I

104TH CONGRESS

1ST SESSION H. R. 487

To improve the single family housing mortgage insurance program of the

Department of Housing and Urban Development.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 11, 1995

Mr. ORTON introduced the following bill; which was referred to the Committee

on Banking and Financial Services

A BILL

To improve the single family housing mortgage insurance

program of the Department of Housing and Urban Development.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘FHA Modernization

5 and Efficiency Act of 1995’’.

6 SEC. 2. CONGRESSIONAL FINDINGS.

7 The Congress finds that—

8 (1) the single family housing mortgage insur9 ance program of the Department of Housing and

10 Urban Development is a significant factor in pro-
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1 moting first-time and affordable homeownership in

2 the United States;

3 (2) use of mortgage financing under the pro4 gram has decreased in recent years, due in part to

5 increasing complexity of mortgage origination and

6 servicing under the program;

7 (3) simplifying and streamlining the loan cri8 teria and loan approval process under the program

9 would have a positive effect on use of the program

10 without increasing risk to the Mutual Mortgage In11 surance Fund; and

12 (4) flexible lending products can be developed

13 without increasing risk to the Mutual Mortgage In14 surance Fund.

15 SEC. 3. MAXIMUM MORTGAGE AMOUNT FLOOR FOR SINGLE

16 FAMILY MORTGAGE INSURANCE.

17 Subparagraph (A) of the first sentence of section

18 203(b)(2) of the National Housing Act (12 U.S.C.

19 1709(b)(2)(A)) is amended by striking ‘‘the greater of’’

20 and all that follows through ‘‘applicable size’’ and insert21 ing the following: ‘‘50 percent of the dollar amount limita22 tion determined under section 305(a)(2) of the Federal

23 Home Loan Mortgage Corporation Act (as adjusted annu24 ally under such section) for a residence of the applicable

25 size’’.
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1 SEC. 4. CALCULATION OF DOWNPAYMENT.

2 Section 203(b)(2) of the National Housing Act (12

3 U.S.C. 1709(b)(2)) is amended—

4 (1) by striking subparagraph (B) and inserting

5 the following new subparagraph:

6 ‘‘(B) except as otherwise provided in this

7 paragraph (2), not in excess of—

8 ‘‘(i) in the case of a mortgage for a

9 property with an appraised value equal to

10 or less than $50,000, 98.75 percent of the

11 appraised value of the property,

12 ‘‘(ii) in the case of a mortgage for a

13 property with an appraised value in excess

14 of $50,000 but not in excess of $125,000,

15 97.65 percent of the appraised value of the

16 property,

17 ‘‘(iii) in the case of a mortgage for a

18 property with an appraised value in excess

19 of $125,000, 97.15 percent of the ap20 praised value of the property, or

21 ‘‘(iv) notwithstanding clauses (ii) and

22 (iii), in the case of a mortgage for a prop23 erty with an appraised value in excess of

24 $50,000 and which is located in a State for

25 which the average closing cost exceeds 3.25

26 percent of the average, for the State, of
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1 the sale price of properties located in the

2 State for which mortgages have been exe3 cuted, 97.75 percent of the appraised value

4 of the property,

5 plus the amount of the mortgage insurance pre6 mium paid at the time the mortgage is in7 sured.’’;

8 (2) in the 1st sentence of the matter following

9 subparagraph (B), by inserting before the period at

10 the end the following: ‘‘, and the term ‘average clos11 ing cost’ means, with respect to a State, the average,

12 for mortgages executed for properties that are lo13 cated within the State, of the total amounts (as de14 termined by the Secretary) of initial service charges,

15 appraisal, inspection, and other fees (as the Sec16 retary shall approve) that are paid in connection

17 with such mortgages’’;

18 (3) by striking the 2d sentence of the matter

19 following subparagraph (B); and

20 (4) in penultimate undesignated paragraph—

21 (A) in the 2d sentence, by striking ‘‘the

22 preceding sentence’’ and inserting ‘‘this sub23 section’’; and

24 (B) by striking the 1st sentence.
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1 SEC. 5. ELIMINATION OF RESTRICTIONS REGARDING NEW

2 CONSTRUCTION.

3 (a) IN GENERAL.—Section 203(b)(2) of the National

4 Housing Act (12 U.S.C. 1709(b)(2)) is amended, in the

5 matter following subparagraph (B)—

6 (1) in the 1st undesignated paragraph, by strik7 ing ‘‘Notwithstanding any other provision of this

8 section,’’ and all that follows through ‘‘beginning of

9 construction.’’; and

10 (2) by striking the 2d undesignated paragraph

11 (relating to mortgage insurance amounts for resi12 dences having solar energy systems).

13 (b) REPEAL OF AUTHORITY TO EXPEND AMOUNTS

14 FROM INSURANCE FUND TO CORRECT SUBSTANTIAL DE15 FECTS.—Section 518 of the National Housing Act (12

16 U.S.C. 1735b) is hereby repealed.

17 SEC. 6. AUTHORITY TO USE AMOUNTS BORROWED FROM

18 FAMILY MEMBERS FOR DOWNPAYMENTS.

19 (a) IN GENERAL.—Section 203(b)(9) of the National

20 Housing Act (12 U.S.C. 1709(b)(9)) is amended by insert21 ing before the period at the end the following: ‘‘: Provided

22 further, That for purposes of this paragraph, the Secretary

23 shall consider as cash or its equivalent any amounts bor24 rowed from a family member (as such term is defined in

25 section 201), subject only to the requirements that, in any

26 case in which the repayment of such borrowed amounts
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1 is secured by a lien against the property, such lien shall

2 be subordinate to the mortgage and the sum of the prin3 cipal obligation of the mortgage and the obligation secured

4 by such lien may not exceed 100 percent of the appraised

5 value of the property plus any initial service charges, ap6 praisal, inspection, and other fees in connection with the

7 mortgage’’.

8 (b) DEFINITION OF FAMILY MEMBER.—Section 201

9 of the National Housing Act (12 U.S.C. 1707) is amended

10 by adding at the end the following new subsections:

11 ‘‘(e) The term ‘family member’ means, with respect

12 to a mortgagor under such section, a child, parent, or

13 grandparent of the mortgagor (or the mortgagor’s

14 spouse). In determining whether any of the relationships

15 referred to in the preceding sentence exist, a legally adopt16 ed son or daughter of an individual (and a child who is

17 a member of an individual’s household, if placed with such

18 individual by an authorized placement agency for legal

19 adoption by such individual), and a foster child of an indi20 vidual, shall be treated as a child of such individual by

21 blood.

22 ‘‘(f) The term ‘child’ means, with respect to a mort23 gagor under such section, a son, stepson, daughter, or

24 stepdaughter of such mortgagor.’’.
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1 SEC. 7. APPROVAL OF CONDOMINIUM PROJECTS.

2 Section 234 of the National Housing Act (12 U.S.C.

3 1715y) is amended by striking subsection (k) and insert4 ing the following new subsection:

5 ‘‘(k) APPROVAL OF PROJECTS.—

6 ‘‘(1) IN GENERAL.—A mortgage covering a

7 multifamily project or a condominium unit in a mul8 tifamily project shall be eligible for mortgage insur9 ance under this section notwithstanding any other

10 provision of this section relating to requirements for

11 multifamily projects if the project has been approved

12 by a government-sponsored housing enterprise and—

13 ‘‘(A) in the case of a mortgage covering

14 any condominium unit in the project, the mort15 gage otherwise complies with the requirements

16 under this section regarding eligibility of mort17 gages for mortgage insurance provided under

18 subsection (c); and

19 ‘‘(B) in the case of a blanket mortgage

20 covering the multifamily project, the mortgage

21 otherwise complies with the requirements under

22 this section regarding eligibility of mortgages

23 for mortgage insurance provided under sub24 section (d).

25 ‘‘(2) DEFINITIONS.—For purposes of this sub26 section, the following definitions shall apply:
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1 ‘‘(A) The term ‘approved by a government2 sponsored housing enterprise’ means, with re3 spect to a multifamily housing project having a

4 condominium ownership structure, that a gov5 ernment-sponsored housing enterprise has de6 termined that any mortgage covering the

7 project or any condominium property in the

8 project may be purchased by the enterprise if

9 such mortgage is otherwise determined by the

10 enterprise to meet the standards and require11 ments of the enterprise relating to mortgages.

12 ‘‘(B) The term ‘condominium unit’ means,

13 with respect to a multifamily property, a 1-fam14 ily dwelling unit in the project and an undivided

15 interest in the common areas and facilities that

16 serve the project.

17 ‘‘(C) The term ‘government-sponsored

18 housing enterprise’ means—

19 ‘‘(i) the Federal National Mortgage

20 Association; and

21 ‘‘(ii) the Federal Home Loan Mort22 gage Corporation.’’.
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1 SEC. 8. DELEGATION OF SINGLE FAMILY MORTGAGE IN2 SURING AUTHORITY TO DIRECT ENDORSE3 MENT MORTGAGEES.

4 Title II of the National Housing Act (12 U.S.C. 1707

5 et seq.) is amended by adding at the end the following

6 new section:

7 ‘‘DELEGATION OF INSURING AUTHORITY TO DIRECT

8 ENDORSEMENT MORTGAGEES

9 ‘‘SEC. 256. (a) AUTHORITY.—The Secretary may del10 egate, to one or more mortgagees approved by the Sec11 retary under the direct endorsement program, the author12 ity of the Secretary under this Act to insure mortgages

13 involving property upon which there is located a dwelling

14 designed principally for occupancy by 1 to 4 families.

15 ‘‘(b) CONSIDERATIONS.—In determining whether to

16 delegate authority to a mortgagee under this section, the

17 Secretary shall consider the experience and performance

18 of the mortgagee under the direct endorsement program,

19 the default rate of insured mortgages originated by the

20 mortgagee compared to the default rate of all insured

21 mortgages in comparable markets, and such other factors

22 as the Secretary determines appropriate to minimize risk

23 of loss to the insurance funds under this Act.

24 ‘‘(c) ENFORCEMENT OF INSURANCE REQUIRE25 MENTS.—
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1 ‘‘(1) IN GENERAL.—If the Secretary determines

2 that a mortgage insured by a mortgagee pursuant to

3 delegation of authority under this section was not

4 originated in accordance with the requirements es5 tablished by the Secretary, and the Secretary pays

6 an insurance claim with respect to the mortgage

7 within a reasonable period specified by the Sec8 retary, the Secretary may require the mortgagee ap9 proved under this section to indemnify the Secretary

10 for the loss.

11 ‘‘(2) FRAUD OR MISREPRESENTATION.—If

12 fraud or misrepresentation was involved in connec13 tion with the origination, the Secretary may require

14 the mortgagee approved under this section to indem15 nify the Secretary for the loss regardless of when an

16 insurance claim is paid.

17 ‘‘(d) TERMINATION OF MORTGAGEE’S AUTHORITY.—

18 If a mortgagee to which the Secretary has made a delega19 tion under this section violates the requirements and pro20 cedures established by the Secretary or the Secretary de21 termines that other good cause exists, the Secretary may

22 cancel a delegation of authority under this section to the

23 mortgagee by giving notice to the mortgagee. Such a can24 cellation shall be effective upon receipt of the notice by

25 the mortgagee or at a later date specified by the Secretary.
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1 A decision by the Secretary to cancel a delegation shall

2 be final and conclusive and shall not be subject to judicial

3 review.

4 ‘‘(e) REQUIREMENTS AND PROCEDURES.—Before ap5 proving a delegation under this section, the Secretary shall

6 issue regulations establishing appropriate requirements

7 and procedures, including requirements and procedures

8 governing the indemnification of the Secretary by the

9 mortgagee.’’.

10 SEC. 9. INSURANCE OF 2-STEP SINGLE FAMILY MORT11 GAGES.

12 Title II of the National Housing Act (12 U.S.C. 1701

13 et seq.), as amended by the preceding provisions of this

14 Act, is further amended by adding at the end the following

15 new section:

16 ‘‘2-STEP SINGLE FAMILY MORTGAGES

17 ‘‘SEC. 257. (a) AUTHORITY.—After making the find18 ing required under subsection (d), the Secretary may in19 sure under any provision of this title a mortgage involving

20 property upon which there is located a dwelling designed

21 principally for occupancy by 1 to 4 families, where the

22 mortgage provides that the effective rate of interest

23 charged is—

24 ‘‘(1) fixed for the duration of a specified period

25 that consists of not less than the first 5 years of the

26 mortgage term;
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1 ‘‘(2) adjusted by the mortgagee upon the expi2 ration of the specified period referred to in para3 graph (1) for the mortgage; and

4 ‘‘(3) for the term of the mortgage remaining

5 after such adjustment—

6 ‘‘(A) fixed at the adjusted rate established

7 pursuant to paragraph (2); or

8 ‘‘(B) periodically adjusted by the mortga9 gee.

10 ‘‘(b) REDETERMINATION OF RATE.—For each mort11 gage insured pursuant to this section, the adjustment of

12 the effective rate of interest pursuant to subsection (a)(2)

13 may be accomplished through adjustments in the monthly

14 payment amount, the outstanding principal balance, or the

15 mortgage term, or a combination of such factors, except

16 that in no case may any extension of a mortgage term

17 result in a total term in excess of 40 years. The adjust18 ment in the effective rate of interest shall correspond to

19 a specified national interest rate index that is approved

20 in regulations issued by the Secretary and information on

21 which is readily accessible to the mortgagors from gen22 erally available published sources.

23 ‘‘(c) LIMITATIONS ON SECOND-STEP PERIODIC

24 RATES.—For each mortgage insured pursuant to this sec25 tion for which the effective rate of interest charged pursu-
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1 ant to subsection (a)(3) is periodically adjusted under sub2 paragraph (B) of such subsection, such adjustments in the

3 interest rate—

4 ‘‘(1) may be accomplished through adjustments

5 in the monthly payment amount, the outstanding

6 principal balance, or the mortgage term, or a com7 bination of such factors, except that in no case may

8 any extension of a mortgage term result in a total

9 term in excess of 40 years;

10 ‘‘(2) shall correspond to a specified national in11 terest rate index that is approved in regulations is12 sued the Secretary and information on which is

13 readily accessible to the mortgagors from generally

14 available published sources;

15 ‘‘(3) shall be made on an annual basis;

16 ‘‘(4) shall be limited, with respect to any single

17 interest rate increase, to no more than 1 percent on

18 the outstanding loan balance; and

19 ‘‘(5) be limited to a maximum increase of 5 per20 centage points above the initial contract interest rate

21 over the term of the mortgage.

22 ‘‘(d) CONDITIONS ON INSURING AUTHORITY.—The

23 Secretary may insure mortgages pursuant to this section

24 only after determining that the risk posed by such insur25 ance to the financial safety and soundness of the insurance
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1 fund of which the mortgage insurance is an obligation does

2 not exceed such risk posed by insurance of mortgages of

3 equivalent terms having fixed interest rates over such

4 terms.

5 ‘‘(e) DESCRIPTION OF FEATURES.—The Secretary

6 shall issue regulations requiring that the mortgagee make

7 available to the mortgagor, at the time of loan application,

8 a written explanation of the features of the 2-step mort9 gage insured pursuant to this section.

10 ‘‘(f) LIMITATION OF TOTAL NUMBER OF MORTGAGES

11 INSURED.—The aggregate number of mortgages and

12 loans insured pursuant to this section in any fiscal year

13 may not exceed 10 percent of the aggregate number of

14 mortgages and loans insured by the Secretary under this

15 title during the preceding fiscal year.’’.

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