Just two short years ago, HUD Secretary Henry Cisneros was mapping out new ways to reinvigorate HUD and the Federal Housing Administration. In a few short months he may be trying to resuscitate it.
The department is now in guarded but stable condition, but like a gangrenous arm FHA may need to be amputated soon to save the rest of the HUD body.
The analogy may be a smidge overstated, but in the wake of the Republican sweep in Congress and the Clinton administration's new- found centrist attitude, the threat against FHA is quite real.
The lack of detail in the OMB proposal clouds what kind of impact such a move would have on the mortgage lending industry, but the current political environment may leave the administration with no other choice. Middle-class tax cuts have been promised and it would be political suicide for President Clinton to renege on that vow. Cisneros is opposed, but he may be run over by the stampede of lawmakers and bureaucrats looking to slash the budget or save agencies.
Will it happen? Probably not, at least not in the sweeping fashion OMB proposes. Rarely do things in Washington finish the way they start. And while the budget ax will fall heavily on HUD's shoulders, Congress will have to mull any changes to FHA long and hard. Do the losses from FHA foreclosures provide enough impetus for the radical changes? Maybe, but what about lost revenues?
HUD earns roughly $300 million in annual revenues in guarantee fees from Ginnie Mae's mortgage-backed securities program, and expects to generate nearly $150 million more in fees from Ginnie's Remic program--the majority of the loans backing those pools are derived from FHA loans.
It's uncertain whether the loss of roughly $450 million in revenues can be offset by savings from the roughly 1,200 fewer full-time positions that OMB projects would be freed-up. Lobbyists and House Banking staff members Mortgage Marketplace talked to hadn't deliberated the potential revenue loss yet.
Mortgage Bankers & CRA
Imagine Rep. Joe Kennedy with nothing to say. It's hard isn't it? The "mouth that roared," as some lobbyists describe the Massachusetts Democrat, isn't likely to be completely quiet in 1995, but he will be muffled. And one issue he championed last session, CRA for mortgage bankers, will be muffled along with him.
Republicans in Congress are no great fans of CRA and the conventional wisdom is that the fight levied by Kennedy and Rep. Maxine Waters, D-Calif., will be passed over in favor of other issues. In fact, Sen. Richard Shelby, R-Ala., new chairman of the Senate Banking regulatory efficiency subcommittee, has pledged to reduce the regulatory burden on banks and plans to put more pressure on "liberal" regulators within the Clinton administration.
Once that legislation is introduced, look for Republicans in the House Banking Committee to follow suit.
A major concern is the how Rep. Marge Roukema, R-N.J., will handle the issue. Roukema will chair the financial institutions subcommittee, which has oversight of all HMDA and CRA issues, and has been a supporter of civil rights and has also voiced concerns over lending weaknesses in minority neighborhoods. Those views make her direction on this issue hard to predict.
DOJ & Fair Housing
This issue rose to the top of the banking industry agenda with a rush through a settlement of lending bias claims between Chevy Chase Federal Savings Bank and a mortgage subsidiary and the Department of Justice in August. The settlement mandated, in effect, DOJ involvement in business decisions of Chevy Chase and subsidiaries, covering everything from advertising layouts to location of branches to a mandate to subsidize loans made to minorities; extensive reports are also required.
The agreement took the industry by surprise, and fears developed of a strong momentum requiring insured institutions to let the DOJ tell them how to grow their business to settle allegations that they didn't conform to fair lending guidelines that had never been described by the agency or banking regulators. The industry also developed a new buzzword, "regression analysis," a mathematical tool that allegedly could be used to prove lending bias.
Barnett Bank, however, with key help from the Federal Reserve Board, appears to have slowed, if not stopped that momentum. The key test was the decision of banking regulators to allow Barnett to complete the acquisition of Florida branches of a California savings bank. The DOJ investigation continues, however, and while the claims could be rhetoric, DOJ officials still say they intend to bring charges against Barnett; several other larger institutions are also involved.
While the potential damage of waves of settlements mandating deep changes in the way banks do business appears to have ended, the flurry of activity will still bring substantive changes to the industry, the new GOP majority in Congress notwithstanding.
With the thrift industry playing less and less a role in the financial service industry, it is important for remaining institutions to be able to coddle the Federal Home Loan Bank System, which reduces their lending costs and understands their needs far more than the Federal Reserve System and other sources of liquidity. Therefore necessary reforms as imposed by the FHFB and the Congress are important to open up the system to non- thrift members so that costs can be kept low, the system's credibility with Wall Street and rating agencies can be retained, and as much of the thrift industry's structure can be maintained as possible while it regroups.
David F. Holland, CEO of Boston Federal Savings and immediate past president of the Savings & Community Bankers of America, raised the issue at a recent hearing of a potential "system implosion" scenario whereby a loss of membership, and the consequent redemption of its common stock under current law, would concentrate the burden of funding REFCorp., and affordable housing programs' contributions on remaining shareholders and prejudice the yield on the remaining stock. His fear is that such a scenario could lead to a death spiral through further departures of members.
How these jobs are accomplished is crucial. A key is whether non-thrifts should be granted the same privileges as thrift members. Opening membership to mortgage banks, that already have most of the mortgage lending market through liquidity provided by Fannie Mae and Freddie Mac, is opposed by virtually every lending group in the system.
While the public anticipates the potential impact of the Republican "Contract With America," compliance officers--particularly those involved in mortgage lending are contemplating the potential cost of class-action suits dealing with an appeals court ruling that held that two items on a cost sheet for a home equity loan were both "finance charges" and should have been disclosed as such. The Rodash line of cases, as they are being called, has lenders throughout the country concerned that loans as old as 10 years old could be subject to rescission. "Lenders are pretty frightened, especially in Florida," said Rudy Schupp of Republic Security Bank in West Palm Beach, Ha.
Congress is seen as the best hope for ending the nightmare, and a colloquy in the Senate by Sen. Connie Mack, R-Fla., said more than 50 class-action lawsuits have been filed on the issue, "and more are being brought every week." At least 30 have been filed in Florida, Mack said, and industry lawyers said other such suits have been filed in Pennsylvania and Illinois, amongst other states.
In their comments on the Senate floor Dec. 1, Mack and Sen. Alfonse M. D'Amato, R-N.Y., chairman-designate of the Senate Banking Committee, said they intend as soon as Congress reconvenes in January to fix the problem through legislation.