COMMERCE AND HOUSING CREDIT

National Needs Statement

There is a recognized national need to maximize the private financing of mortgage credit and to support an environment in which there are fair and equitable opportunities for business development and growth.

Commerce and housing credit programs support the business and housing sectors in the areas of mortgage credit, thrift insurance, the Postal Service, and other forms of commerce, including small business assistance.

Direct loan or loan guarantee programs make up most of the Federal activity in the commerce and housing credit function. The credit programs table within this section reflects the total credit budget activity associated with these programs. The 1984 budget proposes $2.1 billion in direct loan obligations and $42.3 billion in guaranteed loan commitments.

Slower increases in home prices and lower mortgage interest rates have resulted in an expansion of housing activity. Starts, completions, and sales of homes and multifamily projects have all increased considerably in the past few months. Single and multifamily construction permits—which are usually a good predictor of future housing activity-have also increased substantially, indicating that housing should continue to expand in 1983.

The administration's emphasis on deregulation and institutional improvements in financial markets has helped establish more efficient mortgage markets that will be better able to meet the increased credit demands that result from this expanded housing activity. Depository institutions may now offer money market-type accounts to all savers. This increases the flow of savings to mortgage lenders, enabling them to compete more effectively for available funds, and enabling savers to receive competitive rates of return on their investments in these institutions.

To ensure that the private sector has the opportunity to enter the secondary mortgage market, the administration is considering a package of regulatory and tax changes that will eliminate unnecessary barriers to the issuance of private mortgage-backed securities. Known as TIM's (trusts for investments in mortgages), the resulting instruments will make the secondary mortgage market more accessible to private institutions. This improved competition should allow the entire secondary mortgage market to keep pace in the increasingly deregulated financial environment.

The administration also remains committed to seeking the total privatization of two of the housing related Government-sponsored enterprises, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because of their Federal Government sponsorship these enterprises receive special advantages in the securities markets that completely private institutions do not have. An interagency Cabinet-level group will continue to pursue the goal of complete privatization of these enterprises.

The 1984 credit budget requests reductions in commerce and housing credit programs from 1983 levels. These reductions in new direct loan obligations and guaranteed loan commitments should continue to relieve pressure on interest rates without adversely affecting the industries involved. Where Federal involvement is necessary and justified, the principal concern will be to target scarce Federal resources specifically to those groups with the greatest need. This budget ensures the efficient and effective use of limited Federal credit resources by: • targeting rural housing programs to low-income families occu

pying substandard housing; • providing greater emphasis on minority, handicapped, and

first-time borrowers with guaranteed credit assistance of the
Small Business Administration, thereby having the Govern-
ment assume credit risk for these borrowers when the market
may overestimate the risk;
deregulating the interest rate on FHA-insured mortgages,

thereby allowing it to be determined by the market; • ensuring a strong private economy by acting only as a lender

of last resort in certain areas; and • redirecting FHA mortgage insurance programs to those

groups not served by the private mortgage market. The 1984 budget proposes $7.6 billion in budget authority and $0.4 billion in estimated budget outlays for commerce and housing credit. Mortgage credit and thrift insurance programs and activities are the largest portion of the assistance, with $5.7 billion in proposed budget authority in 1984.

Mortgage credit and thrift insurance.—The most significant contribution the Federal Government can make to both the housing industry and individual homebuyers is the pursuit of prudent fiscal and monetary policies that support stable and reasonably low interest rates. Overall Federal credit reductions will continue to exert downward pressure on interest rates and allow the private housing sector opportunity for growth. The focus of Government mortgage credit programs will be on areas the private sector cannot serve, particularly distressed rural areas and central cities. Mortgage purchase activities. The Government National Mortgage Association (GNMA) provides support for the mortgage market through guarantees of mortgage-backed securities. For 1983, a new commitment limitation of $68.3 billion has been enacted, and guarantees are expected to be issued on about $35.2 billion in securities backed by pools of mortgages that are either insured by the Federal Housing Administration or the Farmers Home Administration, or guaranteed by the Veterans Administration. For 1984, the administration proposes a new commitment limitation of $58.6 billion, although only $39.1 billion of securities are expected to be guaranteed. This represents a $9.6 billion commitment limitation reduction from the enacted 1982 and 1983 levels. The credit programs table shows the new commitment limitation proposed for GNMA guarantees. Table F-9 of Special Analysis F, “Federal Credit Programs,” shows the estimated guaranteed loans.

For 1984, the administration proposes no further activity for the GNMA tandem mortgage subsidy programs. The statutory authority for these programs, which involves making direct loans at large losses to the Federal Government, is proposed for repeal. Contingent upon successful enactment of this proposal, outstanding Treasury borrowing for these programs will be forgiven, and the remaining fund balances transferred to the GNMA management and liquidating functions fund.

Mortgage credit.—The Federal Housing Administration (FHA) provides mortgage and loan insurance for families who may be unable to obtain a mortgage without Federal insurance. FHA mortgage credit is one of the largest programs in the Federal credit budget.

Many families, particularly first-time homebuyers, can afford only a low downpayment when purchasing a home. Mortgage lenders, however, are reluctant to make low downpayment loans unless the mortgages are insured. Although private mortgage insurers currently insure more mortgages and charge lower premiums than FHA, some homebuyers—particularly those able to make only very low downpayments—may be unable to obtain private mortgage insurance. Thus, these homebuyers require FHA mortgage insurance in order to purchase a home.

In addition, FHA insurance on mortgages is often sought by mortgage bankers for use in conjunction with GNMA guarantees of pools of insured mortgages. These GNMA securities provide mortgage bankers and other lenders with the means to finance portfolios of mortgages without having to use much of their own capital.

The administration is requesting $39.8 billion of new loan guarantee commitment authority for 1984. The request reflects projections of future housing activity and, more importantly, recognizes

that private mortgage insurers will be able to adequately serve a larger share of the housing market.

The administration obtained a $6.1 billion supplement, in the 1983 Continuing Resolution, to the FHA loan guarantee authority of $39.8 billion for 1983. With the expectation of rapidly falling interest rates, the demand for FHA insurance has increased considerably. More applications were received in the last two months of 1982 than in any other November-December time period in the 48year history of FHA. Approximately 30-40% of this increase in demand is to refinance existing mortgages.

In addition, legislation to remove current statutory ceilings on interest rates for FHA-insured mortgages is being reproposed. Elimination of the FHA regulation that prohibits FHA-insured homebuyers from being charged any points directly will be implemented simultaneously. Points are interest charges that are paid at the time a property is purchased and are used by lenders to increase effective interest rates on FHA-insured mortgages. Each