Order Code RL32062
CRS Report for Congress
Received through the CRS Web
Housing Issues in the 108th Congress
Updated January 30, 2004
E. Richard Bourdon
Analyst in Housing
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

---

Housing Issues in the 108th Congress
Summary
An omnibus spending bill (H.R. 2673, H.Rept. 108-401) that will fund the
Department of Housing and Urban Development (HUD) and other federal agencies
for FY2004 was signed into law by the President on January 23, 2004 (P.L. 108-199).
The Senate had approved the conference report on the bill on December 22, 2003 and
the House, on December 8.
P.L. 108-199 provides HUD with $31.4 billion (not including an “advanced
appropriation” of $4.2 billion that cannot be spent until FY2005), about $400 million
above the FY2003 appropriation. The new law does not contain the Administration’s
controversial plan to convert Section 8 tenant-based vouchers into a block grant to
be administered by the states. The budget provides nearly $19.4 billion for the
Housing Certificate program, a substantial increase over last year and enough to
maintain the program at its current level. The HOPE VI public housing rehabilitation
program is funded at $150 million, a sharp reduction from the $570 million
appropriated in FY2003. P.L. 108-199 provides $87.5 million for the
Administration’s American Dream Downpayment Act, considerably less than the
$200 million requested. Language authorizing the Downpayment Act at $200
million annually from FY2004 through FY2007 was signed by the President on
December 12, 2003 (S. 811, P.L. 108-186). This Act also authorizes a demonstration
Section 202 program to help meet the housing needs of grandparents who raise their
grandchildren and adds a requirement to minimize the permanent displacement of
residents affected by HOPE VI revitalization projects.
H.R. 1102 would create a National Affordable Housing Trust Fund. With about
210 largely Democratic co-sponsors, it would tap “excess profits” from HUD’s
Federal Housing Administration’s (FHA) mortgage insurance program to build 1.5
million affordable housing units over 10 years. An industry-supported predatory
lending bill, H.R. 833, would address “high cost mortgages” and preempt state or
local anti-predatory lending law. Another predatory lending bill, H.R. 1663, would
establish consumer safeguards for those receiving subprime home loans.
The “Ten Year Rule” that limits the use of tax-exempt bonds used to help first-
time homebuyers would be repealed by H.R. 284/S. 595 (with 388 co-sponsors). The
Administration has proposed a homeowner tax credit ( H.R. 839/S. 198, with 250 co-
sponsors) modeled after the popular Low Income Housing Tax Credit. Reports of
accounting irregularities by Freddie Mac have prompted calls for more stringent
regulations of Freddie Mac and Fannie Mae. HUD has forwarded a final rule to the
Office of Management and Budget to reform the Real Estate Settlement Procedures
Act (RESPA) despite strong objections by the real estate and mortgage-broker
industries and some in Congress. The Administration will submit its FY2005 HUD
budget on February 2, 2004 with a plan to control the rising cost of housing vouchers.
With the resignation of HUD Secretary Mel Martinez on December 12, the Senate
will consider the nomination of Alphonso Jackson to be the new Secretary. Not all
bills discussed in this report are cited in this summary. This report will be updated
as issues develop and legislation proceeds in the 108th Congress.

---

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Major Policy Issue: The Increasing Number of Renters and
Owners with “Severe Affordability” Problems . . . . . . . . . . . . . . . . . . . 1
Highlights of the HUD Budget Request for FY2004 . . . . . . . . . . . . . . . . . . . 2
Congressional Response to Proposed HUD Budget (H.R. 2673) . . . . . . . . . 3
Administration to Refocus Major HUD Programs . . . . . . . . . . . . . . . . . . . . 3
The Major Budget Issues
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 8 Housing Voucher Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Public Housing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
National Affordable Housing Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
H.R. 1102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Source of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Distribution of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Trust Fund Assistance By Recipients . . . . . . . . . . . . . . . . . . . . 10
S. 1411 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Issues and Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Increasing Homeownership for Lower Income Households . . . . . . . . . . . . 12
Administration’s FY2004 Homeownership Proposals . . . . . . . . . . . . 13
Concerns About Administration’s Homeownership Policy . . . . . . . . . 15
Other 108th Congress Homeowner Proposals . . . . . . . . . . . . . . . . . . . 17
Predatory Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Real Estate Settlement Procedures Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
The Mortgage Revenue Bond Program for First-Time
Homebuyers — and the Proposed Repeal of the “Ten-Year Rule” . . . 20
Fannie Mae and Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Brownfields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Tables
Table 1. Department of Housing and Urban Development
Appropriations, FY1999 to FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Homeownership Rates, by Household Category . . . . . . . . . . . . . . . . . 12
Table 3. Homeownership Rates, by Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

---

Housing Issues in the 108th Congress
Introduction
Housing issues in the 108th Congress have centered around the Administration’s
proposed FY2004 budget for the Department of Housing and Urban Development
(HUD) and the congressional response, efforts by the Administration to defund the
HOPE VI program, HUD initiatives to increase homeownership rates for lower-
income households, and to reform the housing voucher program and the Real Estate
Settlement Procedures Act (RESPA). Other congressional interests include proposals
to establish a National Affordable Housing Trust Fund, combat predatory lending,
and increase the oversight of Fannie Mae and Freddie Mac. New issues may emerge
when HUD submits its proposed budget for FY2005 to Congress on February 2,
2004, including a plan to control the rising cost of housing vouchers.1 The President’s
immigration reform proposal, and his Prisoner Re-Entry Initiative discussed in his
State of the Union Address, could also raise some housing issues.
Major Policy Issue: The Increasing Number of Renters and
Owners with “Severe Affordability” Problems2
With mortgage rates continuing near 40-year lows, housing prices have
increased sharply in many areas. Many existing homeowners have benefitted from
rising equity. However, high housing prices can present major problems for low and
moderate income households who rent (about 40% of renters live in single-family
homes) or want to buy a first home. The 2003 report, The State of the Nation’s
Housing, by Harvard’s Joint Center For Housing Studies, found that “A staggering
three in ten U.S. households have affordability problems.” The report found that
fully 14.3 million households are severely cost-burdened (spending more than 50%
of their incomes on housing) and another 17.3 million are moderately cost-burdened
(spending 30-50% of their incomes on housing). Some 9.3 million households live
in overcrowded units or housing classified as physically inadequate.
Surprisingly, the Joint Center report found that for the first time ever, more
homeowners are cost-burdened than renters. While there has been a surge in lower-
income homeowners over the past 5 years, more owners are having trouble paying
their mortgage. Rising housing prices result in higher property taxes, which can
become a serious financial burden for those with low or fixed incomes. The percent
1 Bush ‘05 Budget Seeks to Rein in Domestic Costs. New York Times. January 4, 2004.
2 Housing costs that account for no more than 30% of a low-income family’s adjusted
income is considered an acceptable cost burden under most HUD assisted programs. For
example, most HUD low-income housing programs require participants to pay 30% of their
adjusted income towards rent.

---

CRS-2
of FHA insured loans that were delinquent 30 days or more stood at a record high of
12.59% at the end of the 2nd quarter of 2003. Before the year 2000, the delinquency
rate had never been as high as 9%. Along with the growing affordability problems
faced by homeowners and homebuyers, very low-income renters also face
difficulties. In many cases, the rents they can afford to pay are not enough for
landlords to cover the cost of utilities, property taxes, and maintenance; however,
only about a third of renters in the bottom fifth of the income distribution receive
rental assistance.
A study released by the U.S. Conference of Mayors on December 18, 2003,
Sodexho Hunger and Homelessness Survey 2003, found that homelessness continued
to rise in major American cities over the last year, and of the 25 cities surveyed, 23
reported that the lack of affordable housing was the leading cause of homelessness.
Others believe this shortage is reducing the chances that welfare recipients will be
able to achieve economic self-sufficiency. Lower-income households must often
make long and expensive commutes to their jobs because they cannot afford to live
near their work. The lack of affordable housing also makes it difficult for employers
to find help for low paying jobs as retail salespersons, home health aides, child care
workers, preschool and kindergarten teachers, and many who work at hospitals,
nursing and retirement homes. Anecdotal evidence is showing that newly hired
teachers, firefighters, and police officers are finding it increasingly difficult to live
near their job. For example, Sean Connaugton, chairman of the county board of
supervisors of Prince William County, Virginia, a rapidly growing outer suburb of
Washington, D.C., said the county is finding it difficult to recruit and retain teachers
and public safety workers as it becomes harder to find affordable housing (Housing
and Development Reporter, June 23, 2003).
The 2003 Joint Center report concluded that “Progress in tackling the nation’s
housing challenges has stalled.”
Highlights of the HUD Budget Request for FY2004
! Proposed budget of $31.73 billion, up $719 million from FY2003;
! Initiative to convert Section 8 voucher program to state-run block
grant — Housing Assistance for Needy Families (HANF);
! Public Housing Capital Fund requested at $2.64 billion, down $71
million from FY2003, and Public Housing Operating Fund requested
at $3.57 billion, nearly level with FY2003 funding;
! Proposed Public Housing Reinvestment Initiative (PHRI) to give
Public Housing Authorities new ability to leverage private capital for
rehabilitation and make other reforms;
! No funding for HOPE VI, Brownfields Redevelopment,
Empowerment Zones, or Rural Housing Economic Development;
! The HOME program increased to $2.2 billion with $200 million for
the Administration’s homeownership downpayment initiative, and
! Community Development Block Grants requested at $4.716 billion,
$189 million below FY2003 level, with no funding for Economic
Development Initiatives (congressionally earmarked projects).

---

CRS-3
Congressional Response to Proposed HUD Budget (H.R.
2673)
On January 23, 2004, the President signed an omnibus appropriations bill for
FY2004 (P.L. 108-199) that funds numerous federal agencies, including HUD. The
Senate had passed this bill on December 22, 2003 (H.R. 2673, H.Rept. 108-401) and
the House, on December 8, 2003. It should be noted that the omnibus budget figures
presented in this report do not include the 0.59% across the board rescission included
in this bill.
! Total HUD budget of $31.4 billion;
! Housing Certificate Fund provided with $19.4 billion, with no
incremental vouchers;
! HANF, Public Housing Reinvestment, Samaritan, or Colonia
initiatives not approved;
! Large reduction for HOPE VI, at $150 million compared to $570
million in FY2003;
! HOME funded at $2.0 billion, with $87.5 million for
Administration’s Downpayment Initiative;
! Near level funding for Public Housing Capital and Operating
programs, together at just over $6.3 billion;
! Brownfields and Rural Housing level funded at $25 million each;
! Homeless programs increased by $50 million over FY2003;
! Community Development Block Grants funded at about $5 billion,
near level funding with FY2003, about $230 million above the
budget request.
Administration to Refocus Major HUD Programs
The Administration’s FY2004 budget for HUD sought to change the direction
of a number of housing programs. For several decades, HUD has had a reputation,
fairly or not, for mismanaging too many programs, a number of which are considered
ineffective. The Administration has stated that many existing programs address
symptoms rather than addressing the root causes. Some proposals in the FY2004
budget were meant to change this. Rather than increasing the HUD budget, which
may become increasingly difficult in the immediate years ahead due to rising deficits,
the Administration has stated that a better approach for helping more lower income
households is to make existing programs work better. This means removing
confusing and restrictive federal regulations that may prevent state and local
governments from developing creative and efficient approaches to their particular
concerns. By refocusing housing assistance programs on ways to increase the self-
sufficiency of lower income families, and by offering them a chance to accumulate
financial assets through homeownership, the Administration asserts that lower-
income households will have a better chance of moving into the social and economic
mainstream.
Critics have viewed the Administration’s FY2004 housing budget as designed
to further defund HUD programs. They point to the end in FY2001 of the $310
million public housing drug elimination grant program, the $250 million “shortfall”

---

CRS-4
in public housing operating funds in FY2002, and the proposal not to fund the $570
million HOPE VI program for FY2004. In addition, the Administration’s proposal
to convert the Section 8 housing choice voucher program into a block grant to the
states is viewed by some as a first step in financially downsizing and weakening the
program that many consider the most successful of all federal housing programs.
Table 1. Department of Housing and Urban Development
Appropriations, FY1999 to FY2004
(Net budget authority in billions)
FY2000
FY2001
FY2002
FY2003
FY2004
$25.92
$28.48
$30.15
$31.01
$31.41
Source: Budget levels remain uncertain until all program activity has been recorded, and any
supplemental appropriations or rescissions have been taken into consideration. The FY2002 figure
does not include $2.045 billion of emergency supplemental authority and related rescissions approved
in late 2001for New York City to assist in recovery efforts from the terrorist attacks of September 11,
2001. The FY2004 does not includes a 0.59% across the board rescission included in the FY2004
funding measure.
The Major Budget Issues
Section 8 Housing Voucher Issues. In a sharp break with the present
program structure, the Administration proposed in its FY2004 budget to convert the
Section 8 housing choice voucher program into a block grant to the states by
FY2005. The new proposal was introduced on April 29, 2003 as H.R. 1841/S. 947.
Under the proposed program, Housing Assistance for Needy Families (HANF),
states would have the option to administer the voucher program. The Omnibus
budget bill did not include the HANF proposal.
Under HANF, if a state chose not to participate, the Secretary of HUD would
have the authority to choose an administrator. It remains unclear what role the 2,600
PHAs who currently administer the voucher program would play under this proposed
approach. Over the past several years, Congress has expressed frustration with the
large amounts of appropriated funds that have gone unused by PHAs. As a result,
billions of dollars have been rescinded from the voucher program and spent on other
priorities. The Administration believes that the current program’s lengthy, complex,
and prescriptive program regulations inhibit PHAs from innovating. The
Administration hoped that states would use the flexibility provided under HANF to
better coordinate with the efforts of local welfare offices who administer the
Temporary Assistance for Needy Families program (TANF) and other state-run self-
sufficiency initiatives. The Administration believes that self-sufficiency initiatives
would permanently improve the well-being of lower-income households so they
would no longer need housing assistance.
Beginning in FY2006, HANF would have provided funds to states based on a
new formula established by HUD based on the extent of poverty, housing costs,
administrative performance, the number of families receiving aid, and other

---

CRS-5
quantifiable factors. Underutilized funds would be retained by the states, and future
grants would be reduced by the amount of the unutilized funds. States would have
wide flexibility to establish program rules and requirements, but would have to
submit a plan to HUD detailing quantifiable objectives and performance measures.
There would be sanctions for poor state performance. Eligible block grant activities
would include tenant-based rental and homeownership assistance, and other activities
to support these uses. In order to be eligible, families would have to have incomes
below 80% of the area median income, although HUD could set higher income limits
for the elderly. States would be required to target 75% of their vouchers to families
below 30% of area median income. However, they could apply to HUD for waivers
to lower their income targeting requirements to 55% of all vouchers.
Critics argued that the HANF proposal would have added another layer of
bureaucracy to the program if states simply passed the funds on to PHAs. They
worried that targeting requirements for voucher recipients and other safeguards could
be weakened and questioned whether states wanted this new responsibility. They
believe that current problems in the Section 8 program, including those related to
inspections, payment levels, and methods of payment, can best be fixed within the
existing program structure. There was little support expressed for the HANF
proposal during hearings held in the House and Senate during 2003. As noted,
neither the House-approved appropriations bill, H.R. 2861, the Senate bill reported
by the Appropriations Committee, S. 1584, nor the Omnibus appropriations bill, H.R.
2673, included the HANF proposal.
In addition to the controversy surrounding HANF, the President’s FY2004
budget raised some funding concerns among low-income housing advocates. Several
worried that there would not be adequate funds under the Administration’s FY2004
budget request to renew all currently authorized vouchers.3 Analyzing HUD data, the
Center on Budget and Policy Priorities (CBPP) concluded that the Administration’s
funding request for vouchers could result in insufficient funding in 2004 to support
as many as 90,000 housing vouchers now in use. HUD’s FY2004 funding request
was based on data from 2001 and 2002, which indicated that fewer vouchers were
being used and that voucher costs were lower than CBPP estimated using FY2003
data. If the funding provided by Congress turned out to be insufficient to renew all
existing vouchers, then HUD would have several options. It could dip into unspent
funds from prior years to cover any shortfall, although it is unclear how much is
available from this source. HUD could also direct PHAs not to reissue vouchers that
become available, which would cut down on costs without evicting anyone. Finally,
if these other strategies did not work, HUD could direct PHAs to take back subsidies
from families.
In recognition of a possible funding shortfall, H.R. 2861, the House-approved
budget for HUD, increased the Housing Certificate Fund (HCF) by $150 million to
near $18.6 billion (taking the money from HUD’s working capital fund that is used
to make improvements to computers and other information technology systems).
Some housing groups said this was still too little to pay for all renewals and that,
3 New HUD Data Show Families Will Likely Lose Housing Vouchers If Congress Approves
President’s Budget Request, Center on Budget and Policy Priorities, July 11, 2003.

---

CRS-6
even with the increase, more than 60,000 vouchers would still be at risk. The Senate
Appropriations Committee (S.Rept. 108-143), which provided $18.4 billion for the
HCF, acknowledged in its report that the funding it provided might not be adequate
to cover all renewals and expected the Administration to address any budget shortfall
through a FY2004 supplemental appropriations.
The Omnibus budget bill increases funding significantly for the voucher
program, up from $17.3 billion in FY2003, to near $19.4 billion of direct
appropriations. This would be sufficient to maintain the program at its current level.
The increased funding in the voucher program would be offset by a large rescission
— $2.8 billion of unobligated funds from previous years, up substantially from the
$1.3 billion proposed in both the House and Senate bills.
For more details, see CRS Report RL31930, The Housing Choice Voucher
Program: Background, Funding, and Issues in the 108th Congress.

Recently, the accuracy of eligibility and rent determinations in the voucher
program has come into question. The General Accounting Office has found that, in
many cases, HUD is overpaying subsidies because families are inaccurately reporting
their incomes. HR. 1030, which was referred to the House Ways and Means
Committee, and Section 217 of the Omnibus budget bill, would allow PHAs access
to the National Directory of New Hires to verify income. The directory is already
used for child support enforcement purposes. The Congressional Budget Office
estimates that this provision could have long-term savings for the voucher program.
Some have raised privacy concerns about PHA access to this database. As noted, the
Administration’s FY2005 HUD budget is expected to contain a plan to control the
rising cost of housing vouchers and would “require families seeking housing aid to
help the government obtain more accurate information on their earnings” (New York
Times, January 4, 2004).
Public Housing Issues. There are about 1.25 million units of public
housing worth an estimated $90 billion in the United States. Many elected officials
and advocacy groups view the public housing stock as a national asset that provides
a last resort social safety net for the most disadvantaged and poorest households.
They believe it needs to be well maintained and protected particularly since it is so
difficult and controversial to find new sites for affordable housing. However, others
believe that with public ownership, there are not the market-based incentives
necessary for effective management. They point to a number of big city public
housing authorities that have had to be taken over by HUD because of
mismanagement and corruption. Furthermore, critics of public housing argue that
unlike portable vouchers, public housing traps families in areas of high poverty and
crime and little opportunity. Current issues involve these desires both to protect
public housing and to ensure that it is well run.
The HOPE VI program to revitalize severely distressed public housing received
$570 million in FY2003, but the Administration’s HUD budget for FY2004
requested no new funding. Started in 1992, HOPE VI was envisioned as a 10-year
effort to tear down about 100,000 of the worst units of public housing and replace
them with “mixed income” communities. Former HUD Secretary Martinez pointed
out that replacement construction has been excruciatingly slow due to lawsuits and

---

CRS-7
other delays, with only about 25,000 of the 85,000 units approved for construction
completed. A June 30, 2003 GAO report (03-555), Public Housing: HUD’s
Oversight of HOPE VI Sites Needs To Be More Consistent, blames HUD staffing
limitations for the slow expenditures in the HOPE VI program and said that HUD
field offices have provided inadequate oversight. The report also found that the
majority of HOPE VI grantees had not met their obligations, with only 15 of the 165
HOPE VI sites being fully completed.
With large amounts of funds remaining in the pipeline — only $2.1 billion spent
out of $4.5 billion awarded — the HUD Secretary said it was unnecessary to
appropriate any additional funds at this time. Even without additional appropriations
for FY2004, program activity would continue for a number of years. He said he
wanted a dialogue with interested parties about how the program could be improved.
Housing advocacy groups generally support the program, but say the main
problem is that many more housing units have been torn down than replaced, forcing
many former residents to leave their old neighborhoods with a housing voucher that
is often difficult to use. A General Accounting Office study released on November
21, 2003, Public Housing: HOPE VI Resident Issues and Changes in Neighborhoods
Surrounding Grant Sites (GAO-04-109) found that as of June 30, 2003, public
housing authorities had demolished or planned to demolish 76,393 units and to
rebuild or renovate 44,781 replacement public housing units. The GAO report also
found that in a majority of neighborhoods with FY1996 HOPE VI projects, the
percentage of the population with a high school diploma increased, average housing
values had gone up, and the poverty rate had decreased.
Based on congressional hearings on the FY2004 budget in the spring of 2003,
there appears to be bipartisan support for continued funding of this program. The
House budget bill, H.R. 2861, recommended $50 million for HOPE VI in FY2003,
and the Senate bill, S. 1584, provided $195 million. The Omnibus budget bill, H.R.
2673, recommends $150 million.
S. 811, which was signed into law by the President on December 16, 2003,
reauthorized the HOPE VI program from FY2004 through FY2006 (P.L. 108-186).
This new law also includes a new program within HOPE VI, the Main Street
Reinvestment Initiative, which will provide grants to small communities to revitalize
distressed main street areas. In addition, the Act requires that the selection criteria
for awarding HOPE VI grants consider the extent to which the plan for using HOPE
VI funds minimizes the permanent displacement of current residents of the public
housing site who wish to remain in or return to the revitalized community.
It is estimated that the nation’s 1.25 million units of public housing need $20-
$22 billion in capital repairs, with new needs accruing at the rate of $2-$3 billion
annually. Under the Administration’s Public Housing Reinvestment Initiative
(PHRI), PHAs would be able to voluntarily convert some public housing units to
project-based voucher assistance — tying federal assistance more closely to
individual projects rather than to an overall lump sum annual capital grant to the
PHA. Along with new federal loan guarantees, the stream of voucher subsidies
would make it more possible for PHAs to turn to the private sector for rehabilitation
loans, pledging the project-based revenues as collateral. In addition, after receiving

---

CRS-8
a voucher for a year, a tenant at the project could take the voucher and move
elsewhere if they chose to, allowing families to move to areas of lower concentrations
of poverty and greater economic opportunity. HUD believes this initiative would
move public housing towards private ownership, with more market-based decisions
about operations and maintenance. Some say that because there are often long
waiting lists to get into public housing, tenants hesitate to leave even when the
service and conditions are less than desirable. Under PHRI, they say, PHAs could
no longer take a tenant’s occupancy for granted.
The Congress rejected this initiative in the FY2003 budget, directing HUD to
report to the Appropriations Committees about PHAs that have already obtained
private financing for their capital needs, particularly in Baltimore, Chicago and
Philadelphia. Some housing organizations and PHAs are concerned that the
Administration’s proposal is an untested experiment that could lead to serious
financial difficulties for PHAs and the potential loss of large amounts of the nation’s
low-cost housing stock. Neither H.R. 2861, S. 1584, nor the Omnibus budget bill
accepted the PHRI Initiative.
In related legislation, H.R. 1981 would reauthorize HUD’s Public Housing Drug
Elimination Program. The program was ended in FY2001 with a final appropriation
of $310 million.
For more details on housing issues in the HUD budget for FY2004, see CRS
Report, RL31804, Appropriations for FY2004: VA, HUD, and Independent Agencies
or CRS Report RL31962, The Department of Housing and Urban Development:
FY2004 Budget.
National Affordable Housing Trust Fund
Housing trust funds are public accounts established by legislation or resolution
to receive specific revenues, which can only be spent on housing. The most
important feature of a housing trust fund is that it receives on-going revenue from
dedicated sources of funding, such as taxes or fees. According to the Housing Trust
Fund Project, more than 270 housing trust funds have been established by cities,
counties, and states. It is estimated that these trust funds are now spending more than
$500 million a year for affordable housing, although a large majority of this spending
is likely made by a small number of the largest trust funds. While housing trust funds
use about three dozen sources of revenue, real estate transfer fees and direct
appropriations are the primary source of funds.
H.R. 1102 and S. 1411, similar but not identical bills, have been introduced in
the 108th Congress to establish a National Affordable Housing Trust (the “Trust
Fund”) in the Treasury of the United States. H.R. 1102 has about 209 mostly
Democratic cosponsors. The goal of both bills would be to produce, rehabilitate, and
preserve at least 1,500,000 affordable housing units over the next 10 years. They
would do so “by using profits generated by Federal housing programs to fund
additional housing activities, without supplanting existing housing appropriations.”
The Trust Fund would focus on the production of rental housing for families with the
greatest need, in mixed income settings, and in areas where families could gain
access to the greatest economic opportunities.

---

CRS-9
H.R. 1102. Most of the grants made by the Trust Fund to state and local
governments would be required to be used for rental housing for “extremely low-
income families” (not less than 45% of grant amounts) and for “minimum wage-
income families” (not less than 30% of amounts). Up to 25% of the funds could be
used for rental housing and homeownership assistance for families with incomes up
to 80% of the greater of the median family income of the local area or of the state.
Source of Funds. Under H.R. 1102, the Trust Fund would be established
and, beginning in FY2004, an amount would be appropriated annually to the Trust
Fund equal to:
! the amount in the FHA Mutual Mortgage Insurance (MMI) Fund that
exceeds the legally required 2% capital ratio (the economic value of
the fund divided by the amount of insurance in force) each year; and
! the amount in the Government National Mortgage Association that
exceeds the funds necessary to ensure the safety and soundness of
the agency, as determined by the HUD Secretary.
Distribution of Funds. Of the total amount of funding available each year,
40% would go to states and 60% to participating local jurisdictions (PJs). Each state
would receive at least 1.0% of the total annual funds designated for states. A formula
would be established by the Secretary for allocating assistance to states and PJs based
on a comparison of the relative needs of eligible recipients and would include the
following factors:
! the percentage of families living in substandard housing, paying
more than 50% of their annual income for housing costs, and having
an income at or below the poverty line;
! the cost of developing or carrying out rehabilitation of housing; and
! counties that have extremely low vacancy rates or extremely old
housing.
In order to receive its annual Trust Fund allocation, an eligible state or PJ would
have to make a matching contribution from certain designated “non-federal sources.”
In general, eligible states or PJs would receive an allocation equal to four times their
matching contribution. Only funds from the following sources could be used for the
matching requirement:
! 50% of funds from Low Income Housing Tax Credits;
! 50% of funds from mortgage revenue bonds and tax-exempt bonds;
! 50% of grants under the Community Development Block Grant and
the HOME program;
! 50% of project-based housing voucher assistance;
! 50% of funds from the rural housing assistance program;
! federal, state, or local amounts from the Temporary Assistance for
Needy Families program; and
! general state revenue (any state or local government revenue not
derived from federal sources, including any state tax revenue).

---

CRS-10
There would be a 50% reduction in the matching requirement for recipients in
fiscal distress, and a 100% reduction for those in severe fiscal distress.
Use of Trust Fund Assistance By Recipients. Once eligible “recipients”
(states and participating local jurisdictions) received funds, they would, in turn,
distribute grants to eligible “entities” or “subrecipients.” These could include any
public or private nonprofit or for-profit entity, unit of general local government,
regional planning entity, or any other entity engaged in the development,
rehabilitation, or preservation of affordable housing, as determined by the Secretary.
The HUD Secretary would establish dollar limits per unit for grant amounts that
could be used for eligible activities.
To be an eligible recipient, a state or participating jurisdiction must have
established and submitted an allocation plan to the Secretary that includes priority
housing needs and an agreement to comply with requirements relating to rents
charged, the availability of units to voucher holders, the use as affordable housing for
50 years, mixed-income usage, and the Fair Housing Act.
Grant assistance could be provided in the form of capital grants, noninterest
bearing or low-interest loans or advances, deferred payment loans, guarantees, and
other forms approved by the Secretary.
Appropriations would be authorized for Section 8 project-based vouchers for
units assisted under this act for families that would otherwise pay rents that exceeded
30% of their adjusted income.
S. 1411. As noted, this bill is similar to H.R. 1102. However, under S. 1411,
the Trust Fund would be financed by the amount in the FHA Mutual Mortgage
Insurance (MMI) Fund that is above what is necessary to maintain a 3% capital ratio,
rather than the 2% ratio in H.R. 1102. Under S. 1411, 75% of the grants would have
to be used for the development of affordable housing for rent by extremely low-
income families, and 25% would have to be used for rental housing or for
homeownership — for low-income families. Three-quarters of money from the Trust
Fund would be given as matching grants to states and local governments through a
formula based on the need for housing (with similar matching requirements by state
or local governments from “non-federal” resources as in H.R 1102); the remainder
would be awarded by HUD through a national competition to non-profit
intermediaries. Assisted housing would have to remain affordable for 40 years.
Issues and Concerns. The Administration does not support a national trust
fund for the construction of “project-based” assistance. They point to the record high
national rental vacancy rate of 9.9% reported by the Census Bureau in the third
quarter of 2003. Housing advocacy groups say however that many of these units are
very expensive or are not in areas that can be reached by public transportation. The
Administration also cites the existing $4 billion a year Low Income Housing Tax
Credit program that provides financial support for an estimated 120,000 new and
rehabilitated units a year. Trust Fund advocates respond that the Tax Credit program
is targeted at renters with incomes of 50-60% of the local area median, while Trust
Fund units would generally be directed at households with incomes with “extremely
low incomes” — those with incomes at or below 30% of the local area median. The

---

CRS-11
Administration also points to several other HUD programs, HOME and Community
Development Block Grants, that can also be used to support new rental construction
or rehabilitation. The HOPE VI public housing program is also being used to fund
construction and rehabilitation of rental housing (although as noted above, the
Administration did not request funding for this program for FY2004). Again,
however, critics argue that very few of the rental units constructed or rehabilitated
under these other federal programs have been targeted at “extremely low-income
households.”
The main source of funds to support the proposed Trust Fund is the “surplus”
reserves of HUD’s profitable FHA mortgage insurance business. Under the FHA
program, homebuyers pay mortgage insurance premiums into the program. The
premiums are used to protect FHA-approved lenders, who have lent funds to many
relatively risky homebuyers, from losses if homeowners are no longer able to make
their mortgage payments and undergo foreclosure. Over the past decade, the
favorable economy has meant low foreclosures rates (although they have been
increasing in the past several years). As a result, FHA reserves have been building.
The program is expected to add $2.9 billion of additional reserves in FY2004 alone,
with the fund’s economic value reaching $29.3 billion by FY2004 and $44.8 billion
by FY2008. The capital ratios are projected to be 4.47% in FY2004 and 5.10% in
FY2008, considerably above the government-mandated minimum 2%. But the levels
of surplus could change quickly if there were to be a serious downturn in the
economy, with many more homeowners losing their homes.
There has been considerable confusion over how the FHA insurance reserves
are treated for budgetary purposes. They are not idle funds waiting to be tapped, but
they flow into the Treasury like other federal revenues, and they are used to pay
government expenses. Since 2001, the Office of Management and Budget has treated
the net FHA reserves as revenue to HUD, offsetting appropriations that would
otherwise be required. If the FHA reserves were to be tapped for the Trust Fund,
they would have to be replaced by additional appropriations, the same as funding for
any other HUD program. Some ask why supporters do not simply propose the
financing of the Trust Fund through direct appropriations rather than through the
FHA reserves, given that both approaches would have the same cost. According to
the National Low Income Housing Coalition, “while all trust funds are subject to
annual budget decisions ... trust funds are less subject to the vicissitudes of the annual
appropriations process.”4
There is another view that the growing FHA reserves means the insurance
premiums are too high and should be lowered to more closely approximate the
estimate of future needs. Proponents of this view point out that most of the reserves
have come from low- and moderate-income homebuyers. S. 607 in the 107th
Congress would have reduced premium levels. HUD also has the authority to reduce
premium levels and did so in 2001.
4 2003 Advocates’ Guide to Housing and Community Development Policy, National Low
Income Housing Coalition, p. 122.

---

CRS-12
Increasing Homeownership for Lower Income Households
Despite major gains in recent years, Table 2 below shows that homeownership
rates for lower income and minority households remain significantly lower than the
rate for whites. There are a number of reasons for these lower rates. Minorities have
lower incomes than whites and a larger percentage live in central cities, both of
which make it more difficult to find a desirable home to purchase. (Many larger
cities have thousands of decrepit boarded-up homes in distressed neighborhoods, but
the purchase and rehabilitation of individual units is rarely an option for lower-
income buyers without the help of a Community Development Corporation or some
similar organization. See Table 3 for differences in homeownership rates by area.)
For a variety of reasons, many lower income households have poor credit records
which makes obtaining a mortgage more difficult, more expensive, or impossible.
Table 2. Homeownership Rates, by Household Category
Household type
1993
3rd Quarter 2003
White, non-Hispanic
70.2%
75.7%
Black
42.0%
48.0%
Hispanic 39.4%
46.1%
Households with family
N.A.
83.7%
incomes greater than or
equal to the median family
income
Households with family
N.A.
52.%
incomes less than the
median family income
Married couples with
73.7%
79.1%
children
Married couples without
82.9%
86.8%
children
Other families with
35.5%
44.8%
children
Other families without
63.9%
65.9%
children
Single Person Households
47.1%
52.9%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.
The main homeownership tax incentives — the mortgage and property tax
deductions — provide substantial housing assistance to upper-middle income
homeowners, but are of little use to those in the bottom half of the income

---

CRS-13
distribution. Housing analysts have long suggested that a change from the current tax
deduction to a tax credit would help put lower income homebuyers on a more level
playing field, since under a progressive tax rate structure, a tax deduction favors
those with higher incomes. While discrimination in mortgage lending and in the sale
of homes has been reduced over the past decade, it is still considered to play a
significant factor in the lower rate of homeownership for minorities.
The Administration has made increasing homeownership for lower income
groups the centerpiece of its housing policy. It has proposed a number of
homeownership initiatives, including the $200 million American Dream
Downpayment Initiative (H.R. 1276, S. 811), a new FHA mortgage insurance product
to help families with poor credit records, and a single-family affordable housing tax
credit (H.R. 839/S. 198) to stimulate the construction or rehabilitation of lower-
priced homes.
In testimony before the House Committee on Financial Services Subcommittee
on Housing and Community Opportunity on April 8, 2003, HUD Secretary Martinez
stated that homeownership offers minorities the best opportunity to accumulate
wealth that can later be used for education, to start a business, or to take advantage
of other opportunities that may not be available to those without financial assets.
Others believe that increased homeownership can help economically distressed
neighborhoods to stabilize and revitalize themselves. The HUD Secretary has taken
part in Habitat for Humanity construction projects and says he has seen profound
changes in how families view their future prospects when, for the first times in their
lives, they have something that is increasing in value.
Administration’s FY2004 Homeownership Proposals. The
Administration’s FY2004 HUD budget contains a number of homeownership
proposals.
! American Dream Downpayment Initiative. Under this initiative,
$200 million would be set aside within the existing HOME program
for the “American Dream Downpayment Fund.” Introduced in the
108th Congress as H.R. 1276/S. 811, HUD estimated that this
proposal would help 40,000 additional families to buy a home each
year ($200 million divided by $5,000 per buyer). The House bill
was reported by the House Financial Services Committee with
several amendments on May 21, 2003, authorizing $200 million to
be spent in each of FY2004 and FY2005.
Status. On December 16, 2003, the President signed P.L. 108-186 (S. 811), the
American Dream Downpayment Act, that authorizes the downpayment assistance
program. The HUD Secretary may award grants to state and local “participating
jurisdictions” to assist low-income families who are first-time homebuyers with
incomes at or below 80% of the local area median income. In general, the funds will
be allocated to jurisdictions based on the percentage of the national total of low-
income households residing in rental housing in the participating jurisdiction. The
law authorizes $200 million for each fiscal year from 2004 through 2007. Up to 20%
of the grant funds may be used to provide assistance to the first-time homebuyers for
home repairs. Downpayment assistance to families is limited to not more than the

---

CRS-14
greater of either 6% of the purchase price of the home or $10,000. The Omnibus
budget bill would provide $87.5 million for this program in FY2004. With the
Administration now estimating that grants would average $7,500 per homebuyer, the
$87.5 million would assist about 11,700 buyers per year.
! New FHA Financing Option. A new mortgage product was
proposed that rewards credit-risk borrowers who make timely
mortgage payments. This would help families with poor credit
records who must often rely instead on high-cost “subprime loans.”
Status: No committee action
! Self-Help Homeownership Opportunity (SHOP). The
Administration has proposed to expand the SHOP program by
reaching out to faith-based or other organizations to help more low-
income families become homeowners. Under SHOP, grants are
made to national and regional non-profit organizations such as
Habitat for Humanity. Homebuyers must contribute significant
amounts of volunteer labor to the construction or rehabilitation of
the property. The budget requests a $65 million set-aside within the
Community Development Block Grant program, and is expected to
help produce 5,200 new homes nationwide.
Status: The Omnibus budget bill provides $27 million for FY2004.
! Housing Counseling. Counseling helps families learn about the
process of buying a home and how to avoid predatory lending
practices. It also helps homeowners avoid foreclosure during
periods of financial stress. The FY2004 budget requests $45 million
for housing counseling, up from $35 million in FY2003.
Status: The Omnibus budget bill would provide $40 million as a set-aside
within the HOME program.

! Single-Family Affordable Housing Tax Credit.
The
Administration has proposed a tax credit to stimulate the production
of homes that are affordable to lower-income households — and to
help revitalize distressed communities. It has been introduced as
H.R. 839/S. 198, and is modeled after the popular Low Income
Housing Tax Credit for rental housing. As of the end of 2003, the
bills had 250 co-sponsors. The tax incentive would provide an
estimated $1.7 billion of tax credits to be taken by homebuilders
(developer or investor partnership) over 5 years to encourage the
rehabilitation of existing properties (including abandoned housing
in central cities) or new construction of 100,000 affordable single-
family homes in urban or rural areas. Credits would be allocated to
state housing credit agencies on the basis of population ($1.75 per
capita in the first year and indexed to inflation thereafter). State
agencies would award first-year credits to single-family housing
units in a project located in a census tract with median income equal

---

CRS-15
to 80% or less of the area median income. The present value of
credits, determined on the date of a qualifying sale, could not be
more than 50% of the cost of constructing a new home or
rehabilitating an existing property.
Status: No committee action
Concerns About Administration’s Homeownership Policy. While
most housing advocates find it difficult to oppose additional homeownership
opportunities for lower-income families, they have voiced concerns that the
Administration’s focus on homeownership is unbalanced. Critics say that HUD’s
policy should have more emphasis on maintaining or increasing choices in types of
housing available, including rental housing. “Homeownership may not be the best
wealth-building strategy,” says Woody Widrow, project director of the Texas
Individual Development Account Network. “Being a renter and owning a business
or saving money to send your kids to college may be a better strategy.”5 Some also
argue that without a cautious and thoughtful homeownership program that avoids
concentrations of lower-income homebuyers in lower-income neighborhoods,
potential benefits to buyers will be minimized. For example, several recent studies
have found that homeownership has positive effects on children’s development.
However, “... the positive effects of homeownership on children are weakened in
distressed neighborhoods, especially those that are residentially unstable and poor.
Thus, helping low-income families purchase homes in good neighborhoods is likely
to have the best effects on children.”6 Harm can be done to both lower-income
buyers and the neighborhoods where the homes are frequently purchased if there are
high default rates.
Some applaud HUD and others in the housing industry for giving more attention
to increasing the financial literacy of lower-income households, but others would like
more efforts to improve the credit records of these households before they buy a first
home. Pre-purchase counseling has greatly increased in recent years and has been
shown to be helpful. As noted above, the Omnibus budget bill would provide $40
million in FY2004 for HUD’s major housing counseling program, up from $35
million in FY2003. Almost all financial advisors recommend that households have
at least 3 months and preferably 6 months of liquid assets available to cover the
financial setbacks that all households face. Lower income households are most
vulnerable to financial setbacks. Yet many lower income and minority homebuyers
are encouraged to purchase a home when they have almost no savings before or after
the purchase. Many are households who have never been able to accumulate any
savings, who may have poor health and be without health insurance, and have little
or no financial knowledge about budgets, mortgages, and home repair contracts.
They may be especially vulnerable to layoffs and a variety of financial and housing-
related scams.
5 Winton Pitcoff, Should Everyone Own Their Own Home?, Shelterforce, Jan./Feb. 2003.
6 Joseph Harkness and Sandra J. Newman, Homeownership for the Poor in Distressed
Neighborhoods. Does This Make Sense?, Housing Policy debate, vol. 13, 2002.

---

CRS-16
Table 3. Homeownership Rates, by Area
(3rd Quarter, 2003)
Area
3rd Quarter 2003
U.S.
68.4%
In central cities
52.3%
Suburbs
75.3%
Outside metropolitan areas
75.4%
Northeast
64.4%
Midwest
73.5%
South
70.0%
West
63.8%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.
The Mortgage Bankers of America reported that 1.2% of all loans were in
foreclosure at the end of the first quarter of 2003, a record high. Additional
homeowners who are seriously behind in their mortgage payments have been able to
avoid or defer foreclosure by filing for bankruptcy. HUD’s largest homeownership
program, its Federal Housing Administration (FHA) mortgage insurance program,
helped about 700,000 first-time buyers in 2002. However, this program continues
to operate with very high delinquency rates — a record high 12.59% of borrowers at
least 30 days past due in the 2nd quarter of 2003. Before the year 2000, this rate was
never above 9%. The Senate Appropriations Committee wrote in its FY2003 report
that ...” in some cases and in certain neighborhoods, FHA has been misused to
underwrite bad loans that lead to defaults and foreclosed homes, contributing to
neighborhood decline and destabilization,” and directed HUD to report to the
appropriate congressional committees on further actions that can be taken to protect
homebuyers and communities experiencing high rates of defaults and foreclosures
on FHA-insured loans.
Increased homebuyer training may help to protect low-income and minority
homebuyers from another significant problem: predatory lending. Research has
shown that lower-income and minority buyers are more likely to receive “subprime”
mortgages with higher interest rates and higher fees, often higher than can be justified
by standard underwriting guidelines.7 Predatory lending has hurt lower-income and
minority homeowners most, often stripping away home equity accumulated over a
lifetime. When foreclosures are concentrated in certain areas, as FHA-insured homes
often are, they can pull property values down and do other damage to these
7 Risk or Race? Racial Disparities and the Subprime Refinance Market — A Report of the
Center for Community Change, Congressional Record, May 1, 2002, pp. S3630-31.

---

CRS-17
neighborhoods. These and other factors work against lower-income homebuyers
accumulating wealth.
Thus, some who are uneasy about current HUD policy simply urge more finesse
in the design and implementation of homeownership programs and policies for
lower-income households. For a review of current homeownership programs and
policy, and the cautions that some recommend, see Homeownership: Too Much of
a Good Thing?8
Other 108th Congress Homeowner Proposals. In addition to the
Administration’s proposals, a variety of homeownership proposals are pending in
Congress. No hearings were held and none were reported out of committee.
! S. 875 would amend the Internal Revenue Code of 1986 to allow an
income tax credit to promote homeownership and community
development. (Very similar to the Administration’s H.R. 839/S.
198.)
! H.R. 1913 would amend the Internal Revenue Code to allow first-
time homebuyers credit for the purchase of principal residences in
rural areas equal to the lesser of 10% of the home purchase price or
$5,000.
! H.R. 133/S. 846 would amend the Internal Revenue Code of 1986
to allow a deduction for premiums on mortgage insurance.
! H.R 1132, the Home At Last Tax Credit Act of 2003, would provide
a tax credit to promote homeownership among low-income
individuals. State housing finance agencies would receive annual
tax credits based on the state’s population. Qualified lenders would
use the tax credits to provide below-market rate mortgages to
homebuyers who, in general, have incomes of 80% or less of the
local area median and who attend pre-purchase homeownership
counseling. (This is very similar to the existing Mortgage Revenue
Bond program.)
! S. 1175, the First-Time Homebuyers’ Tax Credit Act of 2003, would
provide a refundable credit (the Treasury writes a check to the
homebuyer if the credit is more than the first-time buyer owes in
taxes) equal to 10% of the purchase price up to $6,000 for a joint
return ($3,000 for a single) to be used for both closing costs and the
downpayment. The credit could be used in the year of the purchase
by transferring the tax credit to the mortgage lender.
Predatory Lending
Predatory lending involves home mortgages, mortgage refinancing, home equity
loans, and home repair loans with unjustifiably high interest rates, excessive fees,
balloon payments, prepayment penalties, and the imposition of other unreasonable,
and sometimes fraudulent, terms. By many accounts, these loans have grown rapidly
8 Leanne M. Lachman, and Deborah L. Brett, Commentary — Lend Lease Real Estate
Investments, no. 10, 2003, 19 p.

---

CRS-18
in minority neighborhoods in the past half dozen years, frequently targeted to the
elderly, often stripping away wealth that may have taken owners decades or a lifetime
to accumulate.
While Congress has held hearings, and bills have been introduced, industry,
consumer groups, HUD, and other interested parties have not been able to reach a
consensus on what legislation, if any, is necessary to address predatory lending.
Some financial organizations argue that more rigorous enforcement of existing
federal laws would be sufficient. A number of government agencies (Justice
Department, the Federal Trade Commission, the Federal Reserve, HUD, along with
the government sponsored enterprises, Fannie Mae and Freddie Mac) have become
involved in addressing various aspects of the predatory lending issue, which suggests
to some that additional legislation may not be necessary. On the other hand, some
consumer groups believe there should be more education initiatives to increase
financial literacy. One consumer advocacy group said that predatory lending is “so
hard to fight because so many people are making so much money,” and that only
comprehensive legislation can stem the problem.
The Neighborhood Reinvestment Corporation (NRC) argues that predatory
lending threatens to undo the work of many nonprofits that have worked with lenders
and local governments to improve distressed neighborhoods. They have worked with
Freddie Mac to develop a loan product for families that now have predatory loans.
The mortgage lending industry acknowledges that a small number of lenders on the
fringe give their industry a black mark, and say they are working to address the worst
abuses. However, they caution about an overreaction, with excessive regulations that
could increase the costs of borrowing and make it more difficult for those with
impaired credit records to get needed loans. Industry groups are concerned that states
are passing their own predatory lending laws, including California, North Carolina,
and Georgia, and that some are so severe that reasonable federal preemptive
legislation is now desired.
A number of bills designed to combat predatory lending have been introduced
in the 108th Congress. Representative Ney, chair of the Financial Services
Subcommittee on Housing and Community Opportunity, has introduced H.R. 833,
a bill to “combat unfair and deceptive practices in the high-cost mortgage market”
and pre-empt the growing number of state and local predatory lending laws. H.R.
1663, the Predatory Mortgage Lending Practices Reduction Act, also proposes to
curtail abuses among subprime lenders and encourage efforts to resolve complaints
by consumers. Both bills are summarized below.
H.R. 833 would amend the Truth in Lending Act “to combat unfair and
deceptive practices in the high-cost mortgage market, establish a consumer mortgage
protection board, and establish licensing and minimum standards for mortgage
brokers.”
Consumer protections in the bill include:
! prohibiting single premium credit insurance;
! prohibiting loans made without regard to the borrower’s ability to
repay them;

---

CRS-19
! limiting prepayment penalties to 4 years, rather than their current
5-year period;
! prohibiting refinancing during the first 12 months of the loan, unless
it benefits the borrower; and
! prohibiting lenders from profiting from foreclosure by only allowing
them to recoup costs.
The bill also includes a number of new disclosure requirements:
! lenders must disclose that a loan has a balloon payment and that a
borrower is not required to have such a feature in their loan;
! lenders must report borrower’s favorable loan activity to credit
bureaus at least quarterly; and
! borrowers with high cost loans must receive a free copy of their
credit report upon request.
Since this bill would pre-empt more stringent state and local laws, the lending
industry would receive protection from laws they believe raise the costs of lending
and encumber the national mortgage lending market. The legislation would also bar
certain “frivolous” lawsuits that raise the cost of lending. Some consumer groups
oppose the bill because it would eliminate what they view as more consumer-friendly
state and local laws. They claim that this proposal would do little to curb the worst
abusive-lending practices.
Another predatory lending bill, H.R. 1663, would require the HUD Secretary to
establish, by regulation, standards and procedures for mortgage lenders and brokers.
Persons providing mortgage lending services or mortgage brokerage services in
connection with a subprime, federally-related mortgage would be required to be
tested and certified in a variety of areas including the Truth in Lending Act, the Equal
Credit Opportunity Act, the Home Ownership and Equity Protection Act of 1994, and
the Real Estate Settlement Procedures Act. A creditor would be required to make a
good faith effort to resolve any consumer complaint concerning improper or
questionable lending practices within 60 days. There would be prohibitions against
charges by lenders that were not previously disclosed to borrowers and on arbitration
clauses imposed by lenders on consumers without their consent. H.R. 1663 would
also provide grants to Community Development Corporations to provide predatory
lending education to borrowers, and potential borrowers.
Real Estate Settlement Procedures Act
The major purpose of the Real Estate Settlement Procedures Act of 1974
(RESPA)9 is to encourage homebuyers or homeowners who are refinancing their
mortgages, to shop around for the best prices for settlement services (also referred
to as “closing costs”). Many contend that this Act has failed in its purpose over the
decades, with many homeowners or homebuyers being overcharged or forced to buy
unneeded services. On July 29, 2002, the Administration proposed a rule that would
make major changes in RESPA regulations to simplify and improve the process of
9 12 U.S. C. Sec. 2601, et seq.

---

CRS-20
obtaining a home mortgage.10 Homebuyers would have the option of getting a
“package price” including all of the required settlement services before committing
funds to any lender, so that they might compare this “one price” with others from
other settlement service providers. A number of lenders already offer this as a “no
closing costs”option, rolling the settlement costs into a higher mortgage rate.
The HUD Secretary said that these reforms could save Americans up to $8
billion a year — an estimated $700 of savings per homebuyer or those refinancing
a mortgage — but national organizations representing mortgage brokers and real
estate agents that may benefit financially from the lack of competition among
settlement providers have objected strongly. Senator Shelby, chair of the Senate
Banking, Housing and Urban Affairs Committee, said at a recent hearing that the
change would be “significantly damaging to small businesses” and Representative
Manzullo, chair of the Small Business Committee, spoke against this proposal,
saying that it could bankrupt thousands of small businesses across the country.11
Supporters of the proposed reforms argue that under the current system, it is very
difficult for homebuyers to avoid paying more than they would under a competitive
market for these services.
HUD has been frustrated over the past two years at the lack of support with its
RESPA reform proposal during congressional oversight hearings. In late December
2003 during the congressional recess and just days before HUD Secretary Martinez
resigned to run for the Senate from Florida, HUD sent a final RESPA rule to the
Office of Management and Budget. After OMB signs off on it, it will be published
in the Federal Register and take effect.

The Mortgage Revenue Bond Program for First-Time
Homebuyers — and the Proposed Repeal of the “Ten-Year
Rule”
The Housing Bond and Credit Modernization and Fairness Act of 2003 (H.R.
284/S.595), with about 380 bipartisan co-sponsors, would modify several provisions
in the existing Mortgage Revenue Bond (MRB) program for first-time homebuyers.
The MRB program is a provision in the tax code that provides reduced rate
mortgages to first-time homebuyers with incomes up to 115% of the local area
median. Many states also use their programs to provide help with downpayments and
closing costs. States raise funds for the program by selling tax-exempt bonds.
Investors who buy these bonds do not have to pay federal income tax on the interest
income they earn, so they are willing to lend to states at lower interest rates. At an
annual cost of $1 billion in lost tax revenue to the U.S. Treasury, the program serves
an estimated 120,000 buyers who receive reduced-rate mortgages each year at a cost
that averages about $8,000 per buyer. It is not clear how many of these buyers might
have been able to purchase a home without the discounted mortgage.
10 Federal Register, July 29, 2002, pp. 49134-49174.
11 Current RESPA Proposal Doomed, Housing Affairs Letter, Apr. 11, 2003.

---

CRS-21
H.R. 284/S. 595 would repeal the “Ten-Year Rule,” an obscure provision now
said to be preventing tens of thousands of qualified lower-income first-time buyers
each year from getting an affordable MRB-financed mortgage. The rule,12 enacted
before the MRB program was made permanent in 1993, requires states to use the
mortgage payments received from homeowners to pay off the bond once the bond has
been outstanding for 10 years, rather than using (or recycling) these mortgage
payments to make other loans to other first-time buyers. When homeowners sell
their home and pay off their mortgage, or refinance their loan, these funds must also
be used to pay down the bond principal.
The 1988 Ten-Year Rule started having an impact in 1998. Repealing the rule
would allow a recycling of funds and thus allow a larger volume of tax-exempt bonds
to remain outstanding for a longer period of time. This change is supported by the
National Council of State Housing Agencies and the National Governors
Association. The Joint Committee on Taxation has estimated that the repeal would
cost $770 million over 5 years and $2.4 billion over 10 years.
Those who oppose the repeal of the Ten-Year Rule maintain that the purpose
of the rule was to reduce the advantage that the MRB program has over other bond
users competing for the state’s limited bond authority. It is noteworthy that only
MRBs are subject to the Rule, not bonds for rental housing, airport construction,
sewage treatment facilities, or various other private activity bond categories. The
MRB program has always had a significant advantage over many other categories;
the uniqueness of the home mortgage program means that as homeowners make their
monthly payments, the money can be used to make more home loans. In effect, bond
authority used to finance mortgages can be stretched beyond the initial amount.
Other uses of bond authority — such as for a water treatment plant — do not have
this ability. Revenue from the water treatment plant would go directly to pay off the
bond without any recycling opportunity. Thus, even with the Ten-Year Rule, the
MRB program maintains a relative advantage over other bond programs.
There was no movement on these bills during 2003.
Fannie Mae and Freddie Mac
The removal of Freddie Mac’s top three executives in June 2003 over
accounting irregularities has again raised questions about the need for more stringent
regulation of the “Government Sponsored Enterprises” (GSEs) Fannie Mae and
Freddie Mac. Freddie Mac has acknowledged underreporting its income by as much
as $5 billion since 1999.13 Representative Richard Baker, chair of the House
Financial Services Government-Sponsored Enterprises Subcommittee, has long been
a critic of Fannie Mae and Freddie Mac, arguing that they have not been sufficiently
accountable to the public. He has also argued that HUD’s Office of Federal Housing
12 P.L. 100-647.
13 See CRS Report RS21567, Accounting and Management Problems at Freddie
Mac.

---

CRS-22
Enterprise Oversight (OFHEO) has been ineffective in its watchdog role of the GSEs.
H.R. 2575, the Secondary Mortgage Market Enterprises Regulatory Improvement Act
(with 20 Republican cosponsors), would abolish OFHEO, and create a new Office
of Housing Finance Supervision within the Treasury to oversee Fannie Mae and
Freddie Mac. This new entity would establish the duties and authorities for the
Director, provide for the public disclosure of information, risk-based capital tests for
enterprises, and for required minimum and critical capital levels. The proposed
legislation includes provisions for prompt corrective actions and for the enforcement
of actions.
On September 10, 2003, U.S. Treasury Secretary John Snow testified before the
House Financial Services Committee urging Congress to support a new regulator of
Fannie Mae and Freddie Mac at the Treasury Department. HUD is currently working
on proposed regulations that would expand the affordable housing goals required of
the GSEs based on larger minority populations found in 2000 census data. Some
housing organizations fear that moving oversight to the Treasury might lead to a
weakening of these affordable housing requirements. There has been some talk of
a compromise that would include a stand-alone autonomous regulator.
A December 2003 report by the Federal Reserve, The GSE Implicit Subsidy and
Value of Government Ambiguity, concluded that Fannie Mae and Freddie Mac
provide very little help to homebuyers, reducing mortgage rates by only seven “basis
points” (1% equals 100 basis points), not enough to substantially increase the
homeownership rate. According to the author, economist Wayne Passmore, most of
the advantage the GSEs have in borrowing funds at lower rates in financial markets,
which occurs because investors incorrectly believe that the GSEs have implicit
government backing, benefits shareholders in these companies. The GSEs dispute
the findings and the chief economist of the National Association of Homebuilders,
David Seiders, says the results are very questionable and are in conflict with other
studies.
Brownfields
The Brownfields redevelopment program is used to reclaim abandoned and
contaminated commercial and industrial sites — often as part of neighborhood
redevelopment efforts. Some view these efforts as “smart growth,” making use of
the existing infrastructure. But much less progress has occurred than hoped, with
many projects taking 3-4 years to get started and others abandoned because of
complex environmental regulations and other difficulties. Brownfields bills in the
108th Congress include H.R. 239, H.R. 1334, and S. 645. These bills would provide
grants for projects for the cleanup and economic redevelopment of Brownfields.
While HUD’s Brownfields program received $25 million in both FY2002 and
FY2003, the Administration’s FY2004 budget requests no funding, recommending
instead that brownfields activities be turned over to the Environmental Protection
Agency. However, the House- and Senate-approved HUD budget bills, H.R. 2861/
S. 1584, and the Omnibus bill all recommend $25 million of funding for FY2004.
(See CRS Issue Brief IB10114, Brownfields and Superfund Issues in the 108th
Congress and CRS Report RL30972, The Brownfields Program Authorization:
Cleanup of Contaminated Sites.)

---