House Report 108-748 - ZERO DOWNPAYMENT ACT OF 2004

[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.