HUD's FY99 Budget
Congressional Justifications
Office of Housing

Federal Housing Administration
Mortgage and Loan Insurance Programs

Summary of the Budget Request

A. Mortgage Insurance Commitment Limitations. The Budget requests an overall mortgage insurance commitment limitation of $128.1 billion on new fiscal year 1999 FHA loan commitments. The proposed total includes $110 billion under the MMI/CMHI Fund, which will exclusively support insurance of home mortgages; and $18.1 billion under the GI/SRI Fund which supports home, multifamily rental, and an assortment of special purpose (hospitals, nursing homes, etc.) mortgage insurance.

B. Direct Loan Limitations. The Budget requests a direct loan limitation of $50 million under the MMI/CMHI account. A direct loan limitation of $50 million is also 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.

C. Appropriations for Administrative Expense. The Budget requests a total of $540 million for transfer to salaries and expenses accounts. Of this total, $22 million will be transferred to the appropriation for the Office of Inspector General. Of the total transferred, $329 million would be derived from the MMI/CMHI accounts, and the remaining $211 million would be drawn from the GI/SRI account.

D. 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

$1,738 million in negative credit subsidy, of which $529 million will be transferred to the program account to cover the S&E transfers and other costs. Enactment of proposed legislation is estimated to increase negative subsidy by an additional $755 million for MMI and $50 million for GI/SRI in 1999. Both credit subsidies and the loan guarantee limitation will serve as upper limits on new insurance activity.

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.

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.

Single Family has embarked on an aggressive strategy of productivity improvement through consolidation of functions in Homeownership 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. 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 1999, Multifamily will continue to monitor and evaluate its new underwriting criteria and process.

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. FHA realized that sharing information would lead to constructive criticism. Over the last 3 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.

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. Five 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 5 years, those inventories have been reduced dramatically through a series of national loan sales and aggressive property sales. It is expected that single family inventories will be too low to warrant a mortgage sale in fiscal year 1999. As conditions change, however, sales may occur. In 1999, 321 multifamily notes with a UPB of $500 million are expected to be sold. 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.

Legislative proposals for the single family program include a proposed increase to the single family loan limit so that it would equal 100 percent of the Freddie Mac/Fannie Mae conforming loan limit. Under this proposal an estimated 50,000 to 100,000 new FHA loans per year would be written. The total values of these new loans in 1999 is an estimated $8.4 billion, providing an additional $228 million in negative subsidy.

Another legislative proposal would revise the single family property disposition statutes to allow additional flexibility. This revision would allow FHA to take back notes, rather than have lenders foreclose and transfer to HUD the titles on properties, when an insured loan goes to claim. At the point a note would be received, FHA would transfer the note to third parties for servicing and/or disposition. This legislation is proposed to be enacted in 1999, with full implementation by 2002, to allow time for FHA and the industry to have programs and systems in place. This program improvement is expected to save over $500 million on a net present value basis.

Supporting FHA Administrative Costs

Each year the Congress has appropriated 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 insurance Funds. In addition to the amounts appropriated for overhead expenses, the Department has charged the Insurance Funds directly to pay for certain programmatic expenses related to the conduct of FHA's endorsement, accounting and servicing, portfolio analysis, asset management, and disposition activities. In 1999, the Department will account for these costs in accordance with the Federal Credit Reform Act. As such, disposition activities will continue to be charged to the FHA funds directly, and all administrative activities will be charged to the FHA program accounts. Therefore, the Department is requesting appropriations of $304 million for contract activities which support the FHA. Of this amount $200 million will be utilized from the MMI/CMHI program account and $104 million will be utilized from the GI/SRI program account.

Activities covered by the account shift include FHA Headquarters-directed contracting support 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 Headquarters 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 will continue in 1998 and 1999. These initiatives include:

• marketing, which allows FHA to expand access to FHA products to underserved borrowers and maintain premium income;
• 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 risk;
• homeownership strategy, which supports FHA's participation in nationwide efforts to raise America's homeownership rate;
• acquisition of data and analysis to inform 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 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 Conversion 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. Reimbursements to the Working Capital Fund are also included in the activities to be paid from the program accounts.

Costs associated with property 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 contracts 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 is increasingly a part of 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 homeownership rates and the number of homeowners have increased to an all-time high of 65.7 percent and 67.1 million families owning homes. Homeownership has increased for all regions of the country and all ethnic and racial groups between 1994 and 1997.

• FHA is recognized as a leader in asset disposition, selling about 36,000 loans in 1997, with about 64,000 units, and in the process generating over $800 million in deficit reduction.

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

During fiscal year 1999, FHA's priority will continue to be restoring its business capacity to better serve its public purpose. During the last 5 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.

The fiscal year 1999 Budget also established strategic objectives which give direction to decision-making and use of resources. These objectives are:

• Increase availability to affordable housing in standard condition, particularly for the nation�s poor and disadvantaged.

• Provide empowerment and self-sufficiency opportunities to support low-income individuals and families as they make the transition from dependency to work.

• Increase homeownership opportunities, especially in central cities, through a variety of tools, such as expanding access to mortgage credit.

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.