To put it bluntly: the FHA/VA market has hit the skids. As this edition of the Mortgage Industry Directory went to press it looked as though FHA/VA volume (as represented by the issuance of Government National Mortgage Association securities) would account for just 3.5% of the overall production market. To put that number in perspective, ten years ago GNMA production accounted for 11.1% of the entire industry's volume. What's going on here?

By now you've heard the crack that GNMA is the "government's subprime program." But a look at FHA (Federal Housing Administration) delinquency rates shows that private sector subprime loans actually perform much better than FHA-backed product. At year-end the FHA delinquency rate was 13.17% (for all types of FHA loans) compared to 8.63% for subprime loans. (The subprime rate is according to figures compiled by National Mortgage News for its Quarterly Data Report. The Mortgage Bankers Association's subprime delinquency rate was 10.6% — past dues — at year end 2004.)

Loans insured by the Veterans Administration perform better than FHA loans. But keep in mind the FHA/VA delinquency rate has been steadily eroding for years. This has occurred in tandem with declining FHA/VA production. How could this be? Many top mortgage officials tell us that Fannie Mae and Freddie Mac are skimming the best FHA/VA credits off, leaving the "worst of the worst" for the government to insure. But that's not the only reason. The private sector, it appears, has done a good job of creating low payment products — including zero-down options and "payment option" loans — that also are siphoning off business.

In short, many consumers are moving away from FHA into "Alternative-A" and other non-conforming products. Interest-only (IO) mortgages, one of the hottest products of 2004/2005, is partly responsible as well. The strange thing is that FHA loan rates are cheaper than alt-A or other products, but the government's execution is lacking. The FHA loan process, lenders tell us, continues to be cumbersome. Take the hybrid ARM for example. It is estimated that hybrids comprised 70% of ARM originations in 2004 and the 5/1 hybrid ARM is the most popular hybrid.

Congress granted FHA the authority to insure hybrid ARMs in 2000, but a legislative glitch and regulatory red tape has kept the FHA 5/1 hybrid off the market. HUD expects to issue an interim final rule to fix the FHA 5/1 hybrid problem soon, but the Office of Management and Budget is holding up the rule. Meanwhile, the FHA program suffered another blow late last year when Congress eliminated refunds of upfront mortgage insurance premiums that borrowers pay on FHA loans, which makes the FHA product more expensive. Is this any way to run a mortgage program?

One FHA lender based in Colorado told us that back in 2002 government-backed product comprised 57% of his business. Today, it is only 22%. That speaks volumes.

Other Problems

The Department of Housing and Urban Development is increasing its fines on residential servicers that fail to engage in loss mitigation on Federally-insured mortgages. Under a regulation that went into effect in mid 2005 HUD can impose fines of up to three-times the claim amount of the mortgage.

In fiscal year 2003 the average claim on a Federal Housing Administration-insured loan was $92,254 which means some fines could be as large as $276,000. Currently, the maximum FHA penalty is $6,500 for each violation -- or $1.25 million for all violations during any one-year period. Over the past two years HUD has levied fines on about 55 lenders. An agency spokesman said a fine, "usually results from a lender's failure to document that any loss mitigation was conducted on a particular case."

Victoria Vidal, a senior director for the Mortgage Bankers Association, said the loss mitigation regulation, "is not one of our favorites" and the trade group believes, ultimately, that such harsh penalties could "push some firms away from doing FHA servicing." That's not good.

The GNMA Rankings, the Future

In this chapter we rank the top issuers and servicers of GNMA product. GNMA securities, as any mortgage banker can attest, are backed by the Federal government and include home mortgages insured by FHA and VA. As loan servicers grow larger and GNMAs decline in prominence FHA/VA loans account for a smaller and smaller piece of the servicing pie. Over the years industry wide consolidation has eroded the number of actual GNMA servicers in both the residential and commercial niches. It's unlikely that this trend will reverse itself.

The bigger question is this: what's the future hold for GNMA? If you base your assumptions on the FHA delinquency rate and declining GNMA issuance volume the future hardly looks bright for the program. The Bush Administration has done an admirable job of talking up the importance of homeownership in the U.S., but it would be nice to see the White House take a more active role in fixing GNMA's woes. It would be nice to see GNMA become a competitive program once again. Currently, the private sector is cleaning the agency's clock. If Congress allows Fannie Mae and Freddie Mac to buy jumbo sized mortgages it likely will result in even more business for those two GSEs and less for GNMA. It may be hard to fathom but GNMA's best days may be behind it.