File: 
Risk Sharing Proposal Explanation.pdf

Summary

  • Eliminate Prohibition on Ginnie Mae Securitization of Risk-Sharing Loans

    Proposal and Explanation

    This proposal enhances efforts of state Housing Finance Agencies (HFA) to develop and preserve assisted multifamily housing by authorizing the Government National Mortgage Association (Ginnie Mae) to securitize any FHA risk-share multifamily loans under the same terms and conditions as if the loan were insured under the National Housing Act.

    Language

    (a)    AUTHORITY. – Subsection(c) of section 542 of the Housing and Community Development Act of 1992 (12 U.S.C. 1715z-22(c)) is amended by striking paragraph (6) and inserting the following new paragraph:
    ‘‘(6) GINNIE MAE SECURITIZATION.—The Government National Mortgage Association may securitize any multifamily loan insured under this subsection provided that the Association shall not assume any obligation of the lender-issuer under the risk-sharing Agreement and may assign any defaulted loan to the Federal Housing Administration in exchange for payment of the mortgage insurance claim.  If a mortgage insurance claim is paid pursuant to the previous sentence, the Secretary may exercise the authority in paragraph (2)(B) for reimbursement from a qualified housing finance agency.” 
    (b)    CONFORMING AMENDMENT. – Clause (ii) of the first sentence of section 306(g)(1) of the National Housing Act (12 U.S.C. 1721(g)(1)) is amended by inserting before the period at the end the following: “; or insured or reinsured under subsection (c) of section 542 of the Housing and Community Development Act of 1992, subject to the terms of paragraph (6) of such subsection.”
    Cost Estimate
    The Congressional Budget Office estimates that enactment of this language would result in $20 million in mandatory savings over ten years ($2 million annually).  CBO also concluded that the new authority would enable Ginnie Mae to guarantee $500 million in new loan guarantees in 2011 and about $1 billion in new loan guarantees annually in subsequent years.  See cost estimate for H.R. 4868, dates October 8, 2010 (111th Congress).

    Support

    This language is supported by Ginnie Mae, the Federal Housing Administration and HUD, and reflects changes that were suggested by each.  In addition, it is supported by the National Council of State Housing Agencies.


    Additional Background

    HFAs sell tax-exempt bonds to finance mortgage loans used to develop and preserve multifamily affordable housing.  The mortgage loans funded by these bonds are typically securitized and sold, freeing up funds for further affordable housing loans.  The HFA Risk-Sharing program, authorized by Section 542(c) of the Housing and Community Development Act of 1992 (12 USC 1707), is one of the primary multifamily affordable housing financing tools used by state HFAs. 

    Under the Risk- Sharing program, loans underwritten by HFAs receive full FHA mortgage insurance, just like a standard FHA-insured mortgage.  In the event of a default, FHA and the HFA apportion the loss according to a Risk-Sharing agreement entered when the loan was made.

    The program has been very successful and continues to be an important tool, particularly in the current liquidity crisis, when owners and developers of affordable housing are having difficulty obtaining financing.  Under the Risk-Sharing program, 23 HFAs have issued more than $4 billion in bonds to finance developments with more than 82,500 apartments.  Program loan default rates have been very low.

    Despite the very low risk involved in Risk-Sharing loans, bonds used to fund these loans are difficult to sell because of a statutory provision that prohibits securitization of HFA Risk-Sharing loans by Ginnie Mae.  Absent Ginnie Mae securitization, the bonds used to fund these loans do not receive Ginnie Mae credit enhancement and are less attractive to potential bond investors.  Ginnie Mae enhances the bonds by providing a guaranteed pass-through of principal and interest payments, including while the loan insurance is being processed, thus increasing the liquidity of the bonds. 

    Some experts predict that the interest rate on the underlying mortgages could be reduced by as much as 200 basis points (or two percent).  This rate reduction could translate into lower rents and potential rent subsidy savings for federally assisted apartments.

    The FHA Risk-Sharing program exemplifies how state HFAs can reduce the risk to the federal government of insuring affordable housing by taking responsibility for some of the potential losses.  Under this program, HFAs have “skin in the game,” so they use their strong underwriting and servicing practices to ensure that Risk-Sharing loans are sound, keeping the default rates extremely low over the past 19 years.

    The public-private partnerships fostered by the Risk-Sharing program epitomize the kind of creative approach to housing finance that is necessary to address the historically high demand for affordable rental housing at this time.  As the recent report on rental housing by the Joint Center for Housing Studies at Harvard University demonstrated, the number of severely cost-burdened low-income renters has grown dramatically as the affordable housing stock has shrunk over the past decade.  Innovative cost-effective tools for developing and preserving affordable rental housing, such as the Risk-Sharing program, are more important than ever.