SUMMARY OF THE BUDGET REQUEST

1. Mortgage Insurance Commitment Limitations. The Budget requests an overall mortgage insurance commitment limitation of $181 billion on new fiscal year 2001 FHA loan commitments. The proposed total includes $160 billion under the MMI/CMHI Fund, which will exclusively support insurance of home mortgages; and $21 billion under the GI/SRI Fund which supports home, multifamily rental, and an assortment of special purpose (hospitals, nursing homes, etc.) mortgage insurance.
2. Direct Loan Limitations. The Budget requests a direct loan limitation of $250 million under the MMI/CMHI account. A direct loan limitation of $50 million is requested for the GI/SRI account. These direct loans will be used to facilitate the acquisition and disposition by non-profit intermediaries of FHA single family and multifamily acquired properties.
3. Appropriations for Administrative Expense. The Budget requests a total of $846 million for administrative and administrative contract expenses in the FHA program accounts. Of this total, $522 million will be transferred to Salaries and Expenses (S&E), HUD; $18 million will be transferred to the appropriation for the Office of Inspector General; $2 million for a data warehouse for use by the Federal Housing Credit Consortium, and $304 million for administrative contract expenses. Of the total $846 million, $491 million would be funded in the MMI/CMHI accounts, and the remaining $355 million would be in the GI/SRI account.
4. Appropriation for Mortgage Insurance Credit Subsidies. The Budget requests an appropriation of $101 million to support the credit subsidies associated with loan guarantees committed under the FHA's GI/SRI account. The credit subsidy is based on the net cost to the Government, exclusive of administrative expenses, of a direct loan or loan guarantee over its full term, discounted to present value at the Treasury's borrowing cost. In cases where premium and fee income is projected to be more than sufficient to support full costs (i.e., there is no net Federal cost), negative credit subsidy is generated as revenue to offset other spending or reduce the deficit. MMI Fund insurance activity is expected to generate an estimated $3.7 billion in negative credit subsidy, including new business resulting from legislative proposals.

PROGRAM DESCRIPTION

Through mortgage insurance, FHA helps lenders reduce their exposure to risk of default. This allows lenders to make money available to more borrowers for home and home improvement loans, and apartment, hospital and nursing home loans. FHA provides a vital link to financing for America's housing needs.

Mortgage insurance has made financing available in neighborhoods and geographic areas facing economic uncertainty, and to individuals and families not adequately served by the conventional mortgage market. FHA has been a product innovator, and has seen the private sector follow with similar products and terms once they learn from FHA's experience. FHA spreads and manages risk through geographically dispersed loan insurance activity and a portfolio that is diverse in borrowers and products. Over 8 million more families own homes than at the start of this Administration, and the home ownership rate of 67 percent at the end of 1999 is at an all-time high.

In the single family area, FHA has met the Congressionally mandated 2 percent capital ratio years before required. The auditors express full confidence in the FHA financial statements, which are on a Generally Accepted Accounting Principles (GAAP) basis. In addition, FHA prepared financial statements in fiscal year 1998 needed for the HUD financial statements, which are also in compliance with the credit reform accounting requirements of Statement Number 2 of the Federal Accounting Standards Advisory Board (FASAB). Multifamily credit subsidy rates, which reflect an estimated cost of new credit enhancement, have moved steadily lower as products are improved and risk is better understood. Single family programs have contributed larger amounts to reserves.

Single family has continued its aggressive strategy of productivity improvement through consolidation of functions in Home ownership Centers, located in Denver, Philadelphia, Atlanta, and Santa Ana. These Centers are key to improving service to borrowers and lenders with greater productivity per employee. Single family is also expanding its contracts for functions which can be handled more effectively in the private sector, including management and marketing of FHA-held properties, and servicing of assigned notes. Multifamily has consolidated property sales in two Hub locations, and has moved the servicing of coinsurance loans to a single field location. Multifamily also has improved productivity through streamlined procedures, flexible processing teams, and work sharing between offices. In fiscal year 2001, Multifamily will continue to monitor and evaluate its new underwriting criteria and process.

For some years, FHA has realized that sharing information would lead to constructive communication. Over the last 5 years, FHA has developed sites on the Internet to share information on loan sales, property sales, handbooks, notices and staff contacts. It is even possible to learn how to buy a home from the HUD Web page. FHA is a major contributor to a project to establish an industry-wide multifamily data base of property characteristics and operating norms. Data on expiring subsidy contracts was posted on the Internet for communities and other interested parties. The FHA Multifamily and Single Family program offices have also invested in data warehouses that allow easy access to information to manage programs and bridge the gaps created by a lack of system integration. In addition to the Freddie Mac Loan Prospector that was approved in 1998, a new automated underwriting system, Fannie Mae's Desktop Underwriter/PMI's pmiAURA^SM for FHA, is now approved for use by lenders, and other systems are under review for approval.

FHA bears the risk that a borrower will default and that the lender will convey to FHA either a property or a loan in exchange for payment of an insurance claim. Six years ago, the single family and multifamily inventories of loans and properties were diverting enormous resources and management attention away from FHA's core mission. Over the past 6 years, those inventories have been reduced dramatically through a series of national loan sales and aggressive property sales. Single family note inventories are expected to be essentially eliminated in a mortgage sale in fiscal year 2000. As conditions change, however, future note sales may occur. Partly as a result of these loan sales and the Single Family Management and Marketing contracts, property inventories are expected to continue to decline. Consequently, management and staff are increasingly able to focus on underwriting, servicing, loss mitigation and loss prevention.

Legislation enacted in 1999 revised the single family property disposition statutes to allow additional flexibility, allowing FHA to take back notes, rather than having lenders foreclose and transfer to HUD the titles on properties, when an insured loan goes to claim. At the point a note is received, FHA will transfer the note to third parties for servicing and/or disposition. Although this legislation was enacted in 1999, full implementation starts in 2002, to allow time for FHA and the industry to have programs and systems in place. This program improvement is expected to save over $400 million on a net present value basis. At the discretion of the Secretary, options are available for property disposition in revitalization areas to help stabilize and uplift depressed areas. Implementing regulations are currently being drafted for comment.

This legislation enacted for the Single Family program in 1999 also included an increase to the single family loan limit so that it equals 48 percent floor and 87 percent ceiling in relation to the Freddie Mac/Fannie Mae conforming loan limit. In the 2001 Budget, the FHA limit has been proposed to be increased to 100 percent of the conforming loan limit. Increasing the FHA loan limit will help large families and families in high cost areas with home ownership. It will also help senior citizens qualify for larger reverse mortgages, to allow them to stay in their homes when they need cash for emergencies or living expenses. For 2001, this proposal is expected to increase FHA business by 55,000 mortgages and $9.4 billion dollars, and contribute an additional $241 million of negative subsidy.

Legislation is also proposed in the 2001 Budget to allow FHA to insure "hybrid ARMs" - that is, adjustable rate mortgages that have the interest rate fixed for a predetermined initial period. These products have proved popular with homebuyers, because they may qualify for a loan at a lower initial interest rate than a fixed rate mortgage, but avoid the risk of "payment shock" during the initial period if interest rates rise. FHA proposes to insure these hybrid ARM loans with an initial fixed rate period of 3, 5, 7, or 10 years. These loans are expected to increase FHA business by 40 thousand loans valued at $4.4 billion in 2001, and about 54 thousand loans estimated at over $6 billion in 2002 and future years.

The loan limit increase and hybrid ARMs are two of several factors expected to increase home ownership. FHA has changed its underwriting standards to allow non-traditional sources of funds, such as loans from family members and cash saved at home to be counted toward required cash investment. FHA has also:

• allowed lenders to establish "Homeownership Bridal Registry Accounts," encouraging new couples to accumulate funds for a home purchase;
• reduced up-front fees for first time homebuyers with housing counseling (1.75 percent v. 2.25 percent), with further reductions for first time center city homebuyers (1.5 percent), and is preparing an additional premium reduction for counseled first-time center city homebuyers (1.25 percent);
• initiated a "homebuyer protection plan" for single family products. This program includes reforms to the appraisal process to increase accuracy and thoroughness, use of a standard valuation form furnished to homebuyers on the condition of a property, and a nationwide examination for FHA appraisers. This initiative will help ensure that FHA insured borrowers get what they expect in a home; and
• begun to require its lenders to provide an "Informed Consumer Choice" disclosure to assist borrowers in comparing the costs of an FHA loan with a similar conventional loan. All of these have contributed toward the increase in home ownership.

However, the home ownership rate for minorities is less than two-thirds that of whites, and for urban areas, is just over two-thirds of suburban areas. The legislation allowing for selection of preferred purchasers of FHA properties in revitalization areas, purchasers who commit to increasing home ownership and improving neighborhoods, in return for discounted price, provides an opportunity to increase minority and center city home ownership.

In 1996, FHA provided 41 percent of all mortgage credit to African-Americans and 42 percent to Hispanics, while providing only 21 percent to all eligible homebuyers. FHA bears about 66 percent of the credit risk for low-income and minority borrowers and their neighborhoods. Private Mortgage Insurers (PMIs) bear only 6 to 8 percent and Fannie Mae and Freddie Mac bear only 4 to 5 percent. Nearly two-thirds of FHA insured loans would not be covered by PMIs. FHA is the major player in increasing home ownership among the less affluent.

Supporting FHA Administrative Costs

Each year the Congress has appropriated a transfer from the FHA Fund to the Department's Salaries and Expenses account and to the Office of Inspector General to support the general overhead costs associated with the administration of the various insurance Funds. In addition to the amounts appropriated for overhead expenses, the Insurance Funds are appropriated funds to pay for certain programmatic contract expenses related to the conduct of FHA's endorsement, accounting and servicing, portfolio analysis, asset management, and disposition activities.

In addition, $2 million is proposed as FHA's share of a data warehouse of the Federal Housing Credit Consortium for use by the four major Federal housing credit agencies.

Several initiatives designed to strengthen the FHA Fund will continue in 2000 and 2001. These initiatives include:

• management and marketing of single family properties by contracts in 17 geographic areas. The contractors are expected to protect and preserve the assets and effect timely sales which result in the maximum return to FHA. The first 6 months of operations of these contracts show good results, excluding the effect of one defaulting contractor. Net proceeds by the contractors are about 67 percent of the claim amount. Turnover from the time the contractors receive the properties to sale was greatly reduced. Since the initial 6 months included time spent for start-up, disposition of backlogs, and the replacement of a defaulting contractor, the results are expected to continue to improve and future years;
• Neighborhood Networks, which enhances the viability of FHA-insured multifamily projects by improving resident skills and training;
• deployment of automation equipment, to enhance efficiencies in managing assets and risks;
• home ownership strategy, which supports FHA's participation in nationwide efforts to raise America's home ownership rate;
• acquisition of data and analysis to form strategies for reengineering FHA's multifamily portfolio, in particular, analysis of the effects of tenant and rent characteristics on future FHA insurance claims;
• maintaining a place-based data warehouse, which allows FHA insurance and asset management activities on existing business to be viewed in a broader community context; and
• support for the FHA Homepage on the World-Wide-Web, which provides a cost-effective communications device for FHA programs, a marketing capability for asset sales, and up-to-date FHA program information to FHA clients.

Major FHA information processing systems are scheduled to be managed in-house under the direction of the Office of Information Technology (IT), they include the Multifamily Accounting and Reporting System (MARS), Single Family Accounting and Management System (SAMS), Project Management System (PMS), Computerized Home Underwriting Management System (CHUMS), Debt Center Accounting and Management System (DCAMS), Home Equity Conversion Mortgage System (HECM) and FHA Management Information System (FHAMIS). Funding for the development and operation of these systems will be accomplished through reimbursements to the Working Capital Fund. Reimbursements to the Working Capital Fund are also included in the activities to be paid from the program accounts.

Costs associated with asset disposition, (HQ-directed as well as field-originated), are capitalized into the cost of acquired properties and affect the profit or loss realized on the disposition of the asset. These costs are not included in the FHA headquarters total or the funds transferred to the program accounts.

Management Objectives and Performance Measures

While FHA has a specific mission and defined goals, it also contributes to the larger goals of the Department. Through its Single Family 203(k) program, which provides for combined purchase and rehabilitation financing, FHA contributes to community revitalization and development. Through its Multifamily Mixed-Income product, available to convert public and other housing to mixed-income developments, FHA contributes to opening housing markets and encouraging economic and social integration. Through FHA's Neighborhood Networks initiative, residents learn new skills and gain access to information that can help them become less dependent on assistance, and successfully make the transitions required by welfare reform. Multifamily's Safe Neighborhood Action Plans and Drug Elimination Grants improve living conditions in neighborhoods beyond the physical boundaries of FHA-insured properties. Disposition and rehabilitation of multifamily owned property are increasingly a part of the broader community plans and efforts.

Not only have FHA reinvention efforts strengthened the Department, but a more effective FHA has also improved governmentwide performance. FHA has been instrumental in framing the President's National Homeownership Strategy. Both home ownership rates and the number of homeowners have increased to all-time highs of 66.8 percent and 70.1 million families owning homes today. Home ownership has increased for all regions of the country and all ethnic and racial groups between 1994 and 1999.

During fiscal years 2000 and 2001, FHA's priority will be to continue to enhance its business capacity and to better serve its public purpose. During the last 7 years, FHA has focused significant effort on reinventing itself to become more streamlined, market-driven, and effective in furthering the Nation's community and housing goals, including increasing the national home ownership rate to an all time high. More remains to be done to ensure that FHA is a blend of the best of public and private business worlds: a business-driven entity created to serve a public mission, and is flexible enough to act quickly and cost-effectively in rapidly changing markets.

The fiscal year 2001 Budget also established strategic goals which give direction to better decision-making and resource utilization. These goals are to:

• increase availability of decent, safe and affordable housing in American communities;
• ensure equal opportunity in housing for all Americans;
• promote self-sufficiency and asset development of families and individuals;
• improve community quality of life and economic viability; and
• restore the public trust.

Establishing these objectives, with appropriate indicators and benchmarks, enables FHA to focus activities on measurable results. Specific objectives and performance measures for the MMI and GI/SRI funds are discussed in each of the following sections.