After months of debate about its role in the provision of housing credit, the Federal Housing Administration (FHA) is emerging from its identity crisis.
What the FHA now has is a new mandate to help house American families that cannot obtain conventional credit.
In other words, an innovative, streamlined FHA is taking shape just in time to help thousands of home buyers take advantage of falling mortgage interest rates.
The FHA has helped millions of families become homeowners since it was created in 1934 to insure lenders against losses on home-mortgage loans. After taking office nearly two years ago, however, the Reagan adminsitration began questioning the need for the program.
Budget analysts at the Office of Management and Budget wanted to phase out the programs and leave the mortgage-insurance business to private firms.
FHA officials and others argued that the agency should develop new programs to help families at the lower end of the home-buying market, especially the first-time buyers.
Under the compromise hammered out within the administration, the FHA now is implementing new programs to provide some innovative mortgage instruments designed to bring down monthly payments.
The agency also is taking steps to limit its own clientele, mainly by discouraging families with other options from using the federal programs.
''First and foremost, we are concerned about housing the unserved and the underserved,'' says Grayson H. Bowers Jr., a deputy assistant secretary at the Department of Housing and Urban Development (HUD) who administers FHA programs for single-family homes.
''We want to make sure (the programs) are used as sparingly as possible, but still get the job done.''
The FHA helped establish the long-term, level-payment mortgage as the mainstay of housing finance, but it has been criticized in recent years for failing to keep pace with changes in the contemporary housing-finance market brought on by higher interest rates. That is changing under the new regime, Mr. Bowers says, and the FHA is taking the lead again with programs of insurance for growing-equity mortgages and other instruments that offer reduced monthly payments, at least initially.
''What you are going to have is a streamlined mortgage-insurance agency that is in the market with products that are right with the times as far as the lenders and customers are concerned,'' Mr. Bowers says.
Legislation proposed by the Reagan administration would make FHA insurance available for adjustable-rate and shared-appreciation mortgages, both of which offer lower rates, because they allow lenders to increase their yield to compensate for inflation.
That proposal is on the back burner in Congress, but HUD is implementing several new programs that do not require legislation.
Mr. Bowers says he has special hopes for the growing-equity program.
''I think that as the years go by the growing-equity mortgage (GEM) will take the place of the 30-year, level-payment loan,'' he says. ''There are so many advantages, not only for the buyer, but for the lender, too.''
Under the GEM plan, the borrower's monthly payment would increase by 2 or 3 percent a year for the first 10 years of the mortgage. The increase would be applied to the outstanding principal balance of the mortgage, allowing the borrower to pay off the entire loan - interest and principal - in 16 or 17 years.
Mr. Bowers says the agency is preparing to offer another GEM plan with a larger payment increase over a 12-year loan term.
In another policy change, Bowers adds, the FHA will encourage owner financing of home sales by allowing a second mortgage to be secured by a second lien on properties with FHA-insured first mortgages.
The FHA will not let the holder of the second mortgage collect any payments until the FHA mortgage is paid off. In return for waiting, the lender will be allowed to negotiate with the borrower to share in the appreciation of the home when the loan is finally repaid.''
It provides a very convenient vehicle to allow a home buyer to buy a property that he wouldn't be able to get into otherwise,'' Bowers says. ''It encourages owner financing in an organized and protected way.''
But even as it modernizes it programs, the FHA is attempting to limit its clientele to those families with no other options, including first-time buyers.
HUD overcame objections from the Office of Management and Budget to win administration support for continuation of FHA programs by promising to aim for the lower end of the home-buying market and leave higher-income borrowers to the private mortgage-insurance industry.
Bowers says HUD will not arbitrarily restrict eligibility for FHA insurance to accomplish that goal.
''We can best do this by allowing the market to make this determination rather than have specific legislation that would exclude or include certain buyers,'' he says. Part of the strategy is to maintain current limits on the dollar amounts of mortgages that can be insured, thereby restricting the programs to lower-priced homes.
FHA also will require payment of the premium it charges for mortgage insurance in one lump sum upon the closing of a loan instead of monthly, as has been required. The premium could be added to the mortgage and amortized over the term of the loan, as an alternative.
The theory is that psychologically the increased mortgage amount would discourage higher-income borrowers, while keeping monthly payments within the reach of lower-income families.
Those families that still find FHA programs attractive will also find them much easier to use.
In response to complaints that it takes too long to process applications for insurance, Bowers says FHA is expanding a pilot program under which lenders that make a loan also process the application for FHA insurance on the loan. He calls the nationwide expansion of the demonstration project ''the biggest change in the delivery of our service since the beginning of the program,'' and he predicts it will result in ''much faster service.''
Further, the FHA has moved to deregulate its programs. A demonstration project launched this year allows lenders and borrowers throughout the country to negotiate the interest rate on a limited number of loans without regard to the FHA maximum rate.
HUD has asked Congress to eliminate the statutory requirement for establishment of a maximum rate, but the proposal has met with strong opposition from some Democrats who say it would hurt consumers.
Finally, the FHA has simplified its minimum property standards for homes with FHA-insured mortgages to give more deference to local building codes and buyer preferences.
''It should reduce costs and allow the buyers to determine what they are putting their money into,'' Bowers declares.
The changes made in FHA policies thus far have done little to help the depressed housing industry, Bowers acknowledges, mainly because interest rates have been so high.
''When you don't have any market, it's difficult to make a final assessment on what we've done or what we intend to do,'' he adds.
Yet as a result of the substantial drop in interest rates in recent months, FHA activity has soared.
''The FHA is alive and well,'' Bowers concludes.