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Born on the Fourth of July: Arthur Hill, the top man at GNMA, is a rising star at HUD.

Born on the FOURTH of JULY

Arthur Hill is a banker. That is the core experience he draws on to run the Government National Mortgage Association (GNMA) program for the Bush adminstration and it defines his approach to problems.

Since March 12, 1990, he has officially served as president of GNMA.

It looks as if HUD Secretary Jack Kemp, and the others in the administration that decide such things, like what they see in this conservatively dressed Miami banker. They have recently announced that he is their choice to replace C. Austin Fitts as FHA commissioner. Fitts resigned August 16 with her plans undisclosed.

Like any good banker would, Hill recently declined public comment through a HUD spokesman about this most recent twist in his thriving government service career in Washington, D.C.

It's easy to see why the Bush people find Hill's credentials so appealing. First of all, look at the birth date: "Born on the Fourth of July." The year was 1948 and the place was Jacksonville, Florida. Next item: Hill was the chairman of Florida's Black Republicans for Bush in 1988. There's more.

In addition to boasting solid credentials as a banker - his latest position was chairman, president and chief executive officer of Peoples National Bank of Commerce, Miami - his record shows serious involvement with the local community. He's clearly "kinder-gentler" material. His official HUD bio says he "is a founding member of Business Against Drugs, which is headquartered in Miami."

A clip from the Miami Herald's business section describes the tottering financial state of the bank he took over in 1984 this way: "The bank, on the edge of distressed Liberty City, was in such bad shape, so badly run, that it was operating under a cease-and-desist order from federal regulators." To his considerable credit, the article goes on to report as of March 13 that "the bank has trimmed staff, written off bad assets and is looking to expand after years of retrenchment."

Hill's strategy in restoring health to Miami-based Peoples centered around broadening the base of customers beyond the traditional black community it had served in the past. The newspaper article notes how the success of that strategy changed the identity of the bank away from being a strictly minority bank. The Herald quotes Hill as saying that keeping the narrow customer definition is "how Peoples got into trouble in the first place - not being diversified." He added, "This is a business, and my business is protecting deposits and providing shareholders a return on equity."

Spoken like a true banker. When Mortgage Banking interviewed Hill in Washington, D.C. he showed more of those true banker pinstripes when reflecting on the soundness of the GNMA program and the financial foundation it rests on.

The 50 or so GNMA employees aren't that many more than the 20 (down from the original 45) that worked for Hill at Peoples. But the FHA top job, assuming the Senate confirms the Hill nomination to become FHA commissioner, will represent a quantum leap in terms of staff management responsibilities for Hill. And the FHA commissioner's job has been known to sometimes be in the direct line of fire when the political fur begins to fly in Washington. Whereas, the GNMA helm tends to be quieter turf to occupy.

In any case, Hill had some interesting comments about the health of GNMA during a time when Congress and the administration are busily sizing up one of the newer Washington acronyms - the government sponsored enterprise (GSE). Although, GNMA is technically a GSE - like its brethen Fannie Mae and Freddie Mac - it is more secure than most because both FHA insurance and VA guarantees form a solid foundation underneath the guaranty on every Ginnie Mae security. That is the essential message that Hill underscores. He is, he notes, currently running a relatively strong program in terms of capital reserves.

With cool assurance, he runs through the layers of capital that insulate the GNMA program from risk. "Whatever product that we guarantee should be either guaranteed by VA or insured by FHA. For us to really be at risk, theoretically, FHA's insurance funds have to be totally depleted, because they insure [the mortgage]. If there's no cash in the fund, then we cannot actually look to FHA for coverage on the policy side. So, assume that's not there, then we have, in essence, about $2 billion in reserves in our [GNMA] trust fund. We then have a line established with the government and it's a billion and a half dollars."

Hill summed up the prospects of such a drying up of financial resources for GNMA as "a long hike" before it could actually become a reality. He says the "flags would have to go up" if FHA's insurance funds were seriously in trouble. He cited the example of the testimony of Secretary Kemp before Congress on the issue of the FHA fund's health as an example that the warning system is working at the FHA level. Sitting in the GNMA president's chair he commented, "We'd all have to be in severe trouble for GNMA to be severely affected." When he switches over to the FHA top spot, it will be interesting to see if his heightened sense of the FHA insurance fund as financial backstop for the GNMA program colors his viewpoint of the FHA program.

Hill points out that Coopers & Lybrand, the accounting firm, has been commissioned to do an actuarial study on the guaranty fee to determine if the current fee amount is adequate. The study is expected out sometime in the fall and Coopers has been working on it for about a year, Hill said. The study is also looking into other ways to strengthen the GNMA program, as well as the issuer net worth requirements.

The Bush administration actually proposed higher GNMA guaranty fees in its budget proposal this year, not waiting for the results of the actuarial report. Hill acknowledged this effort by saying "that is an administration item. It is not a GNMA item." He clarified that by administration, he actually meant "OMB. [Office of Management and Budget.]"

Hill said the "administration has suggested an increase of our fee from the standpoint of generating additional revenues for GNMA to cover anticipated losses with regard to no-bids and other such losses as they occur." He neatly delineates political items from pure program management issues. The higher guaranty fee is clearly in Hill's political column - it's also been greeted by a hailstorm of protest from the issuer community in every budget year that it has been floated. Still, Hill carefully explains, "There is a move afoot - as you know - on the part of the administration to up the guaranty fee to fortify against future losses. But that's a political matter. It would have to be played out on the Hill. And the industry, I'm sure, will voice its opinion as to whether or not it's valid."

Hill notes that at this stage of the administration's assessment of GSEs, his agency has not "been under scrutiny" or been looked at "in the same light as the other GSEs."

At the same time that OMB and the administration have been on a extensive fact-finding mission to scope out potential financial exposure from GSEs, GNMA has been using its auditors to gather its own extensive data on the issuer community and to set up a data base on the loans backing its pools. Hill acknowledges that GNMA's auditors are more visible than ever and that their mission is serious. "We're trying to develop more data on our issuer base so that we can predict areas of weakness. I think we were all caught off guard when the Southwest economy went down, and we had issuers that were banks, mortgage bankers and also S&Ls out there who went [down] and it caused a considerable amount of frustration on our part [by] not being able to anticipate that."

Coopers, Hill explains, is helping to set up such a data base. "We are trying to go to loan-level detail on all of the pools possible. That way we can take advantage of technology."

A team from Coopers played an instrumental role in untangling the problems with the $7 billion GNMA servicing portfolio that was seized from The New York Guardian Mortgagee Corp., Hempstead, New York.

Hill says the data base they are now putting together should help avert another episode like Guardian. When asked if he has any assurances that another problem of the same magnitude as Guardian will not reoccur with the new monitoring capabilities, he replied: "Oh, I never have that assurance. I wish I could have it. I just hope it doesn't occur again and particularly on my watch."

He called the Guardian incident "an isolated situation." He said that GNMA has "learned from it - what we learned is that we need to get more information on the issuer community." But he concedes that Guardian provided evidence that GNMA did not have enough ongoing current information about its issuers. He says the goal in building the data base is to "not be caught at a disadvantage again." But he quickly adds that "you always run that risk. You never know it all."

We asked him what they could have spotted using the new data base that might have helped prevent the Guardian problems. Hill said that if GNMA had known that a "substantial part of [Guardian's] portfolio was VA no-bids" and a lot of loans were based in the Southwest where the economy was souring and unemployment was high, it would have helped alert GNMA to the problems. Hill said they now have clear, detailed information on issuer delinquency rates, whereas they did not when Guardian's problems were mushrooming.

Also, Hill noted that the data base will allow GNMA to monitor management practices better. He conceded that management practices are "very difficult to monitor - to be in control of." But he added, "Management did some things that were just not helpful to us." He declined to elaborate saying that there are a "whole host of legal considerations" that remain to be settled in regard to the Guardian case. He said that Guardian's management still has not "given up their rights" in regard to the portfolio.

On another subject, GNMA had been indicating after Congress raised the loan limit for VA home loans, that it might create separate pools for VA loans and FHA loans. We asked if that was still under consideration as a way to isolate the no-bid problem. Hill said, "That was an option that we saw as beneficial to the process. We never exercised it, so it was merely an option." But he added, "The [VA loan] limits have gone up and I think the VA no-bids have been coming in as fast as they have before." He added that "out of the corner of our eyes we're looking at it. We are keeping all of our options open."

On the Drexel Burnham Lambert bankruptcy filing that came close to disrupting the forward commitment market for Ginnie Maes earlier this year, Hill said the incident reaffirmed his faith in the GNMA market and the regulatory processes that govern it. He said the process "was put to the test" and it proved up to the challenge. "The Federal Reserve, I think, played a very meaningful role in that they took charge and sort of took the lead in trying to make sure that there was calm in the marketplace. [Finally,] I think there was real good communication between ourselves and Chemical [Bank] and [between] ourselves and the Federal Reserve, and [between] ourselves and the PTC [Participants Trust Corp.] We didn't talk with Drexel. There was really no need to. But the system worked well when it was put to the test."

Hill said the key to maintaining calm in the investor and issuer markets was good communication among the regulators and the key market dealer, issuer and investor groups. Some of the quick decisions that had to be made, Hill said, related to who would honor the forward commitments for Drexel. Hill said GNMA had to address the "fear on the part of [those with] forward commitments. GNMA also had to "try to referee disputes on the part of issuers and Drexel through Chemical."

Hill said the total dollar amount of Ginnie Maes involved "changed frequently, so it's very difficult to tell at any given point in time what the highest or the lowest dollar volume was. It changed throughout the day. It wasn't beyond the control or the management of all the parties involved, but it changed - ebbed and flowed."

As for his advice for issuers in the wake of the Drexel affair, Hill has a few words. "So, we haven't advised the issuer community to, say, look at a Salomon or a Merrill or any other [investment banker] in any way, other than to learn from Drexel and do what you have to do and protect yourself when you have forward commitments. That is what's important. And you know, who's to know? Could anybody have predicted six months ago or nine months ago that Drexel was just [that close to bankruptcy?] And when you're a small issuer and you're trying to get your product out and you have these commitments, you'd better make sure you know who your partner is on the other side."

This is then a small portrait of the banker who would be the next FHA commissioner.
COPYRIGHT 1990 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:profile of Government National Mortgage Association president, chosen to be next Federal Housing Administration commissioner
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Date:Sep 1, 1990
Previous Article:Development niches in the Nineties.
Next Article:Finding a financial yardstick.

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