Senate FHA Measure To Generate Profit, Says Report

by Peter G. Miller
June 11th, 2008

The non-partisan Congressional Budget Office has come out with a report which shows that the “Federal Housing Finance Regulatory Reform Act of 2008″ sponsored by Senate Banking Chairman Christopher Dodd (D-CT) and ranking member Richard Shelby (D-CT) would produce $800 million in new federal profits over 10 years.

The idea is to have the FHA insure mortgages worth $300 billion, loans that would be used to refinance toxic mortgages. The program, however, is supposed to produce losses to the FHA. To cover those losses Fannie Mae and Freddie would be assessed a 4.2 percent fee on the value of new mortgages that they purchase or create each year. That money would produce $8 billion during the coming decade.

Why Fannie Mae and Freddie Mac? They are “GSEs” or “government sponsored enterprises,” federal agencies that were spun off to the private sector. Each company has direct access to the U.S. Treasury with a $2.5 billion line of credit and both have benefited from the perception that they would be bailed out by the federal government if they go into trouble.

The $8 billion from Fannie Mae and Freddie Mac would be off-set $7.2 billion in new costs — the result, $800 billion in new federal revenues after all program costs.

The highlights of the legislation, as reported by the CBO, are below:

___Require Fannie Mae and Freddie Mac to annually pay amounts equal to 4.2 basis points on each dollar of unpaid principal balance of each enterprise’s total new business purchases (that is, 4.2 cents per $100 of the value of the new mortgages purchased or securitized in that year). These assessments would begin during fiscal year 2009 and would be deposited into new federal funds.

___Authorize—from October 1, 2008, through September 30, 2011—a new mortgage
guarantee program under the Federal Housing Administration (FHA) that would
allow certain at-risk borrowers to refinance their mortgages after the mortgage holder (lender or servicer) agrees to a write-down of the existing loan (that is, a reduction in the amount of loan principal). A portion of the GSEs’ assessments would be used to pay the cost of this new program.

___Require loan originators to participate in a Nationwide Mortgage Licensing
System and Registry (NMLSR) that would be administered by either a nonfederal
entity or the Department of Housing and Urban Development (HUD) in
coordination with the federal banking regulatory agencies.

___Authorize the appropriation of such sums as are necessary for the Treasury
Department’s Office of Financial Education to provide grants to state and local governments, Indian tribes, and other entities to support financial education and counseling services.

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