[Congressional Record Volume 141, Number 6 (Wednesday, January 11, 1995)]
[Extensions of Remarks]
[Pages E78-E79]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


            THE FHA MODERNIZATION AND EFFICIENCY ACT OF 1995

                                 ______


                            HON. BILL ORTON

                                of utah

                    in the house of representatives

                      Wednesday, January 11, 1995
  Mr. ORTON. Mr. Speaker, today I am introducing the FHA Modernization 
and Efficiency Act of 1995.
  The purpose of this legislation is to make a number of changes to the 
FHA single family mortgage loan program to make it more responsive to 
market needs, and to provide for more efficient administration within 
the FHA. The bill contains many of the provisions found in H.R. 4484, a 
bill I introduced in the 103d Congress.
  Six of the seven provisions in this bill are identical to the 
provisions the House adopted last year in H.R. 3838, the housing 
reauthorization bill. Since the Senate failed to act on this 
legislation, it is incumbent on Congress to take these matters up 
again.
  As the current Congress convenes, there has been some talk of 
privatizing or eliminating the FHA single family loan program. I 
believe this would be a mistake. FHA has served as an invaluable source 
of low downpayment mortgages to enable young families and individuals 
to enter the housing market. As this Congress increasingly emphasizes 
policies which promote opportunities, there is hardly a better example 
of a Federal program which provides opportunities than the FHA Single 
Family Mortgage Loan Program.
  Furthermore, there appears to be no good fiscal or public policy 
argument for transferring FHA operations to the private sector. The FHA 
single family Mutual Mortgage Insurance Fund [MMIF] is very healthy. 
Moreover, since the program is currently running a surplus, we would 
not cut Government spending by privatizing the program.
  However, privatization or elimination would likely result in 
significantly less competition in the market for low downpayment 
mortgage loans. It is likely that a private company would not have 
either the congressional mandate or incentive to serve the affordable, 
low downpayment single family market in the same way FHA has 
historically done, through all market conditions, good and bad. It is 
hard to see how less competition would be better for the consumer.
  However, it is also true that FHA suffers from a problem typical of 
Government agencies--a failure to adapt quickly to market changes and 
make internal efficiency improvements. While private companies can make 
changes in programs at a moment's notice, FHA is subject to 
programmatic restrictions by Congress that have not been updated for 
some time.
  The FHA Modernization and Efficiency Act is an effort to make these 
needed changes. I believe that with the passage of the provisions in 
this bill, FHA can continue to be a fiscally sound, responsive provider 
of affordable single family loans.
  First, let me address the provisions in my bill which make FHA loans 
more responsive to market conditions. A commonly cited impediment to 
use of FHA is the extraordinarily complex down payment calculation for 
FHA mortgages. Under current statute,
 borrowers, lenders, and realtors are forced to go through a convoluted 
two-part calculation to determine the maximum amount that can be 
financed, and the corresponding down payment required by FHA.

  Under section 4 of my bill, this complexity would be replaced by a 
simple one-part formula, based on the size of the loan. For properties 
with a value up to $50,000, the loan could not exceed 98.75 percent of 
appraised value. For properties between $50,000 and $125,000, the loan 
could not exceed 97.65 percent of appraised value. Finally, for loans 
over $125,000, the loan could not exceed 97.15 percent of appraised 
value. In each case, the borrower could also finance mortgage 
premiums--as under current policy--but could not finance closing costs.
  This measure was adopted as an amendment on the House floor last year 
by voice vote, with bipartisan support. The proposal was painstakingly 
developed to be as neutral as possible in comparison to current law 
with respect to the general levels of downpayments required by FHA. To 
achieve this, we also added a provision for high closing cost States, 
where we permit loans of up to 97.75 percent of value. This is because 
current law generally allows higher loan-to-value ratios for 
transactions with high closing costs. Finally, in a letter dated July 
21, 1994, during House consideration of this proposal, the Commissioner 
of the FHA wrote me a letter in support of this proposal, stating that 
``We concur with your assessment that the new proposal will simplify 
the process for calculating the maximum mortgage amount available on 
single family properties and fully support it.''
  A second provision on my bill, section 6, makes the FHA program more 
flexible by eliminating the current prohibition against parental loans 
used in conjunction with FHA mortgages. Under current FHA policy, 
parents may assist children with downpayment assistance, but only if 
they submit a gift letter indicating that the assistance is not to be 
repayed. While prohibitions against loans for downpayments generally 
make fiscal sense, there is no reason to have this policy in the case 
of a parental loan. There is no practical difference between a parental 
gift and a parental loan. There would be no added risk to the FHA fund 
by eliminating this parental loan prohibition.
  This change would permit many more families and individuals to enter 
the housing market. It would also end the common practice whereby many 
parents are forced to lie about the true nature of financial 
assistance, stating in the gift letter that no repayment is expected, 
when in fact there is a private agreement that the loan shall be 
repayed. This provision was adopted in committee by voice vote and 
included in H.R. 3838 last year. I believe this change is both family-
friendly and noncontroversial.
  A third important provision in my bill, section 9, would provide for 
FHA authority to insure 2-step mortgages. This type of mortgage allows 
the borrower, for example, to have a 30-year term, with a 5-year fixed 
rate of interest, followed by periodic reset(s) of interest rates 
according to a formula. This mortgage
 vehicle has become increasing popular in recent years among private 
lenders, since it provides for more flexibility and lower rates for 
borrowers. In order to keep pace with market innovations, FHA should 
have the same capability. This provision was also adopted in committee 
by voice vote and included in H.R. 3838 last year.

  A fourth provision in my bill, section 3, is probably the only 
controversial provision in the entire bill. This is the provision which 
raises the single family loan floor to 50 percent of the maximum 
Freddie Mac loan amount. This would permit loans of up to $101,150 in 
any place in the country, regardless of the average median home price. 
This is an important simplification provision for many smaller 
communities throughout the country, and was included in the bill which 
passed the House. However, I recognize that a smaller floor increase 
was adopted into law, in the VA-HUD appropriations bill. I believe that 
that increase was too small, and propose that we move the same loan 
floor we passed in the House last year.
  In addition to changes needed to modernize the program, there are a 
number of changes we should make, to make administration of the FHA 
program more efficient. Perhaps the most significant is section 8 of my 
bill, which permits direct endorsement lenders to issue their own 
mortgage certificates. Several years ago, we took the important step of 
delegating underwriting decisions to qualified lenders, subject to 
strict FHA criteria as to LTV, appraisals, and other matters. However, 
the physical issuance of the certificates was still left in the hands 
of HUD. This is an unnecessary burden on HUD, and has resulted on long, 
and sometimes costly delays for lenders. The provision in my bill, 
developed by HUD and included in the housing bill we passed last year, 
would simply let lenders issue their own certificates. This would not 
represent any threat to the fund, since lenders would still be subject 
to the same scrutiny by HUD.
  Finally, there are two other efficiency changes that we should make 
to streamline the FHA program and make it more efficient. Section 5 of 
my bill would remove an outdated 90 percent loan-to-value prohibition 
that applies to newly constructed homes that were 
[[Page E79]] not inspected by HUD prior to start of construction. With 
improvements in local zoning and inspection laws, this special 
limitation is outdated, and places an unnecessary inspection burden on 
HUD staff. FHA insurance of new homes continues to fall, in part 
because of this restriction. Ten years ago, when FHA's total business 
was roughly one-third of today's volume, its new construction business 
was approximately 40 percent higher than it is today. I believe that 
elimination of this unnecessary limitation would make FHA more 
competitive in this area. Again, this provision was adopted in 
committee by voice vote and included in H.R. 3838 last year.
  Finally, section 7 of my bill would eliminate the need for FHA 
approval of condominium projects, when any such project has already 
been approved by a government sponsored enterprise [GSE]. Requiring FHA 
approval in this case is redundant, and is the type of bureaucratic 
excess that we are seeking to undo.
  In conclusion, as we move to consideration of proposals dealing with 
FHA and other Federal housing programs, let's make sensible decisions 
which preserve opportunities for all Americans. My approach is simple: 
don't eliminate FHA--modernize it. I believe the FHA Modernization and 
Efficiency Act is the way to do this, and would welcome cosponsors for 
this important legislation.


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