The administration will propose legislation to change the mechanism for ensuring access to credit by buyers who cannot obtain conventional financing. Under the proposal, FHA will no longer insure individual mortgages. Instead, FHA will provide credit enhancement for pools of high [loan-to-value] and other high-risk mortgages securitized and guaranteed by Fannie Mae, Freddie Mac or other securitizers. The enhancement, in the form of a loss reserve, will ensure that the cash flow to investors is not interrupted by defaults. FHA will continue to charge borrowers a fee to fully fund the loss reserves and cover administrative costs.

New automated underwriting systems will reduce processing times and provide enhanced information concerning credit risk. FHA can achieve its goals through credit enhancement without significant involvement in the underwriting process. The size of the FHA [Mutual Mortgage Insurance Fund] could be reduced significantly, freeing up 1,253 [full-time employees] within HUD (according to FHA-supplied workforce data) and yield administrative savings.

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