SUMMARY OF BUDGET ESTIMATES

1. SUMMARY OF BUDGET REQUEST
   1. Credit Limitation. The Budget requests $120 billion as limitation on new insurance commitments for fiscal year 2000. This limitation includes standby commitments to avoid the need for supplemental appropriations if the demand for insurance should exceed the projected level; but standby commitments are not reflected in the estimates for net outlays and receipts.

      An estimated $96 billion of insurance will be written in 2000, covering 925,000 units. These volumes include $2.3 billion and 16,000 new units resulting from increasing the FHA single family loan limit to a ceiling of 87 percent and a floor of 48 percent of the conforming loan limit. The estimates also include a 2 percent increase in FHA mortgages to purchase new homes.

   2. Appropriation Request. An appropriation of $491 million is requested for administrative expenses during fiscal year 2000. Of this sum, $329 million will be transferred to the Salaries and Expenses, HUD and Office of Inspector General accounts. Another $160 million is needed to cover non-overhead administrative costs, including contracts necessary to run the MMI program. These contracts include maintenance, operation and improvement of ADP systems, financial information and reporting and management services. This new appropriation of $160 million is offset by a proposal to amend the National Housing Act to terminate the existing authority to spend these costs directly from the fund. This proposal scores at $168 million -more than offsetting the cost of the appropriation. Another $2 million is to be transferred to cover FHA's share of costs for a pilot data base for the Federal Housing Credit Consortium, which will be used by the four major housing credit agencies--FHA, GNMA, VA and Agriculture. The MMI Fund is expected to generate about $2 billion of negative subsidy on insurance written in fiscal year 2000, which would offset mandatory outlays.

   3. Mortgage Note Sales. Single Family Note Sale Number 6 has been postponed, but is expected to occur at the end of fiscal year, and to sell the remaining inventory of about 9,200 HUD-held assigned notes.

   4. Increasing the FHA Loan Limit. The 1999 Appropriations Act increased the maximum mortgage amount insurable under the FHA single family programs in all areas of the country to be an 87 percent ceiling and a 48 percent floor of the Fannie Mae/Freddie Mac conforming mortgage loan limit. In 1999, the FHA limit in high cost areas (excluding Alaska, Hawaii, Guam and the Virgin Islands) equals $208,800 for a one family home. By increasing the maximum insurable amount, the Department will make FHA loans more available to working families and thus increase homeownership. This proposal reflects the National Homeownership Strategy, to increase the proportion of Americans who own their homes. The effect of this proposal is reflected in these numbers for all years from 1999.

2. CHANGES FROM 1998 ESTIMATES INCLUDED IN 1999 BUDGET
   1. Commitments and Mortgage Origination.

      

      Commitments are 22 percent above the 1999 Budget, and insurance written 54 percent above. A refinancing boom, high commitments at the end of fiscal year 1997, a good year for real estate generally, and a higher level of commitments proceeding to endorsement have driven this increase. The dollar values of commitments are a record level, and the number of commitments are the second highest in the history of FHA.

   2. Mortgage Assignments, Property Acquisition and Sales Activity.

      

      Budget estimates for total claims are based on the claim rates developed in the Price-Waterhouse Actuarial Review and the most recent estimate of future years' insurance-in-force. Because the Review is finalized in the spring and the Budget must be finished in January, the rates normally used for budget purposes are those in the Review of the year before the actual year in the Budget; thus, for the 2000 Budget, the final claim rates for the 1997 Actuarial Review are being used. Each Review contains claim and prepayment rates for prior and future cohorts of business.

      In 1998, the loss mitigation tools under assignment reform are starting to be used by lenders. Lenders have had time to train their staff and housing counselors have become more familiar with these tools, in large part through HUD sponsored programs. The trend of increased use of loss mitigation tools is expected to continue through fiscal year 2000 and level off at about 15 percent o f total claims.

      Although HUD has not accepted new applications for assignment since April of 1996, the remaining applications are still being processed. The sixth single family note sale, formerly scheduled for September 1998, was postponed, so the inventory of assigned notes is higher than projected in the 1999 Budget.

   3. Financial Activity. Net outlays for all MMI/CMHI accounts (including the off-budget financing account) for 1998 total -$650 million. Higher offsetting receipts from new endorsements was offset by the loss of anticipated revenues from Single Family Note Sale #6, and higher than anticipated claim payments.

3. CHANGES FROM ORIGINAL 1999 BUDGET ESTIMATES

1. Commitments and Mortgage Origination.

   

   Current estimates of commitments for 1999 have decreased from the 1999 Budget Estimates due to a reduction in the number of refinancings estimated in 1999. The Current Estimate of insurance written in fiscal year 1999 includes the effect of the enacted increase to the FHA loan limit, high commitment activity at the end of the 1998 cohort where loans endorse in 1999, and an estimated 2 percent increase in purchase loans.

2. Mortgage Assignments, Property Acquisitions and Sales Activity.

   

   The 1999 claim figures in the 2000 Budget reflect final claim rates from the materials being prepared for the 1997 MMI Actuarial Review. The final rates are considered more accurate than the preliminary rates used for the 1999 budget.

3. Financial Activity. Net outlays for all accounts, including the off-budget financing account, in 1999 are estimated at -$1.0 billion, $1.2 billion less negative than the budgeted level of $2.2 billion. Higher claim payments, partially offset by greater negative subsidy amounts from higher endorsements, produce this change.

EXPLANATION OF INCREASES AND DECREASES

1. Mortgage Origination. FHA anticipates that it will endorse more insurance in single family mortgages in fiscal year 2000 ($96.2 billion and 925 thousand homes) than in fiscal year 1999 ($86.4 billion and 854 thousand homes). Standby commitment authority may not be sufficient to cover increases in demand in 2000, so an additional $10 billion in commitment authority is requested. The estimated $113 billion in new commitments includes commitments for $3.2 billion and 18,000 units from the 1999 increase to the FHA single family loan limit.

2. Mortgage Assignment, Property Acquisitions, and Property Sales. There will be no mortgage assignments in 2000. No notes sales are currently projected, but may occur then or in future years as inventory warrants, if the inventory cannot be depleted in fiscal year 1999. The volumes of acquired properties is projected to be an estimated 4 percent below the 1999 levels, using the final 1997 claim rates from the 1997 Actuarial Review, and calculating increased use of the loss mitigation techniques to 15 percent of claims. Sales are projected based on the estimated inventory at the end of fiscal year 1999 and estimated acquisitions in fiscal year 2000.

3. Financial Activity. Net outlays in 2000 are estimated at -$2.0 billion for all accounts, including the off-budget financing account, about $0.8 billion more negative than the 1999 Current Estimates, primarily due to lower estimate value of claims, and higher volume of business.

   The fiscal year 2000 Budget shows the negative subsidy continuing to be disbursed to the Liquidating Account for 1998 through 2001, until arrangements can be made so that the reserves in the Receipt Account will earn interest, as they currently do in the Liquidating Account. It is expected that such arrangements will be in place before fiscal year 2002, when the negative subsidy will be shown as going to the Receipt Account.

PROGRAM DESCRIPTION AND ACTIVITY

1. MMI/CMHI Funds. The Mutual Mortgage Insurance Fund consists of the basic single family home mortgage program (Section 203(b)), the largest of all the FHA programs.

   The Section 203(b) program, enacted in the National Housing Act of 1934, provides mortgage insurance for one- to four-family residences. This program has contributed to expanding the opportunities for homeownership in the United States and will continue to meet the needs of first-time homebuyers, working families, and minority families, as well as underserved communities, especially center city and rural areas. Under the 203(b) program, any person able to meet the cash investment, mortgage payments and credit requirements may obtain an FHA-insured loan from a private lending institution to purchase a home. Since its inception through September 30, 1998, the MMI Fund has insured approximately $988 billion in mortgages for about 22.5 million families.

   The Cooperative Management Housing Insurance Fund contains the Cooperative Housing Insurance program (Section 213) which provides mortgage insurance for cooperative housing projects of more than five units which are occupied by members of a cooperative housing corporation. The insurance program can be used for new construction, rehabilitation, acquisition, improvement or repair of a project and resale of individual memberships in the cooperative. Enacted in 1950, this program has been inactive in recent years.

   No legislative changes are proposed for MMI for fiscal year 2000.

2. LOAN AND MORTGAGE MANAGEMENT ORGANIZATION

1. Implementation of Loss Mitigation Reform. Reform of the FHA single family assignment program for all future insurance endorsements has been enacted. These reforms abolished the old assignment program and encouraged use by mortgage lenders of alternative loss mitigation techniques, which are expected to reduce the dollar value of claims and net outlays. Reduced claim amounts are expected to occur for several reasons:
   • improving the quality of loans which will be accepted for loss mitigation alternatives by lenders will lead to higher recoveries, and lower costs when foreclosures result;

   • reducing the length of time required for HUD to acquire property in cases which previously applied for assignment and failed, will diminish accumulation of arrearages and loss of property value while the application is processed or the loan is assigned; and

   • while the number of claims may actually increase, it is expected that the use of less expensive alternatives, such as preforeclosure sales and partial claims, will grow; but that there will be an overall reduction in the more costly claims, such as foreclosures.

   The estimated reduction to claims resulting from assignment reform has been slower than anticipated, possibly due to the time required for the industry to adapt to new regulations and retrain staff. Legislation enacted as part of the 1999 Appropriations Act, requiring payment to FHA of triple any claim amount paid by FHA where loss mitigation was not applied appropriately, is expected to encourage the use of loss mitigation. It has taken considerable time for the behavior of lenders to adjust to new expectations for the appropriate ways of dealing with defaults, now that the assignment program is no longer an option. Loss mitigation claims comprised about 7 percent of all MMI claims for 1998, up from less than 1 percent in 1997. With FHA's performance monitoring and financial incentives to speed lender acceptance of loss mitigation tools, a noticeable volume of loss mitigation tools has shown in 1998, and this trend is expected to continue through fiscal year 2000 when the trend is expected to level off.

2. Increasing Government Equity. As of September 30, 1995, the MMI Fund met the 2 percent capital reserve requirement under assumptions of moderate economic activity over the life of the current loans. The 1997 Actuarial Review and audit shows a capital ratio of 2.81 percent as of September 30, 1997; the comparable figures from the 1998 Actuarial Review are not yet available. Even under pessimistic economic assumptions the 1997 Actuarial Review shows that reserves are now sufficient to maintain the capital ratio through in fiscal year 2000.

   Because of increasing equity, FHA has been able to undertake actions to increase the availability of mortgages to underserved and unserved populations. The reduction in the up-front fees for first-time home buyers who receive homeownership counseling was doubled to 50 basis points. To further stimulate activity and reduce disparities between suburban and central city homeownership rates, an additional decrease in up-front fees of 25 basis points has been proposed for first-time homebuyers who get counseling and purchase in central cities, making their up-front premium 1.5 percent instead of 2.25 percent, but this further change can only be implemented through pending rulemaking. FHA is examining other ways to increase homeownership, which would make FHA loans more available to a wide spectrum of possible homebuyers, while preserving the viability of the MMI Fund.

3. Changes to the Means of Disposition of HUD-Held Single Family Property. FHA is seeking to increase the range of options for disposing of single family claims. Foreclosure, the prevailing practice for dealing with most mortgages going to claim, is expensive, time consuming, and allows properties to deteriorate. With continuing limitations on staffing, and a lack of expertise in marketing and sales, FHA cannot handle the property inventory to best advantage. FHA plans on being out of retail property sales by the end of 1999, through a multiyear contract for management and marketing of HUD-held properties. This alternative is available to the Department under prior statute.

   New legislation enacted in the 1999 Budget allows HUD additional alternatives to settle claims, including accepting notes in lieu of properties, where it is advantageous to the Fund. Although the legislation was enacted in 1999, and hence scored for Budget purposes then, it is planned for initial implementation in fiscal year 2002, with a phase-in period through 2004. The interim between 1999 and 2002 allow HUD and the mortgage lenders and servicers time to work out conditions, restrictions, and the like; permits HUD to issue regulations; and allows lenders to complete systems modifications and training required by the changes.

   Also enacted as part of the 1999 Appropriations Act was legislation regarding sales in revitalization areas, which allows the Secretary to determine such areas, and classes of purchasers, at three possible levels of discount, in order to contribute to stabilizing such regions. This budget estimates that 10 percent of claims will continue to be properties in order to provide for this and other public purposes.

4. Increasing the FHA Loan Limit. Enacted legislation increased the ceiling and floor for maximum mortgage amount insured under the FHA single family programs to be equal to 87 percent and 48 percent respectively of the GSE conforming mortgage loan limit. This Act will help further the objective of making homeownership attainable for working families. Families will be able to qualify for mortgages earlier, with a wider choice in the quality of homes and neighborhoods that are available to them. This change assists the National Homeownership Strategy, to increase the proportion of Americans who own their homes. The Budget estimates reflect this provision as generating $2.3 billion in new FHA mortgages insured for 16,000 families in 2000. The Budget estimates are intended to be conservative; the volume impact of the proposal can be expected to be in the range of 16,000 to 33,000 additional FHA loans per year.

5. Performance Indicators. One of the overall strategic objectives of the Department is to increase homeownership opportunities, especially in Central Cities, through a variety of tools, such as expanding access to mortgage credit. The MMI performance goals for this objective are to:

1. increase the share of first-time homebuyers in each HUD field office by 1 percent per year over fiscal year 1995;

2. close sale of 95 percent of single family properties on hand as of October 1, 1998, less leased properties, plus 95 percent of projected acquisitions for October 1, 1998 to May 31, 1999; this goal remains the same for fiscal years 1999 and 2000;

3. reduce FHA's cost of providing mortgage insurance by increasing the net recovery on REO sales. While the management and marketing contracts are expected to contribute to this effort, the goal cannot be set until a financial advisor is retained, and analysis is performed on current practices and procedures to find where improvements are possible and cost effective; and

4. reduce FHA's cost of providing mortgage insurance by increasing the percentage of mortgage defaults and claims resolved by the use of loss mitigation and alternatives to foreclosure. Current use of loss mitigation has gotten off to a slow start, although the effect is increasing rapidly. The causes and remedies of this delay need to be examined and resolved before goals can be set. Use of loss mitigation procedures are increasing and are expected to be 15 percent of total claims in fiscal year 2000.

Cross program goals for HUD, also part of the homeownership objective, to which the MMI fund is expected to contribute materially are as follows:

1. increase the overall rate of homeownership to exceed 67.5 percent in the year 2000. At the end of 1998, the homeownership rate was 66.8 percent; at the end of 1999 it is expected to be 67.5 percent; and

2. increase the home ownership rate in Central Cities to exceed 52.5 percent in the year 2000. The interim goals are 51 percent for 1998 and 52.5 percent for 1999.

The MMI Fund helps communities and States establish a full continuum of housing and services designed to assist homeless individuals and families achieve permanent housing and self-sufficiency to the extent possible, by setting aside a portion of properties being sold for purchase by non-profits at a 30 percent discount, and offering to finance the purchase under the direct loan account. These properties can be used for transitional housing or for resale to low-income families.

FHA is also implementing the management reform goals. These strategic objectives are reorganizing by functions and consolidating and/or privatizing activities where appropriate, modernizing outdated financial management systems, refocusing and retraining staff to carry out our revitalized mission, creating an Enforcement Authority, and replacing the present top-down bureaucracy with a customer-friendly structure.

As part of the Strategic Plan, HUD also is committed to improve customer service and develop partnerships with industry and interest groups. FHA is involved heavily in outreach, including access to information in the WEB. Working Groups set up to work with industry include for MMI the Single Family Mortgage Insurance Underwriting Outreach Group, and the Housing Counseling Working Group. The homeownership centers which have been set up to handle single family loans have provided quicker and more efficient service.