The Department of Housing and Urban Development is pushing a plan to make the 60-year-old Federal Housing Administration loan program more accessible to those who previously have had no other choice but to rent, while at the same time not restricting its business to such customers.
Harvard University’s Joint Center for Housing Studies, operating under a HUD contract, advanced the idea with the recent release of a report summarizing an eight-city series of hearings by HUD on the future of the government-insured loan program.
Based on testimony from more than 150 participants, many representing housing industry and community groups, the report said FHA needs to free itself from government bureaucracy that hampers its ability to respond quickly to changing market needs.
Yet, the report concluded, the agency continues to play a vital role in providing mortgage credit to borrowers that the private industry is unwilling or unable to insure.
“FHA’s most valuable asset is the full faith and credit of the federal government,” said William C. Apgar Jr., executive director of the Joint Center, who co-authored the report. That translates into lower operational costs than the private mortgage insurance industry can achieve, he said.
Congress is considering legislation proposed by the Clinton administration to grant FHA more autonomy but leave it under the policy direction of the HUD secretary.
Competing bills also before the lawmakers, however, seek to abolish FHA and HUD or restrict the single-family home mortgage program to first-time and lower-income home buyers.
Lenders require some form of mortgage insurance on loans with less than a 20 percent down payment to cover their losses in the event of borrower default.
Borrowers pay more for mortgage insurance under the FHA program than they would for privately insured loans. Yet, they still opt for an FHA mortgage because they cannot find a comparable, privately insured mortgage, the report noted.
Despite the higher insurance premiums charged, FHA is able to operate less expensively than the mortgage insurance industry, which charges an average price instead of a risk-based price, said FHA Commissioner Nicolas P. Retsinas.
“Private insurers must earn a profit sufficient to set aside the high levels of capital required by state regulators and their shareholders to provide adequate assurance of the ability to pay claims and earn profits (of up to 18 percent in recent years) for shareholders,” Retsinas said at a recent Congressional hearing.
FHA’s comparative cost advantage, “coupled with FHA’s high premiums, allows it to support a higher level of losses and thus serve untested or higher-risk borrowers, at no cost to the taxpayer,” Retsinas said.
Although the private mortgage insurance industry doesn’t quarrel with the need to retain FHA, the agency’s business should be restricted to avoid competing with the private sector, said W. Roger Haughton, president of PMI Mortgage Insurance Co., a large San Francisco-based mortgage insurer.
“We believe FHA should operate on a more focused, limited basis,” that leaves repeat purchases to the private insurers, Haughton said.
In one of the FHA hearings, Greg Barmore, chairman of G.E. Capital Mortgage Corp., warned against duplicating the efforts of the private insurance industry, in which his company is leading player.
Instead, he said, FHA should be “trying to stimulate it, lead it, encourage it.”
While the Clinton administration also wants FHA to concentrate on first-time buyers, it doesn’t want it to do so to the exclusion of other underserved groups of borrowers.
In its legislative proposal, the administration calls for setting temporary performance goals for the agency, reconstituted as the Financial Housing Corp., that would earmark 67 percent of its business for first-time buyers in each of the next two years.
After that, the target could rise higher still at the discretion of the HUD secretary. To make all that possible, however, FHA will need added Congressional approval.
