A surge in applications for mortgages insured by the Federal Housing Administration and Veterans Administration has raised fears that the Reagan administration might seek to limit such lending, in part to hold down the government's future liability.
Industry experts say middle-income home buyers are moving to the federally insured mortgages because mortgage insurance companies and private lenders have been tightening their credit standards, leaving the FHA and VA loan standards comparatively looser.
These lenders, in turn, say they are being more careful about who they grant mortgages to because the number of mortgage loan foreclosures has been rising.
According to industry experts, the Reagan administration has serious concerns about all the federal programs that involve government insurance in some form, such as the Farm Credit system and the Federal Savings and Loan Insurance Corp. These experts say that record numbers of FHA or VA loans could trigger an attempt to limit the overall activity for such loan guarantee programs.
The surge in applications to FHA and VA has triggered concern among some housing industry officials that increasing volume will touch off a debate about the government's role in providing such insurance programs for families of moderate means.
"If the government elects to continue to provide mortgage money for low-down-payment loans , then the FHA and VA are the right vehicles to use to do it," said David O. Maxwell, chairman and chief executive officer of Fannie Mae. "The issue will be the current administration's bias against doing that." Maxwell said the administration could restrict the FHA by lowering or freezing the loan volume ceiling.
Sources close to the discussion on Capitol Hill said, however, that they doubt Congress would be willing to jeopardize the "one avenue left for people of moderate means to purchase a house."
"The FHA and VA programs have a much wider constituency than the public housing programs, and serve the great mass of middle Americans," said a congressional source who did not want to be named. "The political repercussions would be very wide-ranging if there were an effort to limit FHA or VA loan insurance activity , and I doubt it will happen."
"The sentiment on Capitol Hill and the political pressure is to keep those programs available to moderate-income people," Edwards said. "There currently is no pressure from Washington to tighten the FHA and VA programs, even if some people think there should be."
The tougher credit standards imposed by mortgage lenders and private mortgage insurance companies center on adjustable-rate mortgages that have artificially low starting rates and loans involving very low down payments.
The Federal National Mortgage Association, which directly affects 10 percent of the mortgage-lending business, announced such a set of tougher standards last month. The association, known as Fannie Mae, buys mortgages from banks and savings and loans, providing the lenders with money to make additional loans. The company then packages the mortgages and sells securities backed by them in the secondary market.
The private mortgage insurance industry, which insures loans for lenders to protect them from losing money if a borrower defaults on his mortgage, is facing a record number of claims this year from risky loans insured during the early 1980s. An analyst from Moody's Investors Service told the National Council of Savings Institutions this week that mortgage insurance companies are expecting this year's losses to top $500 million, up from $32 million in 1974.
An FHA spokesman said that the number of loans FHA insured in August was up nearly 8.5 percent over July and three times higher than in August 1984.
The VA also said its loan insurance activity was up substantially last month. According to Robert O'Toole, chief of the home loan guarantee program, the VA insured 20 percent more loans during the second week of August than during the second week of July. So far this year, volume is running about 70 percent above last year's levels.
"One of the immediate reactions of most of the lenders I've talked to about the Fannie Mae action was that home buyers will just move over to FHA and VA for those situations where people are really stretching on their down payments," said Weston Edwards, senior executive vice president of Lomas & Nettleton, one of the country's largest mortgage banking companies. "That will put added pressure on those programs, which are already stretched."
FHA was created in 1934 to stimulate the housing industry and bring within reach of every American family "a decent home in a decent neighborhood," a mission that FHA officials say is still central to the mortgage insurance program.
The program works by providing federal mortgage insurance to private lenders making loans to moderate-income people. FHA insures conventional and adjustable-rate mortgages that may be as much as 95 percent of the purchase price of the house.
To keep the program limited to people of moderate means, there are ceilings on the size of the loan FHA will insure. In most parts of the country, the loan limit is $67,500, although it is higher in areas with expensive housing markets. For the Washington area, the limit is $90,000.
FHA originally regulated the interest rate allowed on loans it insures, but moved to deregulate the rate several years ago. Since then, FHA has accepted any rate lenders would offer for a loan.
The VA loan guarantee program was designed to help veterans buy homes, and while it insures only fixed-rate loans, it will insure loans that have no down payments. This provision, however, has meant serious foreclosure problems for the VA, and has sparked congressional inquiry into the agency's increasing problem with delinquencies.
The national foreclosure rate for all mortgages is at a near-record high of 0.24 percent, meaning that 24 of every 10,000 mortgages are in foreclosure proceedings. The VA's annual rate is 3.8 percent, and foreclosures are running at a rate of 2,500 a month, O'Toole said. The purchaser put no money down in cases involving 88 percent of the loans in foreclosure, O'Toole said.
The House Veterans Affairs subcommittee on housing and memorial affairs was scheduled to hold a hearing this week on whether the VA would be willing to tighten its credit standards, particularly on no-down-payment loans. One source close to the congressional discussions on the VA's problem loans said that any program that "does not require a down payment is going to have problems."
FHA officials said that they are looking into tightening some of their credit-qualification procedures but not the credit standards themselves, saying that they still believe the program's mission is to provide insurance for loans to people that just barely can meet lenders' qualifying standards.
FHA has come close this summer to bumping up against a congressionally mandated ceiling of $50 billion in annual loan insurance activity, though agency officials said they do not expect actually to reach the ceiling by the end of the fiscal year three weeks away.