Statement of John C. Weicher
Assistant Secretary for Housing-FHA Commissioner
before the U.S. House of Representatives
Committee on Financial Services
Subcommittee on Housing and Community Opportunity
April 24, 2002
Thank
you for the opportunity to testify on behalf of the Department of
Housing and Urban Development and the Office of Housing-Federal
Housing Administration (FHA), concerning the "Housing Affordability
for America Act of 2002." The bill covers a very wide range of programs
and activities across the Department, including many different programs
within the Office of Housing. We have carefully reviewed each provision
contained in the bill, and I am grateful for this opportunity to
provide you with our thoughts on the sections of this important
piece of legislation. Because you have also addressed a number of
specific questions about FHA programs in your letter of invitation,
I will combine my answers to those questions with comments on the
corresponding sections of the bill. I have organized my comments
by program area.
FHA
Single-Family Insurance Programs
To
begin with FHA's basic Section 203(b) home mortgage insurance program
and the Mutual Mortgage Insurance (MMI) Fund: as you know, the President
and the Secretary have made promoting homeownership, especially
for minority households, a cornerstone of domestic policy. We are
very proud of FHA's success in promoting homeownership. About 80
percent of our home purchase mortgages serve first-time homebuyers
and about 35 percent serve minority households. The national homeownership
rate, and the minority homeownership rate, both set new records
last year.
The
MMI Fund was determined to have an economic value of $18.5 billion
at the end of FY2001, with a capital ratio of 3.75%. FHA's volume
of business this year is running substantially in excess of expectations.
Indeed, through the first six months of the year we have insured
over $81 billion of single-family mortgages. We are assessing the
need to seek an increase in our current commitment limitation of
$160 billion for the MMI Fund for the current fiscal year. Having
been personally involved in developing the legislation that put
FHA on an actuarially sound basis some 12 years ago - as was Chairwoman
Roukema and Ranking Member Frank - I am very pleased to report this
information to you.
Of
course, the MMI Fund has attracted a number of proposals to spend
the reserves, for example to divert funds into a new "National Housing
Trust Fund" for purposes well beyond the homeownership goals of
the Mutual Mortgage Insurance Fund. We think these proposals are
ill-advised, and they misconstrue the nature of the MMI Fund's net
worth. Net worth includes the estimated present value of future
losses and future premium income, as well as current reserves.
Establishing
the MMI Fund on an actuarially sound basis was a fundamental goal
of the Cranston-Gonzalez National Affordable Housing Act of 1990.
That was intended to forestall the need for any taxpayer bailout
of the FHA, as had just been required for the savings and loan industry.
The MMI Fund was specifically required to operate with a separate
reserve against potential losses. The Cranston-Gonzalez legislation
provided that funds would be available to meet any contingency,
so that general revenues in the Treasury would never be needed to
meet FHA obligations. To achieve this objective, FHA suspended the
payment of distributive shares to borrowers and raised insurance
premiums substantially.
Since
1990, FHA has gradually built up its reserves year by year. This
annual surplus has been counted in the overall Federal budget as
an offsetting receipt, and has helped reduce the deficit. Because
this revenue was previously counted as a receipt, any legislation
that proposes to expend it will be counted as new spending, just
as if funds were being appropriated directly out of the Treasury.
Using these funds for other purposes will result in a substantial
budget outlay. Moreover, using the MMI Fund reserves will vitiate
FHA's ability to meet the basic goal of the Cranston-Gonzalez Act
of making the MMI Fund actuarially sound.
FHA
was able to reduce single-family premiums substantially last year,
and make homeownership more affordable for more families, in line
with our fundamental public policy purpose. The "Housing Affordability
for America Act of 2002" contains several provisions that would
improve FHA's ability to operate our core single-family home mortgage
insurance programs. Section 221 would make permanent a pilot designed
to streamline and simplify the FHA downpayment program. Secretary
Martinez supported this proposal during his testimony before the
House Appropriations Subcommittee last month. This downpayment simplification
calculation has proven to be a successful program modification.
The procedure reduces the number of steps involved in the calculation
of the FHA single-family mortgage amounts, and thereby has eliminated
the confusion experienced by many buyers, brokers, and lenders.
Further, this existing statutory authority has reduced the costs
associated with closing an FHA insured mortgage. Ultimately, the
simplification has increased homeownership opportunities for low-
and moderate-income families. The Department appreciates the efforts
by Rep. Bob Ney and other Members of this Committee in supporting
the permanent extension of this provision.
Similarly, Section 227 should facilitate the Department's ability
to effectuate another legislative priority. During the FY2002 budget
process, the Department requested and received authority to insure
hybrid Adjustable Rate Mortgages (ARMs). Our work to implement that
authority is continuing. The Department's position is that FHA's
hybrid ARM should approximate the conventional hybrid ARM and its
benefits as closely as possible, subject to preserving sound underwriting
policies and protections for FHA borrowers and the MMI Fund. Section
227 supports that end by allowing the Department greater flexibility
in the design of regulations that will govern the initial rate adjustment
at the end of the fixed rate period.
Sections 229-231 are consistent with recent Department actions to
strengthen our Section 203(k) rehabilitation mortgage insurance
program and our nonprofit partnerships. In 1996, the Office of Housing
issued Mortgagee Letter 96-59, placing a moratorium on investor
participation in the 203(k) program. Investors have not been allowed
to participate in the program since the issuance of this Mortgagee
Letter. The moratorium still stands. We have no plans to modify
the Letter and have no objection to Section 229.
Similarly,
Section 230 regarding rehabilitation loan advances is also consistent
with Departmental action. FHA Mortgagee Letter 00-25 states, "mortgagees
are fully responsible for authorizing draw inspections, managing
the rehabilitation escrow account, and approving the associated
draws for the account." The Letter also requires consultants to
be chosen from the FHA 203(k) Consultant Roster and permits consultants
to perform the inspections on the mortgagee's behalf. The Department
has a number of technical questions regarding this provision and
looks forward to working with the Committee to ensure that mortgagees
are held appropriately responsible.
Section
231 would require participating nonprofits to be approved 501(c)(3)
organizations and certify annually to the Department its understanding
of HUD guidelines. In January 2002, the Office of Housing issued
Mortgagee Letter 02-01, establishing new requirements for nonprofits
seeking FHA-approval. Nonprofits must now have, among other requirements,
two years 501(c)(3) IRS tax-exempt status and a minimum of two consecutive
years - within the last 5 years - of housing development experience.
Approved nonprofits have until September 30, 2002 to demonstrate
their compliance with the new requirements. The Office of Housing
supports Section 231 to strengthen its existing guidance. It will
help us prevent a recurrence of the 1998-1999 Section 203(k) fraud
problem in New York City, where a number of nonprofits purchased
small multi-unit buildings in Harlem and Brooklyn, intending to
have them rehabilitated for owner-occupancy. The knowledgeable and
experienced Commissioner of New York City's Department of Housing
Preservation and Development said that she had never heard of 25
of the nonprofits that bought these homes; she had only heard of
two. This fraud will cost U.S. taxpayers some $268 million and will
cost the citizens of New York City another $125 million.
Sections
222-224 contain proposals to provide special opportunities for teachers
and public safety officers. Section 223 would give the Secretary
authority to discount HUD-owned, single-family properties by 50%
to qualified teachers and public safety officers. The Department
certainly does not object to such a program; indeed, the Secretary
already has this authority and has exercised it. The Department's
Officer/Teacher Next Door Program currently allows teachers and
police officers to purchase homes at a 50% discount in designated
revitalization areas, subject to a three-year owner occupancy requirement.
In connection with such programs, however, we do want to highlight
for the Committee the management challenges and program administration
difficulties inherent in these efforts. During a Fiscal Year 2001
audit of the program, the Office of the Inspector General uncovered
a significant number of violations of the program rules by officer
participants. In May 2001, the Department temporarily suspended
sales under the program and instituted enhanced management controls.
A recent IG audit of sales closed after the program resumed in August
2001 did not identify any new program violations. The Department
is currently working on a proposed rule to include these program
controls.
Sections
222 and 224 both aim to reduce downpayment requirements for public
safety officers, while Section 222 also includes teachers among
those who will benefit. In regard to both provisions, it is important
to note that the Office of Housing has recently made significant
changes to its programs to reduce downpayment costs substantially
for all buyers of FHA insured properties. These changes include
the reduction of upfront insurance premium rates by 33 percent,
along with the Downpayment Simplification previously mentioned.
One observation the Department would make with regard to Sections
222-224 is that a number of other occupational groups have expressed
a similar interest in reduced downpayments.
I
would also mention that the Department's Office of Policy Development
and Research is in the process of studying the impact of programs
that reduce downpayment requirements for selected populations, as
required by Congress. We believe that it would be prudent to wait
until the results of this study are available before making any
commitment to such an initiative.
The
Administration appreciates the importance of providing opportunities
for low-income families to receive downpayment assistance. We are
committed to expanding homeownership opportunities. The Department
is prepared to implement the American Dream Downpayment Fund proposed
by the President and funded by Congress last year. The American
Dream Downpayment Fund will reduce the barrier that downpayments
frequently pose to homeownership, for all low- and moderate-income
families. On behalf of the Administration, I want to thank Rep.
Mike Rogers and other Members of Congress for introducing H.R. 4446
to authorize this program.
Section
228, which would establish a uniform national loan limit for Home
Equity Conversion Mortgages (HECMs), also concerns an issue that
is currently part of an internal analysis by the Office of Policy
Development and Research. As mandated by the "American Homeownership
and Economic Opportunity Act of 2000," the Department is conducting
an actuarial analysis on the impact of this provision. We will provide
the Subcommittee with comments and recommendations when this study
has been finalized.
FHA Single-Family REO
The
bill also contains several provisions concerning FHA's single-family
inventory of foreclosed homes, and the Committee has asked about
our Real Estate Owned (REO) activities. Since the introduction of
the Management and Marketing contracts in March of 1999, the Department
has greatly improved its REO disposition. As of March 2002, the
inventory of HUD-owned homes is at its lowest level since 1996 -
28,270, compared to a March 1999 inventory of 41,747. Moreover,
the inventory has been stable during the recession, instead of rising
as has been typical in the past. Currently, properties remain in
inventory an average of 183 days, compared to 221 days in March
1999, and losses per claim have been reduced from 39 cents to 29
cents on the dollar. The loss rate is at its lowest point in at
least 20 years.
FHA
sold 66,415 single-family homes during FY 2001. About 60 percent
of these sales were to owner-occupants, helping serve FHA's basic
purpose of promoting homeownership. Another 30 percent are sales
to investors, and the remainder - slightly less than 10 percent
- goes to local governments and nonprofit organizations.
FHA
currently offers discounts to HUD-approved nonprofit organizations
on the purchase of REO. Properties newly acquired by HUD are offered
initially to governmental entities and nonprofits organizations
on a limited competitive basis, which excludes investors and owner
occupants, for up to 5 days. For specific properties on which governmental
entities and nonprofits organizations express an interest to purchase,
HUD offers them these properties on a limited competitive basis
for up to another 10 days. After these periods, FHA opens bids on
properties to the general public, but nonprofit groups and governmental
entities may bid and still receive sales discounts. These discounts
are factored into a sale after the highest bids are calculated.
HUD
properties are appraised and initially listed for sale on the Internet
and through multiple listing services at the "as-is" value established
by the appraiser. Properties sold to a nonprofit are discounted
by 10%, unless the property is located in a FHA-designated "revitalization
area," in which case the discount is 30%.
FHA
has two primary initiatives underway associated with its property
disposition program. We have begun a major review of our Asset Control
Area (ACA) program, following a report of program deficiencies by
the HUD Office of Inspector General in a recent audit. We are planning
to build stronger controls into the ACA program. During that review,
which will take four to six months, we will let current ACA agreements
expire. Our ACA partners can, however, continue to rehabilitate
and sell the properties they have already acquired from HUD, and
we believe that most, if not all, ACA partners have an inventory
of properties that will not be exhausted during the review.
A
second initiative is HUD's Accelerated Claims Demonstration Program.
This program, created by Section 601 of the FY1999 Appropriations
Act and announced in a Federal Register Notice on February 5th,
will enable HUD to buy seriously defaulted loans that cannot be
addressed through FHA's loss mitigation program and sell these loans
to the private sector for management, including more extensive mitigation
than FHA can provide. This program is expected to begin in the fourth
quarter of this fiscal year. Considering both of these initiatives,
it does not appear that additional statutory authority related to
property disposition is required at this time.
Partly
for these reasons, we see no need for Section 225 of this bill,
which would require HUD to use the Department of Agriculture's Rural
Housing Services Center as an additional resource for servicing
single-family, HUD-held mortgages. We believe that this requirement
is unnecessary and indeed would be counterproductive. Presently,
HUD's National Servicing Center (NSC) in Oklahoma services four
types of secretary-held loans, each with unique characteristics
and servicing requirements. In particular, NSC services 963 reverse
equity loans. For this loan type, the Department makes monthly payments
to the borrowers rather than receiving income from them. The daily
payment process is complex and time sensitive. Additionally, NSC
services second mortgages generated through loss mitigation advances
and discounted sales to officers and teachers in HUD's Officer/Teacher
Next Door programs. Because these mortgages carry no interest and
require no monthly payments, servicing activity is generally limited
to processing subordinations and payoffs. All of these mortgage
types are unique to HUD. The Rural Housing Service has no similar
programs and no experience in servicing such loans. NSC is doing
an excellent job managing their unique mortgage servicing requirements.
It is unclear that there is a benefit or need to outsource the servicing
of these loans.
FHA
Multifamily Insurance Programs
As
the members of this Subcommittee know, FHA's basic multifamily insurance
program is Section 221(d)(4). This program has required a credit
subsidy since Federal Credit Reform was enacted in 1990. Three times
in the last eight years, the program was closed down because the
available credit subsidy was exhausted. To prevent further closures
and place the program on a break-even basis, the Department raised
the premium from 50 basis points to 80 basis points for FY 2002.
Many in the industry, and some Members of Congress, were concerned
that the program would be hamstrung by this increase. That has not
happened. Already in this fiscal year, FHA has insured over $1.5
billion worth of Section 221(d)(4) projects - more than we insured
in all of last year. Moreover, with the 25 percent increase in mortgage
limits that was proposed by the Secretary and enacted by Congress,
we are seeing applications from high-cost metropolitan area that
have not participated in the program in years - Philadelphia, Newark,
Baltimore, here in Washington, the Twin Cities, and Seattle.
In
addition, we have conducted the first systematic re-analysis of
the premium and credit subsidy since Credit Reform was enacted.
We have concluded that Section 221(d)(4) can be operated on a break-even
basis at a much lower premium - 57 basis points. The President's
Budget contains an announcement of this premium reduction, effective
in October, at the beginning of FY 2003. We are also reducing either
the premium or the credit subsidy for nearly every other multifamily
program.
This summary of FHA's multifamily mortgage insurance programs provides
background for consideration of Sections 201 and 202 in the legislation.
They address the question of who should be served by the programs.
FHA multifamily mortgage insurance generally serves moderate-income
renters. Most of the projects that FHA insures are affordable to
families in the lower half of the income distribution, and almost
half are in underserved areas. These are important markets; these
families and these communities need FHA.
Section
201 proposes to index the FHA multifamily mortgage limits. As members
of this Subcommittee certainly know, Congress approved indexing
the mortgage limits in the Section 203(b) single-family mortgage
insurance program several years ago. This provision has enabled
FHA to keep pace with inflation and changing economic conditions
as it serves young, first-time homebuyers. Indexing the multifamily
limits should likewise prove to be more responsive to market conditions
and to the needs of families seeking moderately priced rental housing.
Clearly, annual adjustments provide a better way to compensate for
increased costs than by providing periodic dollar increases. When
Congress raised the limits last year by 25 percent, at the request
of Secretary Martinez, this was the first increase since 1992, and
represented a delayed catch-up for the inflation that occurred between
1992 and 2001; during those years, FHA was progressively less able
to serve moderate-income renters.
Section
202 proposes to increase the maximum mortgage limits in areas with
very high housing costs by 30 percent above the amounts allowed
under current law. It also proposes to increase the amount by which
the Secretary, on a case-by-case basis, may increase the maximum
mortgage amount. The Department would prefer to analyze the data
resulting from our experience with the new limits that Congress
enacted last year and the future effects of the indexing contained
in Section 201 before evaluating the need for additional high housing
cost authority.
FHA
Insurance for Nursing Homes and Hospitals
The
Housing Affordability for America Act of 2002 contains several provisions
relating to FHA's insurance programs for nursing homes and hospitals.
Section 206 seeks to provide a more flexible procedure with respect
to the Certificate of Need (CON) for hospitals, which is somewhat
similar to an Administration proposal that was not enacted last
year. There is a technical problem with the language of Section
206 as drafted. The Section states that HUD should work "in conjunction
with" the Department of Health and Human Services (HHS). HUD currently
has a contractual agreement with HHS with respect to Section 242,
the hospital mortgage insurance program. Under this agreement, both
HHS salaries and expenses are paid from the FHA General Insurance
Fund. This agreement has worked well for several years. Because
of the agreement, the language should be modified to read "in consultation
with," to avoid any contractual disputes between HUD and HHS in
the future. There is no similar agreement between HUD and HHS with
respect to the Section 232 nursing homes mortgage insurance program,
and we do not believe that the language is necessary or desirable
for that program. HUD operates the nursing home program effectively
without formal participation by HHS.
Sections
203-205 amend the definition of the FHA health care and assisted
living programs so as to take FHA into new lines of business. Sections
203 and 204 change the definitions in Section 232 and Section 242,
respectively, to include community health centers, medical practice
facilities, and group practice facilities, and Section 205 permits
insurance to refinance these facilities. These provisions raise
a number of questions and require additional analysis before the
Department can provide a definitive position. The language creates
an overlap between Section 232 and Section 242, as well as Title
XI, so that these new lines of business can be insured under either
program. The programs are now managed separately within the Office
of Housing, and the overlap could possibly complicate our ability
to run both programs. More fundamentally, these proposals would
appear to require FHA to undertake new insurance activities on unfamiliar
products, beyond our current expertise and capacity. FHA primarily
insures financing for housing. To expand our portfolio to include
businesses that provide no shelter could have long-term consequences
to the FHA General Insurance (GI) Fund. We are now experiencing
an increasing number of claims in the Section 232 nursing home program,
and we have some 17 hospitals on our "Problem Watch List." It is
particularly relevant that the expansion of nursing homes into new
business activities during the 1990s led to a significant number
of defaults and bankruptcies.
Programs
for the Elderly and Disabled
Section
301 addresses part of a well-known policy concern. It would authorize
the use of uncommitted, unobligated Assisted Living Conversion Program
funds in the Section 202 program for use in a modernization demonstration
program for Section 236 elderly housing. The Section 236 elderly
housing portfolio is a fraction of the Section 236 program - about
90,000 units, less than one-third of the units in the entire Section
236 portfolio of over 330,000 units nationwide. The elderly housing
projects are generally in good physical condition; only 25 projects
out of 556 have REAC physical inspection scores of less than 60,
less than 5 percent of the inventory. We certainly recognize that
there is some need for capital improvements among the entire older
insured subsidized FHA multifamily portfolio. We have been working
with the multifamily industry over the last two years, in an effort
to modernize and restructure the Section 236 housing portfolio.
The work is being conducted within the framework of preserving these
projects for continued use within the affordable multifamily housing
stock. The general restructuring technique involves a sale of the
project to a new owner who physically modernizes the project and
maintains its affordability for the term of the mortgage plus five
years, generally a total of 15 years. In most cases, the financing
technique utilizes new mortgages supported by the continuation of
Section 8 rental assistance and the remaining Section 236 interest
reduction payments. The owner's capital is provided through the
Low Income Housing Tax Credit (LIHTC). To date, we have succeeded
in restructuring over 100 of these projects. We do not believe that
Section 301 is necessary for this effort. We also are concerned
that the Section 202 Assisted Living Conversion program might be
adversely affected. The program has not yet reached the scale envisioned
in past appropriations, and the unexpended funds have been carried
forward. But it is our experience that new programs do take time
to get underway, and we do not believe it is prudent to anticipate
that Section 202 Assisted Living Conversion funds would be available.
With
regard to Section 303, as you know, the President and the Secretary
are strongly committed to ensuring that religious organizations
have the same opportunities as any other participant in the Section
202/811 programs, which are our largest programs in terms of participation
by faith-based organizations. These organizations now can be sponsors
of these projects, and certainly religious organizations have been
very active in the Section 202 program since its creation in 1959.
In recent years, they have accounted for approximately 40% of the
funding that Congress appropriates for these programs. We therefore
applaud the purposes of Section 303 and will work with the Committee
in consideration of issues that relate to HUD's current practices
in this area.
Other
Provisions
The
Housing Impact Analysis proposed in Title VIII was proposed by President
Bush during the campaign two years ago. It is an effort to create
a system to monitor the aggregate effects of all rules on the cost
and availability of housing. We believe that it is in the interest
of consumers, especially moderate-income families seeking to become
homeowners or to find decent affordable rental housing, to ensure
that regulations are demonstrably required to protect health and
safety, and that the costs and consequences of regulation for affordable
housing are recognized and balanced against other important public
purposes.
Section
902 establishes a single office within the Department to coordinate
counseling activities. This sounds desirable, but may be counterproductive,
in our judgment. It might undermine the ability of the various offices
to establish requirements, standards, and performance measures that
meet the unique needs of their programs and clients. HUD's various
program areas each provide counseling, generally for different purposes
and typically to different clienteles. Recently, FHA revised the
standards and performance measures related to the 1,400 HUD-approved
housing counseling agencies participating in this program. We see
no need for another office within the Department to repeat this
process. As you know, the Administration has requested $35 million
for a new categorical counseling program, nearly doubling the current
level of funding and removing the program from the HOME block grant.
We urge you to support that proposal, and we believe it will be
easier and quicker to provide the funds to counseling agencies if
we can operate the new program on the basis of the standards we
have recently established.
Finally,
the Administration supports Section 908 to simplify current law
pertaining to subsidy layering. The provision permits housing credit
agencies to certify to compliance with the Department's subsidy
layering requirements concerning the combination of HUD and other
governmental assistance with the Low Income Housing Tax Credit.
The housing credit agency will simply certify that it has made the
subsidy layering determination already required by Section 42 of
the Tax Code. This provision is consistent with the Secretary's
efforts to streamline the delivery of HUD's programs and support
the production of affordable housing through the use of FHA mortgage
insurance and the Low Income Housing Tax Credit Program.
Conclusion
Thank
you again for the opportunity to testify on the "Housing Affordability
for America Act of 2002." I would be happy to answer any questions
that the Subcommittee may have.
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