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# Legislative Bulletin............................................................May 7, 2008

**Contents:**

> **H.Res. 1175** -- Providing for consideration of the Senate
> amendments to the bill (H.R. 3221) to provide needed housing reform

H.Res. 1175 -- Providing for consideration of the Senate amendments to
the bill (H.R. 3221) to provide needed housing reform (*Frank, D-MA*)

**Please note the conservative concerns, beginning on page 11 below.**

**[Order of Business]{.underline}**: On August 4, 2007, the House passed
H.R. 3221 as the New Direction for Energy Independence, National
Security, and Consumer Protection Act. Much of the energy language in
H.R. 3221 was enacted as part of H.R. 6, which became Public Law 110-140
on December 19, 2007. On April 10, 2008, the Senate removed all of the
House's energy language from H.R. 3221 and inserted the text of its
Foreclosure Prevention Act. On May 7, 2008, via H.Res. 1175, the House
will motion to amend the Senate amendments to H.R. 3221. Specifically,
the House motion will provide for the consideration of three amendments
that, when taken together, would [strike]{.underline} all of the Senate
amendments and insert three separate ones: #1, #2, and #3.

**[Summary]{.underline}**: The following summarizes the three House
amendments to the Senate amendments.

[HOUSE AMENDMENT #1]{.underline}

House Amendment #1 contains the text of H.R. 5830, H.R. 3019, H.R. 1852,
H.R. 2139, H.R. 1427, H.R. 5579, H.R. 1066, and parts of H.R. 1851.

[Title I of House Amendment #1---Text of H.R. 5830 and H.R.
3019]{.underline}

H.R. 5830:

-   Creates a [new, voluntary program]{.underline} for borrowers and
    existing mortgage loan holders to allow the Federal Housing
    Administration (FHA) to provide up to [\$300 billion in new loan
    guarantees]{.underline} (mortgage insurance) to refinance mortgages
    on properties at risk of foreclosure. It is not clear who would
    initiate participation in the program---lenders or borrowers.

[]{.mark}

-   Creates the [Refinance Program Oversight Board]{.underline},
    comprised of the Federal Reserve chairman, the Treasury Secretary,
    and the Secretary of Housing and Urban Development, which would set
    requirements for and oversee the program, including the "flexible"
    underwriting criteria (discussed below), fees, and insurance
    premiums. The Board could exclude poorly-performing lenders from the
    program.

-   Limits the program [only to principal residences]{.underline} that
    are owner-occupied and excludes investment properties and second or
    multiple homes. The existing loan must have been originated prior to
    Dec. 31, 2007.

-   Requires borrowers to [certify]{.underline} that they have [not
    intentionally defaulted]{.underline} on their existing mortgage in
    order to get into this program and that they [did not provide false
    information]{.underline} in order to obtain the original mortgage.

-   Makes eligible only those borrowers who have a monthly (total)
    mortgage [debt to monthly income ratio]{.underline} above 35% as of
    March 1, 2008.

-   Requires participating lenders to [write-down the value of the
    original mortgage]{.underline} to no more than 85% of the newly
    appraised value of the home. The borrower in the program would then
    get a [new mortgage]{.underline} that is no more than 90% of the
    newly appraised value of the home, which would be used to pay off
    the original lender. The remaining 5% (the difference between the
    new 90%-of-value mortgage and the 85%-of-value write-down) would
    consist of a 3% upfront insurance premium to FHA and a 2%
    origination fee to the new lender.

-   Requires mortgage lenders and servicers to [waive all prepayment
    penalties]{.underline} and related fees.

-   Requires that, in order for participation in this program to be
    complete, the claims of [second lien holders]{.underline} (second
    mortgages and home equity loans) must be wiped out. The Oversight
    Board could set a fixed dollar amount that any second lien holder
    would receive as compensation and could require the borrower to
    share a percentage of future profits on the home with second lien
    holders (subject to the profits exceeding required payments to the
    government). The Board could also prohibit borrowers from taking out
    second mortgages during the first five years they are in the
    program.

-   Requires the new mortgage to be [fixed-rate]{.underline}. The
    [maximum loan amount]{.underline} would be the same as the maximum
    FHA loan amount, which is currently \$729,750.

-   Requires borrowers to pay an [annual mortgage insurance
    premium]{.underline} of 1.5% of the remaining insured principal
    balance of the mortgage, as well as an [exit fee]{.underline} of at
    least 3% of the original insured principal obligation of the
    mortgage when borrowers sell or refinance. If the sale or
    refinancing happens within a year, 100% of the profits would go to
    the federal government. This percentage would phase-down to 80% in
    the second year, 60% in the third year, 50% in the fourth year, and
    20% in the fifth year, and 0% thereafter (though the 3% exit fee
    would never go away).

-   Instructs the Oversight Board to create ["flexible" underwriting
    criteria]{.underline}, including a prohibition on rejecting
    borrowers solely because of their credit scores or because they
    defaulted on their existing mortgage. Borrowers could have a total
    monthly debt-to-income ratio of up to 50% (up from the current 43%
    maximum), if they have made six consecutive payments in an amount
    not less than their new mortgage payment.

-   Prohibits the initiation of any new commitment to insure a mortgage
    under this program beginning [two years]{.underline} after the
    enactment of this legislation, subject to up to four [six-month
    extensions]{.underline} and congressional and public notification as
    such.

-   Authorizes [\$230 million for each of fiscal years 2008 and
    2009]{.underline} for mortgage counseling, \$35 million of which
    would be earmarked for legal assistance to lower-income people
    regarding foreclosure, eviction, etc., and \$20 million of which
    would be earmarked for veterans counseling. 

-   Authorizes [\$150 million]{.underline} for increased FHA
    administrative costs.

-   Conservatives have expressed serious concerns about the language in
    H.R. 5830, as detailed in the "Possible Conservative Concerns"
    section on page 11 of this Legislative Bulletin.

H.R. 3019:

-   Establishes, within the Office of the HUD Secretary, the Office of
    Housing Counseling, which would conduct activities relating to
    homeownership and rental housing counseling.

-   Directs the Director of Housing Counseling to develop, implement,
    and conduct national public service multimedia campaigns (authorized
    at \$3 million a year for three years) designed to make people
    facing mortgage foreclosure, people considering subprime mortgages,
    elderly people, people who face language barriers, low-income
    people, and other "potentially vulnerable" individuals aware
    that: 1) it is advisable, before seeking or maintaining a
    residential mortgage loan, to obtain homeownership counseling from
    unbiased and reliable sources; and 2) such homeownership counseling
    is available through HUD and elsewhere.

-   Directs HUD to make \$45 million in grants to states, localities,
    and nonprofits in each of fiscal years 2008 through 2011 for housing
    counseling activities.

[Title II of House Amendment #1---Text of H.R. 1852 and H.R.
2139]{.underline}

H.R. 1852:

-   This section is similar to H.R. 1852, the Expanding American
    Homeownership Act, which passed the House on September 18, 2007, by
    a vote of [348-72](http://clerk.house.gov/evs/2007/roll876.xml).

-   This section would, among other things, permanently increase the
    availability of loan guarantees from the Federal Housing
    Administration (FHA) and authorize FHA to use risk-based pricing for
    the mortgage guarantees it offers. The language here in House
    Amendment #1 to H.R. 3221 does NOT include the controversial
    language on zero downpayments and diversion of FHA savings to an
    Affordable Housing Fund that was in the House-passed version of
    H.R. 1852. For more details, see the RSC Legislative Bulletin for
    H.R. 1852 here:
    <http://www.house.gov/hensarling/rsc/doc/lb_091807_fha.doc>.

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-   When HR. 1852 was considered in the House last year, many
    conservatives expressed concerns about---and voted against the bill
    because of---numerous provisions in the bill, including:

    -   [Loan Limits Increases]{.underline}. The bill would increase
        various loan limits and thus make more people eligible to
        receive FHA mortgage insurance. By raising loan limits, FHA
        insurance could presumably be obtained by more people who are
        not the true targets of FHA.

    -   [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.

    -   [Crowding Out the Private Market]{.underline}. Some
        conservatives expressed concerns that this bill 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 will crowd out the private market.
        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.

H.R. 2139:

-   This section is substantively identical to H.R. 2139, the FHA
    Manufactured Housing Loan Modernization Act, which the House passed
    by voice vote on June 25, 2007.

-   This section would eliminate the current cap on FHA's exposure on
    manufactured housing loan guarantees of 10% of the value of a
    lender's portfolio, allow FHA to guarantee 90% of an individual
    loan, and increase the manufactured housing loan limits. For more
    details, see the RSC Legislative Bulletin on H.R. 2139 here:
    <http://www.house.gov/hensarling/rsc/doc/LB_062507__suspensions.doc>.

-   When H.R. 2139 moved through the House, some conservatives expressed
    concerns that this bill would significantly expand government
    liabilities in this area.

[Title III of House Amendment #1---Text of H.R. 1427]{.underline}

-   This title is substantively identical to H.R. 1427, the Federal
    Housing Finance Reform Act, as it passed the House on May 22, 2007,
    by a vote of [313-104](http://clerk.house.gov/evs/2007/roll396.xml).

-   This title would, among other things, establish a single
    regulator---the Federal Housing Finance Agency (FHFA)---for
    government-sponsored enterprises (GSEs) involved in the home
    mortgage market (Fannie Mae, Freddie Mac, and the Federal Home Loan
    Banks) and increase the conforming loan limits for the GSEs.
    Additionally, the GSEs would be required to contribute 1.2 cents per
    \$100 of the value of their mortgage portfolios from the previous
    year to a new affordable housing fund created by the bill to support
    the low-income-housing activities of nonprofits like ACORN and La
    Raza nationwide. For more details, see the RSC Legislative Bulletin
    for H.R. 1427 here:
    <http://www.house.gov/hensarling/rsc/doc/LB_051707_GSE.doc> and
    here:
    <http://www.house.gov/hensarling/rsc/doc/LB_052207_GSEamdtsCONT.doc>.

-   While most conservatives have supported the notion of creating a
    single regulator overseeing the GSEs and reining them in from
    exceeding their congressional charters, conservative opposition to
    H.R. 1427 has centered largely on the Affordable Housing Fund. RSC
    Members sent the following letter opposing the Affordable Housing
    Fund:
    [[http://www.house.gov/hensarling/rsc/doc/GSE%20slush%20fund.pdf]{.underline}](http://www.house.gov/hensarling/rsc/doc/GSE slush fund.pdf).

-   **[NOTE:]{.underline}** Many conservatives have regarded the
    required GSE contributions to the Fund as a tax on publicly-traded
    corporations. Arguably, since the GSEs constitute a duopoly, they
    have a heightened ability to pass this "contribution" on to
    consumers---thus making housing *less* affordable rather than more.

> Furthermore, despite the provisions of the Affordable Housing Fund
> section that restrict the use of grants, many conservatives in the
> past have expressed concerns that the Fund could still be used by
> liberal entities to displace other funds. Money is fungible, so that
> if a group cannot use Fund grants for political activities, it could
> certainly have more money freed up for political activities because of
> the injection of Fund grants.
>
> For example, if someone gives you \$100 and says you can't use it to
> pay your electric bill, yet you deposit the money in your bank and
> then write a \$100 check to your electric company, have you used the
> gift money to pay your electric bill? Maybe, or maybe not. More
> importantly, does it matter? The gift money unquestionably offset your
> other expenditures. Perhaps you didn't use the gifted \$100 to pay
> your bill, but you now have \$100 extra to buy other things.
>
> The largest organizations (and thus the most able to commit resources
> to apply for federal grants) who work on affordable housing issues
> include, for example, ACORN (led voter registration efforts against
> Republicans, with allegations of voter fraud in at least Florida,
> Ohio, Missouri, and North Carolina), National Council of La Raza
> (allegations of voter fraud in the Bob Dornan-Loretta Sanchez election
> of 1996), and Housing Works (led a demonstration against Senator Rick
> Santorum for his anti-needle exchange and pro-abstinence voting
> record). These entities unquestionably, and sometimes unabashedly,
> engage in partisan, leftist political activities.
>
> []{.mark}
>
> ACORN, the Association of Community Organizations for Reform Now, is
> actually an umbrella organization for more than 75 entities, most of
> which are run out of a single office in New Orleans. Among these
> entities are [unions]{.underline}, schools, radio stations, home
> mortgage counseling centers, tax advising centers, [voter-mobilization
> organizations]{.underline}, [lobbying firms]{.underline}, and even a
> furniture company. For example, the Service Employees International
> Union Local 880 once listed its contact email as <seiu880@acorn.org>
> (it changed its email address when the Employment Policies Institute
> highlighted this address in a report).
>
> Estimates of ACORN's annual operation budget range from 30 to 40
> million dollars. The Employment Policies Institute reports that large
> amounts of money move back and forth from various elements of the
> ACORN network all the time.
>
> Furthermore, a forthcoming report by the Consumers Rights League will
> document how ACORN has:
>
> \--threatened lenders in order to secure financial resources for
> itself;
>
> \--lobbied extensively and successfully for the lowering of lending
> standards (which have contributed significantly to the current
> increase in foreclosures nationwide);
>
> \--worked to obtain mortgages for illegal workers; and
>
> \--maintained consistent coordination between its tax-exempt and its
> political (non-tax-exempt) activities.
>
> For more information on ACORN, including a map of where ACORN has been
> accused of election fraud, go here: <http://www.rottenacorn.com/>.

-   Additionally, some conservatives have expressed concerns about the
    increases in the GSE conforming loan limits, which could lessen the
    cost (via federal subsidies) of housing for consumers who are not
    necessarily low- or middle-income and crowd out private competitors.
    Other conservatives have argued that the high-cost adjustments are
    needed in certain areas where real estate is extremely expensive and
    "middle class" is defined by higher incomes than in the rest of the
    country.

[Title IV of House Amendment #1---Text of H.R. 5579]{.underline}

-   This title is substantively identical to H.R. 5579, the Emergency
    Mortgage Loan Modification Act, which was reported from the House
    Financial Services Committee on May 1, 2008, but which has not yet
    passed the House.

-   This title would protect servicers of residential mortgage pools
    from legal liability when they modify mortgages before 2011 to avoid
    foreclosure (under certain listed circumstances), even if such
    modifications yield losses for certain individual investors in the
    pool. Mortgage servicers otherwise have a fiduciary responsibility
    to maximize returns to the investors in the aggregate.

[Title V of House Amendment #1---Text of H.R. 1066 and Parts of H.R.
1851]{.underline}

-   This title includes a variety of miscellaneous housing provisions,
    including:

> \--Allowing federal savings associations to make direct or indirect
> investments (subject to certain limits) aimed at promoting the public
> welfare through the provision of housing, services, and jobs ([H.R.
> 1066](http://www.house.gov/hensarling/rsc/doc/LB_022707_Suspensions.doc));
>
> \--Providing for contract transfers for certain individually listed
> public housing projects (language taken from H.R. 1851); and
>
> \--Protecting against discriminatory treatment against disabled
> veterans by mortgage loan guarantee or subsidy programs.

[Title VI of House Amendment #1]{.underline}

-   This title would authorize cash payments to several liberal
    nonprofit groups who undertake affordable housing projects and
    programs. Although none of the payments could be used to lobby or
    retain a lobbyist to influence a federal, state, or local government
    entity or officer, there is no prohibition on using the payments for
    other advocacy or political activity. Furthermore, as has been
    argued elsewhere, money is fungible; thus, federal payments help
    offset the costs of other activities, including lobbying, conducted
    by the funded nonprofits.

-   Specifically, this title would authorize payments as follows:

> \--\$25 million over three years to the National Urban League;
>
> \--\$25 million over three years to the Raza Development Fund;
>
> \--\$25 million over three years to the Housing Partnership Network;
> and
>
> \--\$25 million over three years to the National Community Renaissance
> Program (National CORE").

-   The Comptroller General would have to audit the financial
    transactions and activities of the entities above---only with
    respect to the funds received herein. Additionally, the Comptroller
    General would have to report to Congress on the use of any federal
    funds appropriated to these entities above in the last ten years.

-   None of these cash payments could be used to provide direct housing
    assistance to any person not lawfully present in the United States.
    Presumably, however, *indirect* housing assistance to illegal aliens
    would be acceptable, as would direct or indirect assistance to
    illegal aliens on *non*-housing matters.

[HOUSE AMENDMENT #2]{.underline}

House Amendment #2 contains the text of H.R. 5720.

[Title VII of House Amendment #2---Text of H.R. 5720 and Parts of H.R.
1851]{.underline}

-   H.R. 5720, the Housing Assistance Tax Act, was reported by the Ways
    & Means Committee on April 24, 2008 and has not yet been considered
    by the full House. Highlights are as follows:

-   Increases from \$2.00 per person to \$2.20 per person (in 2008 and
    2009 only) the limit on federal low-income housing tax credits that
    may be allocated per state. *Saves taxpayers \$1.05 billion over 11
    years.*

-   Makes certain clarifications to the rules for tax-exempt housing
    bonds. *Saves taxpayers* *\$519 million over 10 years.*

-   Provides first-time home buyers (only principal residences purchased
    on or after April 9, 2008 and before April 1, 2009) with a
    refundable tax credit equal to 10% of the purchase price of their
    home (up to \$7,500 for married couples, phased-down for taxpayers
    with adjusted gross incomes above \$70,000\--\$140,000 in the case
    of a joint return). Taxpayers would be required to repay any amount
    received under this provision back to the government over 15 years
    in equal installments. *Saves taxpayers* *\$3.81 billion over 11
    years.*

-   Provides home owners who claim the standard deduction with an
    additional standard deduction in 2008 for state and local real
    property taxes, up to \$350 (\$700 for joint filers). *Saves
    taxpayers \$1.17 billion over 11 years.*

-   Allows for the state issuance of an additional \$10 billion of
    tax-exempt housing bonds to provide loans to first-time home buyers
    and to finance the construction of low-income rental housing and
    allows qualified mortgage revenue bonds to be used to refinance
    certain subprime loans. *Saves taxpayers \$1.37 billion over 11
    years.*

-   Allows the low-income housing tax credit and the rehabilitation tax
    credit to be used to offset the Alternative Minimum Tax (AMT) and
    shields interest on tax-exempt housing bonds from the AMT. *Saves
    taxpayers \$2.06 billion over 11 years.*

-   Requires mandatory cost basis reporting by brokers for transactions
    involving publicly traded securities acquired after January 1, 2012
    (January 1, 2010, in the case of stocks). The Democrat staff of the
    Ways & Means Committee notes that, "Requiring brokers to maintain
    records of the adjusted basis of securities sold by their customers
    and report this information to the IRS would increase compliance
    with capital gains reporting." *Costs taxpayers* *\$8.05 billion
    over 8 years.*

-   Delays by one year the implementation of the worldwide allocation of
    interest. In 2004, Congress gave taxpayers, beginning in tax years
    after 2008, the option of using a liberalized rule for allocating
    interest expense between United States sources and foreign sources
    for the purposes of determining a taxpayer's foreign tax credit
    limitation. *Costs taxpayers \$2.93 billion over 3 years.*

-   Employs a familiar PAYGO gimmick that would modify the timing for
    certain corporate estimated tax payments so that corporations have
    to furnish \$17.3 billion more in such estimated tax payments in
    FY2013. Over three years (FY2012-2014), however, affected
    corporations would have no net increase in their tax
    liabilities---just in the timing of such liabilities. *No net
    revenue effect over 11 years*.

-   Directs the HUD Secretary to expedite the approval of new, or
    renovations to existing, multifamily housing projects for which HUD
    or Agriculture Department assistance is provided in conjunction with
    any low-income housing tax credits or tax-exempt housing bonds.

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-   Increases the maximum Section 8 housing project-based voucher
    contract term from 10 to 15 years.

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-   Allows for a public housing project to be funded using housing tax
    credits AND loans from the FHA without triggering the requirement
    that the HUD Secretary certify that HUD assistance to any housing
    project shall not be more than is necessary to provide affordable
    housing.

-   Provides that a subsidy layering review would not be required for a
    housing assistance payment contract for an existing structure or if
    such a review has been conducted by a state or local agency. Subsidy
    layering occurs when a project receives funds from more than one
    governmental source.

-   Requires state agencies administering low-income housing tax credits
    to at least annually furnish to HUD (and subsequently make public)
    information concerning the race, ethnicity, family composition, age,
    income, use of Section 8 voucher assistance, disability status, and
    monthly rental payments of households residing in each property
    receiving the tax credits.

-   Extends from 90 days to one year the period following active duty
    military service during which a servicemember's house could not be
    foreclosed, seized, or sold. If a returning servicemember defaults
    on a mortgage payment for two consecutive months, the lender or
    servicer would have to provide notification in writing of his or her
    mortgage liability.

[HOUSE AMENDMENT #3]{.underline}

House Amendment #3 would be added at the end of the newly amended bill.

-   Provides that this legislation could not be construed as preempting
    the application, to any entity, of any state law regulating the
    foreclosure of residential real property in that state [or the
    treatment of such foreclosed property]{.underline}.

-   The Bush Administration regards this provision as an unwelcome
    imposition of state power upon federal bank regulators.

-   The financial services industry, including the American Bankers
    Association, the American Financial Services Association, the
    Financial Services Roundtable, the Mortgage Bankers Association, and
    others, is unified in its strong [opposition]{.underline} to this
    amendment. They claim that this amendment would give the states a
    new right to regulate how federally chartered financial institutions
    treat property [post]{.underline}-foreclosure. Industry points out
    that states do not control how a national bank cares for or disposes
    of property, nor have they ever. Industry asserts that state control
    over the treatment of foreclosed property, especially if any
    suggested action conflicts with what the federal regulators are
    suggesting, could negatively impact the financial soundness of
    banks.

-   This amendment is "strongly" [supported]{.underline} by such
    entities as ACORN, the AFL-CIO, the NAACP, the National Council of
    La Raza, and the Service Employees International Union.

**[Additional Background]{.underline}**:

[FHA]{.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/>.

[GSEs]{.underline}: The Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are
government-sponsored enterprises (GSEs) created to facilitate a
*secondary* mortgage market. That is, GSEs are privately owned,
congressionally chartered financial institutions created to enhance the
availability of credit for home mortgages. Under their charter, they
exist to buy mortgages from lenders in the *primary* mortgage market and
package them into securities for sale to investors on Wall Street. For
more background on GSEs, including recent accounting failures, see pages
one and two of this RSC Legislative Bulletin here:
<http://www.house.gov/hensarling/rsc/doc/LB_051707_GSE.doc>[.]{.underline}

**[Committee Action]{.underline}**: Various portions of the three House
amendments were considered at the committee level, while others were
not.

**[Possible Conservative Concerns]{.underline}**: Many conservatives
have expressed numerous and significant concerns with this composite
legislation and its various parts, including, but not necessarily
limited to, the following:

[Constitutionality]{.underline}. Some conservatives may question whether
the "rescue" of borrowers and lenders from financial contracts gone bad
qualifies as a proper role of the federal government under the U.S.
Constitution.

[Taxpayer Exposure]{.underline}. The FHA "rescue" portion of the bill
would increase the taxpayer's exposure by \$300 billion. CBO has likely
underestimated the cost of such exposure to be just \$1.7 billion over
five years, despite the fact that CBO concedes that default rates for
this program are likely to be higher than current FHA default rates,
since lenders will seek to off-load their worst-performing loans onto
the FHA.

[Growth of Government]{.underline}. The FHA currently manages a
portfolio worth about \$180 billion, according to the Republican staff
of the Financial Services Committee. How could the FHA handle a \$300
billion increase in its portfolio---a 167% increase---without massive
expansion of its operations, staff, office space, and budget?

[Punishing Good Behavior]{.underline}. The FHA "rescue" portion of the
bill would punish taxpayers who have paid their mortgage on time or who
responsibly delayed buying a home by forcing them, as taxpayers, to pay
to bail out those borrowers who made risky financial decisions or
committed fraud, and those lenders who lowered their standards and also
made risky financial decisions. This bailout would create a moral hazard
by encouraging excessively risky behavior in the future.

[Rewarding Bad Behavior]{.underline}. The FHA "rescue" portion of the
bill would carve out a specific reward for those borrowers who committed
mortgage fraud yet did not get convicted (because those convicted under
state or federal law within the last seven years would not be eligible
for the mortgage trade-in program). Although people would have to
certify that they have not committed mortgage fraud, what value are
certifications of honesty from people who have already lied?

[No Protections Against Intentional Default]{.underline}. There is no
way to ensure that people did not intentionally default on their
mortgage in order to participate in the mortgage trade-in program. While
certifications of non-deliberate-default would be required, one again
could question the validity of certifications. Would someone who
intentionally defaulted admit it?

[Government Overreaction]{.underline}. It is also important to note how
many homeowners and renters are already making due, often by adjusting
their behavior to pay their bills. 25 million households own their home
without an existing mortgage, 35 million households rent, and 42 million
households are adhering to the terms of their existing mortgages.
According to the Mortgage Bankers Association, in the fourth quarter of
2007, 91.7% of borrowers were paying on time, 6.3% of borrowers were
late in making a mortgage payment (but not in foreclosure), and only
2.0% of borrowers were in foreclosure. An estimated 1.35 million homes
went into the foreclosure process last year (up from 705,000 in 2005),
and 1.44 million more are predicted for 2008. While these are not
insignificant numbers, should the 91.7% be expected to shoulder the
burden of the 6.3% (or the 2.0%), especially when many of these
homeowners made a conscious decision to bet on the continued
appreciation their home values and/or committed mortgage fraud?

Furthermore, much of the housing turmoil is concentrated regionally.
44.7% of all foreclosures are located in seven states: Arizona,
California, Colorado, Florida, Indiana, Minnesota, and Nevada. However,
despite clear dips in these and other states, houses are still worth
more now than they were four years ago. The Case-Shiller U.S. National
Home Price Index was 169.2 in the first quarter of 2005, and it was
170.6 for the fourth quarter of 2007. Does this situation really require
putting taxpayers on the hook for \$300 billion?

[Not Truly Voluntary]{.underline}. Although the mortgage trade-in
portion of this bill is being described as "voluntary" by the Democrats,
since borrowers and lenders cannot be forced to participate, once they
do participate---and hundreds of thousands will---the taxpayer would
have no choice of whether to be on the hook for the new mortgages, the
borrower paying his mortgage on time would have no choice, the renter
would have no choice, and the investor in mortgage-backed securities
would have no choice.

[Threatens Retirement Savings]{.underline}. The mortgage trade-in
programs requires new mortgages to be guaranteed at no more than 90% of
newly assessed value, meaning a 10% loss for investors in
mortgage-backed securities. But this problem isn't just for wealthy Wall
Street speculators. Many 401(k) accounts, mutual funds, money markets,
and defined-benefit pensions plans are indirect holders of
mortgage-backed securities. In fact, as according to Credit Suisse, 14%
of mortgage-backed securities are owned by pensions and mutual funds
that serve middle-class savers. Devaluing mortgage-backed securities
weakens retirement savings.

[Affordable Housing Trust Fund and Additional Funds for
Nonprofits]{.underline}. As discussed more fully above, the GSE reform
portion of the bill would create an Affordable Housing Trust Fund,
diverting assets from publicly traded entities to liberal housing
organizations, many of which have engaged in questionable or illegal
political activities. In several other sections of the bill, housing
nonprofits could participate in new funding streams, further funding
activities that many conservatives would regard as objectionable.

[Cash Payments Directly to Liberal Housing Groups]{.underline}. The bill
would quite brazenly authorize \$100 million in cash payments directly
to four liberal housing groups, including the Raza Development Fund
(known famously for voter fraud in the Bob Dornan-Loretta Sanchez race
ten years ago). Although the bill prohibits these funds from being used
for direct housing assistance for illegal aliens, it includes no such
prohibition on *indirect* housing assistance to illegal aliens or direct
or indirect *non*-housing assistance to illegal aliens.

[Wipe Out of Second Liens]{.underline}. The FHA "rescue" portion of the
bill would wipe out a participating borrower's second mortgage and home
equity loans (second liens) as condition of taking advantage of the
mortgage trade-in. Although second lien holders would essentially be
bought off with potential cash payments, it is difficult to see how this
situation would not harm second lien-holders.

[Tax Increase]{.underline}. The tax title's one-year delay in the
implementation of the new rules for the worldwide allocation of interest
is a \$3 billion tax increase on Americans, taking particular aim at
people who have financial dealings abroad.

[Entrenched Public Housing]{.underline}. Some conservatives may also be
concerned at the tax title's provisions lengthening Section 8 public
housing voucher contracts and making it easier for housing projects to
be funded from multiple sources of government money.

[FHA Loan Limit Increases]{.underline}. The FHA modernization section
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 traditional targets of FHA.

[Mandatory Refunds under FHA-Backed Loans]{.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.

[Crowding Out the Private Market]{.underline}. Some conservatives may be
concerned that the FHA modernization section and mortgage trade-in
program 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." 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.

[Process]{.underline}. Lastly, conservatives may be concerned at the
process under which this composite legislation is being considered,
having not gone thru committee in its entirety, coming to the House
floor with little more than a day to review the 630 pages of bill text,
and being unable to offer amendments on the floor to arguably one of the
most far-reaching and significant pieces of legislation the House will
consider all year.

To read more facts and conservative talking points on the housing
market, see this RSC Policy Brief:
<http://www.house.gov/hensarling/rsc/doc/pb_041508_housingmarket.doc>.

**[Administration Position]{.underline}**: The Statement of
Administration Policy (SAP) for H.R. 3221, as amended by the three House
amendments, indicated that the President's senior advisers would
recommend that the President veto the bill, citing many of the same
concerns as noted above in this RSC Legislative Bulletin.

<http://www.whitehouse.gov/omb/legislative/sap/110-2/saphr3221-r.pdf>

**[Cost to Taxpayers]{.underline}**: A comprehensive CBO cost estimate
for the composite bill is unavailable. CBO did estimate, however, that
H.R. 5830, the portion containing the mortgage trade-in program, would
authorize \$2.71 billion over five years.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: Yes, the bill would create several new
programs and new federal authorities, not the least of which is the
mortgage trade-in program.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: Although a comprehensive CBO
analysis of the mandates in the composite bill is unavailable, the bill
does contain several mandates, not the least of which is the Affordable
Housing Trust Fund, which requires that publicly traded companies
"contribute" to a fund providing payments to nonprofits.

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: An earmarks/revenue
benefits statement is not required for motions .

**[Constitutional Authority]{.underline}**: Although a committee report
for the composite bill---or even separate ones for all of its
portions---is not available, the Financial Services Committee, in House
Report 110-619 for H.R. 5830, cites constitutional authority in Article
I, Section 8, Clauses 1 (the congressional power to provide for the
***general*** welfare) and 3 (the congressional power to ***regulate***
interstate commerce). *\[emphasis added\]*

[Note]{.underline}: Article VI, Clause 3 of the U.S. Constitution states
that, "The Senators and Representatives...and all executive and judicial
Officers...shall be bound by Oath or Affirmation, to support this
Constitution."

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