Congressional Justifications for 1998 Budget Estimates

Federal Housing Administration
Mortgage and Loan Insurance Programs

	Actual 1996	Budget Estimate 1997	Current Estimate 1997	Estimate 1998	Increase + Decrease - 1998 vs 1997
(Dollars in Millions)
Appropriation Request:
MMI/CMHI Account:
Insurance Commitment Limitation	$110,000	$110,000	$110,000	$110,000	...
Direct Loan Limitation	200	200	200	200	...
Administrative expenses: Transfer to Salaries and Expenses Accounts	342	351	351	333	-$18
GI/SRI Account:
Insurance Commitment Limitation	17,400	17,400	17,400	17,400	...
Direct Loan Limitation	120	120	120	120	...
Administrative expenses: Transfer to Salaries and Expenses Accounts	202	207	207	222	+15
Credit Subsidy	703	160	95	81	-14
Budget Outlays(Net) MMI/GI/SRI
Discretionary	-323	100	-242	274	+516
Mandatory	-4,423	-109	-2,798	-831	+1,967
Total	-4,746	-9	-3,040	-557	+2,483
Insurance Written (units):
Homes	821,574	699,797	882,604	857,965	-24,639
Multifamily	108,688	125,057	160,176	177,077	+16,901
Title I	111,071	138,000	138,000	160,000	+22,000
Total	1,041,333	962,845	1,180,780	1,195,042	+14,262
Insurance Written (dollars):
Homes	$65,768	$55,315	$71,150	$73,714	+$2,564
Multifamily	4,003	4,817	6,182	6,686	+503
Title I	1,670	2,304	2,710	2,400	-310
Total	71,441	62,436	80,042	82,800	+2,757
Insurance-in-Force
Outstanding Loan Balances
Home mortgages	$401,521	$384,010	$432,467	$466,003	+$33,536
Multifamily	48,459	48,200	51,954	56,007	+4,053
Title I	7,397	6,645	9,925	10,938	+1,013
Total	457,377	438,855	494,346	532,948	+38,602

I. Summary of Budget Request

1. Mortgage Insurance Commitment Limitations. The Budget requests an overall mortgage insurance commitment limitation of $127.4 billion on new fiscal year 1998 FHA loan commitments. The proposed total includes $110 billion under the MMI/CMHI Fund, which will exclusively support insurance of home mortgages; and $17.4 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 $200 million under the MMI/CMHI account. A direct loan limitation of $120 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 $555 million for transfer to salaries and expenses accounts. Of this total, $11 million will be transferred to the appropriation for the Office of Inspector General. Of the total transferred, $333 million would be derived from the MMI/CMHI accounts, and the remaining $222 million would be drawn from the GI/SRI account.

4. Appropriation for Mortgage Insurance Credit Subsidies. The Budget requests an appropriation of $81 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 and GI/SRI Fund insurance activity is expected to generate $1,678 million in negative credit subsidy. Enactment of pending legislation is estimated to increase negative subsidy by an additional $370 million in 1998. Both credit subsidies and the loan guarantee limitation will serve as upper limits on new insurance activity.

II. 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 and dreams.

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.

Much as a builder prepares a strong foundation before laying the blocks that will form the building, FHA has examined and strengthened its foundation as it has renovated its business segments.

Financial Building Blocks. In the Single Family area, FHA has met the congressionally mandated 2 percent capital ratio years before required. The FHA auditors express full confidence in the financial statements. 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.

Organizational Building Blocks. Single Family has embarked on an aggressive strategy of productivity improvement through consolidation of functions in Homeownership Centers. Three Centers have been selected and are moving toward full capacity, two additional Centers are under consideration in fiscal year 1997. These Centers are key to improving service to borrowers and lenders with greater productivity per employee. 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 1998, Multifamily expects to monitor and evaluate the results of a complete re-tooling of its underwriting of new business.

Knowledge as a Building Block. In order to move an organization to a higher level, there must be a plan. In order to develop the plan, there must be a knowledge and information base on which to make decisions. Management at FHA recognized the deficiencies of data and data systems as it focused on planning for the future. And FHA realized that sharing information would lead to constructive criticism. Over the last 2 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. And Multifamily and Single Family invested in data warehouses that allow easy access to information to manage programs and bridge the gaps created by a lack of system integration. There continues to be a gap between private sector and FHA systems and data, and it will be important to continue to invest in systems to help FHA do business smarter, quicker and with less risk.

Shedding Distractions. The 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. Four 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 4 years, those inventories have been reduced dramatically through a series of national loan sales and aggressive property sales. Loan sales will continue through fiscal year 1997 to a point where inventories will be too low to warrant a sale in fiscal year 1998. Partly as a result of these loan sales, 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.

One HUD. 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 new Multifamily Mixed Income product, available to convert public and other housing to mixed income, 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 dependant 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, like Heritage Village in Atlanta, is increasingly a part of broader community plans and efforts.

Measurable Results. Not only have FHA reinvention efforts strengthened the Department, but a more effective FHA has also improved government-wide performance.

• FHA was instrumental in framing the President's National Homeownership Strategy and FHA products, by serving many first-time homebuyers, have been critical to pushing homeownership rates to a fifteen-year high, and the number of homeowners to an all-time high.

• FHA is recognized as a leader in asset disposition, selling about 79,000 loans and in the process generating $1 billion in deficit reduction; and another $534 million has been generated to support spending on multifamily activities.

• FHA activities have received 15 Hammer Awards from the National Performance Review for innovation and improving government performance.

During fiscal year 1998 FHA's priority will continue to be restoring its business capacity to better serve its public purpose. During the last 4 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 homeownership 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, flexible enough to act quickly and cost-effectively in rapidly changing markets.

Performance Measures in 1998. In preparation for meeting requirements of the Government Performance and Results Act, the fiscal year 1998 Budget for FHA also established performance measures which give strategic direction to management decisions and use of resources. During fiscal year 1998, FHA will:

• focus on homebuyers underserved by the conventional market by providing financing assistance to qualified first-time homebuyers unable to afford conventional financing and to homebuyers in underserved areas;
• expand home ownership opportunities by providing support for production, rehabilitation and financing of low-cost housing; and by working more efficiently and effectively with lenders, consumers and non-profit organizations in financing and property sale activities;
• providing financing support for needed rental housing and health care facilities underserved in conventional mortgage markets by focusing Federal credit enhancements; and
• continue strengthening the multifamily portfolio by improving the physical and financial condition of housing projects through negotiation and enforcement.

Establishing these objectives, with appropriate indicators and benchmarks, enables FHA to focus activities and accurately measure results.

IV. Supporting Contracts directly from the FHA Funds

Each year the Congress appropriates a transfer of cash from the FHA Fund to the Department's Salaries and Expenses (S&E) account and to the Office of Inspector General to support the general overhead costs associated with the administration of the various insuran s. s. In addition to the amounts appropriated for overhead expenses, the Department directly charges the insurance Funds to pay for certain non-overhead expenses related to the conduct of FHA's endorsement, accounting and servicing, portfolio analysis, asset management, and disposition activities. The total estimate for FHA non-overhead contract needs for fiscal year 1998 is $404.7 million, the same level requested and approved in fiscal years 1997 and 1996.

The FHA Fund is being used to finance contractor support in a number of FHA activities to complement and expand existing staff expertise and to accommodate surges in workload. Delays in handling peak workload, or the inability to deal with complex financial analysis and disposition issues due to lack of staff or expertise results in substantial and unnecessary cost to the FHA Fund. This is particularly critical in building multifamily specialized asset management and disposition expertise so as to effectively capitalize on the experience of the private sector. The use of contract support to purchase the technical skills and expertise needed to address these requirements is the most timely and cost-effective approach.

FHA Headquarters-directed contracting supports activities under the following general categories: loan management activities; financial analysis; systems operations; debt collection; review/audit of mortgagees; and Headquarters-directed Field contracts including credit reports, appraisals, architectural and engineering services, comprehensive servicing and foreclosure management. FHA HQ contracts also support development of new systems, and the updating and maintenance of all of the major FHA processing, accounting, servicing, management and disposition systems.

Several initiatives designed to strengthen the FHA Fund began in fiscal year 1996 and will continue in 1997 and 1998. These initiatives include: marketing, which allows FHA to maintain premium income and expand access to FHA products to underserved borrowers; Neighborhood Networks, which enhances the viability of FHA-insured multifamily projects by improving resident skills and training; automation equipment, to enhance efficiencies in managing assets and risk; homeownership strategy, which supports FHA's participation in nationwide efforts to raise America's homeownership rate; information used to develop strategies to reengineer FHA's multifamily portfolio, in particular, analysis of the effects of tenant and rent characteristics on future FHA insurance claims; 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 such as 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 Conversation Mortgage System (HECM) and FHA Management Information System (FHAMIS) are planned to be managed in-house under the direction of the Office of Information Technology (ITS). Funding for the development and operation of these systems will be accomplished through reimbursements to the Working Capital Fund.

Contract activity associated with property disposition, (HQ-directed as well as Field-originated), is capitalized into the cost of acquired properties and affects the profit or loss realized on the disposition of the asset. These contracts are not included in the FHA headquarters total.

Since 1996, when contract review procedures were streamlined, the Office of Housing's contract review process provides for direct review by the Commissioner's Office encompassing:

1. the eligibility for the use of FHA funds;

2. the demonstrated need for the contract services;

3. a determination that the approach is a cost-effective way to achieve completion of the task; and

4. a determination that the pricing is consistent with competitive procurement requirements.