Order Code RL32899
CRS Report for Congress
Received through the CRS Web
Housing Issues in the 109th Congress
May 4, 2005
Richard Bourdon, Coordinator
Bruce Foote
Maggie McCarty
Domestic Social Policy Division
Eugene Boyd
Pamela Jackson
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Housing Issues in the 109th Congress
Summary
On February 7, 2005, the Administration submitted a $29.1 billion budget for
the Department of Housing and Urban Development (HUD) in FY2006, a cut of $2.8
billion, or 8.75%, from FY2005 appropriations of $31.9 billion. (The budget figures
used in this report are from the House Appropriations Committee tables dated April
4, 2005.) At about the same time, several appropriation subcommittees were
reorganized, and responsibility for the HUD budget was transferred to a new
Transportation, Treasury, and Housing and Urban Development, the Judiciary,
District of Columbia Subcommittee in the House, and to a new Judiciary, Housing
and Urban Development, and Related Agencies Subcommittee in the Senate.
The most controversial part of the proposed HUD budget, which explains much
of the proposed $2.8 billion cut, would eliminate the Community Development Block
Grant (CDBG) program and transfer its purposes to the Department of Commerce,
combining it with 17 other programs (which collectively had $5.6 billion of
appropriations in FY2005) into a new $3.7 billion Strengthening America’s
Communities grant program. This proposal is intended to consolidate federal
community and economic assistance programs and to target more funds to areas with
the greatest needs. Both the House and Senate have indicated objections to this
proposal in their versions of the FY2006 budget resolution (H.Con.Res. 95). The
Administration’s proposed budget for FY2006 would increase Section 8 rental
vouchers by close to $1.1 billion; however, the HOPE VI program is again slated for
elimination, with the Administration asking for a rescission of the $143 million
appropriated for FY2005. Homeless assistance grants would be increased by $200
million, but housing for persons with disabilities would be cut by nearly 50% to $120
million.
The Administration has proposed a major reform of the voucher and public
housing programs (introduced as S. 771 and H.R. 1999: the State and Local Housing
Flexibility Act of 2005) that would change targeting rules and add greater flexibility
for public housing authorities. The Administration has also reintroduced
homeownership proposals for lower-income and minority households — the Zero
Downpayment Mortgage and the Payment Incentives initiatives. However, the
Administration and the House Appropriations Committee differ by $268 million on
their estimates of the cost of these two proposals. The Administration’s Single
Family Homeownership Tax Credit, a tax incentive for developers of affordable
single-family housing, has been reintroduced (S. 859, H.R. 1549). It is estimated to
cost $2.5 billion over five years.
Other housing related issues before the 109th Congress include bills to address
predatory lending (H.R. 200, H.R. 1182, H.R. 1643) and related mortgage fraud
issues (including inflated appraisals), which the FBI has described as “rampant,” and
continuing efforts to reform the Real Estate Settlement Procedures Act. Hearings
have been held on legislation to create a more aggressive regulator for Fannie Mae
and Freddie Mac (H.R. 1461, S. 190). This report will be updated as issues develop
and legislation proceeds in the 109th Congress.
Key Policy Staff
CRS
Name
Area of Expertise
Division
Telephone and E-Mail
Richard Bourdon,
Trust funds,
Report Coordinator
counseling,
7-7806
homeownership, tax-
DSP
rbourdon@crs.loc.gov
based housing
programs
Eugene Boyd
Community
Development Block
7-8689
G&F
Grants, Brownfields,
eboyd@crs.loc.gov
empowerment zones
Bruce Foote
FHA, HOME,
predatory lending, rural
7-7805
DSP
housing, GSEs,
bfoote@crs.loc.gov
RESPA
Pamela Jackson
Tax programs for
housing: including the
Low Income Housing
7-3967
G&F
Tax Credit and tax-
pjackson@crs.loc.gov
exempt bonds
Margaret M. McCarty
Section 8, public
7-2163
housing, homeless,
DSP
mmccarty@crs.loc.gov
AIDS, elderly/disabled
Division abbreviations: DSP=Domestic Social Policy; G&F=Government and Finance
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overarching Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Role of HUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Rising Housing Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Community Development Block Grant Program . . . . . . . . . . . . . . . . . . . . . . . 3
Administration’s Economic Development Consolidation Proposal . . . . 3
CDBG Formula Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
De-Linking Brownfields and Section 108 Assistance . . . . . . . . . . . . . . . 4
CDBG-Related Earmarks and Set-Asides . . . . . . . . . . . . . . . . . . . . . . . . 4
Assisted Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Housing Choice Vouchers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Public Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 811 Housing for the Disabled Program . . . . . . . . . . . . . . . . . . . . 7
Homeownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
HUD Homeownership Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Homeownership Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Homeownership Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Homelessness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fannie Mae and Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Predatory Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Real Estate Settlement Procedures Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Rural Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
CRS Products on Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. Department of Housing and Urban Development Appropriations,
FY2002 to FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Table 2. Homeownership Rates, by Household Category . . . . . . . . . . . . . . . . . . . 8
Housing Issues in the 109th Congress
Introduction
Housing issues in the 109th Congress center around the Administration’s proposed
FY2006 budget for the Department of Housing and Urban Development (HUD) and
the congressional response.1 The budget includes a controversial proposal to replace
Community Development Block Grant (CDBG) and related programs with a new
initiative in the Department of Commerce, rescission of $2.6 billion in previously
appropriated but unspent HUD funds, the recommendation to eliminate the HOPE VI
program, and significant cuts to the housing for persons with disabilities and the lead
hazard reduction programs. The Administration would increase the Section 8 rental
voucher program by $1.1 billion and homeless assistance grants by $200 million.
Legislation has been introduced on behalf of the Administration to replace the Section
8 voucher program with a new block grant and to make major changes to the public
housing program, and the Administration continues to support several initiatives to
increase the homeownership rate for lower-income and minority households. Other
congressional interests include legislation to combat predatory lending, proposals to
create a stronger regulator for Fannie Mae and Freddie Mac, and continuing efforts to
reform the Real Estate Settlement Procedures Act.
Table 1. Department of Housing and Urban Development
Appropriations, FY2002 to FY2006
(Net budget authority in billions)
FY2002
FY2003
FY2004
FY2005
FY2006
$30.15
$30.01
$31.20
$31.92
$29.13*
Source: Budget levels remain uncertain until all program activity has been recorded and any
supplemental appropriations or rescissions have been taken into consideration. Figures are from the
House Appropriations Committee estimate tables. FY2005 figures are adjusted to reflect the 0.8%
across-the-board rescission enacted in P.L. 108-447. Final spending levels for any fiscal year include
all supplemental appropriations or rescissions. Totals remain uncertain until all program experience has
been recorded, a process that may not be completed for several months after the end of the fiscal year.
*The FY2006 figure is the House Appropriations Committee’s re-estimate of the Administration’s
budget request.
1 For a more detailed discussion, see CRS Report RL32869, The Department of Housing
and Urban Development (HUD): FY2006 Budget, by Richard Bourdon, Bruce Foote,
Maggie McCarty, and Eugene Boyd.
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Overarching Policy Issues
The Role of HUD. Recurring proposals to reduce funding for many of HUD’s
programs have caused some to question the agency’s current and future role. Among
the agencies overseen by the new Transportation, Treasury, HUD, Judiciary and
District of Columbia Appropriations Subcommittee, HUD’s budget is proposed for one
of the most drastic decreases, with a number of programs slated for elimination. Some
also see the Administration’s decision to house the new Saving America’s
Communities Initiative (SACI), which is designed to replace the CDBG program, at
the Commerce Department rather than at HUD as a vote of “no confidence” in the
agency. Furthermore, the elimination of CDBG, which constitutes the Department’s
primary community development program, raises questions about the urban
development component of HUD’s name and mission. Some of these concerns were
voiced by the chairman of the House Appropriations Subcommittee, Representative
Knollenberg, who stated in a March 17 oversight hearing that the Administration itself
was contributing to HUD’s image as lacking “competency” to manage and implement
programs.
HUD notes in its FY2006 budget summary that it has undertaken a number of
initiatives under the direction of the President’s Management Agenda to address
longstanding management problems, although it will take several years to achieve the
President’s goals. The Department also identifies reform of the Section 8 voucher
program as its top priority, motivated at least in part by the program’s growing costs
and resulting pressure on the rest of the HUD budget. Finally, HUD’s budget summary
acknowledges that the SACI proposal is a “fundamental change” but maintains that it
would result in a more targeted and unified program, to replace the “maze” of “costly
and duplicative” programs at multiple departments that communities currently have to
navigate.
Rising Housing Prices. A 2003 report by Harvard’s Joint Center For Housing
Studies, The State of the Nation’s Housing, found that “[a] staggering three in ten U.S.
households have affordability problems.” The report found that 14.3 million
households were severely cost-burdened (spending more than 50% of their incomes on
housing) and another 17.3 million were moderately cost-burdened (spending 30%-50%
of their incomes on housing). The Joint Center report found that for the first time ever,
more homeowners were cost-burdened than renters. With the rapid rise in the price of
housing in recent years in many parts of the country, rising property taxes are becoming
a serious issue for low- and moderate-income owners, and those elderly on fixed
incomes. In addition, there is growing concern over the number of homebuyers and
homeowners who are purchasing with very little or no downpayment, paying subprime
mortgage rates, increasing their mortgage payments with home-equity loans, and using
adjustable rate and interest-only mortgages.
The strength of the economy can be attributed in part to the “wealth effect” from
rising housing prices that make households confident enough to spend more of their
income. However, the wealth effect could operate in reverse. Many households may
be acting on the assumption that housing prices will continue their rapid increase,
putting themselves at financial risk if interest rates should rise significantly, housing
prices decline, or the economy should slow. The FBI recently described mortgage
fraud as “rampant,” and a November 2004 report by the Government Accountability
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Office, Single-Family Housing: HUD’s Risk-Based Oversight of Appraisers Could Be
Enhanced (GAO 05-14), has raised the dangers of faulty and inflated appraisals. The
issues of predatory lending and reforms to the Real Estate Settlement Procedures Act,
discussed later in this report, are part of the larger debate on the implications of rising
housing prices.
Community Development Block Grant Program
The Community Development Block Grant (CDBG) program, administered by
the Department of Housing and Urban Development, is the largest source of federal
grant assistance in support of state and local government housing and community
development efforts. Created in 1974 as Title I of the Housing and Community
Development Act, P.L. 94-393, the program is also the longest-running federal block
grant program. In FY2005, the program allocated $4.15 billion in assistance to
approximately 1,168 entitlement communities, states, and Puerto Rico using one of two
formulas intended to measure community development needs. States and communities
may use CDBG assistance to fund any of 25 categories of eligible activities, including
economic development, housing, historic preservation, public facilities, public services,
works, and energy conservation. Although states and local governments are given
broad discretion concerning the mix of program activities that they can undertake, the
statute governing the program requires that each activity must address one of three
national objectives: (1) principally benefit low- and moderate-income persons; (2) aid
in preventing or eliminating slums or blight; or (3) address an urgent community
development need posing a threat to the health and safety of residents of a community.
The program’s authorizing language also requires that 70% of a community’s CDBG
allocation be used in support of activities principally benefitting low- and moderate-
income persons.
Administration’s Economic Development Consolidation Proposal.
The 109th Congress may consider several CDBG-related issues, including a proposal
by the Bush Administration that would eliminate the CDBG program and 17 other
existing community development, economic development, and community service
programs, and transfer their activities to a new program — Strengthening America’s
Communities — to be administered by the Department of Commerce. The proposal
is being opposed by groups representing state and local officials, including the National
League of Cities, the U.S. Conference of Mayors, the National Association of Counties,
and the Council of Community Development Agencies. The Administration, which
has not yet released a detailed legislative proposal, contends that the programs,
including CDBG, whose activities would be consolidated have been judged to be
ineffective, duplicative, and lack measurable long-term objectives. The new program,
as proposed by the Administration, is intended to:
! reduce duplication and fragmentation in the delivery of federal
economic development assistance;
! target assistance to communities with the greatest need; and
! improve accountability by requiring communities to focus on
measurable outcomes of grant assistance.
For a more detailed discussion, see CRS Report RL32823, An Overview of the
Administration’s Strengthening America’s Communities Initiative.
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CDBG Formula Changes. Congress may also consider legislation that could
change the program’s allocation formula and targeting requirements. A HUD study
released in February 2005, outlined four alternatives to the existing formula. The
study, CDBG Formula Targeting to Community Development Need, notes that the
variables used to allocate CDBG funds to local governments have not changed since
1978, and that although the formulas continue to allocate assistance based on need, the
ability of the formulas to do so “has declined substantially over the last 26 years.” A
change in the program’s formula may have regional implications.
De-Linking Brownfields and Section 108 Assistance. In addition,
Congress may consider two other issues: de-linking the Brownfield Economic
Development Initiative (BEDI) from the CDBG Section 108 loan guarantee program,
and reducing the number and amount of funds allocated to CDBG-related earmark and
set-aside programs. Currently, a community seeking to access BEDI funds may do so
only if it makes use of the Section 108 loan guarantees. This is particularly
cumbersome for smaller, nonentitlement communities, which must gain the support of
the state in order to access either BEDI or Section 108 funding. De-linking the BEDI
program from Section 108 loan guarantees would create a free-standing program that
would reduce the expense associated with underwriting Section 108 bonds and notes.
At least one bill has been introduced in the House, H.R. 280, that would de-link the
two programs.
CDBG-Related Earmarks and Set-Asides. As a cost-saving measure,
Congress may act to reduce the number of CDBG-related earmarks and set-aside
programs as a means of preserving funding for the formula component of the CDBG
program. Critics of CDBG-related set-asides and earmarks believe that these programs
siphon funds from the formula portion of the CDBG program. For FY2005, Congress
appropriated approximately $600 million for CDBG-related earmarks and set-asides,
with approximately 55% ($330 million) of that awarded on a noncompetitive basis to
congressionally directed projects. Eliminating or reducing funding for CDBG-related
set asides and earmarks could, but does not necessarily, translate into additional funds
for the CDBG formula program.
Assisted Housing
Housing Choice Vouchers. The Section 8 voucher program, also called the
Housing Choice Voucher program, provides rental subsidies to low-income families
that they can use to reduce their rent in the private market. It has come under criticism
in recent years for cost increases without corresponding increases in the number of
families served. In FY2005, Congress funded the program at $14.7 billion, a 4%
increase over FY2004 and a 17% increase over FY2003. Over this same period,
Congress did not fund any new vouchers. In FY2006, the President has requested
$15.8 billion for the voucher program, an increase of over 7%, none of which would
be available to serve additional families. The program accounted for more than 46%
of the total HUD budget in FY2005 and is slated to account for more than half of the
HUD budget in FY2006 (in part because of reductions to other programs). In addition
to its cost, the program has been criticized for its administrative complexity and for not
promoting self-sufficiency.
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In response to these critiques, two major initiatives have emerged over the past
several years. The first involves changes to the way the program is funded. Beginning
with changes in the FY2003 appropriations act and continued in the FY2004 and
FY2005 laws, Congress has begun to convert the voucher program from a unit-based,
actual cost program to a budget-based, fixed cost program. Prior to FY2003, PHAs
were issued a number of vouchers that they were authorized to distribute, and they
were reimbursed by HUD for the actual cost of those vouchers. In FY2005, PHAs are
restricted in the number of their authorized vouchers they can use, and they are
reimbursed for their costs only up to a fixed cost level, defined in appropriations law.
This new “budget-based” environment has left some PHAs with less funding than they
require to continue serving the same number of families at the same level that they had
in the past. Many PHAs have made program adjustments to reduce costs, but they are
constrained by federal laws and regulations governing the size of benefit they must
provide and the income levels of the families they must serve. The President’s FY2006
budget request for the voucher program would continue and expand the practice of
budget-based funding for PHAs.
The second major initiative is a HUD-led drive to eliminate the existing Section
8 voucher program and replace it with a new and restructured housing subsidy
program. In FY2004, the Administration’s proposal was titled Housing Assistance for
Needy Families (HANF) and would have provided block grants to states to undertake
a more broadly defined form of tenant-based rental assistance, as well as
homeownership and other activities defined by the Secretary. Eligibility rules would
have been looser than current voucher rules, as would subsidy determination rules. The
initiative was resisted by low-income housing advocates who argued that it would fail
to serve the neediest families. It was also opposed by PHA groups which argued that
local PHAs were better suited to administer a voucher program than states because of
their history and proximity to communities. Critics of the proposal argued that the
block grant structure of HANF would lead to future funding cuts. HANF legislation
was introduced in the House and the Senate, but no further action was taken.
In FY2005, the President included a Flexible Voucher Program (FVP) proposal
in his budget request. Also designed to replace the existing voucher program, FVP
would have continued to use PHAs as administering bodies, but would have adopted
looser eligibility and subsidy determination rules than both the existing program and
the previously proposed HANF. FVP came under criticism by low-income housing
advocates and PHA groups for many of the same reasons HANF was criticized.
However, PHA advocacy groups noted that they did desire additional program
flexibility, including some of the flexibility that FVP would have provided, particularly
if budget-based funding is to continue in the future. No legislation was introduced to
enact FVP; HUD stated in testimony that it did not intend to introduce FVP as
authorizing legislation, but instead expected the Appropriations Committees to include
authorizing language for FVP in the FY2005 appropriations bill. FVP was not enacted
in the 108th Congress.
On April 13, 2005, Senator Allard introduced S. 771, and on April 28
Representative Gary Miller introduced H.R. 1999, the State and Local Housing
Flexibility Act of 2005. Title I of S. 771 is titled the Flexible Voucher Act, and its
provisions are similar to those in the Administration’s FVP proposal from the 108th
Congress. It would expand eligibility for the program to higher-income families and
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would give PHAs the option to set time limits or increase tenant contributions toward
rent. The bills include two additional titles, one that would modify the eligibility and
rent rules for public housing and another that would extend and expand the Moving to
Work Demonstration program. S. 771 has been referred to the Senate Banking
Committee, and H.R. 1999 has been referred to the House Financial Services
Committee. For more information, see CRS Report RL31930, Section 8 Housing
Choice Voucher Program: Funding and Related Issues.
Public Housing. Public housing is a program of publicly owned and federally
subsidized housing units managed at the local level by quasi-governmental PHAs and
available to low-income families, including seniors and the disabled. Congress
provides funding for both the ongoing operating needs as well as the long-term capital
modernization needs of public housing. The major issues in public housing surround
both of those subsidies.
Operating Subsidies. In 2000, Congress directed HUD to contract with the
Harvard University Graduate School of Design to conduct a study on “the costs
incurred in operating well-run public housing.” The purpose of the study was to
develop a new system for distributing operating subsidies to PHAs. The findings were
reported in 2003; the major conclusions were that operating costs should be
benchmarked to the operating costs of private housing providers and that public
housing should be converted from agency-based funding and management to property-
based funding and management. Congress directed HUD to undertake negotiated
rulemaking with stakeholders to develop a new formula for distributing operating funds
based on the contractor’s recommendations. HUD released the proposed rule on April
14, 2005 (70 FR 19857-19875). It has been controversial, as it differs in significant
ways from the final rule that was agreed upon in the negotiated rulemaking sessions.
HUD has stated that it modified the rule “to better reflect Administration policies and
budgetary priorities.”2 It will present major changes in the way PHAs manage their
buildings and receive funding, with the potential that some PHAs will receive increases
in funding and others will receive decreases.
Capital Subsidies. It is estimated that there is a backlog of unmet capital
modernization needs in public housing, totaling between $18 billion and $20 billion.
Additionally, it is estimated that new capital needs accrue at a rate of $2-$3 billion per
year. Public housing advocacy groups argue that the Administration’s funding requests
($2.3 billion in FY2006) and the amount provided by Congress ($2.6 billion in
FY2005) are not sufficient to either keep up with new needs or address the backlog.
One emerging trend in public housing is the leveraging of private resources by PHAs
to fund modernization needs. According to HUD’s budget justification:
To date, HUD has approved 34 transactions in which, a total of 93 PHAs are
participating (some of these transactions include pools of multiple PHAs). The
total amount of loan and bond financing approved to date is approximately $1.7
billion. HUD currently has 15 requests pending to borrow another $765 million for
2 See Regulatory Impact Analysis of “Revisions to the Public Housing Operating Fund
Program” (FR-4874-P-01), Department of Housing and Urban Development, available at
[http://www.hud.gov/offices/pih/publications/4874_op_fund_prop_ea.pdf].
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25 PHAs. HUD has been contacted by representatives for over 150 PHAs
expressing interest in pursuing transactions in excess of $357 million.
HOPE VI. The HOPE VI program provides competitive grants to PHAs for the
demolition and/or revitalization of distressed public housing. HOPE VI has been
popular with many Members of Congress, but has come under criticism from the
Administration for slow expenditure of funds by grantees and from advocates for
public housing residents for displacing more residents than are housed in new
developments. Reflecting these criticisms, HUD has proposed no new funding for
HOPE VI in its FY2004, FY2005, and FY2006 budget submissions. Congress
continued funding the program in FY2004 ($149 million) and FY2005 ($143 million),
although at a lower level than in previous years ($570 million in FY2003).
The President’s most recent budget submission proposes to rescind the funding
Congress provided to HOPE VI in FY2005. HUD has not yet awarded the FY2005
funds, although the Notice of Funding Availability (NOFA) announcing the availability
of these funds was issued on March 21, 2005. The NOFA states that Congress may
rescind any HOPE VI funds awarded through the NOFA. For more information on this
program, see CRS Report RL32236, HOPE VI Public Housing Revitalization
Program: Background, Funding, and Issues.
Section 811 Housing for the Disabled Program. The Section 811
Housing for the Disabled program provides both capital grants and rental assistance
subsidies for developers to use to build low-cost, accessible housing for persons with
disabilities. The President’s FY2006 budget request for Section 811 represents a 50%
cut in funding from FY2005. Further, the funding provided would not be available for
capital grants, rather, the full amount would be used to provide vouchers to persons
with disabilities. HUD budget documents do not provide a rationale for the funding
reduction or the restriction against use for capital grants. In testimony on March 17,
2005, before the House Appropriations Subcommittee on Transportation, Treasury,
HUD, the Judiciary, and the District of Columbia, the Secretary of HUD referred to the
need to make unpopular cuts in programs such as Section 811 in order to maintain
adequate funding for Section 8 and programs for the homeless.
Homeownership
The national homeownership rate stood at 69.1% at the end of the first quarter of
2005, just below the record of 69.2% reached in 2004. 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.) For a variety of reasons,
many lower-income households have poor credit records, which makes obtaining a
mortgage more difficult, more expensive, or impossible.
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Table 2. Homeownership Rates, by Household Category
Household type
1st Quarter 2005
White, non-Hispanic
76.0%
Black
48.8%
Hispanic 49.7%
Households with family incomes greater
84.5%
than or equal to the median family income
Households with family incomes less than
53.0%
the median family income
Source: Table prepared by the Congressional Research Service (CRS) based
on data from the U.S. Census Bureau.
The Administration has made increasing homeownership for lower-income
groups the centerpiece of its housing policy. It believes 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. They make the case that increased
homeownership can help economically distressed neighborhoods to stabilize and
revitalize themselves.
HUD Homeownership Initiatives. The Administration is proposing two
homeownership initiatives in the FHA program for FY2006. One initiative would
permit 100% FHA financing for first-time buyers with strong credit records. Under
the other initiative, HUD would amend its underwriting guidelines in order to permit
borrowers with blemished credit records to obtain FHA-insured loans. The FHA
insurance premiums for these borrowers would be increased to cover the higher risks
and costs involved in these initiatives. The President’s budget assumed that these
initiatives would create $268 million in additional negative appropriations in
FY2006. The House Appropriations Committee, however, did not accept the
Administration’s assumptions. The Committee’s re-estimate assumes zero savings
from the proposed initiatives.
In the 108th Congress, H.R. 3755 would have authorized the creation of a zero-
downpayment product for FHA. The proposal was favorably supported after mark-
up and a hearing by the House Financial Services Committee. A subsequent report
by the Congressional Budget Office (CBO), however, showed a net cost of the
program of $125 million per year. HUD’s original estimates indicated that the costs
would be borne through the higher premiums, but CBO disputes this finding. The
legislation did not move forward because of debate over the budget impact.
Legislation may be reintroduced in the 109th Congress, but, as noted above, the
budget impact will still be an issue.
Homeownership Tax Credit. The Administration’s FY2006 budget request
to Congress included a proposal to create a single-family housing tax credit
(SFHTC). The SFHTC, which has been proposed in previous years, would be made
available to developers of new or rehabilitated affordable single-family housing in
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distressed neighborhoods, for the production of homes for low- and moderate-income
homebuyers. Structured similarly to the Low-Income Housing Tax Credit (LIHTC),
which subsidizes the construction of affordable rental housing, the SFHTC would
authorize state or local housing agencies to award credits to new or rehabilitated
housing projects that develop single-family housing in census tracts with median
incomes of 80% or less of the greater of area or state-wide median income, or in
areas defined as chronically distressed. The Administration intends for the tax credit
to create or increase homeownership opportunities in distressed neighborhoods, and
to revitalize these neighborhoods by increasing the rate of homeownership. As
proposed, the tax credit would be available beginning in FY2006 and would lose $2.7
billion in tax revenue through FY2010. Bipartisan bills H.R. 1549 and S. 859 have
been introduced.
Homeownership Policy Issues. While most housing advocates find it
difficult to oppose additional homeownership opportunities for lower-income
families, there is increasing concern being expressed that the Administration’s focus
on homeownership is unbalanced. Critics say that HUD’s policy should have more
emphasis on maintaining or increasing the choice of housing available, including
rental housing. 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 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.”3 Harm can be
done to both lower-income buyers and the neighborhoods where the homes are
purchased if there are high default rates. HUD’s FHA mortgage insurance program
continues to operate with very high delinquency rates — more than 12% of borrowers
are at least 30 days past due. Before 2000, this rate was never above 9%.
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. Almost all financial advisers recommend that households have
at least three months and preferably six months of liquid assets available to cover the
financial setbacks that all households face. Lower-income households are most
vulnerable to financial setbacks. Yet lower-income and minority homebuyers are
sometimes 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
savings, who may have poor health and be without health insurance, or 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.
3 Joseph Harkness and Sandra J. Newman, “Homeownership for the Poor in Distressed
Neighborhoods: Does This Make Sense?” Housing Policy Debate, vol. 13, no. 3 (2002),
597-630 (597).
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Homelessness
Several of the major federal assistance programs for the homeless are housed
within HUD. Called the Homeless Assistance Grants, they were authorized by the
McKinney-Vento Homeless Assistance Act, which was signed into law in 1987, but
has remained unauthorized since 1994. While legislation to reauthorize the
McKinney Act is not anticipated in the 109th Congress, the President’s FY2006
budget request — as in his FY2004 and FY2005 budget requests — proposes to
consolidate the three competitive components of the Homeless Assistance Grants
account (Shelter Plus Care, Supportive Housing, and Section 8 Moderate
Rehabilitation Single Room Occupancy) into one program. Consolidation legislation
was not introduced in FY2004 or FY2005, although the FY2006 budget states that
legislation will be introduced shortly.
The President’s FY2006 budget includes two additional initiatives. The
Samaritan Initiative would be a $200 million set-aside within the proposed
consolidated Homeless Assistance Grants program. It would fund services-enriched
supportive housing for chronically homeless individuals. The President has set a goal
of ending chronic homelessness in 10 years, and this proposal is designed to aid in
reaching that goal. Authorizing legislation for the Samaritan Initiative was
introduced in the 108th Congress, but was not enacted, and no funds were provided
for the initiative in FY2005. A proposed $25 million for a Prisoner Re-entry
Initiative would be transferred from HUD to the Department of Justice for use in
helping individuals exiting prison successfully transition to community life and
employment. The same proposal was included in the President’s FY2005 budget
request but was not enacted. For more information, see CRS Report RL30442,
Homelessness: Recent Statistics, Targeted Federal Programs, and Recent
Legislation.
Fannie Mae and Freddie Mac
Currently, HUD has staff handling the mission regulation of the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac), while the Office of Federal Housing Enterprise Oversight
(OFHEO) is the office within HUD that is responsible for regulating Fannie Mae and
Freddie Mac regarding the safety and soundness of their operations. The Federal
Housing Finance Board (FHFB) regulates the safety and soundness of the Federal
Home Loan Banks. Fannie Mae, Freddie Mac, the FHLB are referred to as the
housing government-sponsored enterprises (GSEs).
Stronger regulation of the housing GSEs has been an issue for many years. The
issue has gotten a push from the emergence of an accounting scandal at Freddie Mac
in June 2003, and from allegations in 2004 of accounting and management problems
at Fannie Mae.
Two GSE reform bills have been introduced in the 109th Congress — S. 190 and
H.R. 1462. The bills are similar and would replace OFHEO and FHFB with a new
regulatory agency. The new agency would be responsible for the safety, soundness,
and mission regulation of Fannie Mae, Freddie Mac, and the Federal Home Loan
Banks (FHLBs). Both would enable the regulator to require Fannie Mae and Freddie
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Mac to adhere to their statutory secondary market role, and would oversee the
affordable housing goals for Fannie Mae and Freddie Mac, as well as their new
program applications. The agency would be funded by the GSEs and would not be
subject to congressional appropriations. In case of financial distress, the bills would
authorize the new regulator to appoint a receiver for either Fannie Mae or Freddie
Mac. For more information, see CRS Report RL32795, Government-Sponsored
Enterprises: Regulatory Reform Legislation.
Predatory Lending
Since the early 1990s, lenders have developed better methods of estimating the
risks of certain mortgage loans, with the result that lenders are now making home
loans to persons who ordinarily would not qualify for loans, given their income,
savings, and credit profiles. The loans are often referred to as subprime loans. There
are many subprime loans that are the result of lenders making legitimate pricing
decisions based on the higher risks of loans because of some characteristics of the
borrowers. The problems occur when lenders deliberately market the loans to
populations such as low-income elderly and minority homeowners who may have
little understanding of complex financial products and who may have the tendency
to put too much trust in the assumption that the lender is trying to help them. These
lenders are often predators who take advantage of the ignorance of borrowers and
commit them to loans that are not in the borrowers’ financial interests.
The Home Owner Equity Protection Act (HOEPA)4 provides federal
prohibitions on certain predatory lending practices, and twenty-five states and several
municipalities have enacted similar statutes that sometimes offer much broader
protections than those afforded under HOEPA. (See CRS Report RL32784
Predatory Lending: A Comparison of State Laws to the Federal Home Ownership
and Equity Protection Act.) The state and local statutes have led to the call for a
uniform federal statute. Basically, the public policy issue is how to limit predatory
lending without at the same time restricting the ability of lenders to make loans that
are legitimately priced according to the risk of the borrowers.
Predatory lending issues are addressed in H.R. 200, H.R. 1992, and H.R. 1643,
which include provisions related to counseling and education and financial literacy
programs to prevent predatory lending, amendments to the Truth in Lending Act to
add restrictions on high-cost mortgages and prohibit certain practices, and
amendments to additional banking laws to combat predatory lending practices that
affect low- and moderate-income individuals.
Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 to
effect certain changes in the settlement process for residential real estate. These
changes were expected to result in (1) more advance disclosure of settlement costs
to home buyers and sellers, (2) the elimination of kickbacks or referral fees that
tended to cause unnecessary increases in the costs of certain settlement services, (3)
4 Subtitle B of Title I of the Riegle Community Development and Regulatory Improvement
Act, P.L. 103-325; 15 U.S.C. § 1601 et seq.
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a reduction in the amounts that buyers are required to place in escrow accounts for
the payment of property taxes and hazard insurance, and (4) reform and
modernization of local record keeping of land title information. The HUD regulation
administering RESPA was issued on June 4, 1976. The regulation is referred to as
Regulation X and is found in the Code of Federal Regulations at 24 C.F.R. Part 3500.
The only major revision to Regulation X occurred on November 2, 1992.
RESPA requires lenders to provide consumers with estimates of settlement
costs, but no federal or state law requires the lenders to deliver settlement costs in the
amounts stated in the estimates. As a result, consumers often get hit with unexpected
fees at closing, and these unexpected fees can sometimes be hundreds and even
thousands of dollars more than expected. In addition, consumers generally find the
real estate settlement process confusing, and lenders find it cumbersome.
To date, reform of RESPA has not been a priority of Congress, but in recent
years HUD has sought to reform the rules under the existing law. Several changes
in Regulation X have been proposed since 1995, but none of them have resulted in
a final rule. The most recent proposal was made on July 29, 2002, in a proposed rule
entitled “Simplifying and Improving the Process of Obtaining Mortgages to Reduce
Settlement Costs to Consumers” (67 FR 49134). The proposal was withdrawn in
March 2004 for further review and analysis. At the Mortgage Bankers Association
annual policy conference in Washington, D.C. on April 19, 2005, HUD Secretary
Alphonso Jackson pledged to work with Congress, consumer groups, and the housing
industry to reach a consensus on RESPA reform.5 The Secretary expects to submit
a proposal for public comment in late fall or early winter.
Rural Housing
In prior years, the Administration has proposed zero funding for the Rural
Housing and Economic Development program (RHED) in HUD, but Congress has
responded by funding the program at about $25 million. For FY2006, the
Administration is proposing to consolidate RHED into a new program within the
Department of Commerce. (See discussion of Community Development Block Grant
Program above.)
The FY2006 budget proposes several cuts in the rural housing programs of the
Department of Agriculture (USDA). The most drastic cut would be in the Section
515 Rural Rental Housing program, which would have a 73% reduction from the
FY2005 appropriation level. The budget expresses a preference for loan guarantees
over direct lending programs, so the budget would double funding for the Section
538 Rental Housing Guarantee program. Similarly, the Section 502 Single Family
Direct program would be reduced, while the Section 502 Single Family Guarantee
program would be increased. The budget includes $214 million for a new voucher
program to protect tenants from rent increases caused by the prepayment of rental
housing loans, and to support the revitalizing of the portfolio of rural housing loans.
An issue for rural housing advocates is how to prevent or reduce the prepayment of
such loans, or at least ensure that the housing continues to be available as affordable
housing for rural residents.
5 “Jackson Says He’s Listening on RESPA,” Housing Affairs Letter, April 22, 2005.
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CRS Products on Housing
In General
CRS Report RL32869, The Department of Housing and Urban Development
(HUD): FY2006 Budget
CRS Report RL32443, The Department of Housing and Urban Development
(HUD): FY2005 Budget
CRS Report RL31918, U.S. Housing Prices: Is There a Bubble?
Section 8 Rental Assistance
CRS Report RL32284, An Overview of the Section 8 Housing Program
CRS Report RL31930, Section 8 Housing Choice Voucher Program: Funding
and Related Issues
Public Housing
CRS Report RS21241, Community Service Requirement for Residents of Public
Housing
CRS Report RL32236, HOPE VI Public Housing Revitalization Program:
Background, Funding and Issues
CRS Report RS21199, No-Fault Eviction of Public Housing Tenants for Illegal
Drug Use: A Legal Analysis of Department of Housing and Urban
Development v. Rucker
Special Populations
CRS Report RL30442, Homelessness: Recent Statistics, Targeted Federal
Programs, and Recent Legislation
CRS Report RL32104, Housing Assistance and Welfare: Background and Issues
CRS Report RS20704, Housing Opportunities for Persons with AIDS (HOPWA)
CRS Report RL31753, Immigration: Noncitizen Eligibility for Needs-Based
Housing Programs
Community Development
CRS Report RL32834, An Overview of the Administration’s Strengthening
America’s Communities Initiative
Housing Finance
CRS Report RS20530, FHA Loan Insurance Program: An Overview
CRS Report RL32784, Predatory Lending: A Comparison of State Laws to the
Federal Home Ownership and Equity Protection Act
CRS Report RS20533, VA Home Loan Guaranty Program: An Overview
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Housing Government-Sponsored Enterprises (GSEs)
CRS Report RS21567, Accounting and Management Problems at Freddie Mac
CRS Report RS21949, Accounting Problems at Fannie Mae
CRS Report RL32815, Federal Home Loan Bank System: Policy Issues
CRS Report RL32795, Government-Sponsored Enterprises: Regulatory Reform
Legislation
CRS Report RL21724, GSE Regulatory Reform: Frequently Asked Questions
CRS Report RL32230, Regulation of Fannie Mae and Freddie Mac under the
Federal Housing Enterprises Financial Safety and Soundness Act: A Legal
Analysis
CRS Report RS21896, The Department of the Treasury’s Authority to Regulate
GSE Debt: A Legal Analysis
Housing Discrimination
CRS Report 95-710, The Fair Housing Act: A Legal Overview
CRS Report RS20418, Funding for Major Civil Rights Enforcement Agencies