Magazine article Management Review

Rebuilding FHA

Magazine article Management Review

Rebuilding FHA

Article excerpt

The Federal Housing Administration is the focus of bitter debate on Capitol Hill. Critics say it is redundant of the services offered by private sector mortgaging firms and just another example of a federal agency the government would be better off without.

Republicans have a long memory. Remember the New Deal? The legions of Newt Gingrich, many of them barely in knee socks, lots of them not even born, when Franklin D. Roosevelt began redesigning the political, economic and social landscape of America, have waited for 60 years or more to dismantle the institutions created in those distant times.

At the center of at least some Republicans' crosshairs these days is the Federal Housing Administration, which came into existence in 1934 as a result of the reluctance of many mortgage lenders in the depths of the Great Depression to loan funds to prospective homeowners able to put up only a small fraction of the value of the house they were buying. Even in today's considerably more prosperous times, the FHA's inaugural mission is virtually unchanged: to expand dramatically the American dream of home ownership to those who would otherwise be unable to realize it--young couples, first-time homeowners and workers just starting out in careers with no real credit history.

The FHA is an agency with a mission that rubs lots of Republicans decidedly the wrong way. It is an agency that its critics claim duplicates many functions that could be performed by, often even competing with, today's privatesector lending marketplace. The issue has become a consuming interest of a tiny community of housing experts who have managed to whip up an extraordinary passion over concepts that are arcane and complex in their fine points.

A Big Impact

The passion arises from the broader impact of the FHA and the lives it touches each day. Last year alone, the FHA wrote 1.3 million mortgages, 66 percent of them for first-time home buyers. Still, with limits that in some markets approach $150,000 or more, today's FHA often finds itself subsidizing houses to individuals whose incomes could scarcely be defined as poverty-level. But with down payments as low as 3 percent, guarantees for 100 percent of the loan balance and 100 percent financing of closing costs, the FHA is by far the cheapest show in town for prospective homeowners in most markets.

And no matter what the agency looks like in the future, being the cheapest is still its ultimate mission as far as the Clinton Administration is concerned. As a result, President Clinton, at the urging of Housing and Urban Development Secretary Henry Cisneros and FHA Administrator Nicholas Retsinas, says he wants to take FHA out of the HUD bureaucracy and effectively privatize it. Or almost privatize it. And this is where the fine points come into play.

"We are emphatically not talking about privatization," insists Sarah Rosen, FHA's chief strategist. "We are talking about a different structure within the government that would allow us to conduct activities in a business-like fashion, that [would] operate in the commercial marketplace in more sound ways."

Under the FHA's own scenario for transformation, the agency would be absolved of its obligation to obtain congressional authorization for every new product or every new type of loan, every new operating procedure. From procurement to personnel practices to staff and pay scales, it would be removed as well from the shackles of the federal bureaucracy. But it would not be private, in several respects.

First, the FHA administrator would continue to report to the HUD secretary, as is now the case. Second, and more important, under this structure the new agency would not have the kinds of shareholder obligations carried by other housing-related, quasi-independent government agencies like the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac), or the Government National Mortgage Association (Ginnie Mae). …

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