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# Legislative Bulletin.................................................September 18, 2007

**Contents:**

**H.R. 1852**---Expanding American Homeownership Act

H.R. 1852---Expanding American Homeownership Act (*Waters, D-CA*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Tuesday, September 18^th^, likely subject to a structured
rule. Summaries of any amendments made in order under the rule will be
provided in a separate RSC document.

**[Background]{.underline}**: The Federal Housing Administration (FHA)
was created in 1934 (and became a part of the Department of Housing and
Urban Development---HUD---in 1965) to provide mortgage insurance on
loans made by FHA-approved lenders throughout the United States and its
territories. The FHA insures mortgages on single family, multifamily,
and manufactured homes and hospitals. The FHA is reportedly the largest
insurer of mortgages in the world, having insured over 34 million
properties since its inception. FHA mortgage insurance protects lenders
against loss if the homeowner defaults on his mortgage loan.

FHA operates entirely from self-generated income (proceeds from the
mortgage insurance paid by homeowners), which is placed in an account
that is used to operate the program. The FHA currently has 4.8 million
insured single family mortgages and 13,000 insured multifamily projects
in its portfolio.

For more information about the FHA, visit its homepage here:
<http://www.fha.gov/>.

**[Summary]{.underline}**: H.R. 1852 would, among other things,
authorize the Federal Housing Administration (FHA) to use risk-based
pricing for the mortgage guarantees it offers. Highlights of the bill
are as follows:

-   Raises the FHA maximum loan limits for single-family homes (which
    are set at the lesser of two benchmarks) from: (1) 95 percent of the
    median home price for the area to 100 percent and (2) from 87
    percent to 100 percent of the GSE conforming loan limit (the size of
    a loan a government-sponsored enterprise like Freddie Mac may
    purchase), with an increase in the minimum loan limit (the "floor")
    from 48 percent to 65 percent of the GSE limit (the limit is
    \$417,000 in 2007). Currently, FHA insurance will not cover loans
    greater than \$362,000 in high-cost areas and \$200,000 in low-cost
    areas. These limits would increase to \$417,000 and \$271,000,
    respectively.

-   Aligns the loan limits for 2-, 3-, and 4-unit mortgages with the
    ratios used by GSEs.

-   Extends the maximum length for an FHA loan term from 35 to 40 years.

-   Retains the current statutory 3% cash downpayment
    requirement\--except for "zero- and lower-down payment borrowers,"
    as defined in the legislation. The FHA could charge upfront premiums
    for such borrowers in an amount up to 3% of the principal, and
    annual premiums for such borrowers up to 0.75% of the loan balance.

-   Allows the FHA to use a risk-based premium structure for
    single-family mortgages, insured on or after October 1, 2007,
    allowing for different interest rates to be charged depending on a
    borrower's credit history. The bill would specifically allow
    zero-and-lower-downpayment, as well as higher-risk, borrowers (as
    defined in the bill) to received FHA loans.

-   Establishes procedures for HUD to establish and change premiums,
    including a list of factors to be considered in establishing such
    premiums. []{.mark}

-   Requires HUD to provide "payment incentives" (i.e. premium
    reductions) for borrowers who make on-time payments for at least the
    first five years of the loan, and authorizes HUD to offer such
    incentives as soon as three years after continuous on-time payments.

-   Authorizes HUD to require pre-mortgage counseling for zero- and
    lower-downpayment borrowers, as well as higher-risk borrowers (i.e.
    borrowers with poor credit scores) and to require that borrowers be
    informed of their local counseling options. Borrowers who become
    60-days delinquent on their loans would have to be given notice by a
    housing counseling entity of the availability of foreclosure
    prevention counseling.

-   Requires borrowers applying for zero-down and lower-downpayment
    loans to be provided written disclosures, either through counseling
    or at loan application, regarding other mortgage loan options, the
    additional costs associated with lower down payment loans, the
    appreciation needed to pay off the loan, including selling costs,
    disclosures of their payment incentive rights (at the closing), and
    disclosure of rights to loss mitigation (also at the closing).

-   Specifically states that these counseling and disclosure
    requirements yield no right of private action (no ability to sue),
    yet HUD could establish penalties on mortgagees for noncompliance.

-   Requires HUD to report annually to Congress on the rates of default
    and foreclosure of zero- and lower-downpayment and higher-risk
    borrowers, as well as on actions HUD has taken to mitigate losses.

-   Authorizes an up-to-25% increase in the FHA single-family loan limit
    for any home that includes space used for a licensed child care
    facility.

-   Allows the FHA to insure manufactured housing and updates and
    clarifies the existing FHA mortgage insurance procedures for
    condominiums (mainly to align them with adjustments made above to
    single-family housing and to the allowance of manufactured housing).

-   Makes clarifying adjustments to the Mutual Mortgage Insurance Fund
    (MMIF) at the Department of Treasury (which was created to
    consolidate single-family FHA mortgage loan programs under one
    fund). The Secretary would be directed to ensure that the Fund
    remains financially sound. If the Fund proves to be actuarially
    unsound, the Secretary would be allowed to adjust premiums or adjust
    underwriting standards.

-   Makes Homeownership Voucher Program mortgages and Home Equity
    Conversion (i.e. "reverse") mortgages secured under the National
    Housing Act the obligations of the MMIF.

-   Makes single-family mortgages insured under the National Housing Act
    on Hawaiian home lands and Indian reservations the obligations of
    the MMIF.

-   Repeals the following "obsolete or little used" programs (as defined
    by the Democrat staff of the Financial Services Committee): mortgage
    insurance for outlying areas, certain mortgage insurance on Indian
    lands, mortgage insurance for servicemen, special mortgage insurance
    for low income families, and the graduated payment mortgage program.
    The committee staff note that some of these programs are
    duplicative, and the benefits to the involved constituencies are
    available under other portions of the National Housing Act.

-   Eliminates the current volume cap (set at 250,000) on FHA Home
    Equity Conversion Mortgages (HECM) or "reverse mortgages"---whereby
    homeowners over the age of 62 take out a line of credit on their
    home---and sets a single nation-wide loan limit tied to the GSE
    conforming loan limit (thus eliminating the local median home price
    determination). HUD would have to establish limits on the
    origination fee that may be charged for a reverse mortgage loan
    (though not more than 2% of principal) and allows such loans to be
    used for co-op units.

-   Permits mortgage brokers and correspondent lenders to originate FHA
    loans if they post bond in the amount of \$75,000, in lieu of having
    to meet various financial audit and net worth requirements. GAO
    would have to report on the effectiveness of this bond option after
    four years. The bond program would terminate after five years,
    unless HUD extends it based on determinations that it offers similar
    or better protections for borrowers.

-   Imposes additional requirements for mortgage brokers and
    correspondent lenders participating in FHA loans, including
    requiring them to "safeguard and account for any money handled for
    the borrower; to follow reasonable and lawful instructions from the
    borrower; and to act with reasonable skill, care, and diligence."

-   Gives HUD the authority to increase FHA single family loan limits up
    to the nationwide GSE conforming loan limit for a period of up to 36
    months in presidentially-declared disaster areas---but not in excess
    of 100% of a home's appraised value plus closing costs.

-   Prohibits HUD from insuring any FHA loan unless the borrower
    provides acceptable personal identification: a Social Security card
    along with a photo ID issued by the federal or a state government, a
    driver's license or ID card issued by a state in accordance with the
    REAL ID Act of 2005, any valid passport, or a photo ID card issued
    by U.S. Citizenship and Immigration Services.

-   Instructs HUD to carry out a five-year pilot program to establish an
    automated process for providing alternative credit rating
    information (such as information on rent payments, utilities
    payments, etc.) for borrowers who have insufficient credit histories
    for determining their creditworthiness. HUD could not insure a
    number of mortgages under this pilot that exceeds 5% of the
    aggregate number of FHA-insured mortgages in the preceding year. GAO
    would have to report to Congress within two years on the number of
    additional borrowers assisted by this program and on the impact of
    this program on safety and soundness of National Housing Act
    insurance funds.

-   Increases the maximum FHA multifamily loan limits in high-cost areas
    from 140% of the basic loan limit to 170% and raises such maximum
    loan limits on a project-by-project basis from 170% of the basic
    limit to 215% of such limit.

-   Authorizes appropriations, in the amount equal to the net increase
    in negative credit subsidy (i.e. excess FHA funds from premiums and
    fees charged under the mortgage insurance programs) created by this
    bill's provisions, for diversion to an **affordable housing fund**
    (created by the GSE reform bill---H.R. 1427), for grants to provide
    affordable rental housing and homeownership opportunities for low
    income families. [NOTE]{.underline}: in current law, excess FHA
    funds---i.e. savings---are deposited in the U.S. Treasury as a
    benefit to taxpayers.

> The amount diverted to an affordable housing fund would be the amount
> of FHA savings after first deducting all of the following: 1) the
> amount, if any, needed to avoid a credit subsidy appropriation for the
> FHA single family loan program in that year, 2) the amount needed to
> increase nationwide funding for housing counseling grants from the
> current level of \$42 million to \$100 million a year for each of
> fiscal years 2008-2012, and 3) \$25 million for each of fiscal years
> 2008-2012 to increase funding for improving FHA technology,
> procedures, processes, program performance, and salaries.
>
> No negative credit subsidies (i.e. FHA savings) from the single family
> loan program could be used to fund expenditures under this section.
>
> **[NOTE]{.underline}**: RSC Chairman Hensarling submitted an amendment
> to the Rules Committee to strike the diversion of FHA savings to an
> affordable housing fund. See "Possible Conservative Concerns" below.

-   Prohibits HUD from increasing any FHA premiums above the level in
    effect at the beginning of FY2007, unless HUD determines that,
    absent such increase, a program would require a credit subsidy
    appropriation (i.e. a taxpayer bailout).

**[Additional Background]{.underline}**: In the 109^th^ Congress, a
related bill (H.R. 5121, sponsored by Rep. Bob Ney, R-OH), passed the
House on July 25, 2006, by a vote of
[415-7](http://clerk.house.gov/evs/2006/roll400.xml). To see the RSC
Legislative Bulletin on H.R. 5121, see page 17 at this webpage:
<http://www.house.gov/hensarling/rsc/doc/LB_072506_suspensions.doc>.

**[RSC Bonus Fact]{.underline}**: The FHA was created to shore up a
floundering construction industry in the 1930s.
<http://www.fha.gov/about/index.cfm#history>

**[Committee Action]{.underline}**: On March 29, 2007, the bill was
referred to the Financial Services Committee, which, on May 2^nd^,
marked up, and ordered it reported to the full House
[45-19](http://nationaljournal.com/members/markups/2007/05/mr_20070503_6.htm).
All the no votes were Republicans, including Ranking Member Spencer
Bachus (R-AL) and RSC Chairman Jeb Hensarling (R-TX).

**[Possible Conservative Concerns]{.underline}**: Conservatives have
expressed numerous concerns about this legislation, including the
following:

-   [Loan Limits Increases]{.underline}. The bill would increase various
    loan limits and thus make more people eligible to receive FHA
    mortgage insurance. Such increases seem to conflict with the mission
    of the FHA---to help low-income and other people get mortgages. By
    raising loan limits, FHA insurance could presumably be obtained by
    more people who are not the true targets of FHA.

-   [Zero Downpayments]{.underline}. The bill would allow FHA insurance
    to cover loans on which the borrower has made no downpayment.
    Conservatives may be concerned that this program expansion allows
    FHA insurance to cover people who received their homes without
    investing any equity into it.

-   [Mandatory Refunds]{.underline}. The bill would essentially mandate
    refunds to borrowers who have made on-time payments for five years.
    This provision would reduce revenues to the FHA (making it more
    likely to need appropriations support from general taxpayers) and
    would remove flexibility for FHA in its incentive programs.

-   [Affordable Housing Fund]{.underline}. The bill would divert certain
    FHA savings to an affordable housing fund (for the distribution to
    housing non-profit entities). Conservatives have opposed an
    affordable housing fund in the past because, since money is
    fungible, it would allow liberal activist groups, like ACORN and La
    Raza, that perform some housing-related activities to use taxpayer
    dollars to indirectly subsidize their big-government,
    anti-conservative advocacy nationwide. Furthermore, FHA savings
    currently get returned to the Treasury as a benefit to taxpayers.
    This legislation would siphon away FHA savings for this fund, as
    well as for additional activities detailed above.

-   [Crowding Out the Private Market]{.underline}. Some conservatives
    may be concerned that H.R. 1852 would expand FHA's ability to
    guarantee mortgages and therefore increase a federal subsidy for
    homebuyers. In addition, some may be concerned that this expansion
    may crowd out the private market. For instance, according to CBO,
    "FHA's basic insurance is directed at a segment of the market that
    is shrinking and becoming less dependent on the government for
    access to mortgage financing. In part, that situation has arisen
    because private lenders have increased their offerings for
    low-downpayment and higher-risk mortgages."

> Given that the private marketplace is offering many different,
> affordable homeownership opportunities, one might question whether now
> is the proper time to expand and perpetuate a government program that
> was created in 1934 to broaden homeownership and increase employment
> in the building industry.

**[Administration Position]{.underline}**: The Statement of
Administration Policy (SAP) for H.R. 1852 generally supports the bill,
but includes concerns about certain provisions, including:

-   "the Administration strongly opposes the establishment of a new
    Affordable Housing Grant Fund linked to increased FHA receipts;

-   "the provision for mandatory refund of "excess" premium to borrowers
    with FICO credit scores below 560 whose loans survive more than five
    years undercuts the insurance principle on which FHA is based;

-   "the Administration also has concerns with the two percent
    limitation on HECM loan origination fees proposed in the
    legislation; and

-   "the Administration is also concerned about a provision that would
    make it possible for correspondent lenders to use FHA without
    meeting audit and net worth requirements, which could allow
    participation by brokers who are inadequately capitalized or have
    internal control difficulties."

**[Cost to Taxpayers]{.underline}**: According to CBO, H.R. 1852 would
increase mandatory spending by \$16 million in FY2007 and would reduce
authorization levels by \$12 million in FY2008 and by \$95 million over
the FY2008-FY2012 period.

It is worth noting that, in a study requested last year by Congressman
Jeb Hensarling, CBO stated that current budget rules understate the cost
of federal credit programs, such as FHA loan programs, in part by
failing to account for market risk and separately listing administrative
expenses:

> \[Current budget rules\] understate the cost of FHA guarantees
> relative to that of other federal spending programs....For example, a
> proposal to spend \$2 billion per year for vouchers to permit
> high-risk first-time home buyers to purchase private mortgage
> insurance would have a budget cost of \$10 billion over a five-year
> period, whereas the fiscally equivalent alternative of operating the
> \[FHA\] program under current policy would be shown in the budget as
> having net savings of \$1.8 billion for that same period.
>
> Source:
> [http://www.cbo.gov/ftpdocs/74xx/doc7412/07-17-FHA.pdf]{.underline}

As a result, while the CBO cost estimate may suggest "savings" from
expanding the FHA loan programs, H.R. 1852's actual burden to the
taxpayer may be far greater.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: The bill would expand federal loan programs,
as detailed above.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: CBO confirms that the bill
contains no mandates.

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: The Financial Services
Committee, in [House Report
110-217](http://www.congress.gov/cgi-lis/cpquery/R?cp110:FLD010:@1(hr217)),
reports that Section 28 of the underlying bill, regarding the
clarification of the disposition of certain properties, is essentially
an earmark requested by Rep. John Dingell (D-MI). The request letter
from Rep. Dingell submitted to the committee is included in the
committee report:

> DEAR GENTLEMEN: I am requesting the legislative language found in
> Section 28 of H.R. 1852 for the City of Ypsilanti, Michigan in fiscal
> year 2008. The entity that would benefit from this provision is the
> City of Ypsilanti, located at City Hall, One South Huron Street,
> Ypsilanti, MI 48197. The provision would allow HUD to sell the
> Parkview Apartments, located at 596 S. Hamilton Street, Ypsilanti,
> Michigan 48197, at a below market rate. I certified that neither I nor
> my spouse has any financial interested in this project.

House Rule XXI, Clause 9(d) defines "earmark" as "a provision or report
language included

primarily at the request of a Member, Delegate, Resident Commissioner,
or Senator providing, authorizing or recommending a specific amount of
discretionary budget authority, credit authority, or other spending
authority for a contract, loan, loan guarantee, grant, loan authority,
or other expenditure with or to an entity, or targeted to a specific
State, locality or Congressional

district, other than through a statutory or administrative
formula-driven or competitive award process."

**[Constitutional Authority]{.underline}**: The Financial Services
Committee, in [House Report
110-217](http://www.congress.gov/cgi-lis/cpquery/R?cp110:FLD010:@1(hr217)),
cites constitutional authority in Article 1, Section 8, Clause 1
(relating to the congressional power to promote the general welfare of
the United States) and Clause 3 (relating to the congressional power to
regulate interstate commerce).

**[Outside Organizations]{.underline}**: The Mortgage Bankers
Association is supporting this legislation.

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718