[House Report 110-905]
[From the U.S. Government Publishing Office]
110th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 110-905
======================================================================
FHA SELLER-FINANCED DOWNPAYMENT REFORM AND RISK-BASED PRICING
AUTHORIZATION ACT OF 2008
_______
October 2, 2008.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Frank of Massachusetts, from the Committee on Financial Services,
submitted the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 6694]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 6694) to revise the requirements for seller-
financed downpayments for mortgages for single-family housing
insured by the Secretary of Housing and Urban Development under
title II of the National Housing Act and to authorize risk-
based insurance premiums for certain mortgagors under such
mortgages, 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......................................................... 8
Committee Consideration.......................................... 8
Committee Votes.................................................. 8
Committee Oversight Findings..................................... 9
Performance Goals and Objectives................................. 9
New Budget Authority, Entitlement Authority, and Tax Expenditures 9
Committee Cost Estimate.......................................... 9
Congressional Budget Office Estimate............................. 10
Federal Mandates Statement....................................... 13
Advisory Committee Statement..................................... 13
Constitutional Authority Statement............................... 13
Applicability to Legislative Branch.............................. 13
Earmark Identification........................................... 14
Section-by-Section Analysis of the Legislation................... 14
Changes in Existing Law Made by the Bill, as Reported............ 15
Dissenting Views................................................. 21
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 ``FHA Seller-Financed Downpayment Reform
and Risk-Based Pricing Authorization Act of 2008''.
SEC. 2. FHA SELLER-FINANCED DOWNPAYMENT PROGRAM.
Paragraph (9) of section 203(b) of the National Housing Act (12
U.S.C. 1709(b)(9)) is amended--
(1) in subparagraph (C), by striking ``In no case shall the
funds required by subparagraph (A)'' and inserting the
following: ``Except in the case of a mortgage described in
subparagraph (D), the funds required by subparagraph (A) shall
not''; and
(2) by adding at the end the following new subparagraphs:
``(D) Exceptions to prohibited sources.--A mortgage
described in this subparagraph is any of the following
mortgages:
``(i) A mortgage under which the mortgagor
has a credit score equivalent to a FICO score
of 680 or greater.
``(ii) A mortgage under which--
``(I) the mortgagor has a credit
score equivalent to a FICO score of at
least 620 but less than 680; and
``(II) mortgage insurance premiums
charged are established--
``(aa) at levels necessary,
but no higher than needed, to
allow such class of loans to be
insured without resulting in a
need for an appropriation for a
credit subsidy, which may
exceed the maximum amount
permitted under section
203(c)(2)(B);
``(bb) in the case of the
single premium collected at the
time of insurance, in an amount
not exceeding 3.0 percent of
the amount of the original
principal obligation of the
mortgage; and
``(cc) in the case of the
annual premium for a mortgage
under which the mortgagor has a
credit score equivalent to a
FICO score of at least 640 but
less than 680, in an amount not
exceeding 1.25 percent of the
remaining insured principal
balance (excluding the portion
of the remaining balance
attributable to the premium
collected at the time of
insurance and without taking
into account delinquent
payments or prepayments).
``(iii) For mortgages insured in fiscal year
2010 or thereafter, a mortgage under which the
mortgagor has a credit score equivalent to a
FICO score of 619 or less, but only if the
Secretary certifies that such loans can be
insured without resulting in a need for an
appropriation for a credit subsidy. For such
mortgages, the Secretary may charge premiums at
levels authorized under items (bb) and (cc) of
clause (ii)(II) and may establish a credit or
FICO score limitation or impose such other
requirements as are necessary to meet the
conditions for certification under this clause.
``(E) Requirements for downpayment assistance
entities.--Any entity participating in a program that
provides downpayment assistance for a mortgage
described in subparagraph (D) pursuant to the exception
under subparagraph (C), which programs shall include
programs of governmental agencies and private nonprofit
organizations, shall, before the closing for the loan
involved in the mortgage in connection with which such
assistance is provided--
``(i) offer to make available, to the
mortgagor, counseling regarding the
responsibilities and financial management
involved in homeownership;
``(ii) if such offer is accepted by the
mortgagor, make such counseling available for
the mortgagor; and
``(iii) in the case of any such entity that
is a private nonprofit organization, implement
a conflict of interest policy that prohibits
directors, officers, employees, and immediate
family members from receiving financial
benefits from any entity that is providing the
program with goods or services other than the
homeownership assistance program entity itself
or its wholly owned affiliate.
``(F) Civil money penalties for improperly
influencing appraisals.--The Secretary may impose a
civil money penalty, in the same manner and to the same
extent as for a violation under section 536, for
compensating, instructing, inducing, coercing, or
intimidating any person who conducts an appraisal of
the property to be subject to a mortgage described in
subparagraph (D) and under which any part of the funds
required by subparagraph (A) are provided to a party
described in subparagraph (C), or attempting to
compensate, instruct, induce, coerce, or intimidate
such a person, for the purpose of causing the appraised
value assigned to the property under the appraisal to
be based on any other factor other than the independent
judgment of such person exercised in accordance with
applicable professional standards.''.
SEC. 3. LIMITATIONS ON RISK-BASED PRICING.
Section 203(c) of the National Housing Act (12 U.S.C. 1709(c)) is
amended by adding at the end the following new paragraphs:
``(3) Limitations on risk-based pricing.--Except as provided
in paragraph (4), the Secretary of Housing and Urban
Development shall not take any action on or after October 1,
2008, to implement or carry out--
``(A) risk-based premiums, which are designed for
mortgage lenders to offer borrowers an FHA-insured
product that provides a range of mortgage insurance
premium pricing, based on the risk that the insurance
contract represents, as set forth in the Notice
published in the Federal Register on May 13, 2008 (Vol.
73, No. 93, Pages 27703 through 27711) (effective July
14, 2008); or
``(B) any other risk-based premium product related to
the insurance of any mortgage on a single family
residence under this title, where the premium price for
such new product is based in whole or in part on a
borrower's Decision Credit Score, as that term is
defined in the Notice referred to in subparagraph (A),
or any successor thereto.
``(4) Flexible risk-based premiums.--Notwithstanding
paragraph (3) of this subsection and section 2133 of the FHA
Modernization Act of 2008 (Public Law 110-289):
``(A) Authority.--In the case only of a mortgage
under which the mortgagor has a credit score equivalent
to a FICO score of less than 600, the Secretary may
establish a mortgage insurance premium structure
involving a single premium payment collected prior to
the insurance of the mortgage or annual payments (which
may be collected on a periodic basis), or both, under
which the rate of premiums for such a mortgage may vary
according to the credit risk associated with the
mortgagor and the rate of any annual premium for such a
mortgage may vary according to such credit risk during
the mortgage term as long as the basis for determining
the variable rate is established before the execution
of the mortgage. The Secretary may change a premium
structure established under this subparagraph but only
to the extent that such change is not applied to any
mortgage already executed.
``(B) Establishment and alteration of premium
structure.--A premium structure shall be established or
changed under subparagraph (A) only by providing notice
to mortgagees and to the Congress, at least 30 days
before the premium structure is established or changed.
``(C) Annual report regarding premiums.--The
Secretary shall submit a report to the Congress
annually setting forth the rate structures and rates
established and altered pursuant to this paragraph
during the preceding 12-month period and describing how
such rates were determined.
``(D) Considerations for premium structure.--When
establishing and collecting premiums for mortgages
insured under a premium structure established under
this paragraph, the Secretary shall consider the
following:
``(i) The effect of the proposed premiums or
structure on the Secretary's ability to meet
the operational goals of the Mutual Mortgage
Insurance Fund as provided in section 202(a).
``(ii) Underwriting variables.
``(iii) The extent to which new pricing under
the proposed premiums or structure has
potential for acceptance in the private market.
``(iv) The administrative capability of the
Secretary to administer the proposed premiums
or structure.
``(v) The effect of the proposed premiums or
structure on the Secretary's ability to
maintain the availability of mortgage credit
and provide stability to mortgage markets.
``(E) Authority to base premium prices on product
risk.--
``(i) Authority.--In establishing premium
rates under this title, the Secretary may
provide for variations in such rates according
to the credit risk associated with the type of
mortgage product that is being insured under
this title, which may include providing that
premium rates differ between fixed-rate
mortgages and adjustable-rate mortgages insured
pursuant to section 251, between mortgages for
condominiums and mortgages for other interests
in properties, between mortgages having
different ratios of the principal obligation
under the mortgage to the appraised value of
the property, and between such other products
as the Secretary considers appropriate.
``(F) Payment incentives.--
``(i) Authority.--With respect to mortgages
for which insured the Secretary is authorized
to establish a premium structure under this
paragraph, the Secretary shall provide that the
payment incentive under subparagraph (ii)
applies upon the expiration of the 5-year
period beginning upon the time of insurance of
such a mortgage, and the Secretary may provide
that the payment incentive under clause (ii)
applies upon the expiration of the 3-year
period beginning upon the time of insurance of
such a mortgage. The Secretary may limit such
discretionary authority to mortgages prepaid or
paid in full during the 2-year period beginning
3 years after the time of insurance of such a
mortgage.
``(ii) Payment incentive.--In the case of any
mortgage to which the payment incentive under
this subparagraph applies, if, during the
period referred to in clause (i), all mortgage
payments, including insurance premiums, for
such mortgage have been paid on a timely basis,
upon the expiration of such period the
Secretary shall refund to the mortgagor, upon
payment in full of the obligation of the
mortgage, all or a portion of--
``(I) the amount by which the single
premium payment for such mortgage
collected at the time of insurance
exceeded the amount of the single
premium payment chargeable under
paragraph (2) at the time of insurance
for a mortgage of the same product type
having the same terms, but for which
the mortgagor has a credit score
equivalent to a FICO score of 600 or
more; and
``(II) in the case only of mortgages
for which annual premiums are
established and collected under
subparagraph (G), the amount by which
the cumulative amount of annual
premiums paid exceeded the amount of
the maximum annual premium that
otherwise may be established and
collected notwithstanding such
subparagraph.
``(G) Option for higher annual premium in lieu of
higher up-front premium.--In the case only of mortgages
for which the Secretary is authorized to establish a
premium structure under this paragraph, notwithstanding
paragraph (2)(B) of this subsection, the Secretary may
establish and collect, for a period not exceeding the
first 5 years of the term of the mortgage, annual
premium payments in an amount not exceeding 0.75
percent of the remaining insured principal balance of
the mortgage (excluding the portion of the remaining
balance attributable to the premium collected under
paragraph (2)(A) and without taking into account
delinquent payments or prepayments), except that--
``(i) the Secretary may utilize such
authority only for such classes of mortgagors
that the Secretary determines would otherwise
be subject to a single premium payment
collected at the time of insurance exceeding
2.25 percent of the amount of the original
insured principal obligation of the mortgage;
and
``(ii) for such mortgages, the Secretary may
not establish or collect a single premium
payment collected at the time of insurance
exceeding 2.25 percent of such original insured
principal obligation.''.
Purpose and Summary
H.R. 6694, the ``FHA Seller-Financed Downpayment Reform and
Risk-Based Pricing Authorization Act of 2008,'' includes
provisions to modify two pending FHA policy changes that were
included in P.L. 110-289, the ``Housing and Economic Recovery
Act of 2008,'' that are scheduled to become effective on
October 1, 2008.
First, the bill would provide an exception to the
prohibition included in Section 2113 of P.L. 110-289 against
the use of direct or indirect assistance from the seller of the
property being financed to meet the 3.5 percent cash down
payment requirement for FHA loans. The bill permits such
assistance for borrowers with a credit score equivalent to a
FICO score of at least 680, and for borrowers with a credit
score equivalent to a FICO score of at least 680, and for
borrowers with a credit score equivalent of between 620 and
679, subject to higher premiums being established for this
latter class of borrowers in amounts necessary to avoid the
need for any credit subsidy appropriation.
Second, the bill would eliminate the one-year moratorium,
effective October 1st, that was included in Section 2133 of
P.L. 110-289, on the use of risk-based pricing based on the
credit score of the borrower--replacing it with permanent
authority to implement risk-based pricing for borrowers below a
FICO credit score equivalent of 600, but prohibiting such
authority for borrowers equal to or higher than that 600 level.
Background and Need for Legislation
Seller-financed loans
For many years, an important component of FHA single family
loans has been the Seller-Financed Gift Downpayment Loan
Program. Under this program, otherwise creditworthy homebuyers
that are unable to meet the 3 percent FHA cash down payment
requirement (subsequently raised to 3.5 percent under P.L. 110-
289) have been able to meet the FHA down payment requirement
through down payment assistance through qualified nonprofit
intermediaries, which provide such assistance in whole or in
part through assistance provided by the seller of the property
being financed.
The FY 2009 HUD budget placed this program into a separate
line item and proposed its elimination, arguing that the
program has incurred unacceptable losses, and that is ongoing
existence could jeopardize the FHA single family loan program.
As a result, continued existence of the full program would have
required appropriators to make a substantial appropriation, in
excess of $1 billion, to provide the authority to continue the
program as is.
In response, Section 2213 of the ``Housing and Economic
Recovery Act'' (P.L. 110-289) included language explicitly
prohibiting these loans from being insured after October 1,
2008.
However, a review of the rule HUD proposed on May 11, 2008
to eliminate such loans demonstrates that a complete
elimination of the program is not needed to address the fiscal
concerns that precipitated the Congressional elimination of the
program. Supplemental data published on June 16 for that rule
included detailed data on different classes of seller-financed
gift downpayment loans. Data from that publication shows that
seller financed gift down payment loans to borrowers with a
FICO score of 680 and higher actually make a profit for
taxpayers (i.e., there is a negative credit subsidy rate).
Further, data shows that borrowers between a 620 and 679 FICO
score incur a modest loss; however, the loss for such class of
borrowers could be covered by charging the new higher upfront 3
percent fee permitted under P.L. 110-289 and by charging higher
annual fees of around 1.25 percent for borrowers with a FICO
score equivalent of 640 to 679, and a slightly higher fee for
borrowers between 620 and 639.
Section 2 of H.R. 6694, relying on data from the HUD rule,
provides a limited exception to the pending prohibition against
seller-financed gift down payment loans by permitting such
loans to borrowers above a 680 FICO score equivalent. Section 2
also permits loans to borrowers between a 620 and 680 FICO
score, but specifically authorizes higher annual premiums up to
the 1.25 percent level for borrowers between 640 and 679 and
higher fees as necessary for borrowers between 620 and 639.
This section includes language explicitly requiring that
premiums be set ``at levels necessary, but no higher than
needed, to allow such class of loans to be insured without
resulting in a need for an appropriation for a credit
subsidy.'' Such language effectively requires the loans to be
financially self-sufficient.
Finally, Section 2 permits loans to borrowers below a FICO
score equivalent of 620 in fiscal year 2010 and beyond--but
only if the Secretary certifies that this can be done without
the need for a credit subsidy, again requiring that any such
loans be financially self-sufficient. Authority is granted to
HUD to ``impose such other requirement as are necessary'' to
meet the conditions for such certification, thus granting
authority for other reforms that might reduce risk.
In order to address program concerns regarding the
reliability of appraisals, the bill includes a provision,
adopted as a committee amendment, to give HUD authority to
impose civil money penalties to any person who either does, or
tries to, compensate, instruct, induce, coerce, or intimidate
any person conducting an appraisal of a loan financed with
seller-financed assistance for the purpose of causing the
appraised value to be based on any other factor than the
independent judgment of such person in accordance with
applicable professional standards.
Risk-based pricing
On April 5, 2006, HUD unveiled its legislative proposal to
modernize the Federal Housing Administration. The top priority
identified in that letter was the granting of authority for FHA
to util- ize risk-based pricing under its single family loan
program, and HUD has continued to advocate this provision as a
critical priority from that time through the ultimate enactment
this summer of FHA reform legislation.
Risk-based pricing permits different levels of premiums to
be charged to different classes of borrowers, based on their
credit risk. There has not been much real dispute that it is
appropriate for FHA to be able to charge different levels of
premiums based on features of the loan itself--e.g., the level
of loan to value (LTV), whether the loan is fixed rate or
variable rate, and whether the loan is for a condominium vs.
for a fee simple property.
The issue in contention is whether FHA should charge
different premium levels (either upfront, annual, or both) for
different borrowers with the same loan characteristics, but
with different credit or FICO scores. Historically, FHA has not
engaged in risk based pricing based on credit risk. However,
while HUD has been asking Congress to explicitly authorize such
risk based pricing in statute, HUD has taken the position that
it has inherent authority to do this. On May 13, 2008, HUD
published a notice in the Federal Register, effective July 14,
which implements risk-based pricing on a broad scale. Prior to
this notice, FHA charged all borrowers an upfront fee of 1.5
percent. The May 13 notice implemented risk-based pricing, with
upfront premiums for loans above a 95 percent loan to value
(LTV) ranging from 1.25 percent for borrowers over a 680
Decision Credit (FICO) score to 2.25 percent for borrowers
between a 500 and 559 FICO score equivalent.
However, two weeks later, on July 30, the President signed
into law P.L. 110-289, the ``Housing and Economic Recovery Act
of 2008.'' Section 2133 of that act imposes a one-year
moratorium, starting on October 1st, of any risk based pricing
relative to a borrower's Decision Credit Score. Thus, at the
end of this month, HUD will have to return to a uniform pricing
schedule based on a borrower's credit risk, and has stated that
it may have to raise premiums if such authority lapses.
Proponents of risk-based pricing argue that such authority
provides for a more accurate pricing of the loan relative to
the risk of default, foreclosure, and loss. HUD has argued that
in the absence of such authority, the uniform price it has to
charge will overcharge better credit risk borrowers and
undercharge higher risk borrowers, relative to risk. Most
significantly, this might result in FHA not being able to serve
certain classes of riskier borrowers at all, where a uniform
fee is not sufficient to cover the risk of such borrowers.
Opponents of risk-based pricing have argued that risk-based
pricing undermines a long established tradition of cross-
subsidization in FHA loans, in which profits from higher credit
quality borrowers can partially subsidize the cost of loans to
lower credit quality borrowers. Critics argue that the result
of risk-based pricing is that fees are raised for lower credit
quality borrowers--precisely the borrowers for whom affordable
homeownership is most challenging. Another criticism made
against risk-based pricing is that HUD's proposals to cut fees
for better quality borrowers reflect an effort to increase
market share at the expense of private sector lenders, rather
than furthering the mission of filling gaps in the private
sector.
H.R. 1852, the House-passed FHA reform bill from last year,
attempted to strike a balance between these two competing
concerns, by permitting risk-based pricing for borrowers below
a 560 equivalent FICO score, and prohibiting it above such
levels. This would have allowed FHA to charge the higher
premiums necessary to serve the lowest credit quality
borrowers, while retaining substantial cross subsidization
benefits from the borrowers above that level. This pricing
framework is also consistent with historical private sector
lending practices. Finally, to protect borrowers below the
credit cutoff point, the bill included a ``Payment Incentives''
provision, based on a previous HUD budget, which provided that
if a borrower made five years of on-time payments, the borrower
would be entitled to a refund of the higher premiums paid at
the time when the loan was paid off in full. Thus, borrowers
who ultimately turned out not to be a higher credit risk do not
in the end pay higher premiums.
Section 3 of H.R. 6694 would eliminate the moratorium from
P.L. 110-289, and replace it with permanent statutory
authority, using a framework similar to that found in H.R.
1852, including authorizing refunds of the higher premiums
caused by risk-based pricing for borrowers that make at least
five years of on-time payment. The major difference from H.R.
1852 is that Section 3 sets a slightly higher cutoff (600) than
was included in H.R. 1852, in order to reflect more
information, including detailed pricing grids available under
the July 14 rule. Thus, the bill permits risk-based pricing
based on credit score to borrowers below a 600 FICO score
equivalent, but bars such pricing for borrowers at or above
this 600 level.
Hearings
The Subcommittee on Housing and Community opportunity held
a hearing on June 22, 2007 entitled ``Homeowner Downpayment
Assistance Programs and Related Issues.'' The following
witnesses testified:
Panel One
Ms. Margaret Burns, Director, Office of Single
Family Housing Program Development, Federal Housing
Administration.
Mr. James Heist, Assistant Inspector General for
Audits, Office of the Inspector General, U.S. Department of
Housing and Urban Development.
Mr. William B. Shear, Director, Financial Markets
and Community Investment, U.S. Government Accountability
Office.
Panel Two
Ms. Ann Ashburn, Ameridream Inc., President and
Chief Executive Officer.
Mr. Scott C. Syphax, President and Chief Executive
Officer, Nehemiah Corporation of America.
Mr. John Osta, Vice President, Gallinger Realty
USA.
Mr. C. Todd Richardson, Vice President of Legal
Affairs, C. P. Morgan.
Dr. Steven Fuller, Center for Regional Analysis,
George Mason University School of Public Policy.
Ms. Beverly Queen, Homeowner.
Committee Consideration
The Committee on Financial Services met in open session on
September 16, 2008, and ordered H.R. 6694, the ``FHA Seller-
Financed Downpayment Reform and Risk-Based Pricing
Authorization Act of 2008'', as amended, favorably reported 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. Frank 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. Brown-Waite (and Mr. Wilson), No. 1,
regarding civil money penalties for improperly influencing
appraisals, was agreed to by a voice vote.
An amendment by Mr. Al Green (and Mr. Gary Miller, Ms.
Waters and Mr. Shays), No. 2, manager's amendment making
various technical and substantive changes, 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 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:
H.R. 6694 includes provisions to modify two pending FHA
policy changes that were included in P.L. 110-289, the
``Housing and Economic Recovery Act of 2008.'' First, the bill
would provide an exception to the prohibition in Section 2113
of P.L. 110-289 against the use of direct or indirect
assistance from the seller of the property being financed to
meet the 3.5 percent cash down payment requirement for FHA
loans. The bill permits such assistance for borrowers with a
credit score equivalent to a FICO score of at least 680, and
for borrowers with a credit score equivalent of between 620 and
679, subject to higher premiums being established for this
latter class of borrowers in amounts necessary to avoid the
need for any credit subsidy appropriation. Second, the bill
would eliminate the one-year moratorium, effective October 1st,
that was included in Section 2133 of P.L. 110-289, on the use
of risk-based pricing based on the credit score of the
borrower--replacing it with permanent authority to implement
risk-based pricing for borrowers below a FICO credit score
equivalent of 600, but prohibiting such authority for borrowers
above such a credit score equivalent.
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 of 1974.
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:
September 29, 2008.
Hon. Barney Frank,
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. 6694, the FHA
Seller-Financed Downpayment Reform and Risk-Based Pricing
Authorization Act of 2008.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susanne S.
Mehlman.
Sincerely,
Peter R. Orszag.
Enclosure.
H.R. 6694--FHA Seller-Financed Downpayment Reform and Risk-Based
Pricing Authorization Act of 2008
Summary: H.R. 6694 would amend the Housing and Economic
Recovery Act of 2008 (HERA) to provide exceptions to the
prohibition that becomes effective on October 1, 2008, on
seller contributions to homebuyers' downpayments. Seller
contributions are a form of downpayment assistance to
homebuyers that is provided by the seller (or a third party
that is being reimbursed by the seller) toward the downpayment
on a single-family loan insured by the Federal Housing
Administration (FHA). Enacting this legislation would permit
certain borrowers to receive such downpayment assistance and
allow FHA to charge higher premiums for its mortgage insurance
for such borrowers based on the credit score of the borrower.
Enacting this legislation also would eliminate the one-year
moratorium, effective October 1, 2008, included in HERA,
prohibiting FHA from implementing risk-based pricing of its
mortgage insurance based on a borrower's credit score. The bill
would authorize a ``flexible risk-based'' program for FHA that
would permit risk-based pricing for borrowers with low credit
scores. H.R. 6694 also would require FHA under certain
circumstances to provide such borrowers with refunds of the
premiums they paid.
CBO estimates that implementing H.R. 6694 would result in a
net decrease in discretionary spending of $13 million over the
2009-2013 period, assuming enactment of appropriation laws
necessary to implement FHA's single-family program and the
Mortgage-Backed Securities (MBS) program of the Government
National Mortgage Association (GNMA).
Enacting this legislation also would establish civil
penalties (which are recorded in the budget as revenues) for
certain violations related to real estate appraisals by
interested parties in connection with the downpayment
assistance program. CBO estimates that any increase in revenues
resulting from those civil penalties would not be significant.
Enacting this bill would not affect direct spending.
H.R. 6694 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would impose no costs on state, local, or tribal
governments.
Estimated Cost to the Federal Government: The estimated
budgetary impact of H.R. 6694 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------
2009 2010 2011 2012 2013 2009-2013
----------------------------------------------------------------------------------------------------------------
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Cost of Seller-Financed Downpayment Assistance:
Estimated Authorization Level....................... 0 * * * * *
Estimated Outlays................................... 0 * * * * *
Additional GNMA Offsetting Collections:
Estimated Authorization Level....................... -13 -13 -13 -13 -13 -65
Estimated Outlays................................... -13 -13 -13 -13 -13 -65
Cost of Payment Incentives:
Estimated Authorization Level....................... 0 13 13 13 13 52
Estimated Outlays................................... 0 13 13 13 13 52
Total Changes:
Estimated Authorization Level....................... -13 0 0 0 0 -13
Estimated Outlays................................... -13 0 0 0 0 -13
----------------------------------------------------------------------------------------------------------------
Note: GNMA = Government National Mortgage Association; *= costs or savings of less than $500,000.
Basis of Estimate: For this estimate, CBO assumes that the
bill will be enacted near the beginning of fiscal year 2009.
Seller-Financed Downpayment Program
Under this legislation, a borrower would be permitted to
use seller-financed assistance towards a downpayment if the
borrower has a FICO\1\ score of at least 620. In addition, FHA
would be permitted to charge an up-front premium (a fee applied
to the loan's value) and annual premium (a fee applied to the
loan's outstanding balance) at levels that correspond to a
borrower's risk, within certain limits.
---------------------------------------------------------------------------
\1\FICO scores are derived from models developed by the Fair Isaac
Corporation and are used by lenders and others to assess the credit
risk of a prospective borrower.
---------------------------------------------------------------------------
Budgeting procedures for federal credit programs require
that funds must be appropriated in advance to cover the
estimated subsidy cost of loan guarantees on a present-value
basis. Based on information from the Office of Management and
Budget (OMB), CBO assumes that FHA would charge premiums that
would result in an average subsidy rate near zero. Thus, CBO
estimates that this provision would result in a negligible cost
or savings of less than $500,000 a year over the 2009-2013
period.
Starting in 2010, this legislation also would permit
borrowers with FICO scores of less than 620 to receive an FHA
guarantee, but only if the Secretary of Housing and Urban
Development certifies that such loans could be insured without
the need for an appropriation to cover any credit subsidy
costs. Based on information from OMB, however, CBO estimates
that the subsidy rate for such loans would likely exceed zero.
Therefore, we estimate that this provision would result in no
additional loan guarantees over the 2009-2013 period.
GNMA savings
GNMA is responsible for guaranteeing securities backed by
pools of mortgages that are 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
those securities. Because the value of the fees collected by
GNMA is estimated to exceed the cost of loan defaults in each
year, the Administration estimates that the GNMA MBS program
will have a subsidy rate of -0.21 percent in 2009, resulting in
the net collection of receipts to the federal government.
CBO estimates that most of the new loan guarantees made
under this legislation would be included in GNMA's MBS program
and that FHA would insure an additional $6 billion in new loan
guarantees annually as a result of changes to the seller-
financed downpayment program. Thus, CBO estimates that
implementing the MBS program under this legislation would
result in about $65 million in additional offsetting
collections ( a credit against discretionary spending) over the
2009-2013 period, assuming appropriation action to establish a
dollar limitation for the GNMA securities program.
Flexible risk-based pricing and payment incentives
The bill also would authorize a program for FHA that would
permit risk-based pricing for certain borrowers. Under this
provision, FHA could charge risk-based premiums to borrowers
who have FICO scores of less than 600. This legislation also
would require FHA to refund either all or a portion of the
higher fees resulting from the borrower being subject to risk-
based pricing if the borrower makes at least five years of
timely mortgage payments. Such refunds would be made at the
time the loan is paid off in full. (H.R. 6694 also would permit
FHA to issue refunds to borrowers after three years of timely
mortgage payments.)
Because of the one-year moratorium on risk-based pricing
imposed by HERA, CBO has evaluated the cost of enacting this
provision in 2009 with the assumption that FHA would charge the
same premiums for every borrower within each product category
in 2009. Based on information from FHA, CBO estimates that the
average subsidy rate for single-family borrowers with low
credit scores would be near zero under current law in 2009. It
is unclear how FHA would implement risk-based pricing under
this bill, and there are many options for doing so. However,
because the average subsidy rate for the program in 2009 is
estimated to be near zero, CBO expects that FHA would not
exercise the authority provided in this legislation to charge
higher rates for certain borrowers. Consequently, absent the
higher premium charges, FHA would not provide any premium
refunds. As a result, we estimate that this provision would
have no budgetary effect in 2009.
In subsequent years, CBO expects that FHA would implement
risk-based pricing under current law for all types of borrowers
with the intent to realize an average subsidy rate that is near
zero. CBO does not expect that FHA would charge borrowers added
premiums to account for the cost of potential premium refunds
to borrowers after three-to-five years. Under that assumption,
the requirement to provide refunds to certain borrowers would
increase the initial subsidy costs of the loan guarantees.
CBO estimates that the borrowers of about $5 billion in
FHA-guaranteed mortgages made annually would eventually be
eligible for refunds under this provision. This estimate of
loan volume assumes that FHA would initially insure about $15
billion in loans with FICO scores of at least 600. Furthermore,
CBO assumes that of this $15 billion in loan guarantees, about
65 percent would not be eligible for refunds because we expect
that after five years the borrower would have defaulted,
prepaid the mortgage, or have been late on payments.
The cost of refunds would depend on the premiums set by
FHA. The agency has not yet set premiums for 2010, but based on
information from FHA, CBO estimates that the refund provision
would increase subsidy costs for the affected loan guarantees
by an average of 0.25 percent. Under the Federal Credit Reform
Act, such costs require the appropriation of funds. By applying
this average cost to the potential volume of loan guarantees
that would be eligible for refunds, CBO estimates that
appropriations of about $13 million would be required annually
over the 2010-2013 period.
Intergovernmental and Private-Sector Impact: H.R. 6694
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: Elizabeth Cove;
Impact on the private sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, 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.
Earmark Identification
H.R. 6694 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Section-by-Section Analysis of the Legislation
Section 1. Short title
Includes the short title of the bill, the ``FHA Seller-
Financed Downpayment Reform and Risk-Based Pricing
Authorization Act of 2008.''
Section 2. FHA seller-financed downpayment program
Provides an exception to the prohibition in the recently
enacted ``Housing and Economic Recovery Act'' (P.L. 110-289)
against the use of direct or indirect assistance from the
seller of the property being financed to meet the 3.5 percent
cash down payment requirement for FHA loans.
Permits all borrowers with a credit score equivalent to a
FICO score of at least 680 to utilize such assistance in
conjunction with FHA loans. Permits borrowers with a credit
score equivalent to between 620 and 679 to utilize such
assistance, except that (a) FHA is required to set premiums at
levels necessary, but no higher than is needed, to avoid the
need for a credit subsidy appropriation, (b) annual premiums
for borrowers between 640 and 679 be in an amount up to 1.25
percent, and (c) there is no cap on annual premiums which may
be charged for borrowers between 620 and 639.
Also gives FHA authority in FY 2010 and subsequent years to
permit borrowers with a credit score equivalent to a FICO score
of less than 620, but only if the Secretary certifies that the
loans can be insured without the need for a credit subsidy
appropriation, with authority for higher premium levels and
authority for such other requirements as FHA may impose as are
necessary to meet this certification requirement.
Any entity participating in a program that provides
downpayment assistance for a mortgage under this section must
offer to make prepurchase counseling available to all program
participants, and must make such counseling available if
requested by the borrower. In addition, any private nonprofit
organization participating in such a program must implement a
conflict of interest policy that prohibits directors, officers,
employees, and immediate family members from receiving
financial benefits from any entity providing the program with
goods and services other than the homeownership assistance
program entity or its affiliates.
Gives HUD authority to impose civil money penalties to any
person who either does, or tries to, compensate, instruct,
induce, coerce, or intimidate any person conducting an
appraisal of a loan financed with seller-financed assistance
for the purpose of causing the appraised value to be based on
any other factor than the independent judgment of such person
in accordance with applicable professional standards.
Section 3. Authorization for risk-based pricing
Eliminates the one year moratorium, effective October 1,
2008, that was included in the ``Housing and Economic Recovery
Act of 2008'' (P.L. 110-289) prohibiting HUD from carrying out
any risk-based pricing based on a borrower's credit score. In
its place creates a permanent policy which permits risk-based
pricing based on credit scores for borrowers with a credit
score equivalent to a FICO score of less than 600 and prohibits
such risk-based pricing for borrowers with a credit score
equivalent to a FICO score of 600 or more. Establishes
considerations and procedures to be used in establishing the
premium structure under such authority.
Requires FHA to refund either all or a portion of the
higher fees resulting from the borrower being subject to risk-
based pricing if such borrower makes at least five years of on-
time mortgage payments, with such refund to be made at the time
the loan is paid off in full. Also gives FHA discretion to
apply such refunds to borrowers that make at least three years
of on-time payments.
Gives FHA the option of charging up to a .75 percent annual
fee for borrowers subject to risk-based pricing, but only if
the upfront fee does not exceed 2.25 percent and such borrower
would otherwise have been charged an upfront fee in excess of
2.25 percent.
Clarifies that FHA may charge risk-based premiums based on
the credit risk of the mortgage itself being insured, including
premium differentials based on the loan to value, based on
whether the loan is a fixed rate or variable rate loan, and
based on whether the loan is for a condominium or for some
other property interest.
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):
SECTION 203 OF THE NATIONAL HOUSING ACT
insurance of mortgages
Sec. 203. (a) * * *
(b) To be eligible for insurance under this section a
mortgage shall comply with the following:
(1) * * *
* * * * * * *
(9) Cash investment requirement.--
(A) * * *
* * * * * * *
(C) Prohibited sources.--[In no case shall
the funds required by subparagraph (A)] Except
in the case of a mortgage described in
subparagraph (D), the funds required by
subparagraph (A) shall not consist, in whole or
in part, of funds provided by any of the
following parties before, during, or after
closing of the property sale:
(i) * * *
* * * * * * *
(D) Exceptions to prohibited sources.--A
mortgage described in this subparagraph is any
of the following mortgages:
(i) A mortgage under which the
mortgagor has a credit score equivalent
to a FICO score of 680 or greater.
(ii) A mortgage under which--
(I) the mortgagor has a
credit score equivalent to a
FICO score of at least 620 but
less than 680; and
(II) mortgage insurance
premiums charged are
established--
(aa) at levels
necessary, but no
higher than needed, to
allow such class of
loans to be insured
without resulting in a
need for an
appropriation for a
credit subsidy, which
may exceed the maximum
amount permitted under
section 203(c)(2)(B);
(bb) in the case of
the single premium
collected at the time
of insurance, in an
amount not exceeding
3.0 percent of the
amount of the original
principal obligation of
the mortgage; and
(cc) in the case of
the annual premium for
a mortgage under which
the mortgagor has a
credit score equivalent
to a FICO score of at
least 640 but less than
680, in an amount not
exceeding 1.25 percent
of the remaining
insured principal
balance (excluding the
portion of the
remaining balance
attributable to the
premium collected at
the time of insurance
and without taking into
account delinquent
payments or
prepayments).
(iii) For mortgages insured in fiscal
year 2010 or thereafter, a mortgage
under which the mortgagor has a credit
score equivalent to a FICO score of 619
or less, but only if the Secretary
certifies that such loans can be
insured without resulting in a need for
an appropriation for a credit subsidy.
For such mortgages, the Secretary may
charge premiums at levels authorized
under items (bb) and (cc) of clause
(ii)(II) and may establish a credit or
FICO score limitation or impose such
other requirements as are necessary to
meet the conditions for certification
under this clause.
(E) Requirements for downpayment assistance
entities.--Any entity participating in a
program that provides downpayment assistance
for a mortgage described in subparagraph (D)
pursuant to the exception under subparagraph
(C), which programs shall include programs of
governmental agencies and private nonprofit
organizations, shall, before the closing for
the loan involved in the mortgage in connection
with which such assistance is provided--
(i) offer to make available, to the
mortgagor, counseling regarding the
responsibilities and financial
management involved in homeownership;
(ii) if such offer is accepted by the
mortgagor, make such counseling
available for the mortgagor; and
(iii) in the case of any such entity
that is a private nonprofit
organization, implement a conflict of
interest policy that prohibits
directors, officers, employees, and
immediate family members from receiving
financial benefits from any entity that
is providing the program with goods or
services other than the homeownership
assistance program entity itself or its
wholly owned affiliate.
(F) Civil money penalties for improperly
influencing appraisals.--The Secretary may
impose a civil money penalty, in the same
manner and to the same extent as for a
violation under section 536, for compensating,
instructing, inducing, coercing, or
intimidating any person who conducts an
appraisal of the property to be subject to a
mortgage described in subparagraph (D) and
under which any part of the funds required by
subparagraph (A) are provided to a party
described in subparagraph (C), or attempting to
compensate, instruct, induce, coerce, or
intimidate such a person, for the purpose of
causing the appraised value assigned to the
property under the appraisal to be based on any
other factor other than the independent
judgment of such person exercised in accordance
with applicable professional standards.
* * * * * * *
(c)(1) * * *
* * * * * * *
(3) Limitations on risk-based pricing.--Except as
provided in paragraph (4), the Secretary of Housing and
Urban Development shall not take any action on or after
October 1, 2008, to implement or carry out--
(A) risk-based premiums, which are designed
for mortgage lenders to offer borrowers an FHA-
insured product that provides a range of
mortgage insurance premium pricing, based on
the risk that the insurance contract
represents, as set forth in the Notice
published in the Federal Register on May 13,
2008 (Vol. 73, No. 93, Pages 27703 through
27711) (effective July 14, 2008); or
(B) any other risk-based premium product
related to the insurance of any mortgage on a
single family residence under this title, where
the premium price for such new product is based
in whole or in part on a borrower's Decision
Credit Score, as that term is defined in the
Notice referred to in subparagraph (A), or any
successor thereto.
(4) Flexible risk-based premiums.--Notwithstanding
paragraph (3) of this subsection and section 2133 of
the FHA Modernization Act of 2008 (Public Law 110-289):
(A) Authority.--In the case only of a
mortgage under which the mortgagor has a credit
score equivalent to a FICO score of less than
600, the Secretary may establish a mortgage
insurance premium structure involving a single
premium payment collected prior to the
insurance of the mortgage or annual payments
(which may be collected on a periodic basis),
or both, under which the rate of premiums for
such a mortgage may vary according to the
credit risk associated with the mortgagor and
the rate of any annual premium for such a
mortgage may vary according to such credit risk
during the mortgage term as long as the basis
for determining the variable rate is
established before the execution of the
mortgage. The Secretary may change a premium
structure established under this subparagraph
but only to the extent that such change is not
applied to any mortgage already executed.
(B) Establishment and alteration of premium
structure.--A premium structure shall be
established or changed under subparagraph (A)
only by providing notice to mortgagees and to
the Congress, at least 30 days before the
premium structure is established or changed.
(C) Annual report regarding premiums.--The
Secretary shall submit a report to the Congress
annually setting forth the rate structures and
rates established and altered pursuant to this
paragraph during the preceding 12-month period
and describing how such rates were determined.
(D) Considerations for premium structure.--
When establishing and collecting premiums for
mortgages insured under a premium structure
established under this paragraph, the Secretary
shall consider the following:
(i) The effect of the proposed
premiums or structure on the
Secretary's ability to meet the
operational goals of the Mutual
Mortgage Insurance Fund as provided in
section 202(a).
(ii) Underwriting variables.
(iii) The extent to which new pricing
under the proposed premiums or
structure has potential for acceptance
in the private market.
(iv) The administrative capability of
the Secretary to administer the
proposed premiums or structure.
(v) The effect of the proposed
premiums or structure on the
Secretary's ability to maintain the
availability of mortgage credit and
provide stability to mortgage markets.
(E) Authority to base premium prices on
product risk.--
(i) Authority.--In establishing
premium rates under this title, the
Secretary may provide for variations in
such rates according to the credit risk
associated with the type of mortgage
product that is being insured under
this title, which may include providing
that premium rates differ between
fixed-rate mortgages and adjustable-
rate mortgages insured pursuant to
section 251, between mortgages for
condominiums and mortgages for other
interests in properties, between
mortgages having different ratios of
the principal obligation under the
mortgage to the appraised value of the
property, and between such other
products as the Secretary considers
appropriate.
(F) Payment incentives.--
(i) Authority.--With respect to
mortgages for which insured the
Secretary is authorized to establish a
premium structure under this paragraph,
the Secretary shall provide that the
payment incentive under subparagraph
(ii) applies upon the expiration of the
5-year period beginning upon the time
of insurance of such a mortgage, and
the Secretary may provide that the
payment incentive under clause (ii)
applies upon the expiration of the 3-
year period beginning upon the time of
insurance of such a mortgage. The
Secretary may limit such discretionary
authority to mortgages prepaid or paid
in full during the 2-year period
beginning 3 years after the time of
insurance of such a mortgage.
(ii) Payment incentive.--In the case
of any mortgage to which the payment
incentive under this subparagraph
applies, if, during the period referred
to in clause (i), all mortgage
payments, including insurance premiums,
for such mortgage have been paid on a
timely basis, upon the expiration of
such period the Secretary shall refund
to the mortgagor, upon payment in full
of the obligation of the mortgage, all
or a portion of--
(I) the amount by which the
single premium payment for such
mortgage collected at the time
of insurance exceeded the
amount of the single premium
payment chargeable under
paragraph (2) at the time of
insurance for a mortgage of the
same product type having the
same terms, but for which the
mortgagor has a credit score
equivalent to a FICO score of
600 or more; and
(II) in the case only of
mortgages for which annual
premiums are established and
collected under subparagraph
(G), the amount by which the
cumulative amount of annual
premiums paid exceeded the
amount of the maximum annual
premium that otherwise may be
established and collected
notwithstanding such
subparagraph.
(G) Option for higher annual premium in lieu
of higher up-front premium.--In the case only
of mortgages for which the Secretary is
authorized to establish a premium structure
under this paragraph, notwithstanding paragraph
(2)(B) of this subsection, the Secretary may
establish and collect, for a period not
exceeding the first 5 years of the term of the
mortgage, annual premium payments in an amount
not exceeding 0.75 percent of the remaining
insured principal balance of the mortgage
(excluding the portion of the remaining balance
attributable to the premium collected under
paragraph (2)(A) and without taking into
account delinquent payments or prepayments),
except that--
(i) the Secretary may utilize such
authority only for such classes of
mortgagors that the Secretary
determines would otherwise be subject
to a single premium payment collected
at the time of insurance exceeding 2.25
percent of the amount of the original
insured principal obligation of the
mortgage; and
(ii) for such mortgages, the
Secretary may not establish or collect
a single premium payment collected at
the time of insurance exceeding 2.25
percent of such original insured
principal obligation.
* * * * * * *
DISSENTING VIEWS
Just 48 days after the ``Hope For Homeowners Act'' was
enacted into law (Public Law 110-289), the Financial Services
Committee, through H.R. 6694, voted to reverse policy direction
and reinstate the seller-funded downpayment assistance program
on a limited basis. While I support gift downpayments by family
members, religious organizations, employers, or unions, for
example, I cannot support seller-funded third-party interest
downpayment programs that distort the price of homes, increase
defaults on government-insured mortgages, and lead to possible
fraud. Reviving this program is unwise, and I therefore opposed
this legislation during Committee consideration.
The controversy surrounding seller-funded downpayment
assistance on Federal Housing Administration (FHA)-insured
loans dates back to 1999, when the Clinton Administration
proposed rules to address what the Department of Housing and
Urban Development (HUD), under then-Secretary Andrew Cuomo,
perceived as a ``clear quid pro quo between the homebuyer's
purchase of the property and the seller's `contribution' or
payments to the non-profit organization.''\1\ While the Clinton
administration's proposed rule was never finalized, it did
highlight a practice that prompted increasing scrutiny and
further investigation by several other agencies.
---------------------------------------------------------------------------
\1\See Federal Register, September 14, 1999, ``Sources of Homeowner
Downpayment; Proposed Rule'' page 49956-49958.
---------------------------------------------------------------------------
Indeed, HUD, the Internal Revenue Service (IRS), and the
Government Accountability Office (GAO) have all expressed
concerns about the providers of this assistance and its effect
on the future solvency of the FHA program. In a 2007 report,
GAO stated:
Assistance from seller-funded nonprofits alters the
structure of the purchase transaction in important
ways. First, because many seller-funded nonprofits
require property sellers to make a payment to their
organization, assistance from these nonprofits creates
an indirect funding stream from property sellers to
homebuyers. Second, GAO analysis indicated that FHA-
insured homes bought with seller-funded nonprofit
assistance were appraised at and sold for about 2 to 3
percent more than comparable homes bought without such
assistance.\2\
---------------------------------------------------------------------------
\2\Seller-Funded Down-Payment Assistance Changes the Structure of
the Purchase Transaction and Negatively Affects Loan Performance (GAO-
07-1033T June 22, 2007).
---------------------------------------------------------------------------
According to HUD, seller-funded downpayment loans are three
times more likely to end up in foreclosure as loans without
such assistance. Nearly 16 percent of loans made with seller-
funded downpayment assistance in 2000 have already gone to
claim, compared to just 6 percent of borrower-funded loans.
Similarly, nearly 7 percent of loans made in 2004 have gone to
claim, compared to just 1.7 percent of borrower-funded loans.
This difference may be explained, in part, by the higher sales
prices of comparable homes bought with seller-funded
assistance.
Below is a chart showing claim rates over the last 7 years
for the Seller Funded Downpayment Assistance Program.
To-Date Claim Rates on FHA Single-Family Purchase Loan Endorsements by Source of Downpayment Funds
----------------------------------------------------------------------------------------------------------------
Government
Fiscal Year Borrower Relative agency SFDPA Employer
(percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
2000 6.09 8.19 13.26 15.78 9.52
2001 5.42 6.41 12.79 15.65 7.24
2002 4.10 4.25 9.76 12.40 5.50
2003 2.85 3.08 7.64 9.80 3.68
2004 1.61 2.10 4.23 6.74 3.33
2005 0.84 0.97 2.04 3.60 1.42
2006 0.16 0.16 0.42 0.86 0.49
----------------------------------------------------------------------------------------------------------------
Data as of December 31, 2007.
Source: U.S. Dept of HUD.
Explanatory Note: Claim rates decline each year because newer loans
have had less time to go to claim
In 2006, the IRS issued a revenue ruling that stripped
these organizations of their tax exempt status, ruling that
sellers often raise the property price to cover the cost of the
downpayment, resulting in no net benefit to the buyer. The IRS
stated, as early as 2002, that ``in a typical scheme, there is
a direct correlation between the amount of down-payment
assistance provided to the buyer and the payment received from
the seller. Moreover, the seller pays the organization only if
the sale closes, and the organization usually charges an
additional fee for its services.''
The IRS added that ``the payments [from the seller] do not
proceed from detached and disinterested generosity, but rather
are in response to an anticipated economic benefit, namely
facilitating the sale of the seller's home.'' Nothing in H.R.
6694 addresses these concerns.
In what appears to be a circumvention of sound lending
policy, the seller-funded downpayments allow potential
homeowners to purchase homes without any of their own money at
risk. Where I come from, this means the homeowner has ``no skin
in the game.'' Hence, the potential for defaults and
foreclosures increases substantially.
In testimony earlier this year, FHA Commissioner Brian
Montgomery warned this Committee that his agency could lose
$4.6 billion in 2008 largely due to expected losses from
mortgages issued with seller-funded downpayment assistance.
While I recognize that H.R. 6694 attempts to mitigate some
of these risks by limiting the use of seller-funded downpayment
assistance to borrowers with credit scores above 620, this
approach does not go far enough, in my view, to address the
very serious concerns that prompted the statutory elimination
of the seller-funded downpayment assistance program in the
first place.
Given the potentially devastating effect of these programs
on the financial standing of the FHA, it should come as no
surprise that the Bush administration and HUD have serious
concerns about this legislation.
Currently, we are in a housing market environment where the
overall mortgage delinquency rate is at its highest level in 29
years, according to data released earlier this month by the
Mortgage Bankers Association. Almost 10 percent of all
outstanding mortgages are now either delinquent or in
foreclosure. It does not make sound policy to overload the FHA
program at a time when FHA is already being asked to refinance
an estimated 400,000 troubled borrowers on the brink of default
and possible foreclosure as part of the ``Hope for Homeowners
Act of 2008'' program created just 48 days ago.
It is for these reasons that I must oppose this
legislation.
Spencer Bachus.