HUD Pulls Back Proposal Allowing Farm Credit Banks to Participate in FHA Loans

The U.S. Department of Housing & Urban Development (HUD) has withdrawn a proposed rule to amend HUD’s regulations to allow Farm Credit System banks to participate in the Federal Housing Administration’s (FHA) mortgage loan guarantee program as mortgagees and lenders. The proposed rule was published in August 2011 and drew several comments in support of and in opposition to the proposal. The Conference of State Banking Supervisors (CSBS) submitted a comment letter to the agency opposing the proposed rule on the grounds of insufficient evidence for its justification, safety and soundness issues it could pose for banks, and unnecessary use of government guarantees. “The proposed rule does not include sufficient evidence to demonstrate the banks operating in these markets are not meeting legitimate credit needs,” the CSBS letter stated. “We firmly believe HUD’s proposal to provide additional guarantees to the [Farm Credit System banks] in the mortgage finance area will create safety and soundness issues by harming FDIC-insured institutions who are actively lending in local markets.” A notice to withdraw the proposal was published in the Federal Register. In the notice, HUD acknowledged the position of commenters’ that banks are meeting existing mortgage credit needs in rural areas and also concluded that the proposal to let Farm Credit lenders offer loans backed by the FHA would conflict with efforts to reduce the government's involvement in the mortgage finance market. “While HUD seeks to ensure the availability of mortgage financing for qualified borrowers nationwide—and particularly in underserved areas—HUD and the Administration remain committed to reducing the FHA’s market share and facilitating the return of private capital to the housing finance market,” HUD said.