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 De-
velopment.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘FHA Modernization
and Efficiency Act of 1995’’.
SEC. 2. CONGRESSIONAL FINDINGS.
The Congress finds that—
(1) the single family housing mortgage insur-
ance program of the Department of Housing and
Urban Development is a significant factor in pro-
moting first-time and affordable homeownership in
the United States;
(2) use of mortgage financing under the pro-
gram has decreased in recent years, due in part to
increasing complexity of mortgage origination and
servicing under the program;
(3) simplifying and streamlining the loan cri-
teria and loan approval process under the program
would have a positive effect on use of the program
without increasing risk to the Mutual Mortgage In-
surance Fund; and
(4) flexible lending products can be developed
without increasing risk to the Mutual Mortgage In-
surance Fund.
SEC. 3. MAXIMUM MORTGAGE AMOUNT FLOOR FOR SINGLE
FAMILY MORTGAGE INSURANCE.
Subparagraph (A) of the first sentence of section
203(b)(2) of the National Housing Act (12 U.S.C.
1709(b)(2)(A)) is amended by striking ‘‘the greater of’’
and all that follows through ‘‘applicable size’’ and insert-
ing the following: ‘‘50 percent of the dollar amount limita-
tion determined under section 305(a)(2) of the Federal
Home Loan Mortgage Corporation Act (as adjusted annu-
ally under such section) for a residence of the applicable
size’’.
SEC. 4. CALCULATION OF DOWNPAYMENT.
Section 203(b)(2) of the National Housing Act (12
U.S.C. 1709(b)(2)) is amended—
(1) by striking subparagraph (B) and inserting
the following new subparagraph:
‘‘(B) except as otherwise provided in this
paragraph (2), not in excess of—
‘‘(i) in the case of a mortgage for a
property with an appraised value equal to
or less than $50,000, 98.75 percent of the
appraised value of the property,
‘‘(ii) in the case of a mortgage for a
property with an appraised value in excess
of $50,000 but not in excess of $125,000,
97.65 percent of the appraised value of the
property,
‘‘(iii) in the case of a mortgage for a
property with an appraised value in excess
of $125,000, 97.15 percent of the ap-
praised value of the property, or
‘‘(iv) notwithstanding clauses (ii) and
(iii), in the case of a mortgage for a prop-
erty with an appraised value in excess of
$50,000 and which is located in a State for
which the average closing cost exceeds 3.25
percent of the average, for the State, of
SEC. 5. ELIMINATION OF RESTRICTIONS REGARDING NEW
CONSTRUCTION.
(a) IN GENERAL.—Section 203(b)(2) of the National
Housing Act (12 U.S.C. 1709(b)(2)) is amended, in the
matter following subparagraph (B)—
(1) in the 1st undesignated paragraph, by strik-
ing ‘‘Notwithstanding any other provision of this
section,’’ and all that follows through ‘‘beginning of
construction.’’; and
(2) by striking the 2d undesignated paragraph
(relating to mortgage insurance amounts for resi-
dences having solar energy systems).
(b) REPEAL OF AUTHORITY TO EXPEND AMOUNTS
FROM INSURANCE FUND TO CORRECT SUBSTANTIAL DE-
FECTS.—Section 518 of the National Housing Act (12
U.S.C. 1735b) is hereby repealed.
SEC. 6. AUTHORITY TO USE AMOUNTS BORROWED FROM
FAMILY MEMBERS FOR DOWNPAYMENTS.
(a) IN GENERAL.—Section 203(b)(9) of the National
Housing Act (12 U.S.C. 1709(b)(9)) is amended by insert-
ing before the period at the end the following: ‘‘: Provided
further, That for purposes of this paragraph, the Secretary
shall consider as cash or its equivalent any amounts bor-
rowed from a family member (as such term is defined in
section 201), subject only to the requirements that, in any
case in which the repayment of such borrowed amounts
is secured by a lien against the property, such lien shall
be subordinate to the mortgage and the sum of the prin-
cipal obligation of the mortgage and the obligation secured
by such lien may not exceed 100 percent of the appraised
value of the property plus any initial service charges, ap-
praisal, inspection, and other fees in connection with the
mortgage’’.
(b) DEFINITION OF FAMILY MEMBER.—Section 201
of the National Housing Act (12 U.S.C. 1707) is amended
by adding at the end the following new subsections:
‘‘(e) The term ‘family member’ means, with respect
to a mortgagor under such section, a child, parent, or
grandparent of the mortgagor (or the mortgagor’s
spouse). In determining whether any of the relationships
referred to in the preceding sentence exist, a legally adopt-
ed son or daughter of an individual (and a child who is
a member of an individual’s household, if placed with such
individual by an authorized placement agency for legal
adoption by such individual), and a foster child of an indi-
vidual, shall be treated as a child of such individual by
blood.
‘‘(f) The term ‘child’ means, with respect to a mort-
gagor under such section, a son, stepson, daughter, or
stepdaughter of such mortgagor.’’.
SEC. 7. APPROVAL OF CONDOMINIUM PROJECTS.
Section 234 of the National Housing Act (12 U.S.C.
1715y) is amended by striking subsection (k) and insert-
ing the following new subsection:
‘‘(k) APPROVAL OF PROJECTS.—
‘‘(1) IN
GENERAL.—A mortgage covering a
multifamily project or a condominium unit in a mul-
tifamily project shall be eligible for mortgage insur-
ance under this section notwithstanding any other
provision of this section relating to requirements for
multifamily projects if the project has been approved
by a government-sponsored housing enterprise and—
‘‘(A) in the case of a mortgage covering
any condominium unit in the project, the mort-
gage otherwise complies with the requirements
under this section regarding eligibility of mort-
gages for mortgage insurance provided under
subsection (c); and
‘‘(B) in the case of a blanket mortgage
covering the multifamily project, the mortgage
otherwise complies with the requirements under
this section regarding eligibility of mortgages
for mortgage insurance provided under sub-
section (d).
‘‘(2) DEFINITIONS.—For purposes of this sub-
section, the following definitions shall apply:
‘‘(A) The term ‘approved by a government-
sponsored housing enterprise’ means, with re-
spect to a multifamily housing project having a
condominium ownership structure, that a gov-
ernment-sponsored housing enterprise has de-
termined that any mortgage covering the
project or any condominium property in the
project may be purchased by the enterprise if
such mortgage is otherwise determined by the
enterprise to meet the standards and require-
ments of the enterprise relating to mortgages.
‘‘(B) The term ‘condominium unit’ means,
with respect to a multifamily property, a 1-fam-
ily dwelling unit in the project and an undivided
interest in the common areas and facilities that
serve the project.
‘‘(C) 
The 
term 
‘government-sponsored
housing enterprise’ means—
‘‘(i) the Federal National Mortgage
Association; and
‘‘(ii) the Federal Home Loan Mort-
gage Corporation.’’.
SEC. 8. DELEGATION OF SINGLE FAMILY MORTGAGE IN-
SURING AUTHORITY TO DIRECT ENDORSE-
MENT MORTGAGEES.
Title II of the National Housing Act (12 U.S.C. 1707
et seq.) is amended by adding at the end the following
new section:
‘‘DELEGATION OF INSURING AUTHORITY TO DIRECT
ENDORSEMENT MORTGAGEES
‘‘SEC. 256. (a) AUTHORITY.—The Secretary may del-
egate, to one or more mortgagees approved by the Sec-
retary under the direct endorsement program, the author-
ity of the Secretary under this Act to insure mortgages
involving property upon which there is located a dwelling
designed principally for occupancy by 1 to 4 families.
‘‘(b) CONSIDERATIONS.—In determining whether to
delegate authority to a mortgagee under this section, the
Secretary shall consider the experience and performance
of the mortgagee under the direct endorsement program,
the default rate of insured mortgages originated by the
mortgagee compared to the default rate of all insured
mortgages in comparable markets, and such other factors
as the Secretary determines appropriate to minimize risk
of loss to the insurance funds under this Act.
‘‘(c) ENFORCEMENT
OF
INSURANCE
REQUIRE-
MENTS.—
A decision by the Secretary to cancel a delegation shall
be final and conclusive and shall not be subject to judicial
review.
‘‘(e) REQUIREMENTS AND PROCEDURES.—Before ap-
proving a delegation under this section, the Secretary shall
issue regulations establishing appropriate requirements
and procedures, including requirements and procedures
governing the indemnification of the Secretary by the
mortgagee.’’.
SEC. 9. INSURANCE OF 2-STEP SINGLE FAMILY MORT-
GAGES.
Title II of the National Housing Act (12 U.S.C. 1701
et seq.), as amended by the preceding provisions of this
Act, is further amended by adding at the end the following
new section:
‘‘2-STEP SINGLE FAMILY MORTGAGES
‘‘SEC. 257. (a) AUTHORITY.—After making the find-
ing required under subsection (d), the Secretary may in-
sure under any provision of this title a mortgage involving
property upon which there is located a dwelling designed
principally for occupancy by 1 to 4 families, where the
mortgage provides that the effective rate of interest
charged is—
‘‘(1) fixed for the duration of a specified period
that consists of not less than the first 5 years of the
mortgage term;
‘‘(2) adjusted by the mortgagee upon the expi-
ration of the specified period referred to in para-
graph (1) for the mortgage; and
‘‘(3) for the term of the mortgage remaining
after such adjustment—
‘‘(A) fixed at the adjusted rate established
pursuant to paragraph (2); or
‘‘(B) periodically adjusted by the mortga-
gee.
‘‘(b) REDETERMINATION OF RATE.—For each mort-
gage insured pursuant to this section, the adjustment of
the effective rate of interest pursuant to subsection (a)(2)
may be accomplished through adjustments in the monthly
payment amount, the outstanding principal balance, or the
mortgage term, or a combination of such factors, except
that in no case may any extension of a mortgage term
result in a total term in excess of 40 years. The adjust-
ment in the effective rate of interest shall correspond to
a specified national interest rate index that is approved
in regulations issued by the Secretary and information on
which is readily accessible to the mortgagors from gen-
erally available published sources.
‘‘(c) LIMITATIONS
ON
SECOND-STEP
PERIODIC
RATES.—For each mortgage insured pursuant to this sec-
tion for which the effective rate of interest charged pursu-
ant to subsection (a)(3) is periodically adjusted under sub-
paragraph (B) of such subsection, such adjustments in the
interest rate—
‘‘(1) may be accomplished through adjustments
in the monthly payment amount, the outstanding
principal balance, or the mortgage term, or a com-
bination of such factors, except that in no case may
any extension of a mortgage term result in a total
term in excess of 40 years;
‘‘(2) shall correspond to a specified national in-
terest rate index that is approved in regulations is-
sued the Secretary and information on which is
readily accessible to the mortgagors from generally
available published sources;
‘‘(3) shall be made on an annual basis;
‘‘(4) shall be limited, with respect to any single
interest rate increase, to no more than 1 percent on
the outstanding loan balance; and
‘‘(5) be limited to a maximum increase of 5 per-
centage points above the initial contract interest rate
over the term of the mortgage.
‘‘(d) CONDITIONS ON INSURING AUTHORITY.—The
Secretary may insure mortgages pursuant to this section
only after determining that the risk posed by such insur-
ance to the financial safety and soundness of the insurance
fund of which the mortgage insurance is an obligation does
not exceed such risk posed by insurance of mortgages of
equivalent terms having fixed interest rates over such
terms.
‘‘(e) DESCRIPTION OF FEATURES.—The Secretary
shall issue regulations requiring that the mortgagee make
available to the mortgagor, at the time of loan application,
a written explanation of the features of the 2-step mort-
gage insured pursuant to this section.
‘‘(f) LIMITATION OF TOTAL NUMBER OF MORTGAGES
INSURED.—The aggregate number of mortgages and
loans insured pursuant to this section in any fiscal year
may not exceed 10 percent of the aggregate number of
mortgages and loans insured by the Secretary under this
title during the preceding fiscal year.’’.
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