[House Report 108-748]
[From the U.S. Government Publishing Office]



108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     108-748

======================================================================



 
                      ZERO DOWNPAYMENT ACT OF 2004

                                _______
                                

October 6, 2004.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

             ADDITIONAL, SUPPLEMENTAL, AND DISSENTING VIEWS

                        [To accompany H.R. 3755]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 3755) to authorize the Secretary of Housing and 
Urban Development to insure zero-downpayment mortgages for one-
unit residences, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................     5
Background and Need for Legislation..............................     5
Hearings.........................................................     7
Committee Consideration..........................................     7
Committee Votes..................................................     8
Committee Oversight Findings.....................................     8
Performance Goals and Objectives.................................     8
New Budget Authority, Entitlement Authority, and Tax Expenditures     8
Committee Cost Estimate..........................................     8
Congressional Budget Office Estimate.............................     8
Federal Mandates Statement.......................................    13
Advisory Committee Statement.....................................    13
Constitutional Authority Statement...............................    14
Applicability to Legislative Branch..............................    14
Section-by-Section Analysis of the Legislation...................    14
Changes in Existing Law Made by the Bill, as Reported............    17
Additional, Supplemental, and Dissenting Views...................    23

                               Amendment

    The amendment is as follows:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Zero Downpayment Act of 2004''.

SEC. 2. INSURANCE FOR ZERO-DOWNPAYMENT MORTGAGES.

  (a) Mortgage Insurance Authority.--Section 203 of the National 
Housing Act (12 U.S.C. 1709) is amended by inserting after subsection 
(k) the following new subsection:
  ``(l) Zero-Downpayment Mortgages.--
          ``(1) Insurance authority.--The Secretary may insure, and 
        commit to insure, under this subsection any mortgage that meets 
        the requirements of this subsection and, except as otherwise 
        specifically provided in this subsection, of subsection (b).
          ``(2) Eligible single family property.--To be eligible for 
        insurance under this subsection, a mortgage shall involve a 
        property upon which there is located a dwelling that is 
        designed principally for a 1- to 3-family residence and 
that,notwithstanding subsection (g), is to be occupied by the mortgagor 
as his or her principal residence, which shall include--
                  ``(A) a 1-family dwelling unit in a multifamily 
                project and an undivided interest in the common areas 
                and facilities which serve the project;
                  ``(B) a 1-family dwelling unit of a cooperative 
                housing corporation the permanent occupancy of the 
                dwelling units of which is restricted to members of 
                such corporation and in which the purchase of such 
                stock or membership entitles the purchaser to the 
                permanent occupancy of such dwelling unit; and
                  ``(C) a manufactured home that meets such standards 
                as the Secretary has established for purposes of 
                subsection (b).
          ``(3) Maximum principal obligation.--
                  ``(A) Limitation.--To be eligible for insurance under 
                this subsection, a mortgage shall involve a principal 
                obligation in an amount not in excess of 100 percent of 
                the appraised value of the property plus any initial 
                service charges, appraisal, inspection and other fees 
                in connection with the mortgage as approved by the 
                Secretary.
                  ``(B) Inapplicability of other loan-to-value 
                requirements.--A mortgage insured under this subsection 
                shall not be subject to subparagraph (B) of paragraph 
                (2) of subsection (b) or to the matter in such 
                paragraph that follows such subparagraph.
          ``(4) Eligible mortgagors.--The mortgagor under a mortgage 
        insured under this subsection shall meet the following 
        requirements:
                  ``(A) First-time homebuyer.--The mortgagor shall be a 
                first-time homebuyer. The program for mortgage 
                insurance under this subsection shall be considered a 
                Federal program to assist first-time homebuyers for 
                purposes of section 956 of the Cranston-Gonzalez 
                National Affordable Housing Act (42 U.S.C. 12713).
                  ``(B) Counseling.--
                          ``(i) Requirement.--The mortgagor shall have 
                        received counseling, prior to application for 
                        the loan involved in the mortgage, by a third 
                        party (other than the mortgagee) who is 
                        approved by the Secretary, with respect to the 
                        responsibilities and financial management 
                        involved in homeownership. Such counseling 
                        shall be provided to the mortgagor on an 
                        individual basis by a representative of the 
                        approved third party counseling entity, and 
                        shall be provided in person to the maximum 
                        extent practicable.
                          ``(ii) Topics.--Such counseling shall include 
                        providing to, and discussing with, the 
                        mortgagor--
                                  ``(I) information regarding 
                                homeownership options other than a 
                                mortgage insured under this subsection, 
                                other zero- or low-downpayment mortgage 
                                options that are or may become 
                                available to the mortgagor, the 
                                financial implications of entering into 
                                a mortgage (including a mortgage 
                                insured under this subsection), and any 
                                other information that the Secretary 
                                may require; and
                                  ``(II) a document that sets forth the 
                                amount and the percentage by which a 
                                property subject to a mortgage insured 
                                under this subsection must appreciate 
                                for the mortgagor to recover the 
                                principal amount of the mortgage, the 
                                costs financed under the mortgage, and 
                                the estimated costs involved in selling 
                                the property, if the mortgagor were to 
                                sell the property on each of the 
                                second, fifth, and tenth anniversaries 
                                of the mortgage.
                          ``(iii) 2- and 3-family residences.--In the 
                        case of a mortgage involving a 2- or 3-family 
                        residence, such counseling shall include (in 
                        addition to the information required under 
                        clause (ii)) information regarding real estate 
                        property management.
          ``(5) Option for notice of foreclosure prevention counseling 
        availability.--
                  ``(A) Option.--To be eligible for insurance under 
                this subsection, the mortgagee shall provide mortgagor, 
                at the time of the execution of the mortgage, an 
                optional written agreement which, if signed by the 
                mortgagor, allows, but does not require, the mortgagee 
                to provide notice described in subparagraph (B) to a 
                housing counseling entity that has agreed to provide 
                the notice and counseling required under subparagraph 
                (C) and is approved by the Secretary.
                  ``(B) Notice to counseling agency.-- The notice 
                described in this subparagraph, with respect to a 
                mortgage, is notice, provided at the earliest time 
                practicable after the mortgagor becomes 60 days 
                delinquent with respect to any payment due under the 
                mortgage, that the mortgagor is so delinquent and of 
                how to contact the mortgagor. Such notice may only be 
                provided once with respect to each delinquency period 
                for a mortgage.
                  ``(C) Notice to mortgagor.--Upon notice from a 
                mortgagee that a mortgagor is 60 days delinquent with 
                respect to payments due under the mortgage, the housing 
                counseling entity shall at the earliest time 
                practicable notify the mortgagor of such delinquency, 
                that the entity makes available foreclosure prevention 
                counseling that may assist the mortgagor in resolving 
                the delinquency, and of how to contact the entity to 
                arrange for such counseling.
                  ``(D) Ability to cure.--Failure to provide the 
                optional written agreement required under subparagraph 
                (A) may be corrected by sending such agreement to the 
                mortgagor not later than the earliest time practicable 
                after the mortgagor first becomes 60 days delinquent 
                with respect to payments due under the mortgage. 
                Insurance provided under this subsection may not be 
                terminated and penalties for such failure may not be 
                prospectively or retroactively imposed if such failure 
                is corrected in accordance with this subparagraph.
                  ``(E) Penalties for failure to provide agreement.--
                The Secretary may establish and impose appropriate 
                penalties for failure of a mortgagee to provide the 
                optional written agreement required under subparagraph 
                (A).
                  ``(F) Limitation on liability of mortgagee.--A 
                mortgagee shall not incur any liability or penalties 
                for any failure of a housing counseling entity to 
                provide notice under subparagraph (C).
                  ``(G) No private right of action.--This paragraph 
                shall not create any private right of action on behalf 
                of the mortgagor.
                  ``(H) Delinquency period.--For purposes of this 
                paragraph, the term `delinquency period' means, with 
                respect to a mortgage, a period that begins upon the 
                mortgagor becoming delinquent with respect to payments 
                due under the mortgage and ends upon the first 
                subsequent occurrence of such payments under the 
                mortgage becoming current or the property subject to 
                the mortgage being foreclosed or otherwise disposed of.
          ``(6) Inapplicability of downpayment requirement.--A mortgage 
        insured under this subsection shall not be subject to paragraph 
        (9) of subsection (b) or any other requirement to pay on 
        account of the property, in cash or its equivalent, any amount 
        of the cost of acquisition.
          ``(7) MMIF monitoring.--In conjunction with the credit 
        subsidy estimation calculated each year pursuant to the Federal 
        Credit Reform Act of 1990 (2 U.S.C. 661 et seq.), the Secretary 
        shall review the program performance for mortgages insured 
        under this subsection and make any necessary adjustments, which 
        may include altering mortgage insurance premiums subject to 
        subsection (c)(2), adjusting underwriting standards, and 
        limiting the availability of mortgage insurance under this 
        subsection, to ensure that the Mutual Mortgage Insurance Fund 
        shall continue to generate a negative credit subsidy.
          ``(8) Underwriting.--For a mortgage to be eligible for 
        insurance under this subsection:
                  ``(A) In general.--The mortgagor's credit and ability 
                to pay the monthly mortgage payments shall have been 
                evaluated using the Federal Housing Administration's 
                Technology Open To Approved Lenders (TOTAL) Mortgage 
                Scorecard, or a similar standardized credit scoring 
                system approved by the Secretary, and in accordance 
                with procedures established by the Secretary.
                  ``(B) Multi-unit properties.--In the case of a 
                mortgage involving a property upon which there is 
                located a dwelling that is designed principally for a 
                2- or 3-family residence, the mortgagor meets such 
                additional underwriting standards as the Secretary may 
                establish.
          ``(9) Approval of mortgagees.--To be eligible for insurance 
        under this subsection, a mortgage shall have been made to a 
        mortgagee that meets such criteria as the Secretary shall 
        establish to ensure that mortgagees meet appropriate standards 
        for participation in the program authorized under this 
        subsection.
          ``(10) Disclosure of incremental costs.--
                  ``(A) Required disclosure.--For a mortgage to be 
                eligible for insurance under this subsection, the 
                mortgagee shall provide to the mortgagor, at the time 
                of the application for the loan involved in the 
                mortgage, a written disclosure, as the Secretary shall 
                require, that specifies the effective cost to a 
                mortgagor of borrowing the amount by which the maximum 
                amount that could be borrowed under a mortgage insured 
                under this subsection exceeds the maximum amount that 
                could be borrowed under a mortgage insured under 
                subsection (b), based on average closing costs with 
                respect to such amount, as determined by the Secretary. 
                Such cost shall be expressed as an annual interest rate 
                over the first 5 years of a mortgage.
                  ``(B) Coordination.--The disclosure required under 
                this paragraph may be provided in conjunction with the 
                notice required under subsection (f).
          ``(11) Loss mitigation.--
                  ``(A) In general.--Upon the default of any mortgage 
                insured under this subsection, the mortgagee shall 
                engage in loss mitigation actions for the purpose of 
                providing an alternative to foreclosure to the same 
                extent as is required of other mortgages insured under 
                this title pursuant to the regulations issued under 
                section 230(a).
                  ``(B) Annual reporting.--Not later than 90 days after 
                the end of each fiscal year, the Secretary shall submit 
                a report to the Congress that compares the rates of 
                default and foreclosure during such fiscal year for 
                mortgages insured under this subsection, for single-
                family mortgages insured under this title (other than 
                under this subsection), and for mortgages for housing 
                purchased with assistance provided under the 
                downpayment assistance initiative under section 271 of 
                the Cranston-Gonzalez National Affordable Housing Act 
                (42 U.S.C. 12821).
          ``(12) Additional requirements.--The Secretary may establish 
        any additional requirements for mortgage insurance under this 
        subsection as may be necessary or appropriate.
          ``(13) Limitation.--The aggregate number of mortgages insured 
        under this subsection 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.
          ``(14) Program suspension.--
                  ``(A) In general.--Subject to subparagraph (C), the 
                authority under paragraph (1) to insure mortgages shall 
                be suspended if at any time the claim rate described in 
                subparagraph (B) exceeds 3.5 percent. A suspension 
                under this subparagraph shall remain in effect until 
                such time as such claim rate is 3.5 percent or less.
                  ``(B) FHA total single-family annual claim rate.--The 
                claim rate described in this subparagraph, for any 
                particular time, is the ratio of the number of claims 
                during the 12 months preceding such time on mortgages 
                on 1- to 4-family residences insured pursuant to this 
                title to the number of mortgages on such residences 
                having such insurance in-force at that time.
                  ``(C) Applicability.--A suspension under subparagraph 
                (A) shall not preclude the Secretary from endorsing or 
                insuring any mortgage that was duly executed before the 
                date of such suspension.
          ``(15) Sunset.--No mortgage may be insured under this 
        subsection after September 30, 2009, except that the Secretary 
        may endorse or insure any mortgage that was duly executed 
        before such date.
          ``(16) GAO reports.--The Comptroller General of the United 
        States shall submit a report to the Congress not later than 2 
        years after the date of the enactment of this subsection, and 
        annually thereafter, regarding the performance of mortgages 
        insured under this subsection.
          ``(17) Implementation.--The Secretary may implement this 
        subsection on an interim basis by issuing an interim rule, 
        except that the Secretary shall solicit public comments upon 
        publication of such interim rule and shall issue a final rule 
        implementing this subsection after consideration of the 
        comments submitted. ''.
  (b) Mortgage Insurance Premiums.--The second sentence of subparagraph 
(A) of section 203(c)(2) of the National Housing Act (12 U.S.C. 
1709(c)(2)(A)) is amended by striking ``In'' and inserting ``Except 
with respect to a mortgage insured under subsection (l), in''.
  (c) General Insurance Fund.--Section 519(e) of the National Housing 
Act (12 U.S.C. 1735c(e)) is amended by striking ``and 203(i)'' and 
inserting ``, 203(i), and 203(l)''.

                          Purpose and Summary

    H.R. 3755 authorizes the Secretary of Housing and Urban 
Development to insure zero-downpayment mortgages for one- to 
three-unit residences. The bill reported out of the committee 
includes a number of safeguards designed to protect homebuyers 
and the FHA program.

                  Background and Need for Legislation

    Recent census figures document that a record 68.6 percent 
of U.S. households lived in their own homes as of the last 
quarter of 2003. That figure has risen from 67.5 percent at the 
beginning of 2001. The racial divide in homeownership remains 
wide. Seventy-five and \1/2\ percent of white households own 
their own home, compared to 49.4 percent of African American 
households and 47.7 percent of Hispanic households during the 
last part of 2003. Studies show that the single biggest 
obstacle to homeownership for most families is the inability to 
save enough money to meet downpayment and closing costs. 
Minority families in particular are burdened by high 
downpayment requirements.
    Since the creation of the Federal Housing Administration 
(FHA) in the National Housing Act in 1934 (Public Law 73-479), 
downpayments have been a requirement of potential borrowers 
seeking to secure loans insured by the Federal government. FHA 
is not a direct lender; instead, the Federal agency guarantees 
loan payments for mortgages on moderately priced owner-occupied 
property through the issuance of mortgage insurance 
certificates. A housing or mortgage downpayment is the portion 
of purchase price paid to a home seller by a potential 
homebuyer to close a sales transaction, with the understanding 
that the balance will be paid later.
    Over time, as mortgage lending markets matured, the 
conventional market attracted a significant share of mortgagees 
or potential borrowers. The conventional market (conventional 
financing) is commonly referred to in real estate as mortgage 
financing that is not insured or guaranteed by a government 
agency such as HUD/FHA, VA (Veterans Affairs) or the Rural 
Housing Service (RHS). The jumbo market (jumbo financing) is 
commonly referred to as those mortgage loans that exceed the 
statutory size limit eligible for purchase or securitization by 
government sponsored entities or the Federal agencies.
    Theoretically, downpayment requirements were established to 
assure the lender that a borrower would be less likely to 
default or risk foreclosure on a home if there was some 
personal investment stake. Before the invention of automated or 
computerized underwriting to determine credit scores, lenders 
believed that downpayments were one of the best techniques to 
assess creditworthiness of a potential borrower; or, in the 
alternative, downpayments were a good indicator of credit risk. 
These downpayment requirements have ranged from as high as 20 
percent to as low as 3 percent. Traditionally, mortgage loans 
for investment properties, as opposed to owner-occupied 
properties, required a larger downpayment, e.g. 20 percent.
    Recently, some conventional mortgage lending products 
purchased by the secondary markets or held in institutional 
investment portfolios included provisions waving downpayments, 
contingent on certain underwriting conditions. Additionally, a 
majority of State housing agencies have provided some form of a 
zero or very-low downpayment program. H.R. 3755 would provide a 
FHA zero downpayment option for first-time homebuyers and, in 
turn, designed to increase homeownership in this country.
    The introduced bill reflects a legislative proposal 
incorporated in the Administration's FY 2005 budget for the 
U.S. Department of Housing and Urban Development (HUD). The 
Administration's budget proposal assumes increased revenue from 
charging a higher premium to those potential borrowers who 
utilize the zero downpayment option. According to the budget 
proposal, those higher premiums would be sufficient to cover 
any anticipated losses expected by FHA's mortgage insurance 
funds. Although the Administration's budget proposal estimated 
that higher premiums would be sufficient to cover any 
anticipated losses expected by FHA's mortgage insurance funds, 
the Congressional Budget Office estimates that the bill ordered 
reported by the Committee would cost $500 million over the FY 
2006-2009 period.
    While there was considerable debate on whether the 
Administration's proposal would provide enough premium income 
to account for any potential losses, the Committee believed 
that further improvements to the proposal were necessary to 
ensure safety and soundness of the FHA's Mutual Mortgage 
Insurance Fund (MMIF). The Mutual Mortgage Insurance Fund is a 
statutorily-required actuarially sound FHA insurance fund for 
the unsubsidized single-family mortgage insurance program(s).
    These improvements or safeguards incorporated into the 
legislation during the Committee's consideration included the 
following: a requirement establishing extensive counseling 
provisions, including pre-application loan counseling; an 
option, exercised by the new homeowner, for foreclosure 
prevention counseling; and, full disclosure of the incremental 
costs of the loan.
    Consistent with the Administration's statements and 
testimony regarding implementation of a Zero Downpayment 
program, the Committee requires HUD to use an automated 
underwriting system to evaluate potential homebuyers; requires 
HUD to establish a process to monitor lenders to ensure that 
they meet the participation requirements; allows HUD the 
flexibility to charge a mortgage insurance premium, up to 2.25 
percent, paid at the time of origination or mortgage closing, 
as well as assess an annual premium charge up to .55 percent. 
The up-front and annual mortgage insurance premiums are 
designed to offset any potential increased risk.
    In addition to establishing these typical safeguards to 
ensure safety and soundness of the MMIF, the Committee included 
a performance trigger mechanism that would temporarily suspend 
the Zero Downpayment program when the overall claim rate to the 
FHA fund exceeds 3.5 percent. The legislation defines the claim 
rate as the number of claims, or insurance actually paid due to 
a claim against the mortgage insurance premium, during the 
preceding 12 months on FHA single family mortgages. To further 
ensure that Congress and the Administration are apprised of any 
performance trends generated by the new downpayment 
requirements, HUD would be required to provide an annual report 
on the success of the program.
    Moreover, the Committee imposed a program limitation on the 
number of loans that FHA could insure under this zero 
downpaymentrequirements of no more than 10 percent of the 
aggregate number of mortgages and loans insured by FHA in the preceding 
fiscal year.
    Finally, the Committee imposed a 5-year sunset to enable an 
analysis of the FHA zero downpayment concept.

                                Hearings

    The Subcommittee on Housing and Community Opportunity held 
a hearing on March 24, 2004 on H.R. 3755, the ``Zero 
Downpayment Act of 2004''. The following witnesses testified: 
The Honorable John C. Weicher, Assistant Secretary for Housing-
Federal Housing Commissioner, U.S. Department of Housing and 
Urban Development; Ms. Sheila Crowley, President, National Low 
Income Housing Coalition; Rev. Warren L. Henry Sr., Vice-Chair, 
Housing Authority of Fulton County, Atlanta, GA; Mr. Thomas J. 
Finnegan, III, President, Huntington Mortgage Group, Columbus, 
OH; Mr. Michael F. Petrie, President, P/R Mortgage & Investment 
Corporation, Indianapolis, IN, on behalf of the Mortgage 
Bankers Association; Mr. James R. Rayburn, President, National 
Association of Home Builders; Mr. Deane Dolben, President, The 
Dolben Company, Burlington, MA, on behalf of the National 
Multi-Housing Council/National Apartment Association; Mr. 
Conrad Egan, President/CEO, National Housing Conference; Mr. 
Basil N. Petrou, Managing Partner, Federal Financial Analytics, 
Inc.; Mr. Scott Syphax, President & Chief Executive Officer, 
Nehemiah Corporation of America, Sacramento, CA; Mr. Jerome 
Witcher, Real Estate Agent, Art Lee Realtors, Columbus, OH; and 
Ms. Ann Ashburn, President and Chief Executive Officer, 
AmeriDream, Inc., Gaithersburg, MD.

                        Committee Consideration

    On May 5, 2004, the Subcommittee on Housing and Community 
Opportunity met in open session and approved H.R. 3755 for full 
Committee consideration, as amended, by a voice vote.
    On June 3, 2004, the Committee on Financial Services met in 
open session and ordered H.R. 3755 favorably reported to the 
House, with an amendment, by a voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. No 
record votes were taken with in conjunction with the 
consideration of this legislation. A motion by Mr. Oxley to 
report the bill to the House with a favorable recommendation 
was agreed to by a voice vote.
    The following amendments were considered:

          An amendment in the nature of a substitute by Mr. 
        Oxley, No. 1, making various substantive and technical 
        changes to the bill, was agreed to by a voice vote.
          An amendment to the amendment in the nature of a 
        substitute by Mr. Baca, No. 1a, identifying the Gift 
        Downpayment Program as one of the potential zero down 
        alternatives, was withdrawn.
          An amendment to the amendment in the nature of a 
        substitute by Ms. Waters, No. 1b, striking ``any fiscal 
        year'' and inserting ``each of fiscal years 2005, 2006, 
        and 2007'', was withdrawn.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee held a hearing and made 
findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The Secretary of Housing and Urban Development will use the 
authority granted under this legislation to establish a program 
to provide FHA-insured mortgages with no downpayment 
requirement. That program will be administered in accordance 
with the provisions of this legislation to ensure the safety 
and soundness of MMIF.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee finds that this 
legislation would result in no new budget authority, 
entitlement authority, or tax expenditures or revenues.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 21, 2004.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3755, the Zero 
Downpayment Act of 2004.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susanne S. 
Mehlman.
            Sincerely,
                                      Elizabeth M. Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

H.R. 3755--Zero Downpayment Act of 2004

    Summary: H.R. 3755 would authorize a new loan guarantee 
program under the Federal Housing Administration (FHA) that 
would allow first-time home buyers to purchase a home without a 
down payment. Currently, FHA's single-family loan guarantee 
program requires home buyers to make a down payment of at least 
3 percent of the sales price. The new loan guarantees would be 
available to home buyers purchasing various types of one-to-
three family residences, such as single-family homes and 
condominiums, through September 30, 2009. The number of zero 
down-payment loans insured by FHA each year could not exceed 10 
percent of its total number of single-family loan guarantees 
made during the preceding year. This legislation also would 
allow FHA to charge up-front and annual fees up to the levels 
set under current law for the existing single-family program.
    CBO estimates that implementing this legislation would have 
a net cost of about $500 million over the 2006-2009 period, 
assuming future appropriation actions consistent with the bill. 
(We expect that it would take FHA about one year to implement 
the new program.) FHA's loan guarantee programs are 
discretionary federal credit programs that require 
appropriation action each year to establish a dollar limitation 
on the value of loans that may be guaranteed and to provide a 
credit subsidy appropriation for those FHA programs estimated 
to have a positive subsidy rate.
    Included in this net cost is $59 million in offsetting 
collections that would be generated because we estimate that 
about half of the new loan guarantees under the zero down-
payment program would be included in the Government National 
Mortgage Association's (GNMA's) single-family Mortgage-Backed 
Securities (MBS) program. (GNMA is responsible for guaranteeing 
securities backed by pools of mortgages insured by the federal 
government and, like FHA, requires appropriation action to 
establish its dollar limitation for the securities program.)
    Enacting this bill could affect direct spending and 
receipts because the bill would provide the Secretary of the 
Office of Housing and Urban Development (HUD) with the 
authority to establish penalties against borrowers who fail to 
meet certain requirements under the bill. CBO estimates that 
any increase in civil or criminal penalties would not be 
significant.
    H.R. 755 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 3755 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(mortgage and housing credit). For this estimate, we assume the 
bill will be enacted near the beginning of fiscal year 2005.
    Basis of estimate: The budgetary impact of the zero down-
payment loan program would depend on how many households would 
use this provision to help them become homeowners and the 
likelihood that such borrowers would default on their 
mortgages. CBO estimates that FHA would need appropriations of 
$143 million in 2006 and $562 million over the 2006-2009 period 
to cover the estimated subsidy cost of the zero down-payment 
program. We also estimate that about 50 percent of the loan 
guarantees made each year under the zero down-payment program 
would be included in GNMA's MBS program, resulting in the 
collection of additional negative subsidy receipts of $59 
million over the 2006-2009 period. There also would be a cost 
associated with the GAO studies that are required under this 
bill. However, CBO estimates that those costs would be less 
than $500,000 each year. Each of these budgetary effects are 
discussed below.

----------------------------------------------------------------------------------------------------------------
                                                               By fiscal year, in millions of dollars--
                                                     -----------------------------------------------------------
                                                        2004      2005      2006      2007      2008      2009
----------------------------------------------------------------------------------------------------------------
                                        SPENDING SUBJECT TO APPROPRIATION

FHA and GNMA Spending Under Current Law: \1\
    Estimated Authorization Level...................    -3,860    -2,611    -2,444    -2,383    -2,484    -2,428
    Estimated Outlays...............................    -3,860    -2,611    -2,444    -2,383    -2,424    -2,478
Proposed Changes:
    Net Subsidy Cost for Zero Down-Payment Loans:
        Estimated Authorization Level...............         0         0       143       140       138       141
        Estimated Outlays...........................         0         0       143       140       138       141
    GNMA Offsetting Collections:
        Estimated Authorization Level...............         0         0       -16       -15       -14       -14
        Estimated Outlays...........................         0         0       -16       -15       -14       -14
    Total Changes:
        Estimated Authorization Level...............         0         0       127       125       124       127
        Estimated Outlays...........................         0         0       127       125       124       127
Total FHA and GNMA Spending Under H.R. 3755: \2\
    Estimated Authorization Level...................    -3,860    -2,611    -2,317    -2,158    -2,300    -2,351
    Estimated Outlays...............................    -3,860    -2,611    -2,317    -2,158    -2,300    -2,351
----------------------------------------------------------------------------------------------------------------
\1\ The figures for 2004 are CBO's current estimates of budget authority and outlays for these programs under
  the enacted appropriation levels for this year. The 2005-2009 levels are CBO's baseline estimates of the
  amount of offsetting collections generated by FHA's single-family program and GNMA's single-family MBS
  program.
\2\ Enacting H.R. 3755 also would require an annual appropriation of less than $500,000 beginning in 2007 for
  the General Accounting Office (GAO) to prepare the studies required under the bill.

Demand for the zero down-payment program

    According to FHA, mortgage banking associations, and 
industry experts, the number of private entities supporting 
down-payment assistance programs in recent years has grown, 
indicating a growing demand for programs that help home buyers 
who cannot afford down payments. For example, the Nehemiah 
Corporation, which is the oldest and largest nonprofit provider 
of down-payment assistance in the country, provided assistance 
to over 5,500 home buyers in 1998 compared to 33,000 home 
buyers in 2003.
    CBO believes that demand for a zero down-payment program 
would be strong and, based on information from FHA, expects 
that about 150,000 loans with a face value of about $20 billion 
(known as the loan volume) could be guaranteed beginning in 
2006. CBO does not estimate that any new loan guarantees would 
be issued in 2005 because we expect that it would take FHA one 
year to implement the new program following enactment of this 
legislation. This bill would limit the loan volume for the zero 
down-payment program to no more than 10 percent of FHA's total 
number of single-family loan guarantees made in the preceding 
year. CBO's estimates of total loan volume over the next five 
years average about $126 billion each year. Consequently, CBO 
estimates that volume for the new program would be limited to 
about $13 billion each year for around 100,000 borrowers.
    According to FHA, an increasing number of its borrowers who 
are first-time home buyers making low down payments are using 
some form of down-payment assistance (e.g., gifts from 
relatives or grants from nonprofit entities). On average, these 
borrowers represent about 26 percent of all first-time home 
buyers making the minimum 3 percent down payment. CBO estimates 
that about 80,000 FHA borrowers who are first-time home buyers 
will use some form of down-payment assistance each year. CBO 
estimates that at least 50 percent of such borrowers would 
migrate to the new zero down-payment program. Under that 
assumption, about 40,000 FHA borrowers would use the new zero 
down-payment program instead of the existing single-family 
program. CBO estimates that this shift of about $5 billion 
worth of loan guarantees from the existing single-family 
program to the new zero down-payment program each year would 
affect the subsidy cost of the FHA program, as discussed below.

Credit risk associated with the zero down-payment program

    Zero down-payment loans are viewed by private-sector 
lenders as having a higher risk of default than traditional 
mortgages with down payments according to several industry 
experts, such as people involved with the secondary-mortgage 
market, trade associations, and down-payment assistance 
programs. For private lenders, the borrower's loan-to-value 
(LTV) ratio indicates how much equity a borrower initially has 
in the home and serves as one of the predictors of the 
likelihood of default. On average, borrowers with less equity 
(that is, higher LTV ratios) have higher default rates than 
borrowers with more equity. Such borrowers are more vulnerable 
to adverse events, such as job loss and falling house prices. 
Under the proposed zero down-payment program, borrowers would 
enter home ownership with zero and even negative equity because 
borrowers could finance their up-front premiums and closing 
costs, resulting in LTV ratios of 103 percent or more.
    To compensate for the risk of default, FHA has indicated 
that it would not change the credit standards (e.g., debt-to-
income ratios and payment-to-income ratios) it applies to these 
new borrowers, but it would charge such borrowers higher loan-
guarantee fees than those charged to borrowers under FHA's 
current single-family program. We expect that FHA would 
implement the fees at the maximum levels established under 
current law. That is, the up-front fees for the new program 
would be 2.25 percent of the loan value and annual fees would 
be 0.55 percent of the loan value for the first five years and 
0.5 percent thereafter. (In comparison, borrowers in the 
existing program pay an up-front premium of a 1.5 percent and 
annual premiums of 0.5 percent.) Despite these higher fees, 
however, CBO expects that default costs could still exceed the 
value of the higher fees.
    This bill would require FHA to suspend the zero down-
payment program if more than 3.5 percent of the loans in the 
program are foreclosed in one year. CBO estimates that defaults 
for the new program would average about 1 percent each year and 
that the cumulative default rate over a 30-year period would 
exceed 30 percent. This restriction on the number of defaults 
could limit the number of loans FHA insures each year if the 
number of foreclosures is greater than we estimate. But other 
factors, such as changing consumer demand for the program due 
to higher interest rates, could also lead to a smaller loan 
volume in the program. The zero down-payment program would be 
considered a discretionary program that could be suspended by 
FHA at any time. For this estimate, CBO assumes that the 
necessary subsidies are provided each year through the 
appropriation process and that the subsidies are spent each 
year.

Subsidy cost

    Under credit reform procedures, funds must be appropriated 
in advance to cover the subsidy cost of the loan guarantees, as 
estimated on a present-value basis. CBO estimates that the new 
program would have a subsidy rate of about 1.21 percent, 
compared to our estimate of the subsidy rate in 2006 of 
negative 1.78 percent for FHA's existing single-family program. 
With a subsidy rate of 1.21 percent, CBO estimates that the 
zero down-payment program would cost $618 million over the 
2006-2009 period.
    This estimated subsidy cost would be slightly offset by 
some expected savings associated with the $5 billion in 
business that would shift from the existing single-family 
program to the zero down-payment program. Because the loans 
that would shift to the new program would most likely represent 
some of the riskier loans, CBO estimates that the migration of 
these borrowers to the new program would leave the larger 
remaining portfolio of single-family loan guarantees with an 
overall slightly more negative subsidy rate. CBO estimates that 
the negative subsidy associated with the existing single-family 
program would become morenegatively by about 0.1 percent 
beginning in 2006, resulting in additional offsetting collections of 
$57 million over the 2006-2009 period.
    CBO estimates that implementing the zero down-payment 
program would result in a net cost of $143 million of 2006 and 
a net cost of $562 million over the 2006-2009 period. The 
estimated loan subsidy costs--which are treated as 
discretionary spending--would be recorded in the budget each 
year when the subsidy appropriation is provided. Under this 
legislation, the Secretary of HUD would have the ability to 
make certain programmatic adjustments, such as changing the 
guarantee fees, to ensure that the Mutual Mortgage Insurance 
Fund (MMIF) continues to realize offsetting collections. While 
CBO estimates that the zero down-payment program would require 
an appropriation to cover its estimated costs, such costs would 
not preclude the MMIF from generating net offsetting 
collections, albeit fewer collections than would be expected 
under current law.

GNMA subsidy receipts

    GNMA is responsible for guaranteeing securities backed by 
pools of mortgages 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 
these securities. Because the value of the fees collected are 
estimated to exceed the cost of loan defaults in each year, the 
GNMA MBS program is estimated to have a negative subsidy rate 
of 0.23 percent in 2006, resulting in the net collection of 
receipts to the federal government.
    Because over 90 percent of FHA-insured loans are eventually 
included in GNMA's MBS program, CBO estimates that implementing 
the zero down-payment program would result in additional 
collections to GNMA. Based on information from GNMA, CBO 
assumes that only the zero down-payment loans with the lowest 
credit risk would be included in GNMA's MBS program and that 
consequently such loans would not have any significant effect 
on GNMA's negative subsidy rate. We estimate that about 50 
percent of the loan guarantees made under this new program 
would be included in GNMA's MBS program, resulting in the 
collection of $16 million in 2006 and $59 million over the 
2006-2009 period.

GAO studies

    This legislation also would require GAO to prepare a report 
on loan performance under the zero down-payment program no 
later than two years following enactment of the bill and 
annually thereafter. CBO estimates that GAO would require less 
than $500,000 annually beginning in 2007 for such reports.
    Intergovernmental and private-sector impact: H.R. 3755 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal Costs: Susanne S. Mehlman; 
Impact on State, Local, and Tribal Governments: Sarah Puro; and 
Impact on the Private Sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section establishes the short title of the bill, the 
``Zero Downpayment Act of 2004.''

Section 2. Insurance for zero-downpayment mortgages

    Subsection (a) amends section 203 of the National Housing 
Act (12 U.S.C. 1709) to establish the program. Under the 
program, the Secretary is authorized to insure any mortgage 
that meets the requirements of the legislation.
    The legislation defines the types of property eligible for 
this program as dwellings with 1-3 units, condominiums, 
cooperatives and manufactured housing. The principal obligation 
on a mortgage insured under this new subsection may not exceed 
100 percent of the appraised value of the property plus any 
initial service charges, appraisal, inspection, and other fees 
in connection with the mortgage as approved by the Secretary.
    Only first-time homebuyers, as defined under section 956 of 
the Cranston-Gonzalez Act, are authorized to participate in 
this program. Section 956 of the Cranston-Gonzalez Act defines 
first-time homebuyer as an individual who has not had any 
present ownership interest in principal residence during a 
specified period of time. Section 956 recognizes ``displaced 
homemakers'' and ``single parents'' for purposes of first-time 
homebuyer designation as those individuals who would not be 
prohibited from a first-time homebuyer program if they had, at 
one time, an ownership interest in a principal residence while 
married, owned a home with his or her spouse, or resided in a 
home owned by a spouse.
    The program also requires counseling similar to the 
counseling required for eligible borrowers under the HECM 
(Reverse Mortgages) program. The Committee has authorized the 
Secretary to ensure that the counseling agencies cover 
specified topics with the mortgagors in a counseling session in 
order to ensure that mortgagors fully understand the financial 
implications of a Zero Downpayment mortgage. However, it is 
also understood that the required information may not be 
available at the time of counseling, which will occur prior to 
application. Therefore, the Committee urges HUD to develop 
generic information that the counseling agencies can provide to 
the potential program participants.
    The mortgagor is required to receive counseling by a HUD-
approved third-party counseling entity. This provision is 
intended to ensure that an individual considering a zero 
downpayment loan receives counseling from a housing counselor 
that is independent from the mortgagee so that the mortgagor is 
not steered into a loan from a particular lender.
    This counseling should be provided individually and, when 
practicable, in person prior to the mortgage loan application. 
With regard to this provision, the Committee expects HUD to 
provide clear guidance to counseling agencies regarding the 
circumstances under which a counseling agency may waive the in-
person requirement and offer alternative counseling methods. In 
developing these guidelines, HUD should consider the capacity 
of counseling agencies with respect to demand and the location 
of counseling agencies with respect to potential borrowers.
    This section also requires a housing counselor to provide a 
prospective borrower with a document that sets forth the amount 
and the percentage by which the property subject to a proposed 
mortgage must appreciate for the mortgagor to recover the 
principal amount of the mortgage, the costs financed under the 
mortgage, and the estimated costs involved in selling the 
property, if the mortgagor were tosell the property on each of 
the second, fifth, and tenth anniversaries of the proposed mortgage. 
The Committee intends that a housing counselor may choose to meet this 
requirement by providing a prospective borrower with a document that 
makes the required calculations using the actual dollar amount of the 
proposed mortgage, but the housing counselor is not required to use the 
actual dollar amount of the proposed mortgage. To minimize burden, a 
housing counselor may round off the amount of the proposed mortgage and 
use a figure not less than the amount of the proposed mortgage that 
constitutes the nearest $5,000 increment to the actual amount of the 
proposed mortgage. The Committee also intends that the Secretary or his 
designee shall identify and supply to housing counselors interest rate 
tables with ascending $5,000 increments that will permit such 
counselors to make the calculations required by this section. The 
Secretary must post these interest rate tables on the HUD website and 
take all other steps required to make these tables generally available 
and accessible to housing counselors and the public.
    The legislation further requires specific counseling 
regarding real estate property management for mortgagors 
purchasing dwellings with 2 to 3 units. It is understood by the 
Committee that counseling regarding real estate property 
management is a critical risk-mitigation measure for first-time 
homebuyers purchasing 2- or 3-unit properties and specific 
information must be developed for counseling agencies to 
perform this service.
    The bill also requires that the lender provide a form at 
settlement to the new homeowner giving him or her the option to 
agree to allow, but not require, the mortgagee to provide 
notice of the mortgagor's delinquency to a foreclosure-
prevention counseling agency if the loan becomes 60 days 
delinquent. If the lender chooses to notify a counseling agency 
under this provision, the agency must notify the mortgagor of 
the delinquency, the availability of foreclosure-prevention 
counseling from the agency, and the agency's contact 
information. The amendment further provides the lender with a 
mechanism to timely cure a failure to provide the optional 
agreement form, allows the Secretary to impose penalties for 
failure to provide the borrower with the optional agreement 
form, limits the liability of the lender in connection with 
this section, and defines the term ``delinquency period.''
    The Committee notes that this provision seeks to establish 
relationships between mortgagees, mortgagors, and housing 
counseling entities that may be called upon in the event of 
default. It is suggested that the Department evaluate and 
monitor the practicality of this option, and to consider in 
particular the outcome of any previous pilot program completed 
by the Department that may be applicable to this requirement.
    The provision also mandates that a mortgage insured under 
this new subsection is not subject to any requirement of a 
downpayment on the purchase price.
    In order to protect the Mutual Mortgage Insurance Fund, the 
bill provides authority to require the Secretary to charge a 
sufficient mortgage insurance premium that will result in no 
net loss to that Fund. Under the proposed legislation, HUD is 
authorized to charge a mortgage insurance premium, up to 2.25 
percent, paid at the time of origination or mortgage closing, 
as well as assess an annual premium charge up to .55 percent. 
The up-front and annual mortgage insurance premiums are 
designed to offset any potential increased risk.
    The bill also directs the Secretary to use an automated 
underwriting system to assess whether the potential borrower 
has the ability to pay the monthly mortgage payments. In 
addition, this section allows the Secretary to establish 
additional underwriting standards for borrowers purchasing 
dwellings with 2 to 3 units. The Secretary must also establish 
procedures to monitor and address lenders to ensure they meet 
or exceed underwriting and other lender participation 
requirements.
    This provision requires a written disclosure from the 
lender at the time of the loan application specifying the cost 
to a mortgagor of borrowing the amount of a loan under the zero 
downpayment program that exceeds the maximum loan amount of a 
subsection (b) FHA mortgage-insured product. That cost must be 
expressed as an annual interest rate over the first 5 years of 
a mortgage.
    The legislation also requires lenders originating loans 
under this program to use loss-mitigation actions provided for 
in the National Housing Act. The Secretary must report a 
comparison of the rates of default and foreclosure each year 
for mortgages insured under the zero downpayment program, for 
single-family FHA-insured mortgages, and for mortgages for 
housing purchased under the American Dream Downpayment Act.
    The Secretary is also authorized to establish any 
additional requirements for mortgage insurance under this new 
subsection as may be necessary or appropriate.
    The legislation also places a number of limits on the 
program. For instance, the program is limited to 10 percent of 
the aggregate number of mortgages and loans insured in the 
preceding fiscal year. The legislation also establishes a 
program performance trigger to suspend this program when the 
overall FHA claim rate exceeds 3.5 percent over the preceding 
12 months. Finally, the authorization for the program expires 
on September 30, 2009.
    The bill also directs the GAO to report on the performance 
of the mortgages insured under this program 2 years after 
enactment and every year thereafter.
    The bill authorizes the Secretary to implement this program 
on an interim basis by issuing an interim rule, but mandates 
the subsequent issuance of a final rule. The Committee intends 
that the implementation of this program be completed quickly 
and efficiently. The guidance that the Department immediately 
develop an Interim Rule that may take effect within 6 months is 
directed not only to HUD, but also to the Office of Management 
and Budget, to ensure that all necessary interagency 
coordination and approvals be performed in the shortest time 
frame possible.
    Subsection (b) authorizes the Secretary to charge and 
collect a single up-front premium and annual payments.
    Subsection (c) amends section 519(e) of the National 
Housing Act in order to clarify that the Mutual Mortgage 
Insurance Fund, and not the General Insurance Fund, will be 
used for carrying out this program.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

NATIONAL HOUSING ACT

           *       *       *       *       *       *       *



   PART VIII--MORTGAGE INSURANCE, RELIEF, AND FORECLOSURE AND CREDIT 
ENHANCEMENT FOR HOUSING

           *       *       *       *       *       *       *


TITLE II--MORTGAGE INSURANCE

           *       *       *       *       *       *       *



                         insurance of mortgages

    Sec. 203. (a) * * *

           *       *       *       *       *       *       *

    (c)(1) * * *
    (2) Notwithstanding any other provision of this section, 
each mortgage secured by a 1- to 4-family dwelling that is an 
obligation of the Mutual Mortgage Insurance Fund or of the 
General Insurance Fund pursuant to subsection (v) and each 
mortgage that is insured under subsection (k) or section 
234(c),, shall be subject to the following requirements:
          (A) The Secretary shall establish and collect, at the 
        time of insurance, a single premium payment in an 
        amount not exceeding 2.25 percent of the amount of the 
        original insured principal obligation of the mortgage. 
        [In] Except with respect to a mortgage insured under 
        subsection (l), in the case of a mortgage for which the 
        mortgagor is a first-time homebuyer who completes a 
        program of counseling with respect to the 
        responsibilities and financial management involved in 
        homeownership that is approved by the Secretary, the 
        premium payment under this subparagraph shall not 
        exceed 2.0 percent of the amount of the original 
        insured principal obligation of the mortgage. Upon 
        payment in full of the principal obligation of a 
        mortgage prior to the maturity date of the mortgage, 
        the Secretary shall refund all of the unearned premium 
        charges paid on the mortgage pursuant to this 
        subparagraph.

           *       *       *       *       *       *       *

  (l) Zero-Downpayment Mortgages.--
          (1) Insurance authority.--The Secretary may insure, 
        and commit to insure, under this subsection any 
        mortgage that meets the requirements of this subsection 
        and, except as otherwise specifically provided in this 
        subsection, of subsection (b).
          (2) Eligible single family property.--To be eligible 
        for insurance under this subsection, a mortgage shall 
        involve a property upon which there is located a 
        dwelling that is designed principally for a 1- to 3-
        family residence and that, notwithstanding subsection 
        (g), is to be occupied by the mortgagor as his or her 
        principal residence, which shall include--
                  (A) a 1-family dwelling unit in a multifamily 
                project and an undivided interest in the common 
                areas and facilities which serve the project;
                  (B) a 1-family dwelling unit of a cooperative 
                housing corporation the permanent occupancy of 
                the dwelling units of which is restricted to 
                members of such corporation and in which the 
                purchase of such stock or membership entitles 
                the purchaser to the permanent occupancy of 
                such dwelling unit; and
                  (C) a manufactured home that meets such 
                standards as the Secretary has established for 
                purposes of subsection (b).
          (3) Maximum principal obligation.--
                  (A) Limitation.--To be eligible for insurance 
                under this subsection, a mortgage shall involve 
                a principal obligation in an amount not in 
                excess of 100 percent of the appraised value of 
                the property plus any initial service charges, 
                appraisal, inspection and other fees in 
                connection with the mortgage as approved by the 
                Secretary.
                  (B) Inapplicability of other loan-to-value 
                requirements.--A mortgage insured under this 
                subsection shall not be subject to subparagraph 
                (B) of paragraph (2) of subsection (b) or to 
                the matter in such paragraph that follows such 
                subparagraph.
          (4) Eligible mortgagors.--The mortgagor under a 
        mortgage insured under this subsection shall meet the 
        following requirements:
                  (A) First-time homebuyer.--The mortgagor 
                shall be a first-time homebuyer. The program 
                for mortgage insurance under this subsection 
                shall be considered a Federal program to assist 
                first-time homebuyers for purposes of section 
                956 of the Cranston-Gonzalez National 
                Affordable Housing Act (42 U.S.C. 12713).
                  (B) Counseling.--
                          (i) Requirement.--The mortgagor shall 
                        have received counseling, prior to 
                        application for the loan involved in 
                        the mortgage, by a third party (other 
                        than the mortgagee) who is approved by 
                        the Secretary, with respect to the 
                        responsibilities and financial 
                        management involved in homeownership. 
                        Such counseling shall be provided to 
                        the mortgagor on an individual basis by 
                        a representative of the approved third 
                        party counseling entity, and shall be 
                        provided in person to the maximum 
                        extent practicable.
                          (ii) Topics.--Such counseling shall 
                        include providing to, and discussing 
                        with, the mortgagor--
                                  (I) information regarding 
                                homeownership options other 
                                than a mortgage insured under 
                                this subsection, other zero- or 
                                low-downpayment mortgage 
                                options that are or may become 
                                available to the mortgagor, the 
                                financial implications of 
                                entering into a mortgage 
                                (including a mortgage insured 
                                under this subsection), and any 
                                other information that the 
                                Secretary may require; and
                                  (II) a document that sets 
                                forth the amount and the 
                                percentage by which a property 
                                subject to a mortgage insured 
                                under this subsection must 
                                appreciate for the mortgagor to 
                                recover the principal amount of 
                                the mortgage, the costs 
                                financed under the mortgage, 
                                and the estimated costs 
                                involved in selling the 
                                property, if the mortgagor were 
                                to sell the property on each of 
                                the second, fifth, and tenth 
                                anniversaries of the mortgage.
                          (iii) 2- and 3-family residences.--In 
                        the case of a mortgage involving a 2- 
                        or 3-family residence, such counseling 
                        shall include (in addition to the 
                        information required under clause (ii)) 
                        information regarding real estate 
                        property management.
          (5) Option for notice of foreclosure prevention 
        counseling availability.--
                  (A) Option.--To be eligible for insurance 
                under this subsection, the mortgagee shall 
                provide mortgagor, at the time of the execution 
                of the mortgage, an optional written agreement 
                which, if signed by the mortgagor, allows, but 
                does not require, the mortgagee to provide 
                notice described in subparagraph (B) to a 
                housing counseling entity that has agreed to 
                provide the notice and counseling required 
                under subparagraph (C) and is approved by the 
                Secretary.
                  (B) Notice to counseling agency.--The notice 
                described in this subparagraph, with respect to 
                a mortgage, is notice, provided at the earliest 
                time practicable after the mortgagor becomes 60 
                days delinquent with respect to any payment due 
                under the mortgage, that the mortgagor is so 
                delinquent and of how to contact the mortgagor. 
                Such notice may only be provided once with 
                respect to each delinquency period for a 
                mortgage.
                  (C) Notice to mortgagor.--Upon notice from a 
                mortgagee that a mortgagor is 60 days 
                delinquent with respect to payments due under 
                the mortgage, the housing counseling entity 
                shall at the earliest time practicable notify 
                the mortgagor of such delinquency, that the 
                entity makes available foreclosure prevention 
                counseling that may assist the mortgagor in 
                resolving the delinquency, and of how to 
                contact the entity to arrange for such 
                counseling.
                  (D) Ability to cure.--Failure to provide the 
                optional written agreement required under 
                subparagraph (A) may be corrected by sending 
                such agreement to the mortgagor not later than 
                the earliest time practicable after the 
                mortgagor first becomes 60 days delinquent with 
                respect to payments due under the mortgage. 
                Insurance provided under this subsection may 
                not be terminated and penalties for such 
                failure may not be prospectively or 
                retroactively imposed if such failure is 
                corrected in accordance with this subparagraph.
                  (E) Penalties for failure to provide 
                agreement.--The Secretary may establish and 
                impose appropriate penalties for failure of a 
                mortgagee to provide the optional written 
                agreement required under subparagraph (A).
                  (F) Limitation on liability of mortgagee.--A 
                mortgagee shall not incur any liability or 
                penalties for any failure of a housing 
                counseling entity to provide notice under 
                subparagraph (C).
                  (G) No private right of action.--This 
                paragraph shall not create any private right of 
                action on behalf of the mortgagor.
                  (H) Delinquency period.--For purposes of this 
                paragraph, the term ``delinquency period'' 
                means, with respect to a mortgage, a period 
                that begins upon the mortgagor becoming 
                delinquent with respect to payments due under 
                the mortgage and ends upon the first subsequent 
                occurrence of such payments under the mortgage 
                becoming current or the property subject to the 
                mortgage being foreclosed or otherwise disposed 
                of.
          (6) Inapplicability of downpayment requirement.--A 
        mortgage insured under this subsection shall not be 
        subject to paragraph (9) of subsection (b) or any other 
        requirement to pay on account of the property, in cash 
        or its equivalent, any amount of the cost of 
        acquisition.
          (7) MMIF monitoring.--In conjunction with the credit 
        subsidy estimation calculated each year pursuant to the 
        Federal Credit Reform Act of 1990 (2 U.S.C. 661 et 
        seq.), the Secretary shall review the program 
        performance for mortgages insured under this subsection 
        and make any necessary adjustments, which may include 
        altering mortgage insurance premiums subject to 
        subsection (c)(2), adjusting underwriting standards, 
        and limiting the availability of mortgage insurance 
        under this subsection, to ensure that the Mutual 
        Mortgage Insurance Fund shall continue to generate a 
        negative credit subsidy.
          (8) Underwriting.--For a mortgage to be eligible for 
        insurance under this subsection:
                  (A) In general.--The mortgagor's credit and 
                ability to pay the monthly mortgage payments 
                shall have been evaluated using the Federal 
                Housing Administration's Technology Open To 
                Approved Lenders (TOTAL) Mortgage Scorecard, or 
                a similar standardized credit scoring system 
                approved by the Secretary, and in accordance 
                with procedures established by the Secretary.
                  (B) Multi-unit properties.--In the case of a 
                mortgage involving a property upon which there 
                is located a dwelling that is designed 
                principally for a 2- or 3-family residence, the 
                mortgagor meets such additional underwriting 
                standards as the Secretary may establish.
          (9) Approval of mortgagees.--To be eligible for 
        insurance under this subsection, a mortgage shall have 
        been madeto a mortgagee that meets such criteria as the 
Secretary shall establish to ensure that mortgagees meet appropriate 
standards for participation in the program authorized under this 
subsection.
          (10) Disclosure of incremental costs.--
                  (A) Required disclosure.--For a mortgage to 
                be eligible for insurance under this 
                subsection, the mortgagee shall provide to the 
                mortgagor, at the time of the application for 
                the loan involved in the mortgage, a written 
                disclosure, as the Secretary shall require, 
                that specifies the effective cost to a 
                mortgagor of borrowing the amount by which the 
                maximum amount that could be borrowed under a 
                mortgage insured under this subsection exceeds 
                the maximum amount that could be borrowed under 
                a mortgage insured under subsection (b), based 
                on average closing costs with respect to such 
                amount, as determined by the Secretary. Such 
                cost shall be expressed as an annual interest 
                rate over the first 5 years of a mortgage.
                  (B) Coordination.--The disclosure required 
                under this paragraph may be provided in 
                conjunction with the notice required under 
                subsection (f).
          (11) Loss mitigation.--
                  (A) In general.--Upon the default of any 
                mortgage insured under this subsection, the 
                mortgagee shall engage in loss mitigation 
                actions for the purpose of providing an 
                alternative to foreclosure to the same extent 
                as is required of other mortgages insured under 
                this title pursuant to the regulations issued 
                under section 230(a).
                  (B) Annual reporting.--Not later than 90 days 
                after the end of each fiscal year, the 
                Secretary shall submit a report to the Congress 
                that compares the rates of default and 
                foreclosure during such fiscal year for 
                mortgages insured under this subsection, for 
                single-family mortgages insured under this 
                title (other than under this subsection), and 
                for mortgages for housing purchased with 
                assistance provided under the downpayment 
                assistance initiative under section 271 of the 
                Cranston-Gonzalez National Affordable Housing 
                Act (42 U.S.C. 12821).
          (12) Additional requirements.--The Secretary may 
        establish any additional requirements for mortgage 
        insurance under this subsection as may be necessary or 
        appropriate.
          (13) Limitation.--The aggregate number of mortgages 
        insured under this subsection 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.
          (14) Program suspension.--
                  (A) In general.--Subject to subparagraph (C), 
                the authority under paragraph (1) to insure 
                mortgages shall be suspended if at any time the 
                claim rate described in subparagraph (B) 
                exceeds 3.5 percent. A suspension under this 
                subparagraph shall remain in effect until such 
                time as such claim rate is 3.5 percent or less.
                  (B) FHA total single-family annual claim 
                rate.--The claim rate described in this 
                subparagraph, for any particular time, is the 
                ratio of the number of claims during the 12 
                months preceding such time on mortgages on 1- 
                to 4-family residences insured pursuant to this 
                title to the number of mortgages on such 
                residences having such insurance in-force at 
                that time.
                  (C) Applicability.--A suspension under 
                subparagraph (A) shall not preclude the 
                Secretary from endorsing or insuring any 
                mortgage that was duly executed before the date 
                of such suspension.
          (15) Sunset.--No mortgage may be insured under this 
        subsection after September 30, 2009, except that the 
        Secretary may endorse or insure any mortgage that was 
        duly executed before such date.
          (16) GAO reports.--The Comptroller General of the 
        United States shall submit a report to the Congress not 
        later than 2 years after the date of the enactment of 
        this subsection, and annually thereafter, regarding the 
        performance of mortgages insured under this subsection.
          (17) Implementation.--The Secretary may implement 
        this subsection on an interim basis by issuing an 
        interim rule, except that the Secretary shall solicit 
        public comments upon publication of such interim rule 
        and shall issue a final rule implementing this 
        subsection after consideration of the comments 
        submitted.

           *       *       *       *       *       *       *


TITLE V--MISCELLANEOUS

           *       *       *       *       *       *       *


                establishment of general insurance fund

      Sec. 519. (a) * * *

           *       *       *       *       *       *       *

      (e) The General Insurance Fund shall not be used for 
carrying out the provisions of sections 203(b) (except as 
provided in section 203(v)), 203(h) [and 203(i)], 203(i), and 
203(l), or the provisions of section 213 to the extent that 
they involve mortgages the insurance for which is the 
obligation of the Cooperative Management Housing Insurance Fund 
created by section 213(k), or the provisions of sections 
223(e), 233(a)(2), 235, 236 and 237; and nothing in this 
section shall apply to or affect mortgages, loans, commitments, 
or insurance under such provisions.

           *       *       *       *       *       *       *


                            ADDITIONAL VIEWS

    We are writing to express our support for H.R. 3755, the 
Zero Downpayment Act of 2004, as approved by the Committee on 
June 3, 2004.
    We are pleased that a number of important consumer 
protections provisions designed to protect potential homebuyers 
were incorporated into the bill as reported by the Subcommittee 
on Housing and Community Opportunity and by the full Committee. 
In particular, we are pleased that the bill includes the 
following provisions:
           Require potential borrowers to receive prep-
        purchase counseling individually, and, when 
        practicable, in person prior to the loan application;
           Require housing counselors to provide 
        borrowers with a document setting forth the amount and 
        the percentage by which the property must appreciate 
        for the mortgagor to recover the principal amount of 
        the mortgage, the costs financed under the mortgage, 
        and the estimated costs involved in selling the 
        property, if the mortgagor were to sell the property on 
        each of the second, fifth, and tenth anniversaries of 
        the proposed mortgage;
           Require lenders to provide a form at 
        settlement to new homeowners giving them the option to 
        agree to allow, but not require, the mortgagee to 
        provide notice of the mortgagor's delinquency to a 
        foreclosure-prevention counseling agency if the loan 
        becomes 60 days delinquent.
           Require the Secretary to report a comparison 
        of the rates of default and foreclosure each year for 
        mortgages insured under the zero downpayment program, 
        for single-family FHA-insured mortgages.
    In conclusion we consider these consumer protections to be 
vital parts of this legislation, and therefore strongly support 
the bill as reported by the Committee.

                                   Barney Frank.
                                   Ruben Hinojosa.
                                   Michael E. Capuano.
                                   Artur Davis.
                                   Maxine Waters.
                                   Carolyn B. Maloney.
                                   Luis V. Gutierrez.
                                   Wm. Lacy Clay.
                                   Brad Miller.
                                   Rahm Emanuel.
                                   Barbara Lee
                                   Melvin L. Watt.
                                   Joe Baca.
                                   Chris Bell.
                                   Steve Israel.
                                   Nydia M. Velazquez.
                                   Harold Ford.
                                   Dennis Moore.
                                   Mike Ross.
                                   Gregory W. Meeks.
                                   Carolyn McCarthy.

                           SUPPLEMENTAL VIEWS

    Although I certainly applaud the goal of H.R. 3755 and 
agree that increasing homeownership is a very noble and worthy 
objective for this Congress, I would like to register a number 
of concerns with this legislation as reported out of Committee.
    First, I am concerned about the need for expanding the FHA 
insurance program and allowing it to compete with the private 
market and the numerous private organizations that already 
provide downpayment assistance. Currently, homeownership is at 
an all-time high of 68.6 percent, mortgage rates are low 
relative to our history, and you can hardly turn on the 
television, open your mail, or read a newspaper without seeing 
a plethora of offers from a number of different companies 
offering very competitive mortgage rates. An infinite number of 
private lenders are competing for the business of borrowers of 
all income levels, offering a wide variety of choices at very 
low costs. This is a clear example of our free market system 
working, and it is working well.
    I am also very troubled by the taxpayer exposure that is 
likely to result from this legislation. To achieve 
homeownership, I believe a borrower needs to have some 
investment in the underlying home, which this bill does not 
provide. Right now, the foreclosure rate of FHA loans is at a 
record high of over three times the foreclosure rate of 
conventional mortgages. Furthermore, the delinquency rate for 
FHA loans is more than five times as high as it is for 
conventional loans. These rates are important to consider 
because of the huge number of FHA-insured loans that are 
currently outstanding. For instance, in FY 2003 alone this 
program had more than $400 billion in outstanding loans. It is 
unfortunate that we do not hear much about taxpayer exposure in 
this Congress, and that must change. Congress cannot continue 
to put American taxpayers at risk of having to bail out the 
federal government due to misguided public policy decisions.
    Another concern I have is supporting the expansion of FHA 
without considering the effectiveness of the already massive 
number of housing programs aimed at assisting low and moderate 
income people. If a role exists for the federal government in 
providing housing assistance for individuals and families, it 
is my hope that this Committee would work to identify wasteful 
and duplicative federal housing programs not serving their 
intended purpose and either consolidate or eliminate these 
programs. Additionally, it is important to remember that the 
108th Congress has already approved nearly $800 million 
downpayment assistance for low and moderate income people.
    Finally, there are many other obstacles to homeownership 
that must be considered in addition to downpayment assistance. 
Many in America cannot afford to save enough money to own their 
own home because much of their paycheck is gutted by federal 
taxes. Mortgage lenders and financial institutions are burdened 
with some of the highest levels of taxation, litigation, and 
regulation that our nation has seen, preventing them from 
making more home loans in their communities.
    There is no greater housing program in the history of this 
nation than the American free enterprise system. Our housing 
market will strengthen and more Americans will be able to own 
their own homes if Congress focuses on the real obstacles 
potential homeowners face. In order for homeownership rates to 
increase, congress should concentrate their efforts on reducing 
the burdens that excessive taxation, litigation and regulation 
impose on individuals and families wishing to participate in 
the American dream.

                                                    Jeb Hensarling.

                      DISSENTING VIEWS OF RON PAUL

    The Zero Downpayment Act of 2004 (H.R. 3755) waives the 
requirement that a homebuyer make a downpayment in order to be 
eligible for a Federal Home Administration (FHA) insured 
mortgage. This bill distorts the housing market, and thus 
weakens the general economy. Repealing the downpayment 
requirement could also increase the default rate of FHA insured 
mortgages and thus increase the costs of the FHA insured 
mortgage program to the taxpayer. These concerns alone would 
justify rejecting this bill. However, my main objection to this 
legislation is that it furthers the something-for-nothing 
mentality that is incompatible with a free society.
    The requirement that homebuyers make a downpayment ensures 
that a prospective homebuyers is a worthy credit risk and 
reduces the likelihood of default. After all, people are less 
likely to abandon property if they have invested substantial 
savings in the property in the form of a downpayment. The 
sponsors of H.R. 3755 claim that modern methods of evaluating 
whether someone poses a good credit risk eliminates the need 
for the downpayment requirement. However, while modern 
techniques to measure credit worthiness can measure one's 
income and credit history, they cannot measure a person's 
willingness and ability to delay current consumption to ensure 
one can make monthly mortgage payments. Eliminating the 
downpayment requirement makes it more likely that people 
unwilling to save to insure they can make their monthly 
mortgage payments will receive FHA insured home loans. 
Therefore, this program increases the rate of default on FHA 
loans, and thus increase the costs to taxpayers of the FHA 
program. HUD claims it can recoup the loss of a mortgage by 
increasing premium payments. However, if the zero mortgage 
policy raises the default rate, the higher premium will be 
useless in recouping revenue lost from eliminating the 
downpayment requirement.
    Recently, a mortgage broker told a friend of mine that his 
business was experiencing an increase in defaults. According to 
this mortgage broker, one reason for this was the failure to 
require downpayments; private industry has excessively relied 
on credit history information instead of a down payment to 
entice more people into the home market. H.R. 3755 authorizes 
the federal government to repeat this folly. Does anyone really 
believe the federal government will succeed where the private 
sector has failed? Before answering that question, my 
colleagues should consider that FHA foreclosure rates are 
already at record levels! Of course, if default rates raises, 
Congress can pass a new program making the taxpayers 
responsible for the monthly payments of holders of FHA insured 
loans.
    H.R. 3755 will harm the economy by artificially increasing 
the demand for housing, causing resources to be diverted from 
other uses into housing to meet this government-created demand. 
Allocating resources based on market-distorting government 
programs insures that those resources will not be devoted to 
their highest-valued use. Thus, government interference in the 
economy results in a loss of economic efficiency and, more 
importantly, a lower standard of living for all citizens. The 
only policy guaranteed to maximize economic growth and the well 
being of citizens is to allow the actions of private 
individuals in a free-market to determine the allocation of 
resources.
    Government policies have already artificially inflated the 
demand for housing, creating a housing bubble. While the 
temporary effects of this bubble may appear beneficial to 
homebuyers and homebuilders, eventually they will suffer when 
the housing bubble bursts. Encouraging more people to enter an 
already-inflated market will only increase the economic damage 
and human suffering the bursting of the housing bubble will 
cause.
    By increasing the demand for housing, H.R. 3755 will also 
increase the price of housing. Those unable to qualify for an 
FHA insured mortgage might find themselves priced out of the 
housing market. Thus, an unintended consequence of this bill 
could be to reduce some people's ability to obtain affordable 
housing!
    Finally, the most important reason to reject this bill is 
that it undermines liberty. It is bad enough that this 
committee has already expanded the handout state with the 
misnamed ``America Dream Downpayment Act.'' This bill would now 
relieve those already receiving help from the taxpayers through 
the FHA program of the modest requirement that they save for a 
downpayment. Every time Congress makes it easier for people to 
receive handouts from the government, we erode people's 
willingness and ability to care for themselves. Eventually, the 
recipients of this government largesse stop thinking of 
themselves as independent citizens and begin viewing themselves 
as wards of the state. It is impossible to maintain a free 
society when a large number of people look to the state to meet 
every one of their needs.
    By relieving participants in the Federal Home 
Administration program of the requirement that they pay a 
downpayment, H.R. 3755 increases the risk of default, thus 
increasing the program's cost to the taxpayer. H.R. 3755 also 
encourages the something for nothing mentality that is 
inconsistent with a free society. Therefore, the Financial 
Services Committee should reject this bill.

                                                          Ron Paul.

                                  
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