[House Report 109-571]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     109-571

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



 
               ZERO DOWNPAYMENT PILOT PROGRAM ACT OF 2006

                                _______
                                

 July 17, 2006.--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

                            DISSENTING VIEWS

                        [To accompany H.R. 3043]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3043) to authorize the Secretary of Housing and 
Urban Development to carry out a pilot program 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..................................................     7
Committee Oversight Findings.....................................     7
Performance Goals and Objectives.................................     7
New Budget Authority, Entitlement Authority, and Tax Expenditures     8
Committee Cost Estimate..........................................     8
Congressional Budget Office Estimate.............................     8
Federal Mandates Statement.......................................    14
Advisory Committee Statement.....................................    14
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............    16
Dissenting Views.................................................    22

                               Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Zero Downpayment Pilot Program Act of 
2006''.

SEC. 2. PILOT PROGRAM FOR 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 Pilot Program.--
          ``(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) Pilot program limitations.--
                  ``(A) Annual.--In any fiscal year, the aggregate 
                number of mortgages insured under this subsection 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.
                  ``(B) Term of program.--The aggregate number or 
                mortgages insured under this subsection may not exceed 
                50,000.
          ``(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, 2010, 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)''.
  (d) GAO Study of Expanded or Extended Program.--If at any time 
authority to insure mortgages under section 203(l) of the National 
Housing Act (as added by subsection (a) of this section) is--
          (1) expanded to more than 50,000 mortgages, or
          (2) extended to a date after September 30, 2010, including 
        any permanent extension of such authority,
the Comptroller General of the United States shall conduct a study of 
the financial soundness, at such time, of the Mutual Mortgage Insurance 
Fund and the effects of such expansion or extension on such financial 
soundness, and shall submit a report to the Congress regarding the 
conclusions of such study not later than 60 days after the date of the 
enactment of the law providing for such expansion or extension.

                          Purpose and Summary

    H.R. 3043, the Zero Downpayment Pilot Act of 2005, would 
authorize a Federal Housing Administration (FHA) pilot program 
for a mortgage insurance product, limited to 50,000 mortgages 
nationwide, without a downpayment requirement by a potential 
borrower or third party. After 5 years, GAO would report on 
whether the agency was able to develop a product that minimized 
risks and thereby limited defaults and foreclosures for 
otherwise very creditworthy families who have no downpayment 
funds at the time of a real estate settlement, while at the 
same time testing whether the agency could develop appropriate 
underwriting and agency review.

                  Background and Need for Legislation

    Studies demonstrate the single biggest obstacle to 
homeownership is an inability to have enough cash to meet 
downpayment and closing costs. This program, when enacted, will 
be available to first-time homebuyers that meet the Federal 
Housing Administration's (FHA) underwriting requirements and 
who could easily afford monthly payments, but have not had an 
opportunity to save for a downpayment. As a pilot program, the 
number of FHA-insured zero-downpayment mortgages may not exceed 
50,000.
    Further, as a control on whether the demonstration 
accelerates or places FHA-insured mortgages at greater risk of 
default or foreclosure, this pilot program will end if at any 
time the claim rate exceeds 3.5 percent, and will remain 
suspended as long as the claim rate is 3.5 percent or less. 
These measures will allow many families access to an FHA-
insured zero-downpayment product and will provide data for use 
in determining the long-term fate of the FHA zero-downpayment 
program, all while protecting the FHA portfolio.
    Since the creation of the Federal Housing Administration 
(FHA) under the National Housing Act in 1934 (Pub. Law 73-479), 
downpayments have been a requirement of potential borrowers 
seeking to purchase loans insured by the Federal government. 
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. Recently, some conventional mortgage 
lending products, purchased by the secondary markets or held in 
institutional investment portfolios, dropped to zero-
downpayments, contingent on certain underwriting conditions.
    Because certain conventional markets created zero 
downpayment products with minimal risks, there is a question on 
whether downpayments originally thought as necessary to gauge 
the creditworthiness or risk of the borrower are even 
necessary. Seventy-two years after FHA was created, technology 
has advanced as a science on how to predict creditworthiness 
and risk of borrowers based on past credit behavior. Hence, 
credit scores and other assessment tools are central to 
mortgage underwriting. The pilot program envisioned by H.R. 
3043 would allow the agency an opportunity to use advanced 
technology and underwriting mechanisms to test whether FHA 
could provide mortgage insurance to creditworthy families who 
have not paid a downpayment at the time of the real estate 
settlement. A sample of 50,000 FHA mortgages would provide 
adequate data points for the agency to determine whether its 
underwriting and risk assessment controls are adequate. If 
successful, a well-thought zero downpayment product would 
provide another affordable homeownership option for working 
families and communities.
    The Committee is aware of work conducted by the Department 
of Housing and Urban Development's Inspector General, which 
suggested that mortgages made through non-profit gift 
downpayment programs carry default rates far above average 
defaults and claims. According to the Government Accountability 
Office, in 2004, about 30 percent of FHA single-family loans 
used downpayment assistance from a non-profit group, compared 
with 5.8 percent in 2000. During that same time, FHA default 
rates for mortgage holders that receive downpayment assistance 
have steadily increased. This correlation suggests that the 
non-profit gift downpayment programs are largely responsible 
for this increase in default rates.
    In addition to HUD- and GAO-expressed concerns regarding 
the non-profit gift downpayment programs, the Internal Revenue 
Service has raised concerns over how some organizations 
administer non-profit gift programs and is in the process of 
reassessing the status of these programs. Consequently, the IRS 
recently issued a Ruling in which it determined that 
organizations providing downpayment assistance grants to 
homebuyers from funds largely provided by home sellers do not 
qualify as tax-exempt charities. The IRS further acknowledges 
that there are some programs, such as churches, which operate a 
legitimate model using non-home seller proceeds that will 
continue to retain their tax-exempt status.
    The IRS ruling provides FHA lenders with clarity necessary 
to evaluate downpayment assistance gifts in FHA transactions. 
H.R. 3043 will allow FHA flexibility to test these products 
under its own underwriting scrutiny without third-party factors 
that could influence defaults and foreclosures. Due to this 
observation, it is critical that FHA be able to offer similar 
programs to first-time homebuyers with greater financial 
controls such as pre-purchase counseling and additional 
counseling should an individual default on their loan.
    Allowing FHA to enter this market will lead to greater 
oversight, more influence and better outcomes for those 
choosing to participate. Further, the FHA-insured zero-
downpayment product created by this legislation will be 
administered as a pilot program. This will allow the program to 
be studied, in order to determine the effects, if any, of this 
product on the Mutual Mortgage Insurance Fund (MMIF). To this 
end, the legislation calls for GAO reporting.

                                Hearings

    The Subcommittee on Housing and Community Opportunity held 
a legislative hearing on June 30, 2005 on ``H.R. 3034, the Zero 
Downpayment Pilot Program Act of 2005.'' The following 
witnesses testified: Ms. Janis Bowdler, Housing Policy Analyst, 
National Council of La Raza, Washington, DC; Mr. Robert Newman, 
Executive Vice Chairman, AmeriDream, Inc., Gaithersburg, 
Maryland; Mr. Michael F. Petrie, President, P/R Mortgage & 
Investment Corporation, Indianapolis, Indiana, testifying as 
Chairman, Mortgage Bankers Association, Washington, DC; Mr. 
William B. Shear, Director of Financial Markets and Community 
Investment, U.S. Government Accountability Office; Mr. David F. 
Wilson, President Wilson Construction LLC, Ketchum, Idaho, 
testifying as President, National Association of Home Builders.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
May 24, 2006, and ordered reported H.R. 3043, the Zero 
Downpayment Pilot Act of 2005, as amended, to the House 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 in conjunction with the consideration 
of this legislation. A motion by Mr. Oxley to report the bill, 
as amended, to the House with a favorable recommendation was 
agreed to by a voice vote. During the consideration of the bill 
the following amendments were considered:
    An amendment by Ms. Lee, No. 1, dealing with the Community 
Partners Next Door Program, was offered and withdrawn.
    An amendment by Mr. Feeney, No. 2, requiring a GAO study of 
expanded or extended programs, was agreed to by a voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee held hearings 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:
    H.R. 3043, the Zero Downpayment Pilot Act of 2005, would 
authorize a Federal Housing Administration (FHA) pilot program 
for a mortgage insurance product, limited to 50,000 mortgages 
nationwide, without a downpayment requirement by a potential 
borrower or third-party. After 5 years, GAO would report on 
whether the agency was able to develop a product that minimized 
risks and thereby limited defaults and foreclosures for 
otherwise very creditworthy families who have no downpayment 
funds at the time of a real estate settlement, while at the 
same time testing whether the agency could develop appropriate 
underwriting and agency review.

   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 adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act.

                        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:

                                                      June 1, 2006.
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. 3043, the Zero 
Downpayment Pilot Program Act of 2005.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susanne S. 
Mehlman.
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.

H.R. 3043--Zero Downpayment Pilot Program Act of 2005

    Summary: H.R. 3043 would authorize--through fiscal year 
2010--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.
    CBO estimates that implementing this legislation would cost 
$65 million over the 2007-2010 period, assuming future 
appropriation actions consistent with the bill. 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.
    Enacting this bill could affect direct spending and 
receipts because the bill would provide the Secretary 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. 3043 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would impose no costs on state, local, or tribal governments.
    Estimated Cost to the Federal Government: The estimated 
budgetary impact of H.R. 3043 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 end of fiscal year 2006.

----------------------------------------------------------------------------------------------------------------
                                                                By fiscal year, in millions of dollars
                                                     -----------------------------------------------------------
                                                        2007      2008      2009      2010      2011      2012
----------------------------------------------------------------------------------------------------------------
                                        SPENDING SUBJECT TO APPROPRIATION

FHA and GNMA Spending Under Current Law: \1\
    Estimated Authorization Level...................    -1,013      -333      -327      -331      -344      -353
    Estimated Outlays...............................    -1,013      -333      -327      -331      -344      -353
Proposed Changes:
    Net Subsidy Cost for Zero Down-Payment Loans:
        Estimated Authorization Level...............         0        14        23        20        16         0
        Estimated Outlays...........................         0        14        23        20        16         0
    GNMA Offsetting Collections:
        Estimated Authorization Level...............         0        -2        -2        -2        -2         0
        Estimated Outlays...........................         0        -2        -2        -2        -2         0
        Total Changes:
            Estimated Authorization Level...........         0        12        21        18        14         0
            Estimated Outlays.......................         0        12        21        18        14         0
Total FHA and GNMA Spending Under H.R. 3043:
    Estimated Authorization Level...................    -1,013      -321      -306      -313      -330      -353
    Estimated Outlays...............................    -1,013      -321      -306      -313      -330     -353
----------------------------------------------------------------------------------------------------------------
\1\ The figures for 2006 are CBO's current estimates of budget authority and outlays for these programs under
  the enacted appropriation levels for this year. The 2007-2011 level 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.
Note.--GNMA = Government National Mortgage Association; MBS = Mortgage-Backed Securities.

    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 the mortgages. 
CBO estimates that implementing H.R. 3043 would cost FHA $14 
million in 2007 and $73 million over the 2007-2010 period to 
pay for the estimated subsidy cost of the zero down-payment 
program. We also estimate that new federal loan guarantees made 
under the new program (about 60 percent of all zero down-
payment loans) would be included in the Government National 
Mortgage Association's (GNMA's) Mortgage-Backed Securities 
(MBS) program, resulting in the collection of additional 
negative subsidy receipts of $8 million over the 2007-2010 
period. Thus, CBO estimates that the net federal cost of the 
new program would be $65 million over the 2007-2010 period, 
including effects on both FHA and GNMA programs. There also 
would be a cost associated with the Government Accountability 
Office (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 budget effects are discussed 
below.

Proposed zero down-payment mortgage guarantee program

    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, 2010. Borrowers who want to participate in this pilot 
program would be required to attend individual counseling 
sessions related to financial management skills for homeowners 
prior to applying for the loans. Under the bill, the number of 
zero down-payment loans insured by FHA each year could not 
exceed 10 percent of the total number of single-family FHA loan 
guarantees made during the preceding year, and no more than 
50,000 loans could be insured over the life of the program. 
This legislation also would allow FHA to charge up-front and 
annual fees up to the levels set under current law (2.25 
percent and 0.55 percent of the loan amount, respectively) for 
the existing single-family program.

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 and zero down-payment 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 20,000 home buyers in 2005. Furthermore, the 
National Association of Realtors reports that 43 percent of all 
first time homebuyers in 2005 financed their home purchases 
with a zero down-payment mortgage.
    This bill would limit the loan volume for the zero down-
payment program to no more than 10 percent of single-family 
loan guarantees made by FHA in the preceding year (i.e., 33,000 
to 37,000 loans estimated per year) and to no more than 50,000 
loans over the life of the pilot program. CBO expects that 
demand for a zero down-payment loan guarantee program would be 
strong and, based on information from FHA, expects that 50,000 
loans with a face value of about $6 billion to $7 billion 
(known as the loan volume) could be guaranteed over the 2007-
2010 period. CBO estimates that the number of loans guaranteed 
each year of the program would be roughly the same, though CBO 
expects that fewer loans would be guaranteed during the initial 
year of the pilot program, as FHA would need some time to make 
the administrative changes necessary to support the new 
program.

Choice between traditional FHA guarantee and zero down-payment program

    According to FHA, about 70 percent of its borrowers are 
first time home buyers, and an increasing number of them are 
using some form of down-payment assistance (e.g., gifts from 
relatives or grants from nonprofit entities). On average, these 
borrowers represent about 40 percent of FHA's first-time home 
buyers making the minimum 3 percent down payment. CBO estimates 
that about 90,000 FHA borrowers who are first-time home buyers 
will use some form of down-payment assistance each year.
    From the perspective of the FHA borrower, there would be 
both advantages and disadvantages to using the new zero down-
payment program instead of the existing single-family program. 
On the one hand, under the new program the borrower would not 
need to seek gifts from relatives or use down-payment 
assistance programs, which can result in the borrower paying an 
increased amount for the home. On the other hand, the fees 
under the zero down-payment program would be higher than the 
regular FHA program, the borrower would have no equity in the 
home, and the borrower would be required to attend financial 
counseling, though, in some cases, the borrower may readily 
accept the potential benefits of meeting with a counselor and 
consider the assistance to be an advantage. CBO estimates that 
about 40 percent of the 50,000 borrowers expected to 
participate in the pilot program would have used the existing 
single-family program if the proposed zero down-payment program 
did not exist. We estimate that this shift of about 20,000 
borrowers or $3 billion worth of loan guarantees over the 2007-
2010 period from the existing single-family program to the new 
zero down-payment program would reduce 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 downpayments according to several industry 
experts 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 become homeowners with zero or 
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 this risk of default, FHA as indicated 
that it would not change the credit standards (e.g., debt-to-
income ratios and payment-to-income ratios) for zero down-
payment borrowers. Instead, FHA would charge such borrowers 
higher loan-guarantee fees than those charged to borrowers 
under FHA's current single-family program. CBO assumes that FHA 
would charge zero down-payment borrowers the highest fees 
authorized 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. (In 
comparison, borrowers in the existing program pay an up-front 
premium of a 1.5 percent and annual premiums of 0.5 percent.)

Financial counseling

    Based on information from industry experts and credit 
studies, CBO expects that the counseling required under this 
legislation could contribute to better loan performance and 
consequently fewer defaults. We estimate that the claims rate 
for the zero down-payment loans could be lowered by about 25 
percent compared to the claims rate for loans receiving some 
type of down-payment assistance, resulting in a cumulative 
claim rate of about 20 percent for the zero down-payment loans. 
Despite these higher fees and the mandatory counseling, 
however, CBO expects that default costs could still exceed the 
value of the higher fees.

Program suspension

    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 to 2 percent each 
year and that the cumulative default rate over a 30-year period 
would be close to 20 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

    CBO estimates that implementing the zero down-payment 
program would result in a net cost of $12 million in 2007 and 
$65 million over the 2007-2010 period, reflecting changes to 
FMA and GNMA programs. 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.
    FHA Costs. Budget procedures for federal credit programs 
require that 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 1.85 percent, compared to our estimate of 
the 2007 subsidy rate of -0.37 percent for FHA's existing 
single-family program. This estimated subsidy rate assumes that 
FHA would charge the maximum fees allowable under current law 
(2.25 percent for the up-front fee and 0.55 percent for the 
annual fee) and that the cumulative claims rate for the program 
would be about 20 percent, or two times the claim rate for the 
average FHA loan. With a subsidy rate of 1.85 percent, CBO 
estimates that the zero down-payment program would cost $125 
million over the 2007-2010 period.
    This estimated subsidy cost would be partially offset by 
some expected savings associated with borrowers shifting from 
the existing single-family program to the zero down-payment 
program. The borrowers that would shift to the new program 
would tend to have a greater risk of default than the average 
FHA loan. CBO estimates that the shift of these borrowers to 
the new program would leave the remaining portfolio of single-
family loan guarantees in a better financial position with an 
overall slightly more negative subsidy rate. CBO estimates that 
the negative subsidy associated with the existing single-family 
program would decrease by about 0.1 percent beginning in 2007, 
resulting in additional offsetting collections of about $50 
million over the 2007-2010 period. Hence, the net change in FHA 
subsidy costs over the period would be about $75 million.
    GNMA Offsetting Collections. 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 subsidy rate of -0.21 percent in 2007, resulting in the 
net collection of receipts to the federal government.
    Because most 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. We estimate that about 60 percent of the loan guarantees 
made under this new program would represent new loan guarantees 
for FHA that would not otherwise participate in GNMA's MBS 
program, resulting in the collection of $2 million in 2007 and 
$8 million over the 2007-2010 period. GNMA collections 
associated with the remaining 40 percent of the loans made 
under the pilot program are not included in this savings 
estimate because CBO estimates these borrowers would use the 
existing FHA program if the zero down-payment option were not 
available.

GAO studies

    This legislation also would require the Government 
Accountability Office to prepare a report on loan performance 
under the zero downpayment 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 2008 for such reports. In addition, GAO would be 
required to study the financial soundness of the Mutual 
Mortgage Insurance Fund in the event that authority for the 
pilot program is expanded to more than 50,000 mortgages or 
extended beyond its sunset date of September 30, 2010. Because 
CBO cannot predict whether the pilot program will be expanded 
or extended, we do not estimate any costs associated with this 
study.
    Intergovernmental and private-sector impact: H.R. 3043 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    Estimate prepared by: Federal Costs: Susanne S. Mehlman. 
Impact on State, Local, and Tribal Governments: Sarah Puro. 
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


Sec. 1. Short title

    The short title of this act is the ``Zero Downpayment Pilot 
Program Act of 2006.''

Sec. 2. Pilot program for insurance for zero-downpayment mortgages

    This section permits FHA to insure a limited number of 
zero-downpayment mortgages for eligible one- to three-family 
residences.
            Mortgage insurance authority
    In order for a borrower to qualify for a mortgage created 
by this pilot program, he or she must be a first-time 
homebuyer. Also, the borrower will be required to participate 
in approved, third-party financial counseling prior to the loan 
application. This section describes the topics that must be 
covered during this counseling.
    This section gives the lender the option of providing 
notice to a housing counseling agency if the borrower falls 
more than 60 days behind on his or her payments, so that the 
borrower may receive foreclosure prevention counseling. The 
Secretary of HUD may establish penalties for failing to provide 
this option. Also, the lender will not incur any damages 
through the failure of the counseling agency to prevent 
foreclosure and the borrower will have no cause of action.
    In order for eligible borrowers to receive an FHA-insured 
zero-downpayment loan, this section renders the FHA downpayment 
requirement inapplicable for this class of borrowers.
    This section directs the Secretary of HUD to review the 
zero-downpayment pilot program and make adjustments, if needed, 
so that the Mutual Mortgage Insurance Fund (MMIF) continues to 
generate a negative credit subsidy.
    This section also establishes the mortgage insurance 
underwriting standards for loans provided by this pilot 
program. The borrower's credit and ability to make monthly 
mortgage payments will be evaluated using the Federal Housing 
Administration's Technology Open Scorecard (TOTAL) or a similar 
program. In the case that the mortgage involves multi-unit 
properties, the Secretary of HUD may establish underwriting 
standards.
    For a mortgage to be eligible as a ``zero-downpayment 
mortgage,'' as defined by this legislation, it must meet 
standards set forth by the Secretary.
    This section requires a disclosure of incremental costs to 
the borrower of securing a zero-downpayment FHA-insured loan, 
as opposed to securing an FHA-insured loan requiring a 
downpayment.
    The lender will be required to engage in loss mitigation 
upon the default of any mortgage insured under this legislation 
by FHA, in order to provide an alternative to foreclosure. The 
Secretary of HUD will be required to provide a report that 
compares the rates of default and foreclosure during the year 
for mortgages under this Act to mortgages for homes purchased 
using downpayment assistance provided under section 271 of the 
Cranston-Gonzalez-National Affordable Housing Act.
    This section also gives the Secretary of HUD the authority, 
as it relates to mortgage insurance authority, to establish 
additional requirements as necessary or appropriate.
    Because this is a pilot program that will provide an 
opportunity to study the effects of an FHA-insured zero-
downpayment product, this section includes limitations on the 
ability of FHA to insure zero-downpayment mortgages. In any 
fiscal year, the total number of FHA-insured zero-downpayment 
mortgages may not exceed 50,000, nor may these products 
comprise more than 10 percent of the FHA portfolio.
    Further, this pilot program will end if, at any time, the 
claim rate exceeds 3.5 percent, and will remain suspended until 
the claim rate is 3.5 percent or less. These measures will 
allow many families access to an FHA-insured zero-downpayment 
product and will provide data for use in determining the long-
term fate of the FHA zero-downpayment program, all while 
protecting the FHA portfolio.
    This pilot program will sunset on September 10, 2010 unless 
reauthorized.
    The Government Accountability Office (GAO) will submit a 
report to Congress two years after the enactment of this Act 
regarding the performance of FHA-insured zero-downpayment 
mortgages authorized by this legislation.
    The Secretary will have the authority to implement this 
program on an interim basis by issuing an interim rule and will 
solicit public comments before issuing a final rule.
            Mortgage insurance premiums
    Currently, under statute, a first-time homebuyer may not be 
charged an up-front FHA premium above 2 percent. This section 
amends current law so that FHA will have the ability to charge 
an up-front premium in excess of 2 percent.
            General insurance fund
    This section states that the General Insurance Fund may be 
used to carry out the FHA-insured zero-downpayment pilot 
program.
            GAO study of expanded or extended program
    This section requires that a GAO study of the FHA zero-
downpayment program be conducted if the program is expanded to 
more than 50,000 mortgages or is extended past the sunset date 
of September 10, 2010. This study will examine the financial 
soundness of the MMIF and the effects of the expansion or 
extension on the MMIF.

         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

           *       *       *       *       *       *       *



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, provided that the mortgagor refinances 
        the unpaid principal obligation under title II of this 
        Act.

           *       *       *       *       *       *       *

  (l) Zero-Downpayment Mortgages Pilot Program.--
          (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) Pilot program limitations.--
                  (A) Annual.--In any fiscal year, the 
                aggregate number of mortgages insured under 
                this subsection 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.
                  (B) Term of program.--The aggregate number or 
                mortgages insured under this subsection may not 
                exceed 50,000.
          (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, 2010, 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.

           *       *       *       *       *       *       *


                      DISSENTING VIEWS OF RON PAUL

    The Zero Downpayment Act of 2006 (H.R. 3043) establishes a 
pilot program waiving 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 homebuyer 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. 3043 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 increases 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.
    A friend of mine was informed by a mortgage broker 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 downpayment to 
entice more people into the home market. H.R. 3043 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 rise, 
Congress can pass a new program making the taxpayers 
responsible for the monthly mortgage payments of holders of FHA 
insured loans.
    H.R. 3043 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 polices have already artificially inflated the 
demand for housing, creating a housing bubble. While the 
temporary effect 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. 3043 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 expanded the handout state with legislation like 
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 creating a pilot program relieving some participants in 
the Federal Home Administration program of the requirement that 
they pay a downpayment, H.R. 3043 increases the risk of 
default, thus increasing the program's cost to the taxpayer. 
H.R. 3043 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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