February 8, 2011 (Chris Moore)

As Congress wrangles with its solution to reform the role of Fannie Mae and Freddie Mac and the Obama Administration puts on the finishing touches for its plan on restructuring the two GSE giants, an unintended consequence may be an explosion in business for the Federal Housing Authority (FHA).

The housing bubble and the subsequent economic and housing crisis that ensued has resulted in unprecedented taxpayer bailouts of Wall Street, the banking industry, and the government backed secondary market purchasers Freddie Mac and Fannie Mae. Taxpayers have bailed out the two mortgage giants to the tune of $150 billion so far with costs expected to go much higher.

This has led to cries from different factions of the government to reform or privatize the two GSE’s and has led to risk retention rules via the Dodd-Frank Finance Reform Bill. But many fear within the government that as these new rules and roles are implemented borrowers may be driven to seek out FHA-insured loans with lower down payments at a time when the government wants to get out of the mortgage business.

Next Monday, the White House is slated to release its budget for fiscal year 2012 along with its plan for restructuring Fannie Mae and Freddie Mac and reducing the government’s role in the mortgage market. The budget document is expected to include proposals to restrict the FHA single-family program, possibly through higher insurance premiums, larger down payments, and maybe even lower loan limits, according to sources.

At the same time, federal regulators are contending with the requirements of the Dodd-Frank Refinance Bill’s requirement of creating a working definition for a “qualified residential mortgage (QRM)” that will exempt high quality credit loans from the risk retention rules created by the bill.

The fear is, if the QRM requirement is set too high, borrowers would then turn to the FHA and its 3.5 percent down payments in order to secure a mortgage loan to purchase a home. FHA already has a 24 percent market share and that amount would be expected to increase dramatically if the QRM is too high and borrowers naturally gravitate towards the lower cost and easier to obtain FHA loans.

Administration officials recognize the connection between FHA and the QRM rule, according to mortgage banking consultant Brian Chappelle. “If there is going to be a tough QRM reg, we should expect commensurate tightening on FHA,” Chappelle said.

And if that happens, what form would it take? Setting the bar too high to circumvent a banks requirement to retain a measly five percent risk in their loan portfolio and subsequently making FHA loans more difficult to obtain could spell big trouble for the housing industry, and in all likelihood, borrowers who meet today’s minimum standards.

Tags: mortgage giants, fannie mae, freddie mac, fha, housing bubble, housing crisis, insured loans, taxpayer bailout, mortgage business, white house, federal regulators, dodd-frank bill, lenders, borrowers