WASHINGTON—The White House has spoken: not only does it want to pull the plug on Fannie Mae and Freddie Mac—it wants a reduced role for the FHA program, which unlike the GSEs hasn’t lost a nickel of taxpayer money.
The Obama administration’s plan for reviving the private mortgage market is predicated on downsizing the government’s role in housing: ending the GSEs and whittling down the FHA.
Among other things, it calls for gradually increasing guarantee fees and reducing loan limits, a process that is already underway. Fannie and Freddie have been raising risk-related fees for several years. FHA raised its annual premium by 25 basis points in October with another 25 bp hike unveiled just last month. (Starting in mid-April, newly originated FHA-insured mortgages with loan-to-value ratios greater than 95% will have annual fees of 115 bps.)
“This will continue the ongoing effort to strengthen the capital reserves of the FHA, and put it in a better position to gradually shrink its market share,” declared FHA commissioner David Stevens. “Going forward we will coordinate reforms of Fannie Mae and Freddie Mac with changes at FHA to help ensure the private market, not FHA,” picks up new market share, Stevens testified before Congress.
The commissioner also offered assurances that the FHA is not concerned about the impact of new risk retention rules on the FHA’s volumes. The FHA is exempt from risk retention rules mandated by the Dodd-Frank Act. But the industry is concerned regulators are moving toward a narrow definition for a “qualified residential mortgage” that will exempt only a small segment of loans from the 5% risk retention requirement. A narrow QRM would drive more business to FHA.
Stevens said there are “responsible ways” to control loan volume and keep the FHA targeted on serving low- and moderate-income borrowers going forward. Loans limits, mortgage insurance premiums and product guidelines are “three primary methods that would ultimately be used,” he said, “as we carefully transition to a more normalized market where private capital is re-engaging.”
The administration is already committed to allowing the $729,750 maximum loan limit for the GSEs and FHA to drop down to $625,500 on Oct. 1. Republican lawmakers may try to push it down further. The chairman of the House GSE subcommittee is weighing proposals discussed at a recent hearing to lower the maximum GSE loan limit in high-cost areas to $500,000.
Chairman Scott Garrett, R-N.J., told reporters he is reviewing the various options before deciding how fast or by how much the GSE loan limits should be reduced. Separately, Department of Housing and Urban Development officials rolled out their new budget for fiscal year 2012, which starts Oct. 1.
One of the top-line numbers is that the FHA is going to insure only $218 billion in “forward” single-family loans in FY 2012, which would represent a substantial reduction in FHA activity.
But a closer look at the budget documents show the FHA is projected to endorse $218 billion in purchase mortgages, plus $83.7 billion in refinancings and $20 billion in HECM reverse mortgages. Overall, the budget estimates the FHA will insure $321.7 billion in SF loans in FY 2012, down 16% from $384.6 billion in the current 2011 fiscal year.
HUD officials expect the back-to-back annual premium increases will be a drag in FHA originations going forward. And the FHA continues to tighten its underwriting guidelines.
Industry officials are bracing for Stevens to curb seller concessions this spring. Homebuilders and others sellers can cover a buyer’s closing costs or buy down the interest rate using concessions. The FHA wants to cut seller concessions from 6% to 3% of the loan amount.
Meanwhile, the FHA commissioner continues to plug the FHA short refinancing program that is designed to rescue underwater borrowers.
Results have been disappointing since its launch in September.
But Stevens says two large lenders are preparing roll out the principal reduction program.
He noted that HUD secretary Shaun Donovan and Treasury secretary Timothy Geithner have discussed the FHA short refi program with the CEOs of major lending institutions.
“This is an area we continue to focus on,” Stevens testified. “We believe that principal writedown is absolutely needed. It is one of the key remaining variables left to address to get this housing economy right-sized.”
The short refi program requires servicers to write down the principal amount of a conventional the mortgage by at least 10% so the loan can be refinanced into a standard, fully underwritten FHA mortgage with a 97.75% loan-to-value ratio.
Stevens noted that 27% of homeowners have negative equity. And the budget documents show the FHA is projected to refinance $83.7 billion in mortgage loans in FY 2012, compared to $60 billion this fiscal year.
