H.R. 1852
Expanding American Homeownership Act of 2007
As ordered reported by the House Committee on Financial Services on May 3, 2007
SUMMARY H.R. 1852 would amend the National Housing Act to authorize the Federal Housing Administration (FHA) to implement a new pricing structure for the mortgage guarantees itoffers. This legislation also would remove the statutory limitation on the number of reversemortgages that FHA can insure and would make other changes to the Home Equity Conversion Mortgage (HECM) program. In addition, this legislation would authorize the appropriation of funds to provide certain borrowers with financial counseling and to establish a new affordable housing fund.
Enacting H.R. 1852 would increase direct spending by allowing the Department of Housingand Urban Development (HUD) to sell certain properties at below-market prices without an appropriation of funds to offset any forgone sales proceeds. That provision would modifythe cost of some previous and outstanding loan guarantees. As a result, CBO estimates that enacting H.R. 1852 would increase direct spending by $16 million in 2007.
CBO also estimates that implementing H.R. 1852 would result in a net increase in offsettingcollections (a credit against discretionary spending) of $313 million in 2008 and $628 millionover the 2008-2012 period, assuming that appropriation laws necessary to implement the FHA programs and the Mortgage-Backed Securities (MBS) program of the Government National Mortgage Association (GNMA) are enacted.
H.R. 1852 contains no intergovernmental or private-sector mandates as defined in theUnfunded Mandates Reform Act (UMRA) and would impose no costs on state, local, ortribal governments.
Amendments to the HECM Loan Insurance Program. HECM loans are considered to be“reverse mortgages” because they enable homeowners who are at least 62 years of age towithdraw some of the equity in their homes in the formof monthly payments, in a lump sum,or through a line of credit. Under current law, FHA is permitted to guarantee up to acumulative total of 275,000 such loans, although this limitation has been waived throughfiscal year 2007. This cap has already been reached this year; consequently, the program will be inactive beginning in 2008 unless the cap is amended.
Loan size is tied to loan limits that vary by geographic region, and such loans cannot be used to purchase another home. In addition, the origination fee charged by lenders is calculatedas a percentage of the home’s value.
Enacting this legislation would remove the statutory limitation on the number of loans thatcould be guaranteed, set a single nationwide limit on the dollar amount of a HECM loan thatwould be tied to the conforming loan amount, limit the origination fee to 2 percent of theloan amount (subject to a minimum allowable amount), and allow borrowers to use HECMloans to purchase a new home. (Conforming loans have terms and conditions that follow the guidelines set forth by the Government Sponsored Enterprises (GSEs); the conforming loanamount is $417,000.)
Implementation of the HECM program, like all of FHA’s insurance programs, is contingenton the enactment of appropriation laws that provide annual loan commitment authority.Thus, the estimated budgetary impact of this proposal is considered to be discretionary, andit is tied to the demand for HECM loans and the estimated subsidy cost of the loan guarantees. Because, under credit reform procedures, guarantees of HECM loans are estimated to have negative subsidies (that is, they earn money for the government), CBOestimates that implementing those amendments would increase offsetting collections byabout $2.1 billion over the 2008-2012 period.
Demand for HECM Loans. According to the National Reverse Mortgage Lenders Association (NRMLA) and other industry experts, the HECM program has risen inpopularity in recent years. As more consumers are becoming aware of the product, morehouseholds are becoming eligible for the program (currently over 17 million households haveowners who are age 65 or older, according to census data), and more seniors view theproduct as an alternative approach to financing home-improvement projects, medical costs,and other needs. In addition, sources in the mortgage industry have observed an increasingdemand among seniors for new housing within senior communities. The number of HECMloans insured by FHA more than doubled from 2003 to 2006 (18,000 loans were insured in 2003, compared with 76,000 loans in 2006). Furthermore, based on the number of HECMloans insured as of April 2006, that volume could reach over 100,000 loans by the end offiscal year 2007.
Based on information from FHA, NRMLA, and other industry experts, CBO estimates thatsetting a single nationwide loan limit and permitting borrowers to use HECM loans topurchase a new home would result in a product that would be more attractive to borrowersand more easily marketed by lenders, resulting in increased demand for HECM loans. Onthe other hand, the limit on the origination fee could result in a programthat is less profitablefor certain lenders, causing some to end or limit their participation in the program. A lowerorigination fee, however, could increase the program’s attractiveness to some borrowers, assuming lenders do not increase interest rates significantly to compensate for lower origination fees.
Currently, the market for FHA’s HECM loans appears to be very robust, and under this bill,FHA would probably insure more than 100,000 loans annually over the next several years.Also, GNMA’s recent decision to begin securitizing HECM loans could result in increased activity by lenders, as investors in the secondary mortgage market begin to invest inmortgage-backed securities that include this product. Whether the number of guaranteescould exceed 100,000 loans on a continued basis each year would depend on FHA’s ability to administer and manage the program in an efficient manner and on the market’s responseto this bill, especially the change in the origination fee. Based on information from FHA,CBO estimates that the agency could insure about 110,000 loans (with a face value of about$27 billion) in 2008. In subsequent years, we estimate that demand would increase at theestimated rates for appreciation in housing prices—about 2 percent to 4 percent a year
Raising Loan Limits for the Single-Family Program. Section 3 would raise FHA’s loan limit—the dollar amount of a mortgage that FHA can insure—for its single-family program from 87 percent of the conforming loan amount to 100 percent of the conforming loan limit in certain geographic regions where the cost of housing is very high. Effectively, this wouldbe a change from insuring loans of $362,790 today to insuring loans of up to $417,000 incertain parts of the country. In less expensive markets, the limit would be raised from48 percent to 65 percent of the conforming loan limit, or a change from loan guarantees of up to $200,160 to loan guarantees of up to $271,050 under the bill.
CBO estimates that implementing this provision would increase loan volume by about8 percent a year—about $4 billion annually in additional loan guarantees—over the next fiveyears. This increase would stem mostly from increasing the limit in the less expensivehousing markets. Despite this estimated increase in loan volume, CBO estimates that noadditional offsetting collections would be realized because we expect the subsidy rate for thesingle-family program to be zero over the next five years. However, because most FHAsingle-family loan guarantees are included in GNMA’s MBS program, CBO estimates that raising the loan limit would result in additional offsetting collections to GNMA of about$45 million over the 2008-2012 period. As mentioned earlier, GNMA requires appropriationaction to establish its dollar limitation for the securities program, so those savings would beoffsets to discretionary spending.
Limit on Increases in Fees for Mortgage Insurance. Currently, FHA has the authority toadjust fees for its mortgage insurance programs through administrative action. Section 30would prohibit FHA from increasing fees unless the increase is required to maintain theestimated credit subsidy for the program at zero, but not less than zero. According to theAdministration, annual fees for new loan guarantees for the apartment development and refinance programs will increase by about 16 basis points beginning in 2008. CBO estimates that those fee increases would affect about $2.6 billion in loan guarantees in 2008 and over$3 billion in loan guarantees annually in subsequent years. Furthermore, we estimate that those fee increases would increase offsetting collections for this program by $192 million over the 2008-2012 period. Thus, prohibiting those fee increases would result in a loss of$192 million in discretionary offsetting collections over the next five years.
Risk-based Pricing and Flexible Downpayment Requirements. Currently, FHA’s single-family loan guarantee program has a flat premium structure under which all borrowers paythe same up-front and annual fees, regardless of the borrower’s individual risk of default.According to the FHA, the up-front fee in 2008 is expected to increase from 1.5 percent to1.66 percent and the annual fee will rise from 0.5 percent to 0.55 percent. Furthermore, theAdministration estimates that those fee increases will result in a subsidy rate of zero for thesingle-family program for 2008.
Under this legislation, FHA would have the authority to match the fees it charges with the borrowers’ risk of default or the risk associated with a particular loan product, and to offerguarantees for loans with little or no downpayment. For certain borrowers and types of loanproducts, the up-front fee could be as high as 3 percent and the annual fee could be as highas 0.75 percent. CBO estimates that implementing this risk-based pricing proposal wouldresult in a weighted subsidy rate that is about zero. Because the subsidy rate for 2008 isestimated to be zero under current law, CBO expects that FHA would charge rates underH.R. 1852 that would produce a similar result.