A public-Private Partnership to Expand Homeownership

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A Brief Primer

The Current Situation

The Federal Housing Administration (FHA) and the Veterans Administration (VA) act as "mortgage insurers" to many homebuyers who sometimes do not qualify for the private conventional mortgage market. They assist predominantly low and moderate-income consumers achieve homeownership by providing a partial guarantee (in the case of VA loans), or government supported mortgage insurance (in the case of FHA loans). Most of these FHA and VA housing policy benefits are directed to first time homebuyers or families with limited or even slightly impaired credit. In either case, the benefits act as financial catalysts for potential homebuyers with very little available cash savings to apply toward the downpayment on a home. Lenders originate the FHA and VA mortgage loans and package them into mortgage backed securities guaranteed by Ginnie Mae. Ginnie Mae provides the full faith and credit guarantee of the United States government that investors in these security instruments will not be exposed to principle loss.

The First Time Homebuyers Act

The First Time Homebuyers Act is a new public-private partnership that will make buying a home more widely available to many Americans, particularly those buyers who have traditionally had difficulty obtaining a loan in the past – including minorities, first-time home buyers and low- and moderate-income Americans.

The innovation behind this public private partnership is that it introduces private mortgage insurance into the Ginnie Mae program, allowing the private sector to join the FHA and VA in supporting the risk on certain Ginnie Mae loans. That means if loans default, the taxpayers alone will no longer bear the primary burden for those losses. Losses would be spread between the government and the private sector. Having more places to spread the risk will result in more sources of capital to expand homeownership.
There would be considerable housing policy advantages to this initiative as well. Potential homebuyers would experience new choices and innovations when seeking a mortgage. For instance, there are essentially only two automated scoring systems used to determine who is approved and rejected for home loans, those owned and controlled by the secondary mortgage entities Fannie Mae and Freddie Mac.
With this initiative, potential homebuyers would have access to several automated scoring systems. Most potential homebuyers, especially those, who are repeatedly rejected by lenders, don’t realize that today, many different lenders use the same scoring systems, the systems owned and controlled by Fannie Mae and Freddie Mac. With public-private partnership, they would have greater opportunities for loan approval. With greater choice, increased competition and access to Ginnie Mae, many new affordable loans could be made.
Additionally, it’s important to note that FHA-insured loans have a default rate two to three times higher than loans insured by the private conventional market. In addition to spreading some of the default risk, the new public private partnership will give the government access to the innovative private sector technology and default management tools used to help keep families in their homes when they run into financial trouble.

How it works

At least half of all FHA and VA loans are made to buyers who have down payments of three percent or less. That extensive concentration of FHA and VA support leaves less FHA and VA funding available for potential homebuyers in the mortgage market with between three- and ten-percent to put down on a house. The First Time Homebuyers Act is designed to make loans to serve that group - those with a down payment of more than three percent and less than ten percent. As a result, the initiative is specifically designed to complement, not compete with, the current FHA program. Ginnie Mae’s ability to securitize more loans in the 90 percent to 97 percent loan-to-value range will result in a larger, stronger market for homebuyers who can afford down payments within that range (three-to-ten percent).

In addition, because The First Time Homebuyers Act offers so-called “life of loan” mortgage insurance coverage, the program makes investing in Ginnie Mae securities much more attractive to Wall Street, ensuring an even more abundant supply of mortgage money for low and moderate income consumers. While Ginnie Mae and investors receive life of loan protection, the homebuyer also benefits because – like homeowners in the private mortgage market – they will be able to stop paying mortgage insurance premiums once they have reduced their remaining balance to 78 % of the value of their home. Wall Street will also be attracted to the new Ginnie Mae securities because the private insurers will be responsible for the first 30 percent of loss on any eligible loan.

Benefits to Lenders

The private mortgage market wants to help expand and support the government mortgage market not only because it is good housing policy that will help more families realize the American dream of home ownership, but also because it makes good economic and business sense. Lenders will benefit from the increased size of the government mortgage market created through the program. Lenders are also better protected against borrower default by the deeper insurance coverage the program offers in comparison to conventional lending. Additionally, lenders get greater control over underwriting decisions: under the initiative they can choose from the variety of diverse underwriting systems and programs made available by private companies, rather than being limited to only the two currently available through Fannie Mae and Freddie Mac.

The First Time Homebuyers Act: A win-win-win proposition

The First Time Homebuyers Act is a win-win-win: consumers benefit through lower costs, more choice and options, and through the expansion of mortgage availability – often to those who have been shut out in the past. Taxpayers benefit through the expansion of homeownership in a public private partnership that diminishes the impact of potential homeowner default risk on the government in the event of a national – or even a regional – economic downturn. Ginnie Mae will benefit by getting the full use of the tools and technology that has enabled the private market to be outstanding at underwriting loans and terrific at keeping people at risk of default in their homes. Lenders benefit from the increased size of the government mortgage market created by forming this innovative public-private partnership.