August 6, 1997

Federal Home Loan Bank of Seattle Proposes FHA Loan Purchase Program

Seattle - In an effort to increase mortgage lending for lease-to-own housing programs, the Federal Home Loan Bank of Seattle has proposed a pilot program to purchase up to $25 million in Federal Housing Administration (FHA)-insured Section 203 loans benefiting low- and moderate-income families. The proposal, available for comment, will be published this week in the Federal Register.

The proposal aims to stimulate mortgage lending for an underserved market niche, said James R. Faulstich, president and chief executive officer of the Federal Home Loan Bank of Seattle. Lease-to-own programs are costly for lenders to develop because of the low mortgage amounts as well as the higher underwriting costs often involved with loans to nonprofit and government organizations. By providing technical assistance and an outlet for the loans, we see an opportunity to stimulate more lease-to-own lending which is an effective way to provide homeownership opportunities to modest-income families.

In FHA 203 loans, nonprofit organizations or local government housing authorities enter into lease- to-own agreements with low- to moderate-income families who wish to become homeowners. A portion of each lease payment is set aside until a sufficient amount is accumulated to make the three percent downpayment for an FHA loan. When the downpayment is accumulated, the family submits an application to assume the mortgage. The family benefits by having a stable monthly payment and the opportunity to buy the home at the end of the lease period and upon completion of homeownership training.

The Seattle Bank proposes purchasing FHA 203 loans originated by its customers (financial institutions and housing finance agencies). Lenders may immediately sell these loans to the Seattle Bank, rather than holding them to accumulate the pool of loans required to securitize a Government National Mortgage Association (Ginnie Mae) security, and incurring additional interest rate risk.

This proposal was approved by the Seattle Banks Board of Directors and forwarded to the Federal Housing Finance Board. The Federal Housing Finance Board is expected to consider the pilot program this fall, following a public comment period.