The future of our nation’s housing finance system may have been proposed 17 years ago.

In 1994, President Bill Clinton floated the idea of taking the FHA and making it a government-owned corporation that could behave more like a private company. The FHA would remain part of HUD, but would have more independence—maintaining its own funds, for instance, as opposed to being subject to the appropriations process—in order to hire top talent and invest in technology.

The proposal didn’t get very far, but then again, the political motivation to re-engineer the agencies wasn’t as strong in the mid-'90s. But now, there are some influential voices calling for a similar framework.

“The FHA is essential to the system—the left, right, and center seem to agree on that,” says Shekar Narasimhan, managing partner of McLean, Va.-based Beekman Advisors. “Option one is FHA, option two is FHA, and option three is also FHA. One way or another, the government, in a guaranteed form, will have an entity to provide some type of assistance to creating affordable rental housing.”

Potential Benefits
Of course, the FHA as it’s currently constituted is a model of inefficiency—just ask anyone who’s closed an FHA loan lately. But by freeing it from its bureaucratic chains, a functioning, self-sufficient FHA Corp. could generate profits for the government while spreading the risk around.

The idea is basically to mirror Fannie Mae’s Delegated Underwriting and Servicing (DUS) lending model. A regulated private intermediary market—a network of well-capitalized private lenders—would risk-share with the FHA, much as DUS lenders do with Fannie Mae now.

Unlike Fannie Mae, the FHA Corp. could also provide construction financing, sharing the risk with banks. Multiple entities will likely emerge—community banks may create a consortium; larger banks will need a charter, too; and private equity firms will see a great opportunity to get in on the ground floor and capitalize one just for multifamily.

The Obama Administration’s white paper offered some clues that it just may be inclined to give it a try. The white paper talks about expanding the FHA’s capacity to support multifamily lending, including risk-sharing with private lenders, giving the FHA more flexibility to adjust fees and programs, and goes on to say, “FHA should also have the technology and talent needed to run what should be a world-class financial institution.”

Multifamily First
The problem with some Congressional proposals is that they either want to eliminate the GSEs very quickly—throwing the housing markets into chaos—or not quickly enough. If Congress continues to debate the issue for another decade, the GSEs will wither on the vine.

“People don’t wait around in dying places; they don’t hang around a funeral home after a funeral. It wouldn’t hold together,” Narasimhan says. “We can’t just suddenly end the GSEs, and we can’t say let’s keep thinking about it for another 10 years. The answer is really somewhere in between.”

To Narasimhan, the rallying cry is “multifamily first.” The multifamily industry should try the FHA Corp. model first to prove that it could be done. The agencies’ multifamily divisions are already profitable; the markets are recovering, and more new construction capital is now needed to meet rising demand.

“I believe that the framework of a plan—multifamily first—can be achieved in 2011,” Narasimhan says. “There is a basic agreement that we’ve desperately got to have a functioning FHA, and that we’ve got to have private capital ahead of any government resources. Can we do a pilot? Can we see if we can raise capital? Let’s go out and try.”