While frustrated home buyers waited for a break from high interest rates this year, officials at the Federal Housing Administration were shuttling back and forth between meetings to try to find new ways to help finance housing for the families who could not buy, especially those at the lower end of the market.
After months of behind-the-scenes work, a leaner, more innovative, deregulated FHA is emerging. After surviving a run-in with administration budget-cutters last winter, FHA programs are undergoing a series of regulatory and legislative changes that officials say will benefit buyers, builders and lenders, not to mention the federal treasury.
Grayson H. Bowers Jr., the deputy assistant secretary who administers FHA single-family mortgage insurance programs, said the agency is returning to its original role as an innovator in the use of new mortgage instruments.
"What you are going to have is a streamlined mortgage insurance agency that is in the market with products that are right with the times as far as the lender and customer are concerned," Bowers said.
But the new, improved FHA won't be for everyone. With prodding from the Office of Management and Budget, FHA will focus its programs on lower-income, higher-risk borrowers who may not qualify for conventional credit, leaving the upper end of the home-buying market to the growing private mortgage insurance industry. "First and foremost, we are concerned about housing the unserved and the under-served," Bowers said.
When the FHA was created in 1934, it helped establish the long-term, level payment mortgage as the work horse of housing finance by insuring lenders against losses. Now, Bowers said, the agency is leading the way once again, this time toward greater use of new mortgage instruments, such as growing equity mortgages, that will offer borrowers reduced interest rates and lower monthly payments, at least initially.
The most innovative new programs would make FHA insurance available for adjustable-rate and shared-appreciation mortgages, both of which lenders offer at lower rates because they protect their yield from inflation. These new programs and several changes in current programs are included in legislation to reauthorize FHA programs for fiscal 1983, but may not be enacted because of disagreements between the House and Senate on these and other issues.
In the meantime, FHA is using its authority under current law to provide mortgage insurance for several new types of financing, including growing-equity mortgages (GEMs). "I think as the years go by, the GEM will take the place of the 30-year, level-payment loan," Bowers said. "There are so many advantages, not only for the buyer but the lender, too." As Bowers sees it, the GEM helps buyers by offering a shorter term--and therefore a lower, fixed interest rate -- and by forcing them to save in the form of increasing equity in their home.
Under the FHA GEM plan, the borrower's monthly payments would increase by 2 or 3 percent a year for the first 10 years. Unlike the current FHA graduated payment mortgage program, the increases in the payment would be applied to the outstanding principle, not interest, enabling the borrower to pay off the loan in 16 or 17 years. FHA officials are preparing to authorize additional GEM plans with larger payment increases over a 12-year loan term. At the same time, the Government National Mortgage Association is planning to permit inclusion of GEMs in its mortgage-backed securities program, a move that will encourage lenders to offer such mortgages by allowing them to recoup their investment through the sale of government guaranteed securities.
FHA, which is part of the Department of Housing and Urban Development, also plans to facilitate the use of owner financing by allowing a second mortgage on properties with FHA insured first mortgages. The borrower could not make payments on the second mortgage until the FHA-insured loan was paid off. In return for waiting, FHA would allow the owner making the second loan to share in the appreciation of the property.
"It provides a very convenient vehicle to allow a home buyer to buy a property that they wouldn't be able to get into otherwise," Bowers said. "It encourages seller financing in an organized and protected way."
Another pending regulatory change would make it easier to finance manufactured housing. Under the plan, mortgages on manufactured units could be insured under the major single-family programs authorized by Title II of the National Housing Act, which offers more favorable terms than the current Title I manufactured housing loan program.
Housing industry groups support the agency's efforts to promote new instruments offering lower payments. National Association of Home Builders assistant staff vice president Jay Shackford said the builders want to see new instruments as long as it is not at the cost of the long-term fixed rate mortgage. Officials of the mortgage bankers association of America and the National Association of Realtors agree, but point out that new instruments will only be successful if there is a secondary market for them, if the public accepts them, and if underlying rates continue to fall.
Mark Riedy, executive vice president of the mortgage bankers group, agrees the GEM has potential because borrowers know what their payments will be. Under adjustable rate mortgages, by contrast, interest rates and payments change according to market rates. In addition, Riedy added, the GEM would cut the average buyer's total housing costs in half because of the more rapid amortization of principle.
James G. Banks, executive vice president of the Washington Board of Realtors, is less impressed with the GEM, not to mention FHA programs as a whole. Although they are certain, he said, the increasing payments of the GEM will discourage its use since many people are unsure their incomes will increase accordingly, or continue at all.
Even as FHA improves its product line, it is trying to limit its clientele. When the Reagan administration was debating its fiscal 1983 budget proposals a year ago, Office of Management and Budget staffers argued that FHA had fulfilled its role and that private mortage insurers could now take over most if not all the mortgage insurance business. In formal negotiations with HUD, OMB rejected HUD's plans for innovative insurance programs and called for restrictive limits on overall activity under FHA programs and the Government National Mortgage Association mortgage backed securities program.
HUD won administration approval to propose new programs and to keep FHA activity limits at levels that are not expected to restrict actual activity. At the same time, however, HUD agreed to target its programs toward inner city and first-time home buyers, who cannot obtain conventional financing. The plan made sense as a way of keeping FHA from competing with private mortgage insurers and to curtail the federal credit budget that the administration says contributes to high interest rates.
"We in this building and the rest of the administration are in accord with what we want," Bowers said. "We want to target our efforts to home buyers that can't be served otherwise. We want to make sure the programs are used as sparingly as possible, but still getting the job done." FHA already serves the lower end of the market for the most part, Bowers added, saying his goal is to keep it that way.
Bowers said the department would not impose arbitrary restrictions on eligibility for its programs but is changing its policies to discourage higher income borrowers from using the programs. "It's the department's position that we can best do this and deliver our product in a cost-effective way by allowing the market to make this determination rather than have specific legislation that would exclude or include certain buyers."
Part of the FHA policy is to keep the maximum dollar amount of mortgages it will insure at current levels to restrict use of the programs to lower-priced homes. Washington area borrowers will be among those to feel the pinch if current limits are left unchanged. The FHA mortage limit for the area is $89,500, while the average purchase for all loans closed in July was $120,600, according to the Federal Home Loan Bank Board. The department is also considering increasing downpayments for higher priced homes.
The tax increase bill signed into law by President Reagan includes another measure affecting FHA customers, a requirement that borrowers pay mortgage insurance premiums in one lump sum when the loan is closed instead of monthly payments over the life of the loan, as has been the practice. The upfront premium could be included in the mortgage, and Bowers estimated it would add an average of 3 to 3 1/2 percent to the amount of the typical mortgage, thereby discouraging buyers with other options from using the program.
The practical effect of the lump-sum requirement as opposed to the monthly premium payment is small to the homebuyer, since the cost is merely added to the mortgage. Because of the way the premiums have been calculated, the change actually would result in slightly lower monthly payments for the first 12 years of an FHA mortgage than under the old system, and slightly higher payments after that, Bowers said.
Those who still find FHA programs an attractive option will also find the programs easier to use, Bowers said. In an attempt to address the complaint that FHA takes too long to process applications the agency is planning to let lenders throughout the country process applications within the next year. The agency has decided to expand the so-called delegated processing throughout the country after a demonstration in 19 field offices.
"It's the biggest change in the delivery of our service since the beginning of the program," Bowers said. "The home buyer can anticipate much faster service," he said.
The department is moving toward deregulation of FHA programs with a demonstration under which buyers and lenders can negotiate both the interest rate and the number of discount points to be charged on a limited number of FHA loans without regard to the FHA maximum rate, which is currently at 14 percent. The demonstration is the first step toward the legislative goal of eliminating the maximum rate, a step that mortgage lenders are eagerly awaiting but that faces political opposition.
In another major stab at deregulation, HUD has simplified the minimum property standards governing one and two family homes with FHA insured mortgages. The revised standards defer to local building codes on many issues and completely drop federal requirements that do not affect health or safety and that are not required by law. "It should reduce costs and allow the buyers to determine what they are putting their money into," Bowers said.
Finally, HUD has implemented a number of regulatory changes as part of an effort to revive the sagging housing market. The changes allow builders to buy down the interest rate on FHA graduated payment mortgages, increased the maximum loan-to-value ratio for mortages involving non-occupant co-mortgagors, and liberalized the income standards to qualify for an FHA mortgage.
President Reagan himself announced some of the changes in FHA programs intended to help the industry, but industry groups and HUD officials agree that the changes have had little impact given the level of interest rates. "When you don't have any market, it's difficult to make a final assessment on what we've done or what we intend to do," Bowers said. Activity is picking up as rates drop, he said. But only time will tell if the new FHA is a success.
But Bowers is optimistic and pleased with the changes that have been made in FHA programs. "FHA is alive and well," he said. "There is no question about that."