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[Senate Report 110-227]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 481
110th Congress                                                   Report
                                 SENATE
 1st Session                                                    110-227
======================================================================
 
                     FHA MODERNIZATION ACT OF 2007

                                _______
                                

               November 13, 2007.--Ordered to be printed

                                _______
                                

 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \8\ GAO-07-708, page 13.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \9\ GAO-07-708, page 14.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                           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.

                                  
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