[Senate Report 110-227]
[From the U.S. Government Publishing Office]
Calendar No. 481
110th Congress Report
SENATE
1st Session 110-227
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FHA MODERNIZATION ACT OF 2007
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November 13, 2007.--Ordered to be printed
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Mr. Dodd, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany S. 2338]
The Committee on Banking, Housing, and Urban Affairs,
having had under consideration an original bill (S. 2338) to
modernize and update the National Housing Act and enable the
Federal Housing Administration to more effectively reach
underserved borrowers, and for other purposes, having
considered the same, reports favorably thereon and recommends
that the bill do pass.
INTRODUCTION
On September 19, 2007, the Committee on Banking, Housing,
and Urban Affairs considered a Committee Print, entitled the
``FHA Modernization Act of 2007,'' a bill to modernize and
update the Federal Housing Administration program. The
Committee voted 20 to 1 to report the bill.
PURPOSE AND SUMMARY OF THE LEGISLATION
The ``FHA Modernization Act of 2007'' updates the Federal
Housing Administration's single-family insurance program to
enable the program to serve more home buyers and borrowers, and
to serve them more effectively. This reform is particularly
important, as President Bush has said, in light of the current
mortgage crisis that has driven foreclosure rates to historic
levels. The legislation is the result of close consultations of
Committee staff, staff of Committee Members, and the Department
of Housing and Urban Development (HUD).
The Act extends the benefits of FHA insurance to a larger
number of families by raising loan limits and simplifying
downpayment requirements. It also makes FHA insurance more
accessible to people buying or refinancing condominiums and
cooperatives, including manufactured housing condominium and
cooperative developments. The legislation streamlines the FHA
authorizing statute by moving all single-family programs into a
single fund within FHA. The legislation also expands access to
post-purchase homeownership counseling to help people keep
their homes and avoid foreclosure; it also establishes a
demonstration to determine the most effective form of pre-
purchase counseling for first-time home buyers.
While much of the legislation focuses on the single-family
mortgage insurance program set out in Title II of the National
Housing Act, the legislation also modernizes and expands the
Title I program dealing with manufactured housing. It also
removes the current cap on the number of so-called ``reverse
mortgages'' made through the Home Equity Conversion Mortgage
(HECM) program and raises the loan limit for this program to a
single national loan limit. The HECM program has been a
demonstration program; this legislation makes the HECM program
a permanent feature of FHA.
BACKGROUND AND NEED FOR THE LEGISLATION
Prior to the creation of FHA in 1934, homeownership rates
in the United States in the early decades of the 20th century
were about 45 percent and the mortgage market was much
different than the market with which we are familiar today.
Home buyers could only borrow 50 percent of the value of the
home; and they had to fund the other 50 percent through savings
or other means. Banks made exclusively interest-only mortgage
loans for periods of 3 to 5 years, after which the principle of
the loans was due in full. At that point, borrowers would have
to refinance their mortgages on whatever terms were available,
starting the cycle over again. During the Great Depression,
however, as the banking system started failing, lenders were
unwilling or unable to refinance many of the loans that came
due, forcing many homeowners to pay off their loans in full,
which they were simply unable to do. Other borrowers who had
lost their jobs no longer could have qualified for mortgages,
even if funds had been available. As a result, many homeowners
ended up defaulting on their loans and losing their homes to
foreclosure, driving property values and home prices downward.
It was in the midst of this crisis that FHA was created by
the Congress. FHA encouraged the private sector to return to
the mortgage market during this period by offering government-
backed insurance for the full balance of the loan. This same
benefit continues to operate today. While large segments of our
mortgage markets have been struck by a significant contraction,
the FHA-insured market continues to operate smoothly, and, in
fact, attract additional business. When it was first created,
FHA not only got banks lending again, it also standardized
mortgage instruments and underwriting procedures.\1\
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\1\ Albert Monroe, ``How the Federal Housing Administration Affects
Homeownership,'' Harvard University paper, November, 2001.
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FHA fundamentally restructured the mortgage market, turning
it into the market we recognize today. FHA institutionalized a
``revolutionary idea'' \2\--fully amortizing mortgages with 20-
year terms requiring only 20 percent downpayments. Over time,
terms were extended out to the current traditional 30 years,
and downpayments were greatly reduced. These long-term, low
downpayment loans brought homeownership well within the means
of millions of additional American families.
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\2\ Bruce Foote, FHA Loan Insurance Program: An Overview, CRS, July
31, 2007.
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FHA--Current Market Conditions--Traditionally, FHA has
played a major and disproportionately large role in providing
home purchase financing to minority, first-time, and lower-
income home buyers.\3\ However, from 1996 to 2005, the FHA saw
its overall market share drop dramatically, as well as its
share of the minority and low-income markets. The GAO reports
that during that time, FHA's market share fell 13 percentage
points (from 19% to about 6%). At the same time, the subprime
market share grew 13 percentage points (from 2% to 15%). The
prime market share rose slightly (about 5 percentage points)
during this period.
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\3\ GAO, Federal Housing Administration: Decline in the Agency's
Market Share Was Associated with Product and Process Developments in
Other Mortgage Market Participants, June, 2007 (GAO-07-645). In 2005,
53.1 percent of FHA loans went to low-income buyers, and 29.3 percent
went to minorities. Page 42.
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In addition, FHA experienced a ``sharp decrease among
minority and lower-income populations where it traditionally
has had a strong presence.'' \4\ Among minority borrowers, for
example, FHA's share of the market dropped 25 percentage points
(from 32% to 7%) at the same time that the subprime market
share increased by 24 percentage points (from 2% to 26%) among
that population.
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\4\ GAO briefing materials provided to Members' staff, July 13,
2007. Emphasis in the original.
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For lower-income borrowers (defined as less than 80% of
area median income), the story is much the same. FHA share fell
16 percentage points while the subprime share went up 14
percentage points over the same period of time. For both
minority and lower-income borrowers, the prime market share
rose modestly (6 and 7 percentage points respectively).
These data strongly indicate that much of the gain in
subprime market share has been at the expense of FHA. This, in
turn, has raised concerns both at HUD and among members of the
Committee that these borrowers are not getting the most
suitable, lowest-cost loans for which they qualify. Driving
this shift is the fact that the dominant subprime product in
recent years has been the \2/28\ hybrid adjustable rate
mortgage (ARM), which offers a lower initial teaser interest
rate, or an interest-only feature and, in many cases, requires
little or no down-payment. Most of the time, these loans do not
include escrow accounts for taxes or insurance, allowing
mortgage originators to make it appear that the monthly
payments are cheaper than alternatives such as FHA alternatives
that are safer and more affordable in the long-term. As the GAO
report points out, while they appear to be cheaper at first,
``these mortgages became more costly as the interest rates on
many of these loans reset to higher rates, typically 2 to 3
percentage points higher in a relatively short time period.''
\5\
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\5\ GAO-07-645, page 24.
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In addition to offering teaser rates, subprime originators,
who are overwhelmingly mortgage brokers, have provided faster
approval times than FHA. In part, this reflects a problem with
the administration of FHA, and in part, it reflects
questionable and unscrupulous sales practices used by some
mortgage brokers and lenders in the subprime market. In
hearings held on February 7 and March 22, 2007, it was shown
that mortgage brokers often represent themselves as
``mentors,'' \6\ or trusted advisors, to borrowers while
simultaneously claiming to be independent third parties without
a duty to the borrower. Brokers and some loan officers get
additional compensation for steering borrowers to higher cost
loans. This has created incentives for originators to direct
borrowers away from the generally safe and affordable FHA loans
toward more-expensive, higher-rate subprime loans.
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\6\ FAQ section of the official web site of the National
Association of Mortgage Brokers (www.NAMB.org). After the hearing in
which this was pointed out to the President of NAMB, the reference to
``mentors'' was removed.
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An oft-mentioned goal of HUD and members of the Committee
for the FHA modernization legislation is to make FHA a more
viable alternative to the subprime market, especially for those
borrowers who the program has traditionally served because of
the more consumer-friendly terms of FHA loans. Indeed, Home
Mortgage Disclosure Act (HMDA) data show that, while FHA
borrowers have, on average, credit scores that are very similar
to subprime borrowers' scores, and significantly lower than
scores for prime borrowers, FHA borrowers pay interest rates
that are nearly identical to prime borrowers and considerably
lower than rates paid by subprime borrowers. Moreover, two-
thirds of subprime borrowers have prepayment penalties, which
are prohibited for FHA loans. Finally, fewer than 10% of FHA
loans are ARMs, whereas nearly 73% of subprime loans in 2005
were ARMS.\7\
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\7\ GAO-07-645, Appendix III, pages 42-44.
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Overall, FHA delinquency rates have been similar to those
in the subprime market. However, MBA's most recent data
(National Delinquency Survey) shows total past due loans (at
least 30 days) to be higher for subprime loans than for FHA
loans over the past two quarters, though some prior quarters
have had contrary results. Nonetheless, new foreclosure rates
for FHA loans are and have long been sharply lower than those
for subprime loans, in large part because FHA has an effective
loss mitigation program which is particularly good in its use
of tools that help homeowners retain their homes. For example,
the rate of FHA-insured mortgages going into foreclosure in the
second quarter of 2007 was 0.79 percent of the total FHA
portfolio compared to 2.72 percent for subprime loans.
Administrative Improvements--FHA has undertaken a number of
administrative efforts to make its programs easier to use by
originators. For example, FHA introduced the Lender Assistance
Program, which allows higher-performing lenders to endorse FHA
loans without prior review of the paperwork by HUD. Before this
change, instituted in January, 2006, all lenders were required
to send each loan binder to the Department for review, a costly
and very time-consuming process that often resulted in lenders
choosing other alternatives . While not doing up-front reviews,
FHA continues to do post-endorsement audits of the lenders. In
addition, FHA has streamlined its appraisal and closing cost
protocols as well, ``to align them more closely with
conventional standards.'' \8\
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\8\ GAO-07-708, page 13.
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According to lenders and industry groups, these changes
have significantly reduced processing times for FHA loans (by
about 35%), reduced the costs of its FHA business (by about
25%), and shortened the time it takes to close an FHA loan, an
important consideration in a competitive market. In addition,
the Lender Insurance Program has saved FHA more than $2 million
in contracting costs and $70,000 in mailing costs in the first
9 months of the program.\9\
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\9\ GAO-07-708, page 14.
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The Committee expects that these administrative
improvements, taken together with the legislative changes
contained in this Act, will make it more likely that lenders
will, once again, include FHA in the choice of products they
offer to consumers.
Financial Condition--FHA is in a very strong financial
position; it has a record $22 billion in capital, and a capital
ratio of 6.82 percent,\10\ more than 3 times its statutory
minimum of 2 percent. Like the market as a whole, recent FHA
loan performance has not been as strong as expected. According
to the President's FY 2007 budget submission, without certain
reforms, many of which are contained in this legislation, HUD
might be required to raise upfront premiums from 1.50 percent
to 1.66 percent in order to avoid the need to seek appropriated
credit subsidy for the FY 2008 book of business. However, HUD
recently finalized a rule prohibiting the use of seller-
financed downpayment assistance entities in conjunction with
FHA insurance. These programs have been responsible for a
significant and disproportionate amount of FHA single-family
losses. As a result of this new regulation, FHA will be able to
cover its expected losses for its FY 2008 book of business
without any appropriated credit subsidy. It should be pointed
out that the proposed legislation does allow for lower
downpayments, which is an important risk factor. On the other
hand, the independent actuarial review of FHA notes that higher
balance loans perform better. Since this legislation raises the
FHA loan limits, this should mitigate some of the risk created
by allowing lower downpayments. In either case, the Committee
expects the Department to continue to monitor the performance
of the FHA fund very closely.
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\10\ An Actuarial Review of the FHA Mutual Mortgage Insurance Fund
for Fiscal Year 2006, Technical Analytics Center, Inc. This is the
independent actuarial study of the FHA fund.
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SECTION BY SECTION
Title I--Building American Homeownership Act
Section 101--Short title
Establishes the title as the ``Building American
Homeownership Act of 2007.''
Section 102--Maximum principal loan balance
Increases FHA Section 302(b)(2) single-family mortgage loan
limits. Under current law, the maximum insurable mortgage loan
amount for a single-family residence is the lesser of (a) 95
percent of the local median home price, or (b) 87 percent of
the nationwide government-sponsored entity (GSE) conforming
loan limit--except that notwithstanding the local median home
price, there is a national loan floor equal to 48 percent of
the nationwide GSE conforming limit. This section raises the
loan limit to the lesser of: (a) 100 percent of the local
median home price, or (b) the nationwide GSE conforming loan
limit. It also raises the nationwide loan floor from 48 percent
to 65 percent of the GSE conforming limit. In 2007, the
nationwide GSE conforming loan limit is $417,000.
This section also changes the calculation for 2-, 3-, and
4-unit mortgages so that the ratio of loan limits for 2-, 3-,
and 4-unit mortgages to the FHA 1-unit mortgage limit is
conformed to the same ratio used to calculate the GSE limits
for homes with the same number of units. The maximum loan
amount for any particular property would be 100 percent of the
appraised value of the property.
There are numerous markets around the country where home
prices have skyrocketed to the point where FHA has been
effectively eliminated from the market. The Committee expects
that raising the loan limits will make FHA-insured mortgages
available to more people.
Section 103--Cash investment requirement and prohibition of seller-
funded downpayment assistance
Current law includes a complex calculation that generally
allows a 3-percent minimum cash investment or downpayment,
though that amount varies by loan amount and for states with
high closing costs. Mortgage insurance premiums and closing
costs may be financed into the loan. This section simplifies
the calculation to require a minimum 1.5-percent cash
investment of the appraised value of the property for all FHA-
insured loans. As in current law, family members may contribute
to this amount.
Lenders cite the complexities of the calculation of the
minimum investment requirement, commonly known as the
downpayment, as one of the reasons that they do not use FHA
more frequently. This section simplifies that calculation and
reduces it, making it a flat 1.5 percent of the appraised value
of the property. However, the Committee-passed bill does not
allow for a zero downpayment, as requested by the
Administration, although closing costs, FHA premiums, or other
fees may be financed up to 100 percent of the value of the
home. The legislation reflects the views of the members of the
Committee that a borrower should be required to make a real
investment in the purchase of his or her home.
This section also prohibits seller-funded downpayment
entities from providing any of this required cash investment.
Since this legislation was passed by the Committee, HUD has
promulgated a regulation that also prohibits these entities
from providing downpayment assistance funds. Both the HUD
Inspector General and the GAO have found that loans originated
in conjunction with these funds have led to significant losses
for the FHA fund. Moreover, the Internal Revenue Service has
found that these organizations, while calling themselves non-
profit charities, have not always acted in the interest of the
homebuyer. According to the IRS:
Increasingly, the IRS has found that organizations
claiming to be charities are being used to funnel down
payment assistance from sellers to buyers through self-
serving, circular-financing arrangements. In a typical
scheme, there is a direct correlation between the
amount of the down payment assistance provided to the
buyer and the payment received from the seller.
Moreover, the seller pays the organization only if the
sale closes, and the organization usually charges an
additional fee for its services. Such programs have
non-charitable purposes of facilitating real estate
sales for the benefit of sellers and related financing
entities. Thus the organizations do not meet the
requirement of section 501(c)(3) that they be operated
exclusively for charitable purposes.\11\
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\11\ Internal Revenue Service, July 2007.
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Section 104--Mortgage insurance premiums
Currently, the maximum up-front mortgage insurance premium
is 2.25 percent of the insured principal balance of the loan.
This section would allow FHA to charge up to 3.0 percent.
Current law limits the up-front premium to 2.0 percent for
first-time homebuyers who complete approved homeownership
counseling. The Committee bill retains this 25 basis point
discount, thereby lowering the maximum premium for borrowers
who receive counseling to 2.75 percent.
Section 105--Rehabilitation loans
This section deletes obsolete language in existing Section
203(k) rehabilitation loans and moves the program from the
General Insurance Fund to the Mutual Mortgage Insurance Fund
within FHA.
Section 106--Discretionary action
Moves existing language contained in Section 203(s) of the
National Housing Act dealing with notification requirements
about actions taken by the Secretary to suspend or revoke the
approval of a mortgagee to participate in FHA programs to
Section 202 of the National Housing Act, which contains the
basic authority of the Mortgagee Review Board, the Board that
does lender reviews.
Section 107--Insurance of condominiums and manufactured housing
Amends Section 201(a) of the National Housing Act to add a
definition of condominium mortgage to the definition section,
consistent with the intent to insure condominium mortgages
under Section 203 of the Act, and to provide that condominiums
may be in the form of manufactured housing units. Modifies the
definition of real estate to permit manufactured homes to be
financed, even though they are not taxed as real property.
Section 108--Mutual Mortgage Insurance Fund (MMIF)
Clarifies that the MMIF is subject to the provisions of the
Credit Reform Act of 1990. Directs HUD to ensure that the MMIF
remains financially sound. Also requires HUD to provide an
independent actuarial report to Congress annually on the
financial status of the Fund, and requires HUD to submit a
quarterly report on the financial status and soundness of the
Fund. Grants HUD the authority to change underwriting standards
or premiums if the Fund is at risk.
Makes insured mortgages that are used in conjunction with
the Homeownership Voucher program the obligation of the MMIF,
and makes reverse mortgages under Section 255 of the National
Housing Act obligations of the MMIF.
Section 109--Hawaiian Home Lands and Indian Reservations
Makes single-family mortgages insured on Hawaiian Home
Lands under Section 247 of the National Housing Act and single-
family mortgages insured on Indian Reservations under section
248 of the Act obligations of the MMIF.
Section 110--Conforming and technical amendments
Repeals certain obsolete or little-used programs, and makes
other technical and conforming amendments.
Section 111--Insurance of mortgage
Allows FHA insurance to be used more effectively in
cooperatives.
Section 112--Home Equity Conversion Mortgages (HECMs)
Eliminates the current cap on the number of HECMs FHA may
insure. Provides for a uniform nationwide mortgage loan limit
on FHA reverse mortgage loans equal to the GSE conforming loan
limit. Limits the origination fee on such mortgages to 1.5
percent (down from the current 2 percent) subject to a minimum
allowable amount. Permits FHA reverse mortgage loans to be used
in cooperatives, and authorizes reverse mortgages to be taken
out on newly purchased homes as long as the home is the primary
residence of the mortgagor. Gives the FHA Commissioner the
authority to increase or lower the fee cap, depending on market
conditions.
The HECM program was originally authorized in 1987 as a
demonstration program, with a cap on the total number of such
mortgages FHA would be allowed to insure. The cap has been
raised a number of times since then. In recent years, the
program has grown faster as more elderly households have turned
to HECMs as a safe and effective way to tap their home equity
without incurring monthly payments and without risking default
or foreclosure. As a result, FHA has reached the program cap
numerous times, resulting in either the program being shut down
or requiring Congress to act quickly to raise the cap. The
Committee believes that the HECM program has proved to be a
success, so this legislation eliminates the cap.
As noted, the Committee also establishes a single national
loan limit for HECMs. This limit will allow seniors to safely
withdraw more equity from their homes. The Committee chose to
tie this new higher limit to a provision lowering origination
fees. Without the lower fee, many seniors would have to pay
higher origination fees for loans of the same size because the
fee is calculated on the basis of the maximum allowable loan
rather than on the actual size of the loan. The Committee
believes that the lower origination fee will make HECMs more
accessible to a wider range of seniors. However, the
legislation also gives the Secretary of HUD considerable
authority to raise this fee if he or she believes it is
constraining the willingness of lenders to participate in the
reverse mortgage market on the one hand, or lower the fee if he
or she concludes that additional savings for consumers would be
forthcoming without restricting credit on the other hand.
The Committee expects that removing the cap and
establishing a new, higher, and uniform loan limit will
encourage new competitors to enter the reverse mortgage market,
as both the National Association of Reverse Mortgage Lenders
(NRMLAs) and AARP contend. Such increased competition should
help further to control fees.
Section 113--Energy efficient mortgages
Current law includes an energy efficient mortgages pilot
program. This section raises the cap on the value of the energy
efficiency improvements from a maximum of 5 percent of the
value of the property up to $8,000, to the greater of 5 percent
of the single-family loan limit established under Section
203(b)(2)(A) or 2 percent of the limit established under
Section203(b)(2)(B). The pilot is also capped at no more than 5
percent of the number of loans originated under the single-family
program in the preceding year.
The Committee recognizes that residential structures
contribute significantly to greenhouse gases. The Committee
hopes that this program will help encourage the use of FHA to
finance energy-efficient homes and energy efficiency
improvements. The Committee urges HUD to look at other ways to
achieve this goal by encouraging the broader housing finance
market to take into account energy savings generated by energy-
efficient design, materials, appliances, and the like, as well
locations of homes to public transportation, when calculating
what a potential home buyer may be able to afford for a home.
Section 114--Pilot program for automated process for borrowers without
sufficient credit history
This section requires HUD to carry out a pilot program to
establish an automated process for providing alternative credit
rating information for borrowers who have insufficient credit
histories for determining their creditworthiness. Under this
section, HUD is limited to insuring no more than 5 percent of
the aggregate number of FHA-insured mortgages in the preceding
year originated with this alternative scoring process. The
section requires the GAO to study the impact of the pilot,
which sunsets 5 years after the bill's enactment.
It is widely acknowledged that certain borrowers with
``thin'' credit files have lower credit scores and may pay more
for mortgages and other credit than a more accurate analysis of
their risk would require. Some experts point to the fact that
these borrowers may have a strong history of on-time payments
for items that are often not included in certain credit scores,
such as rent and utilities. The Committee believes that using
FHA to test a number of different methods for measuring this
risk more accurately, under controlled circumstances, is a
worthwhile goal for a government-run program. The Committee
hopes that this pilot program will develop a system that can be
more widely used, both by FHA and other lenders.
Section 115--Homeownership preservation
Requires the Secretary of HUD and FHA Commissioner, in
consultation with the industry and other experienced parties,
to develop and implement a plan to improve FHA's loss
mitigation process. FHA's loss mitigation program is already an
effective tool for preventing foreclosures. However, data from
HUD show that there is still a significant number of FHA
borrowers who are never contacted, never offered the
opportunity to engage in loss mitigation, or who run into other
problems and end up in foreclosure. The Committee expects HUD
to work with industry groups and consumer and community groups,
many of which are successfully partnering with servicers today
to work with delinquent borrowers, in an effort to help people
save their homes, to cut down on the number of FHA borrowers
who go through foreclosure or are required to give up their
homes through short sales and the like.
Specifically, the Committee expects the Department to work
with these groups to make earlier contact with delinquent
borrowers by third parties with foreclosure prevention
counseling experience easier and more routine. In addition, the
Committee expects the Department to explore how counseling
groups may be able to be paid on a fee-for-service basis,
possibly from the FHA fund, to help ensure the development and
retention of skilled counselors. Finally, the Committee urges
the Department to require servicers to provide counselors and
the public with a dedicated telephone number for loss
mitigation experts, so that they can reach the appropriate
servicing staff as quickly and easily as possible. The
Committee believes that all these steps will help improve home
retention numbers for delinquent FHA borrowers, and decrease
the losses experienced by the Fund.
Section 116--Use of FHA savings for improvements in FHA technologies,
procedures, processes, program performance, staffing, and
salaries
Authorizes $25 million from any negative subsidy generated
by the FHA title II program to be appropriated to modernize the
technology, staffing, and other processes of FHA. Prior to such
an appropriation, the Secretary of HUD must certify that the
FHA Mutual Mortgage Insurance Fund (MMI Fund) met its required
capital ratio, and that other FHA insurance funds are in a safe
and sound condition.
Section 117--Post-purchase housing counseling eligibility improvements
Expands the eligibility for post-purchase housing
counseling by a HUD-approved housing counseling entity to
families that suffer significant drops in income, or
significant increases in basic living expenses due to medical
expenses, divorce, and other factors. The Committee expects
that this provision will make many more families experiencing
hardships eligible for counseling that may help them save their
homes.
Section 118--Pre-purchase homeownership counseling demonstration
Creates a new, pre-purchase homeownership Counseling
Demonstration designed to test, in a scientifically valid way,
the effectiveness of a variety of types of pre-purchase
counseling for first time homebuyers with low downpayments. The
Committee believes that such a demonstration will be useful in
identifying what types of pre-purchase counseling are most
effective in helping lower downpayment borrowers prepare for
and achieve sustainable homeownership. The Committee expects
HUD to work with Congress to determine how best to implement
this section.
Section 119--Fraud prevention
Ensures that any fraudulent activity against FHA is
punished in an equivalent way to fraud against other federal
entities, or federally-insured or chartered financial entities.
Section 120--Limitation on mortgage insurance premium increases
Prohibits HUD from increasing premiums for the FHA
multifamily insurance program above the FY2006 premiums except
to cover increases in expected losses. This prohibition stays
in effect until October 1, 2009.
Section 121--Savings provision
Provides that any mortgage insured before the bill's date
of enactment shall continue to be governed by laws,
regulations, orders, and terms and conditions that existed
prior to the bill's enactment.
Section 122--Implementation
Requires HUD to establish by notice any additional
requirements necessary to carry out the provisions of this
bill, which shall take immediate effect.
Title II--Manufactured Housing Loan Modernization
Section 201--Short title
Establishes the title as the ``FHA Manufactured Housing
Loan Modernization Act of 2007.''
Section 202--Purposes
Contains the findings and purposes, including that
manufactured housing is an important source of homeownership
and that the current FHA title I program structure has
inhibited its use and should be reformed.
The Committee expects that the FHA title I manufactured
housing program will be an effective tool in helping more
people to afford homeownership. This title is intended to help
achieve that result by making the program operate more like the
traditional FHA single family mortgage insurance program, while
taking into account the differences in the ownership structure
of the housing.
Section 203--Exception to limitation on financial institution portfolio
Changes from a lender portfolio system to a loan-by-loan
insurance system, as in Title II. Retains the 10% lender co-
insurance.
Section 204--Insurance benefits
Requires FHA to pay claims on a loan-by-loan basis, absent
fraud or misrepresentation.
Section 205--Maximum loan limits
Increases the Title I program loan limits, which have not
been adjusted since 1992. The limit for the manufactured
housing repair program increases from $17,500 to $25,090. The
limit for the home-only program, the primary Title I program,
increases from $48,600 to $69,678. The limit for the land and
home program increases from $64,800 to $92,904. The limit for
the lot-only program increases from $16,200 to $23,226.
Provides for inflation adjustments based on an index to be
established by the Secretary based on manufactured housing
price data.
Section 206--Insurance premiums
Increases the maximum upfront premium from 1% to 2.25%.
Sets the maximum annual premium at 1% rather than a sliding
scale based on loan term. Requires that FHA charge sufficient
premiums such that the Title I program maintains a negative
credit subsidy.
Section 207--Technical corrections
Technical corrections, including authority for the
Secretary to dispose of property.
Section 208--Revision of underwriting criteria
Requires that within 6 months of enactment, HUD reform the
Title I loan underwriting standards to ensure that the program
is financially sound.
Section 209--Prohibition against kickbacks and unearned fees
This section applies certain provisions of the Real Estate
Settlement Procedures Act (RESPA) to the purchase of
manufactured homes financed with FHA-insured loans. The section
also gives the Secretary of HUD broad authority to determine
how to reasonably apply this section, and to make exemptions as
necessary. Finally, the section gives the Secretary the
authority to prohibit unfair or deceptive practices in
connection with the purchase of manufactured homes with a loan
insured under this title.
The Committee is concerned that, while this title will
expand the availability of FHA-insured manufactured housing
financing, there have been many abuses over the years in the
financing of manufactured housing. The Committee expects the
Secretary to ensure that RESPA rules against kickbacks and
fees, gifts, or other benefits paid or given for the referral
of business are strictly enforced when FHA is used to finance
the purchase of manufactured homes. The Committee also expects
the Secretary to exercise his authority under this section to
ensure that consumers are treated fairly.
Section 210--Leasehold requirements
This section requires that manufactured homes that are
financed with FHA insurance be placed in manufactured home
communities only if that community provides a lease with a
minimum term of 3 years that is renewable for successive 1 year
terms. In addition, the section requires that the lessee of the
home be provided with a notice of at least 180 days prior to
the closing of the manufactured home community.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
FHA Modernization Act of 2007
Summary: This legislation would amend the National Housing
Act to provide the Federal Housing Administration (FHA) with
new authorities aimed at expanding FHA's share of the market
for mortgage insurance. This legislation also would permanently
remove the statutory limitation on the number of reverse
mortgages that FHA can insure and would make other changes to
the Home Equity Conversion Mortgage (HECM) program. In
addition, this legislation would authorize the appropriation of
funds to support various improvements to FHA's administrative
functions and would modify FHA's loan guarantee program for
manufactured housing.
CBO estimates that implementing this legislation would
result in a net cost of $22 million in 2008 and a net increase
in offsetting collections (a credit against discretionary
spending) of $1.6 billion over the 2008-2012 period, assuming
that appropriation laws necessary to implement the FHA programs
and the Mortgage-Backed Securities (MBS) program of the
Government National Mortgage Association (GNMA) are enacted.
Enacting this legislation could affect direct spending and
revenues because the bill would impose criminal penalties for
certain fraudulent acts committed against FHA. Criminal fines
are recorded as revenues, then deposited in the Crime Victims
Fund, and later spent (as direct spending). CBO estimates that
any increase in criminal penalties would not be significant.
The legislation contains no intergovernmental or private-
sector mandates as defined in the Unfunded Mandates Reform Act
(UMRA) and would impost no costs on state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of the bill is shown in the following table.
The cost of this legislation falls within budget function 370
(mortgage and housing credit). For this estimate, CBO assumes
that this legislation will be enacted near the start of fiscal
year 2008, that the amounts necessary to implement the bill
will be appropriated for each year, and that appropriation laws
necessary to implement the FHA and GNMA programs will be
enacted each year.
Basis of estimate: CBO estimates that implementing this
legislation would result in a net increase in offsetting
collections of $1.6 billion over the 2008-2012 period, assuming
enactment of appropriation laws necessary to implement the FHA
and GNMA programs. Those estimated offsetting collections would
mostly stem from the authority in the legislation to expand
FHA's HECM loan program. Other offsetting collections for GNMA
would result from the change to the loan limits for FHA's
single-family program. Additional discretionary costs
associated with limiting a planned increase in mortgage
insurance fees and authorizing the appropriation of funds to
support various improvements to FHA's administrative functions
would increase costs subject to appropriation.
CBO expects that other provisions of the bill would have no
significant budgetary impact over the next five years. The
major provisions of the bill are discussed below.
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
--------------------------------------------
2008 2009 2010 2011 2012
----------------------------------------------------------------------------------------------------------------
SPENDING SUBJECT TO APPROPRIATION
Net FHA and GNMA Spending Under Current Law: \1\
Estimated Authorization Level.......................... -913 -425 -425 -425 -425
Estimated Outlays...................................... -913 -425 -425 -425 -425
Proposed Changes:
Amendments to HECM Loan Program:
Estimated Authorization Level.............................. -10 -385 -410 -445 -480
Estimated Outlays.......................................... -10 -385 -410 -445 -480
Additional GNMA Offsetting Collections:
HECM Provisions:
Estimated Authorization Level.............................. * -6 -6 -10 -15
Estimated Outlays.......................................... * -6 -6 -10 -15
Raising Loan Limit for the Single-Family Program:
Estimated Authorization Level.......................... -7 -8 -9 -10 -11
Estimated Outlays...................................... -7 -8 -9 -10 -11
Limit on Premium Increases for Mortgage Insurance:
Estimated Authorization Level.............................. 20 43 0 0 0
Estimated Outlays.......................................... 20 43 0 0 0
Improving FHA Administrative Functions:
Estimated Authorization Level.............................. 25 25 25 25 25
Estimated Outlays.......................................... 19 25 25 25 25
Amendments to Manufactured Housing Loan Guarantee Program:
Estimated Authorization Level.............................. 0 * * * *
Estimated Outlays.......................................... 0 * * * *
Total Changes:
Estimated Authorization Level.......................... 28 -331 -400 -440 -481
Estimated Outlays...................................... 22 -331 -400 -440 -481
Net FHA and GNMA Spending Under Legislation:
Estimated Authorization Level.................................. -885 -756 -825 -865 -906
Estimated Outlays.............................................. -891 -756 -825 -865 -906
----------------------------------------------------------------------------------------------------------------
\1\ The figures for 2008 are CBO's current estimates of budget authority and outlays for FHA's multifamily
programs, the HECM program, and GNMA's MBS program under Public Law 110-92. CBO annualizes the budget
authority provided under continuing resolutions. The 2009-2012 amounts are CBO's baseline estimates of the net
offsetting collections that would be generated by those programs, assuming that appropriation laws necessary
to implement FHA and GNMA programs are enacted. Also included in the figure for 2008 is the estimated portion
of the total credit subsidy appropriated for that year (i.e., $1 million) that will be used by FHA for the
manufactured housing loan guarantee program.
Note.--GNMA = Government National Mortgage Association; HECM = Home Equity Conversion Mortgage; MBS = Mortgage-
Backed Securities; FHA = Federal Housing Administration; * = costs or savings of less than $500,000.
Amendments to the HECM loan insurance program
HECM loans are considered to be ``reverse mortgages''
because they enable homeowners who are at least 62 years of age
to withdraw some of the equity in their homes in the form of
monthly payments, in a lump sum, or through a line of credit.
Loan size is tied to loan limits that vary by geographic
region, and such loans cannot be used to purchase another home.
In addition, the origination fee charged by lenders is
calculated as a percentage of the home's value.
FHA is permitted to guarantee up to a cumulative total of
275,000 loans; that number of loans was reached during 2007.
The current continuing resolution (Public Law 110-92)
eliminates the limit on the number of HECM loans FHA can insure
through November 16, 2007. Consistent with CBO's standard
convention of extrapolating a continuing resolution through the
remainder of the fiscal year, this estimate is based on the
assumption that there will be no limit on the number of HECM
loans guaranteed in fiscal year 2008. In the absence of this
bill, CBO assumes that the HECM program will be inactive
beginning in 2009.
Enacting this legislation would permanently remove the
statutory limitation on the number of loans that could be
guaranteed, set a single nationwide limit on the dollar amount
of a HECM loan that would be tied to the conforming loan
amount, limit the origination fee to 1.5 percent of the home's
value (subject to a minimum allowable amount), and allow
borrowers to use HECM loans to purchase a new home. (Conforming
loans have terms and conditions that follow the guidelines set
forth by the government-sponsored enterprises (GSEs); the
conforming loan amount is currently $417,000.)
Implementation of the HECM program, like all of FHA's
mortgage insurance programs, is contingent on the enactment of
appropriation laws that provide annual loan commitment
authority. Thus, the estimated budgetary impact of this bill is
considered to be discretionary, and it is tied to the demand
for HECM loans and the estimated subsidy cost of the loan
guarantees. Because, under credit reform procedures, guarantees
of HECM loans are estimated to have negative subsidies (that
is, they earn money for the government), CBO estimates that
implementing those amendments would increase offsetting
collections by about $1.7 billion over the 2008-2012 period.
Demand for HECM Loans. According to the National Reverse
Mortgage Lenders Association (NRMLA) and other industry
experts, the HECM program has risen in popularity in recent
years. As more consumers are becoming aware of the product,
more households are becoming eligible for the program
(currently over 17 million households have owners who are age
65 or older, according to census data), and more seniors view
the product as an alternative approach to financing home-
improvement projects, medical costs, and other needs. In
addition, sources in the mortgage industry have observed an
increasing demand among seniors for new housing within senior
communities. The number of HECM loans insured by FHA quadrupled
from 2003 to 2006 (18,000 loans were insured in 2003, compared
with 76,000 loans in 2006). Furthermore, based on the number of
HECM loans insured as of mid-September 2007, that volume could
reach 105,000 after final loan volume for 2007 is tallied by
FHA.
Based on information from FHA, NRMLA, and other industry
experts, CBO estimates that setting a single nationwide loan
limit and permitting borrowers to use HECM loans to purchase a
new home would result in a product that would be more
attractive to borrowers and more easily marketed by lenders,
resulting in some increased demand for HECM loans. On the other
hand, the limit on the origination fee could result in a
program that is less profitable for certain lenders, causing
some to end or limit their participation in the program. A
lower origination fee, however, could increase the program's
attractiveness to some borrowers, assuming lenders do not
increase interest rates significantly to compensate for lower
origination fees. CBO anticipates that the bill would result in
a higher volume of HECM loans than would occur under the
provisions of the continuing resolution, thus increasing
offsetting collections by $10 million in 2008.
Currently, the market for FHA's HECM loans appears to be
very robust, and under this bill, FHA would probably insure
more than 110,000 loans annually beginning in 2009. Also,
GNMA's recent decision to begin securitizing HECM loans could
result in increased activity by lenders, as investors in the
secondary mortgage market begin to invest in mortgage-backed
securities that include this product. Whether the number of
guarantees could exceed 110,000 loans on a continuing basis
each year would depend on FHA's ability to administer and
manage the program in an efficient manner and on the market's
response to this bill. Based on information from FHA, CBO
estimates that the agency could insure about 112,000 loans
(with a face value of about $28 billion) in 2009. In subsequent
years, we estimate that demand would increase at the estimated
rates of appreciation in housing prices--about 2 percent to 4
percent a year.
Subsidy Cost. Under current law, FHA guarantees of HECM
loans are estimated to result in net offsetting collections to
the federal government because guarantee fees for those
mortgages are currently estimated to more than offset the costs
of expected defaults. For 2008, the Department of Housing and
Urban Development's (HUD's) subsidy estimate for HECM loan
guarantees is -1.9 percent. Under the expanded program
authorized by this legislation, CBO estimates that the subsidy
rate for the HECM loans would be -1.35 percent. This reduction
from the estimated rate for 2008 is due to the increased risk
FHA would experience under the proposed nationwide loan
limitation. With larger loan sizes, the ``equity cushion''
(that is the difference between the home's value and the
potential cost of a claim payment) would decrease, leading to
potentially more costly claims for FHA. CBO estimates that
implementing this legislation would result in additional
offsetting collectionsof $1.7 billion over the 2008-2012
period, contingent on enactment of appropriation bills that would
establish the authority to make HECM loan guarantees by specifying
annual loan commitment levels.
Additional GNMA offsetting collections from HECM provisions
GNMA is responsible for guaranteeing securities backed by
pools of mortgages that are insured by the federal government.
In exchange for a fee charged to lenders or issuers of the
securities, GNMA guarantees the timely payments of scheduled
principal and interest due on the pooled mortgages that back
those securities. Because, under credit reform procedures, the
value of the fees collected by GNMA is estimated to exceed the
cost of loan defaults in each year, the Administration
estimates that the GNMA MBS program will have a subsidy rate of
-0.21 percent in 2008, resulting in the net collection of
receipts to the federal government.
Currently GNMA does not securitize HECM loans; according to
GNMA, however, securitization of those loans will begin
sometime 2008. CBO estimates that in 2008 about 5 percent of
the HECM loans will be included in GNMA's MBS program. (Only a
small portion of this 5 percent would stem from the changes
made to the HECM program in 2008 under this legislation.) We
estimate that in subsequent years, 10 percent to 20 percent of
the HECM loans would be securitized by GNMA. Thus, CBO
estimates that the changes to the HECM loan program in this
bill would result in additional offsetting collections to GNMA,
totaling about $37 million over the 2008-2012 period, assuming
appropriation action to establish a dollar limitation for the
GNMA securities program.
Raising loan limits for the single-family program
Section 102 would raise FHA's loan limit--the dollar amount
of a mortgage that FHA can insure--for its single-family
program from 87 percent of the conforming loan amount to 100
percent of the conforming loan limit in certain geographic
regions where the cost of housing is very high. Effectively,
this would be a change from insuring loans of $362,790 today to
insuring loans of up to $417,000 in certain parts of the
country. In less expensive markets, the limit would be raised
from 48 percent to 65 percent of the conforming loan limit, or
an increase in the ceiling from $200,160 to $271,050 under the
bill.
CBO estimates that implementing this provision would
increase loan volume by about 8 percent a year--about $4
billion annually in additional loan guarantees--over the next
five years. This increase would stem mostly from increasing the
limit in the less expensive housing markets. Despite this
estimated increase in loan volume, CBO estimates that no
additional offsetting collections would be realized because we
expect the subsidy rate for the single-family program to be
zero over the next five years. However, because most FRA
single-family loan guarantees are included in GNMA's MBS
program, CBO estimates that raising the loan limit would result
in additional offsetting collections to GNMA of about $45
million over the 2008-2012 period. (Because GNMA requires
appropriation action to establish its dollar limitation for the
securities program, those savings would be offsets to
discretionary spending.)
Limit on premium increases for mortgage insurance
Currently, FHA has the authority to adjust fees for its
mortgage insurance programs through administrative action.
Section 120 would prohibit FHA from increasing fees through
2009 unless the increase is required to maintain the estimated
credit subsidy for the program at zero, but not less than zero.
Based on information from the Administration, CBO expects that
annual fees for new loan guarantees for the apartment
development and refinance programs will increase by about 16
basis points beginning in early 2008. The weighted average
subsidy rate for those programs is currently about -2 percent.
CBO estimates that those fee increases would affect about $2.6
billion in loan guarantees in 2008 and more than $3 billion in
loan guarantees annually in subsequent years. Furthermore, we
estimate that those fee increases would increase offsetting
collections for this program by $63 million over the 2008-2009
period. Thus, prohibiting those fee increases would result in a
loss--relative to the current-law baseline--of $63 million in
discretionary offsetting collections over the 2008-2009 period.
Improving FHA's administrative functions
Section 116 would authorize the appropriation of $25
million annually over the 2008-2012 period. Such funding would
be used to improve FHA's technologies, processes, and overall
program performance associated with the execution of its
mortgage insurance programs. CBO estimates that implementing
this section would cost $119 million over the 2008-2012 period.
Those funds would not be authorized to be appropriated each
year unless HUD, by rule, determines that FHA premiums being
charged that year are sufficient to comply with the Mutual
Mortgage Insurance Fund's (MMIF's) capital ratio requirement
and are also sufficient to ensure the safety and soundness of
other FHA mortgage insurance funds.
In addition, section 118 would require HUD to establish a
three-year demonstration program to test the effectiveness of
various forms of pre-purchasing financial counseling. HUD
already provides several types of housing counseling services,
and CBO expects that implementing the pilot program would
result in no significant additional costs to the
federalgovernment. However, this section also would allow (but not
require) HUD to reduce mortgage insurance premiums for certain
borrowers who agree to participate in a counseling program. Such fee
reductions could increase the subsidy rate for the affected loan
guarantees. (The Federal Credit Reform Act of 1990 requires the
appropriation of funds to cover subsidy costs of loan guarantees.) The
cost of this provision would depend on the degree of any fee reduction
provided and other risk factors associated with those borrowers, which
have not been determined by FHA. CBO estimates that such costs would
probably not be significant, given that only 3,000 borrowers could
participate in the demonstration program.
Amendments to the Manufactured Housing Insurance program
Guarantees of manufactured housing loans fall under title I
of the National Housing Act. Under that act, FHA has authority
to insure home improvement loans. The volume of manufactured
housing loans guaranteed by FHA has fallen from 30,000 per year
in the 1990s to fewer than 2,000 loans per year in recent
years. Furthermore, in the late 1990s GNMA experienced
significant losses from its securitization of those
manufactured housing loans. As a result of those losses, GNMA
imposed a moratorium on new issues of securities for those
loans.
Moreover, financing options for manufactured housing are
very limited. Currently, only two private lenders participate
in the FHA program, and because no private secondary market
exists, most private lenders and insurers have no incentive to
make loans or loan guarantees for manufactured housing. Despite
the fact that there are relatively few financing options
available for manufactured housing, there are about 11 million
manufactured homes in the United States (mostly in rural
areas), according to the Manufactured Housing Institute (MHI).
Most of those manufactured houses are financed through personal
loans. Title II of this legislation would make several
amendments designed to increase demand for FHA's manufactured
housing loan program.
Proposed Changes. Under current law, FHA limits its
exposure to losses from manufactured housing loan guarantees by
capping the lender's insurance coverage at 10 percent of the
value of the lender's portfolio for the title I program. That
is, FHA pays only lender claims that total no more than 10
percent of the value of the lender's loan portfolio for the
title I loans. As a result, the amount of insurance that FHA
provides for each loan varies. Enacting this legislation would
eliminate this insurance structure for loans associated with
manufactured homes and would direct FHA to insure 90 percent of
each individual loan. That change would significantly expand
the government's liability under the program.
Title II of this legislation also would raise the loan
limit for insuring a manufactured home by about 40 percent and
would require that the limit be indexed for inflation on an
annual basis. According to FHA, the average cost of a
manufactured home is about $60,000. Current law limits FHA to
guaranteeing the purchase of manufactured homes to $48,000;
under the legislation, this limit would increase to $69,678
after the program changes are implemented in 2009.
Currently, borrowers are charged a 1 percent up-front fee
for a manufactured home loan guarantee. Because the fees
collected are not expected to exceed the cost of defaults, FHA
estimates that the manufactured housing loan guarantee program
has a subsidy rate of about 1 percent. Enacting this
legislation would require FHA to assess higher premiums to
offset the cost of expected defaults to yield an estimated
negative credit subsidy rate for the program. Based on
information from FHA, CBO expects that FHA would set the up-
front premium for borrowers at about 2.25 percent and the
annual premium at 1 percent. CBO expects that those fees would
be sufficient to make the program's estimated subsidy rate
close to zero, assuming that the pattern of future default
rates in this program is similar to recent history--about 9.5
percent. Because there is essentially no private market for
manufactured housing loan guarantees to compare to the federal
program, it is uncertain whether those higher fees would result
in a program with no net cost. On balance, CBO estimates that
implementing the manufactured housing provisions would result
in net costs or savings of less than $500,000 a year beginning
in fiscal year 2009.
Cost of Program. Based on information from FHA and MHI, CBO
estimates that it would take about one year to implement the
changes proposed under the bill. Furthermore, CBO anticipates
that significant outreach by FHA would be needed to identify
and educate prospective borrowers and lenders about the
manufactured housing program reforms. Thus, CBO estimates that
the number of loans insured under the program would begin to
grow by about 5 percent annually beginning in 2009. Assuming
this gradual increase in demand and an estimated subsidy rate
for 2009 and subsequent years that is near zero, CBO estimates
that implementing this legislation would result in a net cost
or savings of less than $500,000 a year over the 2009-2012
period.
GNMA Savings. According to GNMA, the agency would consider
securitizing additional manufactured housing loans following an
evaluation of the program after the proposed changes are
implemented and to the extent FHA has begun to guarantee a
significant number of loans, most likely with a face value
close to at least $1 billion. Because CBO estimates that it
would take FHA many years to increase its business volume to
that level, we estimate that the manufactured housing
provisions would not generate any additional offsetting
collections associated with GNMA's MBS program over the next
five years.
Fees and downpayment requirements
Currently, FHA's single-family loan guarantee program has a
flat premium structure under which all borrowers pay the same
up-front and annual fees, regardless of the borrower's
individual risk of default. Based on information from FHA, CBO
expects that, in 2008, the up-front fee will increase from 1.5
percent to 1.66 percent and the annual fee will rise from 0.5
percent to 0.55 percent. (The maximum fees allowable under
current law are 2.25 percent for the up-front fee and 0.55
percent for the annual fee.) HUD estimates that those fee
increases will result in a subsidy rate of zero for the single-
family program for 2008.
Under this legislation, FHA would have the authority to
raise the up-front premium to 3 percent and to offer guarantees
for loans with downpayments as low as 1.5 percent of the
principal loan amount. Because the subsidy rate for 2008 is
estimated to be zero under current law, CBO expects that FHA,
with these new authorities, would continue to charge fees under
this bill that would produce a similar result.
Intergovernmental and private-sector impact: The
legislation contains no intergovernmental or private-sector
mandates as defined in UMRA and would impose no costs on state,
local, or tribal governments.
Previous CBO estimates: On June 1, 2007, CBO transmitted a
cost estimate for H.R. 2139, the FHA Manufactured Housing Loan
Modernization Act of 2007, as ordered reported by the House
Committee on Financial Services on May 23, 2007. H.R. 2139 and
title II of this legislation would make the same changes to the
manufactured housing insurance program; thus, the costs
associated with this program are identical in the two
estimates.
On June 11, CBO transmitted a cost estimate for H.R. 1852,
the Expanding American Homeownership Act of 2007, as ordered
reported by the House Committee on Financial Services on May 3,
2007. Both H.R. 1852 and this legislation contain nearly
identical provisions affecting the HECM program, the loan
limits for FHA's single-family program, and FHA's
administrative functions. The costs associated with those
provisions are estimated to be the same for the two bills
beginning in 2009. In addition, both bills include provisions
limiting fee increases for certain FHA loan guarantees, though
the provision in H.R. 1852 would make the limitation permanent
while the provision in this legislation would extend the
limitation only through 2009. This difference is reflected in
the cost estimates.
Other differences exist between the two bills, and those
differences are also reflected in the cost estimates.
On September 12, 2007, CBO transmitted a cost estimate for
H.R. 2895, the National Affordable Housing Trust Fund, as
ordered reported by the House Committee on Financial Services
on July 31, 2007. Similar to H.R. 1852, H.R. 2895 includes a
provision to permanently limit fee increases for certain FHA
loan guarantees.
Estimate prepared by: Federal Costs: Susanne S. Mehlman;
Impact on State, Local, and Tribal Governments: Elizabeth Cove;
Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Assistant Director
for Budget Analysis.
ADDITIONAL VIEWS OF SENATORS SHELBY, ALLARD, DOLE, CRAPO, SUNUNU, ENZI,
BENNETT AND BUNNING
The FHA only insures the lender's credit loss, not the
borrower's ability to remain in their home. Therefore, efforts
to extend the scope of the FHA should balance providing
additional opportunities for home ownership with the risk of
loss to the American taxpayer.
One of the precursors to increasing defaults in the
subprime market was the introduction of subprime mortgage
products requiring little, or even no, equity on the part of
the borrower. The recent pattern of delinquencies and defaults
in the subprime market clearly illustrates that those borrowers
with little or no equity in their home will be the most likely
to find themselves in a serious financial predicament. The
FHA's own reporting states, ``* * * a borrower's equity
position in the mortgaged house is one of the most important
drivers of default behavior. The larger the equity position a
borrower has, the greater the incentive to avoid default on the
loan.'' (FHA MMI Fund Analysis FY2006). With declining home
prices predicted by almost all economic forecasters, borrowers
starting with little or no equity today could quickly discover
that their home is worth less than they owe. Consequently, a
family's greatest asset could become its greatest liability in
very short order. Because equity gives borrowers a stake in
their home and a cushion against falling home values, this
Committee rightly rejected calls to allow FHA to insure zero-
down payment loans. It chose, instead, to require FHA borrowers
to continue to provide a down payment of at least 1.5%. We
believe this is the absolute minimum that should be required
especially in light of continuing distress in the residential
real estate market. Therefore, we urge the Secretary to monitor
closely market conditions and consider seriously requiring
higher down payments when appropriate.
Although this bill reduces the minimum down payment to
1.5%, it does retain current law which directs the HUD
Secretary to require borrowers with a loan to value in excess
of 97 percent to complete a counseling program. The Secretary
does have the authority to waive the counseling requirement.
For approximately fifteen years, however, the Secretary has
done neither. Such inaction fails to meet both the legislative
mandate of the National Housing Act and the minimum
requirements of the Administrative Procedures Act. The HUD
Secretary should comply with the law and require all new
borrowers with less than 3 percent equity in their homes to
complete a counseling program. Doing so would help borrowers
enter home ownership in a more informed and responsible manner.
The reported bill also directs HUD to improve its loss
mitigation procedures. The purpose of loss mitigation is not
simply to allow a defaulted borrower to stay in their home, but
to also make the mortgage sustainable. HUD's Inspector General
(IG) has reported several failings with the FHA's current loss
mitigation procedures. For instance, the FHA has pushed
servicers to approve borrowers for loss mitigation even when a
workout is unlikely to succeed. According to HUD's IG, ``These
actions are delaying the foreclosure process, increasing the
cost of foreclosure, and subsidizing borrowers who don't pay
their mortgage for extended periods of time.'' HUD's IG also
reported that, ``some borrowers are withholding mortgage
payments to qualify for assistance.'' The FHA should not, in
its loss mitigation process, reward borrowers who choose to
game or cheat the system. Foreclosure assistance should only be
available to those who show a willingness to pay their mortgage
because delinquent borrowers who attempt to game the FHA's loss
mitigation process undermine the financial soundness of the FHA
and the integrity of the process. Therefore, as suggested by
HUD's IG, the FHA should ``(1) ensure that good business
judgment is followed when determining whether the borrower
qualities for the program, (2) reduce the time frames for
processing loss mitigation, and (3) require borrowers to make a
good faith effort of making three normal payments before
completing a partial claim.''
The FHA's current and future financial condition pose great
concern. While the FHA currently has significant capital on
hand, current capital holdings are irrelevant if future
liabilities swamp future assets. According to the Office of
Management and Budget, in the absence of programmatic or
premium changes, the FHA's total costs exceed its receipts on a
present value basis. Further, the FHA's portfolio is
experiencing delinquency rates comparable to that in the
subprime market. Therefore, any attempt to simply shift the
riskiest borrowers from the subprime market into FHA insured
loans will increase the likelihood that losses in the subprime
market will be borne by taxpayers instead of investors. Such a
shift will also continue to encourage families into home
ownership that is not sustainable. If the FHA is allowed to
assume these greater risks, this Committee must exercise
considerable and extensive oversight to insure the financial
soundness of the Mutual Mortgage Insurance fund and reduce any
potential liability to the American taxpayer.
Richard Shelby.
Wayne Allard.
Elizabeth Dole.
Mike Crapo.
John E. Sununu.
Michael B. Enzi.
Robert F. Bennett.
Jim Bunning.