A White House proposal to privatize and revamp the Federal Housing Administration has caused concern among mortgage bankers and the effects of such a measure could, among other things, lead to the demise of Ginnie Mae.
The talk of privatizing FHA is nothing new in Washington, but in a White House passback budget proposal, the administration revealed that it intends to privatize FHA and radically change the way the HUD agency does single-family mortgage insurance business. Some sources have said, however, that while OMB has offered the plan, HUD isnt endorsing it.
In the passback, the Office of Management and Budget said that the administration plans to propose legislation to change the mechanism for ensuring access to credit by borrowers who cannot obtain conventional financing by turning FHA into a credit enhancement agency rather than the mortgage insuring agency it currently is.
Under the proposal, FHA would stop insuring individual mortgages and would instead provide credit enhancement for pools of high loan-to-value loans, as well as other high-risk mortgages securitized and guaranteed by Fannie Mae, Freddie Mac and other securitizers.
The planned enhancement, which OMB calls a loss reserve, will ensure that the cash flow to investors is not interrupted by default. A fee would still be charged to borrowers to fully fund the loss reserves and cover administrative costs, the passback said.
The enhancement is intended to raise the rating on securities to an attractive level for investors and would offset additional risks to private investors, such as private mortgage insurers and securitizers. FHA would have no open-ended obligation if the reserve was inadequate to cover all debts, eliminating the large potential credit exposure FHA currently experiences.
Whether such a measure would pass is far from certain, however. One mortgage lending lobbyist said that HUD opposes the passback proposal, which was reportedly developed by Bush administration holdovers within OMB. The proposal is in the passback process and HUD is likely to appeal. The resulting plan could be changed significantly from the original.
But HUD is faced with a number of budget fightssuch as proposed sweeping cutbacks in Section 8 programsand it will have to prioritize its battles, the source said. Its not clear if this is one HUD will defend.
If the measure survives the battle within the administration, the likelihood of it passing seems good. Sources say that incoming House Banking Committee Chairman Jim Leach, R-Iowa, supports the measure.
Mortgage bankers were concerned that the proposal might hinder minority and low- and moderate-income lending, particularly in depressed real estate areas such as the Northeast. FHA is clearly serving the markets that the private markets are not, said Sharon Canavan, a regulatory counsel with the Mortgage Bankers Association. And FHA is also serving a greater percentage of minoritiesthe HMDA data underscored that.
Perhaps a greater problem, Canavan said, is that based on the OMB passback, the plan had no revenue-generating implications. Although the proposal still calls for FHA to charge borrowers a fee to fund the loss reserves and cover administrative costs, the program would generate no revenues. HUD programs ancillary to FHA, particularly Ginnie, are large revenue makers that have big implications on the federal budget.
Ginnie, which produced $286 million in fiscal year 1994, is also uncertain. Fannie and Freddie would benefit greatly from the OMB proposal by stepping in to purchase the low-LTV FHA loans that Ginnie currently issues. Ginnie would maintain control of its Remic program, and VA and FmHA loan issuance programs.