was fraught with contradictions, on the one hand encouraging the Mortgage Partnership Finance program to compete with Fannie Mae and Freddie Mac, which dominate the conventional market, but hindering their ability to compete with Ginnie.
"If they are trying to encourage competition in one market to reduce the price of homeownership, why should they restrict competition in another?" said John von Seggern, president of the Council of Home Loan Banks, which represents 10 of the 12 banks.
A source at one of the Home Loan banks, who spoke on condition of anonymity, said that low-income borrowers, who can get an FHA loan more easily than a conventional mortgage, are being deprived of the benefits of increased competition in the market.
The number of FHA loans bought through the mortgage partnership finance program is not publicly available. However, Alex Pollock, the president and chief executive officer of the Home Loan Bank of Chicago, said FHA investments "were an important contributor" in the program's recent growth.
The Mortgage Partnership Finance program's outstanding loans grew 146% to $4.4 billion from yearend to March 31. Master commitments for additional loans grew 267%, to $24.2 billion.
Mr. Apgar says that FHA loans were not originally part of the Mortgage Partnership Finance program, and that the Home Loan banks "wandered into FHA's" recently.
But the Home Loan bank source said that when the banks asked the board for permission to buy FHA loans last fall, the board decided they were already authorized to do so.
The board said that the language of the initial authorization given to the Mortgage Partnership Finance program in 1997 was broad enough to cover FHA loan buying, the source said.
An aide to Mr. Apgar said that the proposed cap on FHA buying would give the banks a great deal of leeway, because at one-third it is much greater than the percentage of FHA loans in the secondary market, estimated by the Mortgage Bankers Association to be 14%.
He added that the Home Loan banks profit more from buying FHA loans because the banks need hold less capital against them than for conventional loans.
Not so, said the source at the Home Loan bank. The capital requirement is the same for all sorts of assets, he said: 4.76%. The Finance Board is only working on a risk-based capital rule that could change the requirement.
The Mortgage Partnership Finance program, which began in 1997, is designed to be a competitor to Fannie Mae and Freddie Mac. While Fannie and Freddie assume all of the risks of the loans they buy, the Home Loan banks' program splits risk between the Home Loan banks and their members. The Home Loan banks manage interest rate, funding, liquidity and prepayment risks, while the lenders hold on to the credit risk.
The sources who opposed the proposal argue that as the FHA commissioner, Mr. Apgar has to promote the FHA, but as assistant secretary of HUD he is out to protect Ginnie Mae, a conflict of interest in this case.
Other observers said that Ginnie Mae's profits are vulnerable because the competition from the Home Loan banks would drive up prices for the loans Ginnie buys and securitizes.
HUD has an incentive to protect Ginnie's profits, these observers said, because the department's budget is indirectly affected by how much Ginnie makes.
They said that in budget negotiations with Congress, HUD regularly tries to use the profits from programs like Ginnie Mae to justify spending on other programs. If Ginnie's profits were to sink, they said, HUD would have a harder time persuading Congress to let it spend more on those other programs.
When asked about this, Mr. Apgar said, 'We get nothing back from Ginnie's profits."
