Is FHA Considered a GSE? A Comprehensive Overview

The housing finance system in the United States involves various key players, including mortgage lenders, government agencies, and government-sponsored enterprises (GSEs). One common question that comes up is whether the Federal Housing Administration (FHA) is considered a GSE.

The short answer is no, the FHA is not technically considered a GSE. However, the FHA and GSEs like Fannie Mae and Freddie Mac work closely together to promote homeownership, especially for low-to-moderate income borrowers.

In this article, we’ll provide a comprehensive overview explaining what the FHA and GSEs are, how they differ, and how they coordinate to increase access to affordable mortgage credit.

What is the FHA?

First, let’s start with the FHA. The Department of Housing and Urban Development (HUD) is in charge of the Federal Housing Administration. It was set up in 1934 to help keep the housing market stable during the Great Depression by making it easier to get home loans.

The FHA insures mortgage loans made by approved lenders. This mortgage insurance protects lenders from losing money if a borrower doesn’t pay back the loan. People who borrow money pay an upfront and yearly mortgage insurance premium to the FHA in exchange for this insurance.

By offering this insurance, the FHA lets lenders give mortgages to people who might not be able to get a regular loan, like those with bad credit or a lot of debt compared to their income. When compared to conventional mortgages, FHA loans usually have less strict credit requirements and lower down payments.

What are GSEs?

Now let’s look at government-sponsored enterprises, commonly referred to as GSEs. GSEs are privately held financial services corporations created by Congress to help improve credit availability and liquidity in key sectors of the economy, especially housing.

GSEs help make mortgage loans possible by buying loans from other lenders on the secondary market. They are not direct lenders. Some of these loans are put together into mortgage-backed securities, which are then sold to investors. Lenders have more money to make new mortgage loans now that they have sold the loans.

The two most prominent GSEs in the housing finance system are Fannie Mae and Freddie Mac. Here is a quick overview of their roles:

• Fannie Mae: Established in 1938 to help increase mortgage availability after the Great Depression. Fannie Mae purchases conventional loans that meet its underwriting guidelines from lenders and sells them on the secondary market.

• Freddie Mac: Created in 1970 to give Fannie Mae competition and further expand access to mortgages. Like Fannie Mae, Freddie Mac buys mortgages on the secondary market and sells them as mortgage securities.

In essence, GSEs like Fannie Mae and Freddie Mac increase liquidity in the mortgage market and promote homeownership by buying loans from lenders and selling them to investors. Their guarantee of timely payment of principal and interest provides stability and attracts investment capital into the housing finance system.

Key Differences Between FHA and GSEs

While both the FHA and GSEs aim to facilitate homeownership, especially for underserved borrowers, there are some important differences between them:

• Ownership Structure: The FHA is a government agency, while GSEs are privately owned corporations. However, Fannie Mae and Freddie Mac have been under government conservatorship since 2008.

• Function: The FHA insures mortgages, taking on credit risk. GSEs buy and securitize mortgages, providing liquidity.

• Mortgage Eligibility: The FHA insures loans that meet its criteria. GSEs buy loans adhering to their underwriting standards. FHA loans often have more flexible requirements than conventional loans bought by GSEs.

• Borrower Type: The FHA tends to serve higher risk borrowers with lower credit scores and higher debt ratios. GSEs have tighter credit standards and serve more moderate-income borrowers.

• Down Payment: FHA allows down payments as low as 3.5%. GSEs typically require at least 5% down for borrowers with credit scores below 720.

• Mortgage Insurance: FHA borrowers pay annual mortgage insurance premiums directly to the FHA. Private mortgage insurance is required on conventional loans with less than 20% down.

Coordination Between FHA and GSEs

The FHA and GSEs both aim to serve low-to-moderate income and first-time homebuyers. This means there can be some overlap in their target borrower profiles. When one makes pricing changes, it can shift borrowers between FHA and GSE-backed loans.

For example, in 2023 the GSEs eliminated some loan-level pricing adjustments for lower income borrowers, while the FHA announced a reduction in annual mortgage insurance premiums. Such pricing changes help coordinate the relative competitiveness of FHA and conventional loans for targeted borrowers.

Beyond pricing coordination, the FHA and GSEs can also collaborate to increase access to credit by leveraging each other’s unique capabilities and strengths:

• The GSEs can harness technology and use bank statement data to qualify more borrowers upfront who may not fit standard income documentation requirements.

• The FHA can tap into its low-cost government capital to insure a greater share of riskier but still worthy borrowers.

• The FHA can streamline processes and reduce lender concerns to attract more participation from large lenders and increase market competition.

• The GSEs and FHA can jointly assess the impact of policy changes on expanding credit access to marginalized groups rather than only focusing on loan counts or volume.

Overall, a coordinated effort between the FHA and GSEs has significant potential to unlock homeownership opportunities for more low-income and first-time homebuyers who may not qualify through conventional channels alone. The unique offerings and capabilities of each entity are complementary in serving a wider spectrum of borrowers.

• The FHA is a government agency that provides mortgage insurance, while GSEs are private corporations buying and securitizing mortgages.

• The FHA serves higher-risk borrowers with more flexible credit requirements compared to the GSEs.

• The FHA and GSEs make pricing changes to coordinate the competitiveness of FHA and conventional loans for targeted borrowers.

• Further collaboration between the FHA and GSEs could greatly increase access to affordable mortgages by combining the strengths and capabilities of each entity.

So in conclusion, the FHA is not considered a GSE, but it works closely with GSEs to promote homeownership opportunities for credit-challenged and underserved borrowers. Coordinated efforts between the FHA and GSEs have the potential to unlock access to mortgages and enable more inclusive housing finance, especially for low-to-moderate income and first-time homebuyers.