[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.

                                  
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