The Federal Housing Administration (FHA) was established by the National Housing Act of 1934 to broaden homeownership, protect lending institutions, and stimulate the building industry. Prior to the creation of FHA, home mortgages typically did not exceed 50 percent of the home value or extend beyond five years. At the end of the five years, mortgages had to be repaid or renegotiated. During the Great Depression, lenders were unable or unwilling to renegotiate many loans as they came due. Consequently, many borrowers lost their homes and lenders lost money because property values declined significantly. The FHA program, which is administered by the Department of Housing and Urban Development (HUD), was established to provide stability and liquidity in the market. Its creation fostered the development of the 30-year mortgage product and led to standardized mortgage instruments.

Since 1934, FHA has insured more than 33 million loans and is the largest insurer of mortgages in the world. During the 1940s, FHA helped finance military housing and homes for returning veterans. In the 1980s, FHA helped to steady falling home prices and made it possible for potential homebuyers to obtain financing at a time when the private sector was withdrawing from targeted geographical regions, such as the oil-producing states.

While there is a lack of familiarity with FHA, and a mistaken belief that FHA directly provides mortgage loans, the agency actually only provides mortgage insurance for those loans that meet FHA-established underwriting standards. Moreover, these FHA-insured loans are available to owner-occupants who can demonstrate the ability to repay the loans. In contrast to loans in the conventional market, primarily purchased and meeting guidelines established by Government Sponsored Enterprises (GSEs) or the Jumbo Market, FHA underwriting standards allow for more flexibility in calculating household income and debt/payment ratios. The cost of mortgage insurance is passed along to the homeowner in the form of an up front premium paid at the time of the closing and a second premium charged on an annual basis and typically paid monthly.

FHA is one of the few government agencies to operate entirely based on the fee income derived from its programs, which means the taxpayer does not pay for or subsidize the agency. There are two funds operated by FHA: (1) Mutual Mortgage Insurance Fund (MMIF), and the General Insurance/Special Risk Fund (GI/SRI). Despite FHA's ability to pay for itself, there has been considerable debate on the proper role of a government agency in promoting homeownership, which includes the question of whether the agency should be involved in mortgage insurance activities where a private sector industry exists to meet the need. Arguably, FHA is primarily used for first-time, inner-city, and rural homebuyers, a market where private sector activity has been thought to lag behind. However, the private sector has argued that it is using new technologies to market its products more aggressively in these typically underserved areas and markets.

Many FHA proponents believe that the program must be reformed in order for it to maintain its relevance in the marketplace. While FHA was previously considered an innovator, its products currently lag behind private-market offerings, often leaving consumers with the sole option of obtaining costly, more risky loans available in the subprime market. The FHA program is also cumbersome and antiquated technologically, leading many lenders to forgo FHA product origination.

On the same day that Housing Subcommittee Chairwoman Maxine Waters and Financial Services Chairman Barney Frank introduced H.R. 1852, the `Expanding American Homeownership Act of 2007,' Housing Subcommittee Ranking Member Judy Biggert and Full Committee Ranking Member Spencer Bachus introduced H.R. 1752, also entitled `The Expanding American Homeownership Act of 2007.' H.R. 1752 is identical to H.R. 5121, bipartisan legislation that passed the House last Congress by a margin of 415-7.

H.R. 1752 proposes comprehensive reform of FHA's single-family mortgage insurance activities. The legislation would allow FHA to base each borrower's mortgage insurance premiums upon the risk that the borrower poses to the FHA Mortgage Insurance Fund, with slight variations. Under this proposal, mortgage insurance premiums would be based on the borrower's credit history, loan-to-value ratio, debt-to-income ratio, and on FHA's historical experience with similar borrowers. The Administration has stated it believes that this change would decrease premiums for many of FHA's traditional borrowers, thereby increasing access to homeownership.

H.R. 1752 would also amend the National Housing Act to change the factors used to determine the maximum single family mortgage amounts insurable by FHA. Generally, under current law, the maximum insurable mortgage is the lesser of a maximum allowable dollar amount and an amount based on a maximum percentage of appraised value plus the mortgage insurance premium.

Currently, FHA maximum mortgage dollar amounts are established with reference to the median home price for the area in which the property is located. For a single-family residence, the maximum dollar amount that can be insured is 95% of the median home price for the area. For two-, three- and four-family residences the maximum dollar amounts that can be insured are 107%, 130% and 150% of such median price, respectively. These amounts are capped and cannot exceed 87% of the Federal Home Loan Mortgage Corporation Association conforming loan limit, which now stands at $362,790 for a one-unit property. There is also a statutory `floor' amount below which the maximum mortgage dollar amount cannot be set. The current `floor' is set at 48% of the FHLMC conforming loan limit, now $200,160 for a one-unit property.

In addition, under H.R. 1752, FHA would be allowed to insure up to the full median house price in the area, as opposed to 95% of the median house price. Moreover, for consistency, the references to the percentages for two-, three- and four-family residences would be removed from the statute. This proposal strikes the 87% cap, and allows FHA to insure up to 100% of the FHLMC loan limit. Also, the bill increases the `floor' to 65% of the FHLMC conforming loan limit.

Although H.R. 1852 contains many of the reforms included in H.R. 1752, it also features several significant departures from last Congress's House-passed bill. These important differences include:

• H.R. 1852 limits eligibility for low- and no-downpayment FHA loans to first time homebuyers, while H.R. 1752 allows participation by any FHA-qualified borrower, including those seeking to refinance an existing loan;
• H.R. 1852 includes a directive for FHA to serve high-risk borrowers (those with FICO scores of 560 or lower), while H.R. 1752 includes no such mandate;
• H.R. 1852 caps annual premiums for borrowers making at least a 3% down payment (including borrowers deemed high-risk) at current levels, while H.R. 1752 gives HUD greater flexibility to devise a truly risk-based pricing structure for the FHA program that more closely matches the premiums paid by an individual borrower to that borrower's credit history; and
• H.R. 1852 authorizes the use of surpluses generated by the FHA program to support the creation of a grant program to fund affordable rental housing and affordable homeownership opportunities for low-income families, while H.R. 1752 contains no such provision.

H.R. 1852's provisions to divert a portion of FHA surpluses to fund a new, unrelated, and as yet undefined government housing program caused the greatest concern among Republicans during the Committee's consideration of the legislation. These concerns are shared by the Administration. On May 1, 2007, HUD transmitted a letter to Chairman Frank outlining its views on H.R. 1852. Regarding the affordable housing fund, the letter stated:

H.R. 1852 also includes provisions that would have an adverse budgetary effect. The act would create an Affordable Housing Grant Fund with savings from increased FHA receipts. This is potentially disruptive to the existing appropriations process. All FHA receipts are currently netted against HUD's spending totals and taken into consideration during appropriations for the Department. The proposal's details are also undefined and unclear; therefore, the specifics may raise additional policy concerns. In addition, the act revises certain recently enacted asset disposition reforms for FHA multifamily programs.

The bulk of the surplus generated by FHA under H.R. 1852 would result from the negative credit subsidy created by HUD's collection of premiums under the Home Equity Conversion Mortgage (HECM) program. HECM loans are reverse mortgages that allow homeowners over the age of 62 to tap the equity in their homes in the form of monthly payments, lump sum distributions, or lines of credit. Republicans believe that excess premiums under the HECM program should remain in FHA for the benefit of senior citizens and other FHA beneficiaries, rather than being redirected to an amorphous affordable housing fund.

To address concerns about the affordable housing fund and the other key differences between the Republican and Democratic approaches to FHA modernization identified above, Republicans offered a series of amendments at the markup of H.R. 1852. Most notably, Mrs. Biggert offered an amendment to substitute the text of H.R. 1752 for H.R. 1852, and Ranking Member Bachus offered an amendment to postpone the new spending authorized by H.R. 1852 to finance the affordable housing fund until such time as Congress stops raiding the Social Security surplus to pay for unrelated government initiatives. Both amendments were defeated, prompting a majority of Committee Republicans to vote against favorably reporting the legislation to the full House.

While we support legislation that modernizes the FHA program and reestablishes it as a viable alternative for low- and middle-income homebuyers, we will continue to oppose legislation that siphons funds away from the FHA program as seed money for an affordable housing agenda that has not been adequately delineated or explained by its proponents.

Spencer Bachus.
K. Marchant.
Adam H. Putnam.
Tom Feeney.
Donald A. Manzullo.
Frank D. Lucas.
Judy Biggert.
Geoff Davis.
Paul Gillmor.
Randy Neugebauer.
Ginny Brown-Waite.
Stevan Pearce.