The thrift industry is girding this week for an all-out lobbying blitz to block efforts in the House Banking Committee to immediately expand the cap on loans that can be covered by FHA insurance and provide for future indexation.
The venue for this effort is the markup of the Clinton administration's version of housing reauthorization legislation.
Rep. Herbert Klein, D-N.J., for one has said publicly that he expects to offer an amendment increasing the cap for FHA loans at the markup of the bill, H.R. 3838, the housing reauthorization bill, and H.R. 4310, which deals with HUD's HOME program, before the panel's housing subcommittee. The markup is tentatively scheduled for May 26 and 27.
Klein's proposal would expand FHA mutual mortgage insurance program coverage from $151,725 to $172,675 immediately for single-family borrowers in high-cost areas and provide a system for future indexation.
The Savings and Community Bankers of America is mobilizing an effort to thwart attempts to increase the limit. It is being joined by private mortgage insurance companies and such consumer groups as ACORN and the National People's Action Coalition.
Rep. Henry B. Gonzalez, D-Texas, chairman of the housing subcommittee as well as the full committee, is apparently seeking to broker a compromise on that issue as well as several other controversial provisions of the Clinton administration proposal.
One argument that Gonzalez is apparently heeding is that increasing the loan cap will benefit wealthy people, not those in the low-income bracket, according to several lobbyists.
One argument being used with Gonzalez is that the annual family income required to service a conventional $172,675 loan is $71,000, an amount only 13% of American families earn.
"FHA program benefits should be concentrated on credit worthy borrowers most in need," one lobbyist is said to have told the congressman.
Another criticism of the proposal, according to a thrift industry official, "is that there is no showing that the higher-income market FHA proposes to move into is underserved. Nor is it evident that FHA has fully developed the potential of the market for FHA loans within current limits.
"FHA should serve a greater portion of the creditworthy, lower-income borrowers that are now eligible before it expands this program into the market that conventional lenders currently serve," this official said.
Gonzalez is also being told that FHA's mutual mortgage insurance fund is still increasing its capital levels to reach the long-term minimum capital level of 2% mandated by Congress.
"Until reserves approach that level more closely, higher-income programs that put the fund at greater risk should not be introduced," thrifts, for one, are arguing.
Critics also say that increased loan amounts introduce greater risk to the fund.
"Industry-wide data show that loan default risk increases, not decreases, between $150,000 and $175,000," one thrift official said. "Even if the default rate for high-dollar loans is the same as for lower-dollar loans, larger loan amounts mean the overall cost to the fund is greater for higher-dollar loan defaults."
Klein, the primary supporter of the legislation, calls raising the cap a "necessity."
He said many middle-income homebuyers in his northern New Jersey district "have limited housing opportunities because they do not have the minimum 5% downpayment required to qualify for a conventional loan." He said increasing the loan limit is the "only answer."
He said the change in the cap will benefit those in several states, including New Jersey, California, Connecticut, New York and Maryland.
Klein argues that the program will benefit the MMI, and as a result enhance FHA's ability to help underserved communities through what he terms, "cross-subsidization."
"The new business generated by the increase in mortgage limits - about 200,000 loans - is expected to be very good and will increase FHA's reserves," he says.
"In turn, FHA will be able to take additional steps to reach to more low-and moderate-income buyers through programmatic initiatives."