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.
The credit enhancement will raise the rating on securities to a level that makes them attractive to investors and offsets any additional risk to private guarantors, including private mortgage insurers and securitizers. FHAwill have no open-ended obligation if the reserve is inadequate to cover all defaults; future credit exposure will be eliminated.
Floor and maximum mortgage amounts in high-cost areas for single-family insurance remained unchanged.
Receipts include the assigned note sale proceeds as proposed by [HUD]. With no documentation about the estimates of the proceeds from those sales, receipts will be made after further discussion with FHA.
FHA would continue to charge borrowers a fee sufficient to offset payments from the loss reserves and administrative costs. The government could continue to capture the excess receipts to reduce the deficit, or eventually pass efficiency savings along to the borrower.
As currently structured, the government would no longer collect the mandatory receipts Ginnie Mae earns for its pass-through guarantee on FHA pools ($256 million in fiscal year 1994). Ginnie would retain its current Remic, VA and FmHA functions.
GNMA and FHA MMIF negative subsidy receipts are scored in the mandatory liquidating account under credit reform. Fees for borrowers and securitizers could be set to cover risk to FHA and other government costs associated with the private management of FHA pools and would partly offset lost credit reform receipts.