The confluence of GSE reforms and risk retention rules is forcing the Obama administration to consider ways to clamp down on the Federal Housing Administration program to prevent an explosion in its insurance market share.
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 downpayments, and maybe even lower loan limits, according to sources.
At the same time, federal regulators are working on a definition for "qualified residential mortgage" that will exempt high credit quality loans from risk retention rules. (The risk retention rule, when finalized, will require securitizers of non-QRM loans to retain 5% of the credit risk.)
Some expect high downpayment requirements will be part of the QRM definition, which would drive borrowers to seek out FHA-insured loans with low 3.5% downpayments.
FHA already has a 24% market share, according to figures compiled by ASR's sister publication National Mortgage News. 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.
The risk retention debate also could spur the Senate to take up an FHA reform bill that was passed by the House last year, according to Edward Mills, a research analyst at FRB Capital Markets. "I won't be surprised if the QRM debate becomes a catalyst for passing FHA reform," Mills told NMN.