Order Code RL33879
Housing Issues in the 110th Congress
Updated July 18, 2008
Libby Perl, Maggie McCarty, and Bruce E. Foote
Domestic Social Policy Division
Eugene Boyd, Darryl E. Getter, Oscar R. Gonzales,
Mark Patrick Keightley, Francis X. McCarthy,
Edward Vincent Murphy, and N. Eric Weiss
Government and Finance Division
David H. Carpenter
American Law Division
Meredith Peterson
Knowledge Services Group
Housing Issues in the 110th Congress
Summary
A number of housing-related issues have been prominent in the 110th Congress.
Possibly the most visible issue is the prevalence of subprime loans and growing
mortgage default and foreclosure rates. Congress has responded with numerous
legislative proposals to assist borrowers. Among the bills that have been considered
is H.R. 3221, the Foreclosure Prevention Act of 2008 (as passed by the Senate on
April 10, 2008) and the American Housing Rescue and Foreclosure Prevention Act
(as passed by the House on May 8, 2008). After the House passed H.R. 3221, the
Senate again amended the bill, entitled the Housing and Economic Recovery Act, and
passed it on July 11, 2008.
Concern over subprime loans and mortgage foreclosures has also entered the
debate over reform of the government-sponsored enterprises (GSEs) — Fannie Mae
and Freddie Mac — and Federal Home Loan Banks (FHLBs), although efforts to
reform the GSEs and FHLBs began prior to the prominence of the debate over
subprime loans. On May 22, 2007, the House passed H.R. 1427, which would create
a new regulator for the GSEs and would use profits from the GSEs to create an
affordable housing fund, the funds from which would be transferred to a National
Affordable Housing Trust Fund, if enacted. (The House passed a bill that would
create a National Affordable Housing Trust Fund, H.R. 2895, on October 10, 2007.)
On May 8, 2008, most provisions of H.R. 1427 were incorporated into the House
version of H.R. 3221.
Another issue being considered in the 110th Congress involves potential
revisions to the Federal Housing Administration (FHA) loan insurance program.
Both the House and Senate have passed FHA reform bills, H.R. 1852, the Expanding
Homeownership Act, and S. 2338, the FHA Modernization Act. Both bills would
make changes to FHA, including raising single-family mortgage limits and modifying
the insurance premium pricing structure. However, H.R. 1852 would authorize the
transfer of some FHA funds into an affordable housing fund; S. 2338 would not. On
May 8, 2008, H.R. 1852 was incorporated into the House version of H.R. 3221.
Additional legislation in the 110th Congress includes Section 8 voucher reform
legislation in both the House (H.R. 1851) and Senate (S. 2684); the House passed its
version on July 12, 2007. Legislation also includes a bill to reauthorize the HOPE
VI program (H.R. 3524), which has been approved by the House; and a bill to
reauthorize the McKinney-Vento Homeless Assistance Act (S. 1518), which has been
approved by the Senate Banking Committee. The House has considered legislation
that would preserve assisted housing, including the Mark-to-Market Extension and
Enhancement Act (H.R. 3965), which was approved by the House Financial Services
Committee, and the Section 515 Rural Housing Property Transfer Improvement Act
(H.R. 3873), which was approved by the House. Both the House and the Senate have
passed versions of bills to reauthorize the Native American Housing Assistance and
Self-Determination Block Grant (H.R. 2768 and S. 2062). And a version of a bill
that would make changes to the Section 202 Housing for the Elderly program (H.R.
2930) has been passed by the House. A similar bill has been introduced in the Senate
(S. 2736).
Key Policy Staff
Telephone and
Area of Expertise
Name
E-Mail
Assisted rental housing, including Section
Maggie
7-2163
8, public and assisted housing, HOME
McCarty
mmccarty@crs.loc.gov
Community and economic development,
Eugene Boyd
7-8689
including Community Development Block
and Oscar R.
eboyd@crs.loc.gov
Grants, Brownfields, empowerment zones
Gonzales
7-0764
ogonzales@crs.loc.gov
Consumer law and mortgage lending,
David H.
7-9118
housing law, including fair housing,
Carpenter
dcarpenter@crs.loc.gov
consumer issues of bankruptcy
Emergency management policy, including
Francis X.
7-9533
post-disaster FEMA temporary housing
McCarthy
fmccarthy@crs.loc.gov
issues.
Fannie Mae, Freddie Mac, and SBA
N. Eric Weiss
7-6209
disaster loans
eweiss@crs.loc.gov
Homeownership, including FHA,
Bruce E. Foote
7-7805
predatory lending, rural housing, RESPA
bfoote@crs.loc.gov
Housing finance issues, including
Darryl E. Getter
7-2834
mortgage underwriting and FHA lending
dgetter@crs.loc.gov
criteria
Housing for special populations, including
Libby Perl
7-7806
the elderly, disabled, homeless, HOPWA
eperl@crs.loc.gov
Housing tax policy, including the Low-
Mark Patrick
Income Housing Tax Credit, mortgage
Keightley
revenue bonds, and other incentives for
7-1049
rental housing and owner-occupied
mkeightley@crs.loc.gov
housing
Non-traditional mortgages, including
Edward Vincent
lending oversight by the OCC, OTS,
Murphy
7-4972
FDIC, and Federal Reserve, and Federal
tmurphy@crs.loc.gov
Home Loan Banks
Contents
Status of Mortgage-Related Legislation in the 110th Congress . . . . . . . . . . . . . . . 1
Enacted Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legislation Passed by the House or Senate . . . . . . . . . . . . . . . . . . . . . . . . . . 1
H.R. 3221 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Legislation Approved by House or Senate Committees . . . . . . . . . . . . . . . . 4
The Current Housing Market: Subprime Lending and the Rise in
Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Subprime Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Exotic Mortgages, Resets, and Rising Foreclosures . . . . . . . . . . . . . . . 6
The Role of Securitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Price Declines, Unsold Inventories, and Falling
Construction Starts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Initiatives That Would Change the Lending and Homebuying Process . . . . . . . . 9
Regulating Participants in the Lending Process . . . . . . . . . . . . . . . . . . . . . . . 9
Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgage Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Appraiser Objectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Suitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Borrower Counseling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Truth in Lending Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Home Ownership and Equity Protection Act . . . . . . . . . . . . . . . . 13
Real Estate Settlement Procedures Act . . . . . . . . . . . . . . . . . . . . . . . . 14
Home Mortgage Disclosure Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Predatory Lending and Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Efforts to Assist Troubled Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Borrower Counseling and Workouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Refinancing Loans by Expanding the Authority of GSEs and FHA . . . . . . 18
Assisting Communities with Foreclosed Properties . . . . . . . . . . . . . . . . . . 20
Grants and Loans to Assist States and Communities . . . . . . . . . . . . . . 20
Expanding the Use of Mortgage Revenue Bonds . . . . . . . . . . . . . . . . 20
Issues in Bankruptcy
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Taxing Debt Forgiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Reforming Federally Sponsored Financing Institutions . . . . . . . . . . . . . . . . . . . . 22
GSE Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Fannie Mae, Freddie Mac, and Federal Home Loan
Bank Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Affordable Housing Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FHA Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The Expanding American Homeownership Act (H.R. 1852) . . . . . . . 26
The FHA Modernization Act (S. 2338) . . . . . . . . . . . . . . . . . . . . . . . . 28
Housing After the 2005 Hurricanes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Rebuilding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
FEMA Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Road Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Mississippi Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Rebuilding Public Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Ongoing Housing Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Manufactured Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Rental Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Legislative Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
H.R. 1227 and S. 1668 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Disaster Housing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Housing Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
The HUD Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Position of HUD Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Federally Assisted Housing Funding and Reform . . . . . . . . . . . . . . . . . . . 35
Section 8 Voucher Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Public Housing Operating Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
HOPE VI Reauthorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Assisted Housing Preservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Previous Legislative Efforts to Preserve Affordable Housing . . . . . . . 40
The Mark-to-Market Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 202 Housing for the Elderly Program Preservation . . . . . . . . 41
Other Preservation Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Native American Housing Assistance and Self-Determination
Block Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Low Income Housing Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Homelessness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CRS Reports on Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Housing Issues in the 110th Congress
Status of Mortgage-Related Legislation
in the 110th Congress
The 110th Congress has seen a good deal of legislative activity surrounding the
growing number of mortgage defaults and foreclosures. The issues surrounding this
growth are discussed in subsequent sections of this report; however, this section
summarizes the status of bills related to the current turmoil in the mortgage market.
Legislation in this section has either been enacted, has been passed by the House or
the Senate, or been approved by full committee in either the House or the Senate.
The information regarding the bills discussed in this section is current as of the date
of this report and will be updated as legislative activities warrant.
Enacted Legislation
On December 20, 2007, the President signed the Mortgage Forgiveness Debt
Relief Act of 2007 (P.L. 110-142) that excludes from taxable income mortgage debt
that was forgiven or canceled by a lender prior to January 1, 2010. (For more
information about this issue, see the section of this report entitled “Taxing Debt
Forgiveness.”) Another legislative provision that has been enacted in the 110th
Congress was part of the FY2008 Consolidated Appropriations Act (P.L. 110-161),
in which $180 million was appropriated to the Neighborhood Reinvestment
Corporation for foreclosure mitigation activities. (For more information about this
issue, see the section of this report entitled “Borrower Counseling and Workouts.”)
A third bill, the Economic Stimulus Act of 2008 (P.L. 110-185), enacted February
13, 2008, temporarily increased conforming loan limits of the Government
Sponsored Enterprises (GSEs) and maximum mortgage limits for Federal Housing
Administration (FHA) insured loans, giving homeowners in high-cost areas the
ability to refinance loans under more favorable terms. (For more information about
these provisions, see the section of this report entitled “Refinancing Loans by
Expanding the Authority of GSEs and FHA.”)
Legislation Passed by the House or Senate
On November 15, 2007, the House passed H.R. 3915, the Mortgage Reform and
Anti-Predatory Lending Act of 2007. The bill would create a licensing system for
residential mortgage originators, establish minimum standards for mortgage loans,
redefine high-cost mortgages, and enhance mortgage disclosure requirements under
the Real Estate Settlement Procedures Act (RESPA). (For more information about
these issues, see the section of this report entitled “Initiatives That Would Change the
Lending and Homebuying Process.”)
CRS-2
On May 8, 2008, the House passed H.R. 5818, the Neighborhood Stabilization
Act of 2008. The bill would provide $15 billion in loans and grants to allow states
and local governments to purchase and resell or rent foreclosed properties. Funds
would be distributed by taking account of the number of foreclosures in a state and
the number of subprime loans more than 90 days delinquent, adjusted by median
home price. (For more information on this issue, see the section of this report
entitled “Assisting Communities with Foreclosed Properties.”)
H.R. 3221. An omnibus housing package, H.R. 3221, has gone through several
iterations in both the House and the Senate. Initially, the bill was introduced as an
energy package, which was passed by the House on August 4, 2007. The bill then
went to the Senate, where an amendment in the nature of a substitute transformed it
into the Foreclosure Prevention Act of 2008. The Senate approved this new version
of H.R. 3221 on April 10, 2008. When the bill returned to the House, it was again
amended and approved, this time as the American Housing Rescue and Foreclosure
Prevention Act, on May 8, 2008. In June 2008, the Senate Banking Committee again
amended the bill (S.Amdt. 4983) and retitled it, this time as the Housing and
Economic Recovery Act of 2008. The Senate approved this amended version of H.R.
3221 on July 11, 2008. The provisions in each of the housing-related versions of
H.R. 3221 are discussed below.
On April 10, 2008, the Senate passed a foreclosure prevention measure as an
amendment to H.R. 3221, a House-passed energy bill. The Senate’s version of the
bill was entitled the Foreclosure Prevention Act of 2008. The Senate amendment
would have provided $4 billion through the Community Development Block Grant
program to allow state and local governments to purchase and rehabilitate foreclosed
homes. (For more information on this proposal, see the section of this report entitled
“Assisting Communities with Foreclosed Properties.”) The measure also included
FHA reform provisions, foreclosure protection provisions for servicemembers, and
additional funding for housing counseling. In addition, the bill contained tax-related
provisions, one of which pertained to business net operating losses. (For more
information about net operating losses, see CRS Report RL34535, Net Operating
Losses: Proposed Extension of Carryback Period, by Mark Patrick Keightley.)
Another tax-related provision concerned purchasers of foreclosed homes. The bill
would have provided a $7,000 tax credit for foreclosed and newly constructed homes
purchased within 12 months of enactment. The tax credit would have been equally
divided among the two taxable years beginning with the year of purchase.
On May 8, 2008, the House passed its version of H.R. 3221, entitled the
American Housing Rescue and Foreclosure Prevention Act, as a series of three
amendments to the Senate-passed version. The amendments contained many
provisions already passed by the House or approved by committees. The first
amendment addressed expansion of the FHA loan insurance program (H.R. 5830),
GSE reform (H.R. 1427, discussed later in this report), FHA modernization (H.R.
1852, discussed later in this report), and loan modification protection for servicers
(H.R. 5579). The second amendment provided foreclosure protections for
servicemembers (H.R. 4883). It also included housing tax provisions, one of which
would make changes to the Low Income Housing Tax Credit program (H.R. 5720,
discussed later in this report). The second amendment would also allow for a
temporary first-time home-buyer tax credit equal to the lesser of $7,500 or 10% of
CRS-3
the purchase price of a principle residence before April 1, 2009. Married individuals
filing separately would be able to claim a maximum $3,750 credit. Under the
proposed legislation, the tax credit would be recaptured over a 15-year period,
starting in the second year after the taxable year the home was purchased. The
recapture provision essentially makes the tax credit a loan. The third amendment
clarified that the provisions of H.R. 3221, as well as provisions of the National Bank
Act and the Home Owner’s Loan Act, would not preempt state laws regulating the
foreclosure of residential real property or the treatment of foreclosed property.
After House passage of H.R. 3221, Members of the Senate Committee on
Banking, Housing, and Urban Affairs again amended the bill through a manager’s
amendment (S.Amdt. 4983). On July 11, 2008, the full Senate approved the
amended version of the bill, entitled the Housing and Economic Recovery Act of
2008. Some of the provisions that were made part of H.R. 3221 had been part of an
unnumbered bill approved by the Senate Banking Committee on May 20, 2008
(discussed in the next section of this report, “Legislation Approved by House or
Senate Committees”). These include provisions to reform the Government
Sponsored Enterprises (GSEs), to increase the GSE conforming loan limits, and to
create a Housing Trust Fund. The Senate’s amendment to H.R. 3221 would
eliminate many differences in GSE oversight reform that previously have been
proposed in the House and Senate. (For more information on proposed changes to
the GSEs, see CRS Report RL33940, Reforming the Regulation of Government-
Sponsored Enterprises in the 110th Congress, by Mark Jickling, Edward Vincent
Murphy, and N. Eric Weiss.) However, there are differences in proposed changes to
the GSE conforming loan limits in the Senate’s version of H.R. 3221 approved on
July 11, 2008 compared to those in the House-passed version of H.R. 3221. The
House bill would make permanent the increase in the conforming loan limit included
in the Economic Stimulus Act of 2008 (P.L. 110-185); the Senate would have a lower
permanent increase. In 2008, the House bill would set a conforming loan limit in
high cost areas of $729,750; the Senate bill would set a limit of $625,000 in 2008.
The House would allow the limit to decrease, but the Senate would not; instead, the
Senate version would “bank” any declines in the house price index to be applied
against future increases.
Differences also remain between the most recent Senate-passed version and the
House-passed version of H.R. 3221 with regard to an affordable housing fund. Both
proposals would use fees from the GSEs to create the fund, but the House and Senate
differ in how the fee would be calculated. The House would have first-year funds go
to areas damaged by Hurricanes Katrina and Rita. The Senate would have first-year
funds go to support the HOPE for Homeowners Program. HOPE for Homeowners
would be a program through which homeowners at risk of foreclosure could
refinance their current mortgages with FHA-insured loans. Similar to the provisions
in the House-passed version of H.R. 3221, FHA would be authorized to insure
refinanced mortgages up to a total principal balance of $300 billion. In the most
recent Senate-passed version, the support from the housing trust fund would be
phased down during the second and third years.
The July 11, 2008, Senate-passed version of H.R. 3221 also contains provisions
that were in the initial version of H.R. 3221 passed by the Senate on April 10, 2008.
Among these is an appropriation of $4 billion to assist communities with foreclosed
CRS-4
properties; the House-passed version of H.R. 3221 does not include a similar
provision. (For more information about proposals to assist communities with
foreclosed properties, see CRS Report RS22919, Community Development Block
Grants: Legislative Proposals to Assist Communities with Home Foreclosures, by
Eugene Boyd and Oscar R. Gonzales.) Additional provisions that were in the version
of H.R. 3221 initially passed by the Senate are FHA reform provisions, protections
for servicemembers, and funding for housing counseling. The version of H.R. 3221
passed by the Senate on July 11, 2008 also proposes a first-time home-buyer credit
equal to the lesser of $8,000 or 10% of the purchase price of principle residence
before April 1, 2009. The credit would be recaptured over a 15-year period, starting
in the second year after the taxable year the home was purchased.
Legislation Approved by House or Senate Committees
On April 3, 2008, the Senate Judiciary Committee approved S. 2136, the
Helping Families Save Their Homes in Bankruptcy Act of 2007, which would allow
judges to modify the terms of mortgages during bankruptcy proceedings. (For more
information on this provision, see the section of this report entitled “Issues in
Bankruptcy.”)
H.R. 4883, ordered reported on April 30, 2008, by the House Veterans’ Affairs
Committee, would amend the Servicemembers Civil Relief Act to provide for a
limitation on the sale, foreclosure, or seizure of property owned by a servicemember
during the one-year period following the servicemember’s period of military service.
A similar provision was included in both the House- and Senate-passed versions of
H.R. 3221.
The House Committee on Ways and Means reported H.R. 5720, the Housing
Assistance Tax Act of 2008 on April 24, 2008. Among other provisions, the bill
would provide a refundable tax credit of up to $7,500 for first-time home buyers and
would authorize use of mortgage revenue bond proceeds to refinance certain
subprime residential mortgage loans. On May 8, 2008, the bill was incorporated by
amendment into the House version of H.R. 3221, the American Housing Rescue and
Foreclosure Prevention Act (discussed earlier in this section). (For more information
about mortgage revenue bonds, see the section of this report entitled “Expanding the
Use of Mortgage Revenue Bonds.”)
On May 1, 2008, the House Financial Services Committee approved H.R. 5579,
the Emergency Mortgage Loan Modification Act of 2008, which would encourage
loan servicers to engage in loss mitigation efforts by shielding them from liability
from investors. On May 8, 2008, the bill was incorporated by amendment into the
House version of H.R. 3221, the American Housing Rescue and Foreclosure
Prevention Act (discussed earlier in this section).
On May 5, 2008, the House Financial Services Committee reported H.R. 5830,
the FHA Housing Stabilization and Homeownership Retention Act of 2008, which
would provide authority for an additional $300 billion in FHA loan guarantees. FHA
would use the expanded authority to insure refinanced mortgages for borrowers
facing foreclosure; in order to refinance these mortgages, the lender must agree to
write down the principal on the current mortgage and to structure a payment plan that
CRS-5
is affordable to the borrower. On May 8, 2008, the bill was incorporated by
amendment into the House version of H.R. 3221, the American Housing Rescue and
Foreclosure Prevention Act (discussed earlier in this section). (For more information
on this issue, see the section of this report entitled “Refinancing Loans by Expanding
the Authority of GSEs and FHA.”)
On May 20, 2008, the Senate Banking Committee approved a bill entitled the
Federal Housing Finance Regulatory Reform Act of 2008. As of the date of this
report, the bill does not have a number. The bill includes provisions to reform the
Government Sponsored Enterprises (GSEs). (For more information about GSE
Reform, see the section of this report entitled “Reforming Federally Sponsored
Financing Institutions.”) In addition, the bill would increase the GSE conforming
loan limit in high-cost areas up to 132% of the national limit, under which the current
limit of $417,000 would be $550,000. The GSEs would be able to purchase
mortgages within the higher limits, but would have to sell them to other investors
rather than including them in their own portfolios. The bill would also create a
Housing Trust Fund to help finance housing for low-income families. The trust fund
would be created with funds from Fannie Mae and Freddie Mac. In the first year
after the bill’s enactment, 100% of the Housing Trust Fund would support a new
program through FHA, called the HOPE for Homeowners program, which would
allow FHA to insure the refinanced mortgages of homeowners at risk of foreclosure.
Many of these provisions were included in the version of H.R. 3221 that was
amended by the Senate Banking Committee and considered by the Senate in June
2008. (See above for a description.)
The Current Housing Market:
Subprime Lending and the Rise in Foreclosures
The housing market experienced significant stress in 2007 and 2008. Borrowers
found it difficult to meet their mortgage obligations, and late payments and
foreclosures increased. The biggest increases in mortgage defaults have occurred
among subprime borrowers — those borrowers with significant indicators of
heightened risk of default, such as blemished credit history or high debt-to-income
ratio. Subprime borrowers may have relied upon the low interest rates and rapid
house price appreciation that occurred between 2001-2005 to continue but now face
significant risk of foreclosure as housing markets slow. Changes in mortgage
contracts and the method of funding mortgages, such as interest-only and adjustable
rate mortgages, could have contributed to housing market stress. Troubles in the
housing market are not relegated to subprime borrowers, however. Falling prices and
slowing home sales affect all home owners. Declining construction starts affect local
employment. These troubles in the current housing market, combined with changes
in mortgage contracts, have led some economists to forecast even higher default rates
in coming months.
Subprime Lending. Since the early 1990s, lenders have developed better
methods for estimating the risks posed by borrowers with blemished credit profiles,
with the result that lenders now offer home loans to consumers who earlier would
have been denied mortgage credit. These loans are often referred to as subprime
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loans. Typically, loans to subprime borrowers have higher interest rates and fees than
loans to prime borrowers because subprime borrowers have historically experienced
higher default rates. Delinquency and foreclosure rates for subprime loans rose
rapidly during the second half of 2006 and the first half of 2007. On April 11, 2007,
the Joint Economic Committee issued a special report on rising foreclosures. The
report predicted that subprime foreclosures would continue to rise, and recommended
immediate action to minimize any costs that foreclosures can impose on surrounding
communities.1 (For more information about subprime loans, see CRS Report
RL33930, Subprime Mortgages: Primer on Current Lending and Foreclosure
Issues, by Edward Vincent Murphy.)
Although the primary causes of foreclosure are traditionally personal financial
setbacks (job loss or medical calamity), the recent rise in subprime foreclosures may
be partly due to imprudent underwriting standards during the housing boom that
occurred between approximately 2001 and 2005. House prices rose rapidly in certain
markets, which may have encouraged some borrowers in hot markets to assume more
debt than was prudent. Rapidly rising prices encourage excess debt because, once
in the home, the borrower earns the house price appreciation, which can then be used
to refinance the house on more favorable terms. In order to take advantage of
anticipated appreciation, some subprime borrowers turned to mortgage products with
low introductory payments, but which risked higher future payments.
Exotic Mortgages, Resets, and Rising Foreclosures. Slowing housing
markets may frustrate the plans of borrowers who used nontraditional mortgages,
sometimes referred to as exotic mortgages, to finance their homes. One form of
alternative mortgage has an interest-only (I/O) introductory period for two, three,
five, or more years. The borrower pays no principal during the introductory period,
but then payments increase when the I/O period expires because the remainder of the
borrower’s payments must pay off the principal over a shorter period of time. For
example, a 2/28 mortgage has an I/O introductory payment for two years but then
resets to a higher payment for the remaining 28 years of the loan. Another form of
alternative mortgage, the adjustable rate mortgage (ARM), employs a variable
interest rate, which adjusts to changes in a market interest rate. One of the simplest
ARMs offers an initial low rate, called a teaser, at the beginning of the loan and then
resets after an introductory period. The teaser rate may apply for one year or for as
little as one month. (For more information about alternative mortgage terms, see
CRS Report RL33775, Alternative Mortgages: Causes and Policy Implications of
Troubled Mortgage Resets in the Subprime and Alt-A Markets, by Edward Vincent
Murphy.)
These I/O loans, ARMs, and hybrids of the two result in fluctuating monthly
house payments for borrowers. Because of the increased use of 2/28 hybrid ARMs
during 2005 and 2006, tens of billions of dollars of subprime loans will reset their
payments each month until fall of 2008. If borrowers with resetting mortgages had
1 U.S. Congress Joint Economic Committee, Sheltering Neighborhoods from the
Foreclosure Storm, April 11, 2007, available at [http://jec.senate.gov/index.cfm?FuseAction
=Files.View&FileStore_id=389d9fc3-d503-4168-9b11-2d73f3757ca8].
CRS-7
planned to depend on continued house price appreciation to sustain their homes, then
the recent housing slowdown could result in sharply rising foreclosure rates.
Foreclosure rates are rising, especially among subprime borrowers. Some of the
geographic distribution of mortgage defaults can be explained by the performance of
local economies. The rise in the national foreclosure rate, however, is difficult to
explain because the national unemployment rate remains relatively low. Late
payments, as measured by a Mortgage Bankers Association survey, are rising among
borrowers with ARMs, whether subprime or not. Subprime borrowers with fixed
rate mortgages, however, are not experiencing higher rates of late payment. This
heightened risk among ARMs is cause for concern because most of the subprime
2/28s that must reset between now and the fall of 2008 are hybrid ARMs. In addition
to the subprime ARMs that reset in 2008, there will be increasing jumbo mortgage2
resets in 2009. The increase in unsustainable loans during relatively strong national
economic conditions raises the question of how the loans were qualified by the
lenders in the first place. (For more information about foreclosures, see CRS Report
RL34232, Understanding Mortgage Foreclosure: Recent Events, the Process, and
Costs, by Darryl E. Getter.)
The Role of Securitization. Many loans, especially subprime and jumbo
loans, were financed outside of traditional banking channels in a process called
securitization. In securitization, a lender sells loans quickly, rather than keeping
them on the lender’s books. Many similar loans are then pooled together in trusts,
or special purpose vehicles (SPVs). Pieces of the funds flowing through the trusts,
called tranches, are sold to investors. Although securitization may have helped
increase the supply of funds available for mortgages and thus held down interest rates
for borrowers, it may also have facilitated the rise of non-bank lenders operating
without federal supervision of their underwriting standards. The disproportionate
rise in defaults among loans originated and securitized outside federal supervision
has caused some to call for greater scrutiny of the process. (For more information
about securitization, see CRS Report RS22722, Securitization and Federal
Regulation of Mortgages for Safety and Soundness, by Edward Vincent Murphy.)
One concern is that securitization may have separated the up-front returns of
mortgage originators from the long-term risk of securities holders. If the
securitization process does not have adequate controls, mortgage originators could
have the incentive to encourage borrowers to take on too much debt because the
mortgage originator might not suffer losses if the borrower defaults in the future.
The securitization community argues that investors are sophisticated market analysts
who include contract clauses in securitization transactions to prevent mortgage
originators from passing on this risk.
One proposal to address concerns raised by securitization would make
secondary market investors liable for deceptive or predatory marketing by primary
lenders. Some believe that extension of liability to the secondary market, referred to
as assignee liability, would prevent secondary market investors from purposefully
2 Jumbo loans are too large to be eligible for purchase by Fannie Mae or Freddie Mac. This
cap, called the conforming loan limit, is currently $417,000.
CRS-8
remaining ignorant of the marketing strategies of primary lenders. In this view, if
secondary market investors were held liable, they would tighten underwriting
standards and more closely monitor the practices of their lending partners. Others
argue that extension of liability could create too much uncertainty for rating agencies
to evaluate risks and lead to a shutdown of the secondary market.
Price Declines, Unsold Inventories, and Falling Construction Starts.
After increasing at a rapid rate during 2001-2005, house prices slowed significantly
during 2006-2007, even though the national unemployment rate has not significantly
increased. One important sign of inconsistencies in a housing market is a price
decline in an area with a relatively strong local economy. Although not true in every
case, local job growth and income growth generally lead to increases in demand for
housing and result in higher prices because housing supply responds relatively
slowly. The current market is unusual because price declines were reported in cities
such as Washington, DC, Phoenix, Miami, and several California cities, despite
relatively strong local employment conditions. Areas with relatively poor local job
markets, such as Michigan and Ohio, are also experiencing house price declines.
The inventory of unsold homes is rising, as is the home owner vacancy rate.
One indicator of the strength of a local housing market is the length of time it takes
to sell a house. If houses are selling more slowly than the rate at which people are
offering them for sale, then the inventory of unsold homes grows. According to the
National Association of Realtors, at the beginning of 2005, the month’s supply of
homes on the market was 3.8;3 a month’s supply is calculated by taking the number
of homes currently offered for sale and dividing by the current number of sales per
month. It is meant to represent the amount of time that would be required to sell the
houses that are on the market. A balanced market has a month’s supply between 5.0
and 6.0 according to the National Association of Realtors. By October 2007, the
month’s supply had peaked at 10.5, and was at 9.9 in March 2008.4 The existence
of a glut of unsold homes is also evidenced by rising vacancy rates. Homeowner
vacancy rates measure the percentage of the homeowner inventory that is vacant and
for sale. According to the Census Bureau, homeowner vacancy rates in the first
quarter of 2008 were at 2.9%, the highest level they had reached since the survey
began in 1956.5
The slowing housing market is hurting builders and construction workers. As
the supply of unsold homes has increased, builders have begun canceling options to
acquire land for new construction and have offered reduced-price upgrades and other
discounts on existing homes. The result has been even further downward pressure
on prices and a slowdown in new construction. For example, the National
Association of Home Builders confidence index fell more than 50% from 2005 to
3 Robert Freedman, 2006 Economic Outlook, National Association of Realtors, January 1,
2006, available at [http://www.realtor.org/rmomag.nsf/pages/feature2jan06].
4 National Association of Realtors, Existing Home Sales, April 2008, available at
[http://www.realtor.org/research/research/ehsdata].
5 See U.S. Census Bureau, Housing Vacancies and Homeownership, Historical Tables,
available at [http://www.census.gov/hhes/www/housing/hvs/historic/histtab2.html].
CRS-9
2007. The index measures home builders’ expectations of home sales for the next
six months.
Initiatives That Would Change
the Lending and Homebuying Process
Some Members of Congress have responded to the troubles in the current
housing market by introducing legislation that would modify the lending and home
purchase process in an effort to prevent similar events from occurring in the future.
Some of these proposals would regulate the behavior of lenders, mortgage brokers,
and other participants in the lending process. Other legislation would either expand
the amount of information required to be disclosed to borrowers or increase the
availability of borrower counseling. Some legislation would attempt to prevent
fraudulent practices, sometimes referred to as predatory lending. Provisions that are
included in some of these bills are summarized in the following sections. However,
the discussion does not include an exhaustive list of legislation that has been
introduced.
Regulating Participants in the Lending Process
Lenders. The mortgage lending market does not have a unified regulatory
system. Banks that make mortgage loans are regulated by one of several federal
regulatory agencies such as the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, or the Federal Reserve System. Similarly, savings
and loans and credit unions have their own federal regulators, the Office of Thrift
Supervision and the National Credit Union Administration respectively. However,
there is no federal regulatory system for mortgage lenders that are not banks, savings
and loans, or credit unions. Instead, these institutions are licensed at the state level,
where they are subject to state regulation. Since the recent increase in subprime
loans and foreclosures, questions have been raised about the adequacy of state
regulation over non-bank mortgage lenders. Treasury Secretary Henry Paulson has
recommended that a Mortgage Origination Commission be created to evaluate state
licensing and regulatory systems.6 In addition, legislation has been introduced in the
110th Congress that would create new requirements for lenders. Some of the
provisions that would regulate lenders include the following:
! requiring that loan originators be registered through the state and
that if a state registration system does not exist, requiring the
establishment of a national licensing system (H.R. 3915, H.R. 5857,
and S. 2595);
! establishing a certification system specifically for subprime
mortgage lenders (H.R. 2061);
6 U.S. Department of the Treasury, Blueprint for a Modernized Financial Regulatory
Structure, March 2008, p. 78, available at [http://www.treas.gov/press/releases/reports/
Blueprint.pdf].
CRS-10
! establishing a federal duty of care for mortgage originators (S. 2452
and H.R. 3915);
! requiring lenders to take into account a borrower’s ability to repay
(H.R. 3081, H.R. 3915, and S. 2114); and
! prohibiting brokers from “steering” borrowers to loans that are more
expensive than loans for which they qualify (H.R. 3081, H.R. 3813,
S. 1299, and S. 2452).
Mortgage Brokers. Mortgage brokers help match borrowers with mortgage
lenders. Some have argued that brokers have a conflict of interest because, although
they are agents of mortgage lenders, many borrowers rely on the advice of mortgage
brokers when choosing a mortgage. In many cases, borrowers think that brokers are
working for them and in their best interests. In order to reduce any conflict of
interest, some critics suggest additional regulation of mortgage brokers. Mortgage
brokers argue that, as members of the community in which they operate, they rely on
their reputations for business and therefore do not require additional regulation.
Nonetheless, legislation has been introduced containing provisions that would
regulate mortgage brokers. These include the following:
! requiring mortgage brokers to be licensed by either state or federal
law (H.R. 3915) or registered through a national registry (S. 2114);
! creating a fiduciary or agency relationship between brokers and
borrowers (H.R. 3018, H.R. 3296, S. 1299, and S. 2452);
! verifying a borrower’s ability to repay a loan (H.R. 3081, S. 1299,
and S. 2452); and
! prohibiting brokers from “steering” borrowers to loans that are more
expensive than loans for which they qualify (H.R. 3081, H.R. 3296,
S. 1299, and S. 2452).
Appraiser Objectivity. Another area where a potential conflict of interest
could occur is in the appraisal of property in order to determine a home’s value.
Appraisers are supposed to be objective. However, the desire for repeat business
from lenders may result in some appraisers feeling pressure to assess a house at a
high enough value to ensure that a borrower will qualify for the proposed loan.
Currently, the Appraisal Subcommittee of the Federal Financial Institutions
Examinations Council (FFIEC) helps set minimum standards for state licensing of
appraisers. Among the legislative proposals that would regulate appraisals are the
following:
! establishing federal standards for appraisers and appraisal
management firms (H.R. 3915);
! establishing as an unfair and deceptive trade practice the attempt to
influence an appraiser (H.R. 3915 and S. 2860) and imposing
CRS-11
penalties against parties that attempt to exercise influence over an
appraisal (H.R. 1723, H.R. 1852, H.R. 2061, H.R. 3915, and S.
2860);
! imposing a duty of care on appraisers (S. 2452);
! enacting new appraisal standards that apply to subprime loans,
including the requirement that a qualified appraiser conduct a
physical inspection of the premises, that a second appraisal must
take place under certain circumstances, and that borrowers receive
a free copy of the appraisal (H.R. 5857); and
! amending the Truth in Lending Act and Financial Institutions
Reform, Recovery, and Enforcement Act to ensure proper appraisal
practices (H.R. 3837).
Suitability. The term “suitability” in the mortgage lending context refers to
whether the terms of a loan are suitable for a particular borrower on the basis of
income, monthly mortgage payments, and other financial characteristics. A loan
might be considered unsuitable if a borrower is unable to support the monthly
mortgage payments on his or her income. Mortgage originators, including brokers
and lenders, could be made liable for defaults if underwriting standards are unsuitable
for the borrower’s circumstances. One advantage of this approach is that originators
have direct contact with borrowers and generally have the potential to obtain a great
deal of information about each borrower’s circumstances (as compared to mortgage-
backed securities investors or financial regulators). Originator liability could ensure
that mortgage brokers and lenders retain a stake in the long-term performance of their
loans even if the loans are sold or securitized. A disadvantage of this approach is that
suitability is difficult to define, is subject to significant uncertainty and litigation risk,
and is determined only after events occur that trigger defaults. Legislation has been
introduced in the 110th Congress that would require lenders to ensure that borrowers
have adequate income and an ability to repay their mortgage loans (H.R. 3915 and
S. 2452).
Borrower Counseling. Through its Housing Counseling program, HUD
provides competitive grants to local housing counseling agencies, national
intermediaries, and state housing finance agencies to fund assistance to homebuyers,
homeowners, renters, and homeless persons. Examples of housing counseling
assistance include pre-purchase counseling for first-time homebuyers, foreclosure
prevention counseling for homeowners, and eviction prevention assistance for
renters. Legislation has been introduced in the 110th Congress that would increase
the availability of borrower counseling beyond what is provided in HUD’s existing
program in order to improve borrowers’ understanding of loan terms prior to entering
into mortgage loans, among other things. These provisions include the following:
! creating an Office of Housing Counseling within HUD to coordinate
counseling for home buyers and renters (H.R. 3221 as passed by the
House, H.R. 3915, and H.R. 5857);
CRS-12
! awarding grants to states to establish State Homeownership
Protection Centers (S. 1386); and
! requiring lenders to notify borrowers about homeownership
counseling services (S. 1386 and S. 2452), and requiring borrowers
to participate in counseling in certain circumstances (H.R. 3894).
Disclosure Requirements
The mortgage lending industry has multiple laws that regulate the information
that must be disclosed to consumers. These include the Truth in Lending Act
(TILA), the Home Ownership and Equity Protection Act (HOEPA), and the Real
Estate Settlement Procedures Act (RESPA). Another law, the Home Mortgage
Disclosure Act (HMDA) regulates the information that lenders are required to collect
from loan applicants; the information is then made available to the public. The
current increase in subprime and exotic mortgages has resulted in proposals to
increase disclosure requirements as a means of ensuring that borrowers understand
the terms of their loan transactions.
A Federal Trade Commission (FTC) study tested 819 mortgage consumers to
document their understanding of current mortgage cost disclosures and loan terms,
as well as their ability to avoid deceptive lending practices.7 The authors found that
borrowers (both prime and subprime) did not understand important mortgage costs
after viewing mortgage cost disclosures. Some borrowers had difficulty identifying
the annual percentage rate (APR) of the loan and loan amounts. Many borrowers did
not understand why the interest rate and APR of a loan would differ.8 In addition,
borrowers had the most trouble understanding loan terms for the more complicated
mortgage products such as those with optional credit insurance, interest-only
payments, balloon payments, and prepayment penalties. Borrowers were unable to
determine whether balloon payments, prepayment penalties or up-front loan charges
were part of the loan. Survey results also indicated that some consumers may still
need borrower counseling and education to understand terminology used in the
mortgage lending and settlement industry.
The Truth in Lending Act. The Truth-In-Lending Act (TILA) of 1968
requires lenders to disclose the cost of credit and repayment terms of mortgage loans
before borrowers enter into any transactions.9 Among the items that must be
disclosed pursuant to TILA are an itemization of the amount financed, the annual
percentage rate of the loan, the total finance charge, details of a variable interest rate,
7 See James M. Lacko and Janis K. Pappalardo, Improving Consumer Mortgage
Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms, Bureau
of Economics Staff Report, Federal Trade Commission, June 2007, [http://www.ftc.gov/os/
2007/06/P025505MortgageDisclosureReport.pdf].
8 The APR is the annual cost of a loan, which includes the interest cost of the principal loan
amount, insurance, and other fees expressed as a percentage. The mortgage interest rate
only includes the interest cost of the principal loan amount expressed as a percentage.
9 TILA is contained in Title I of the Consumer Credit Protection Act, P.L. 90-301, 81 Stat.
146, as amended by 15 U.S.C. § 1601 et seq. Regulations are at 12 C.F.R. § 226.
CRS-13
and a payment schedule. TILA also gives borrowers the right to rescind the loan
transaction within three days from the date of signing the mortgage documents. A
number of bills in the 110th Congress would make changes to TILA. These include
the following:
! ensuring that lenders disclose additional information about loan
terms to borrowers (S. 2296, S. 2636, S. 2734, and S. 2791), disclose
information about adjustable rate mortgages and interest rate resets
(H.R. 3705, H.R. 3915, H.R. 5857, S. 2636, S. 2734, S. 2791, and
H.R. 3221 as passed by the Senate) and negative amortization (H.R.
3894), disclose maximum possible payments if interest rates are
variable (H.R. 5857), and that mortgage brokers disclose to
borrowers the risk, benefits, and characteristics of loans (H.R. 3296);
! requiring disclosures regarding mortgage brokers and mortgage
broker fees (S. 2114), or limiting points, finance charges, and fees
(H.R. 3081);
! requiring creditors, assignees, or mortgage servicers to provide
periodic statements to borrowers disclosing the principal balance of
the loan, the interest rate, the date of interest rate reset, if any, and
prepayment or late payment penalties (H.R. 5857); and
! requiring, in certain circumstances, escrow accounts to be
established for borrowers in order to ensure sufficient funds for
property taxes and insurance (H.R. 3535, H.R. 3837, H.R. 3915, and
H.R. 5857).
The Home Ownership and Equity Protection Act. The 1994 Home
Ownership Equity Protection Act (HOEPA) was enacted as an amendment to TILA.10
Borrowers of HOEPA loans must be provided with certain disclosures three days
before the loan is closed, in addition to the three-day right of rescission generally
required by TILA. This gives consumers a total of six days to decide whether to
enter into the transaction. HOEPA applies to mortgages that are secured by a
borrower’s primary residence but exempts certain loans from its coverage, most
notably residential mortgage transactions, which are basically loans provided for the
purchase or initial construction of the homes securing the loans.11 HOEPA’s
protections apply where (1) the non-exempt loan’s “APR exceeds by more than 10
percentage points the yield on Treasury securities with comparable periods ... of
maturity ...” or (2) “the total points and fees payable by [a borrower] at or before
closing exceed the greater of 8 percent of the total [non-exempt] loan amount” or
10 HOEPA is implemented through Regulation Z, 12 C.F.R. Part 226, sections 31, 32, and
34.
11 These types of loans are often referred to as purchase money mortgages. Because of the
exemption of “residential mortgage transactions,” HOEPA’s coverage is basically limited
to certain second mortgages and refinances.
CRS-14
$561.12 (For more information about HOEPA, see CRS Report RL34259, A
Predatory Lending Primer: The Home Ownership and Equity Protection Act, by
David H. Carpenter.)
In light of the recent increase in subprime mortgage lending, proposals to add
to HOEPA’s protections have been advanced. Among the proposed provisions are
those
! including home purchase loans in the definition of “high cost
mortgages” covered by HOEPA (H.R. 3915 and S. 2452);
! reducing, in some cases, the fee thresholds that trigger HOEPA
protections (H.R. 3915 and S. 2452); and
! making lenders subject to state laws that provide greater protections
than HOEPA (H.R. 1996).
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.13 The law requires lenders to provide
to borrowers estimates of settlement costs, referred to as a good faith estimate (GFE);
a list of the actual closing costs must be provided to borrowers at the time of closing.
Examples of settlement costs included in the GFE are loan origination fees or points,
credit report fees, property appraisal fees, mortgage insurance fees, title insurance
fees, home and flood insurance fees, recording fees, attorney fees, and escrow
account deposits. Additionally, servicers are required to provide borrowers with
certain notices each time a federally related mortgage loan is sold, transferred, or
assigned to a new holder.
Consumers generally find the real estate settlement process confusing, and
lenders find it cumbersome. Although RESPA requires lenders to provide consumers
with estimates of settlement costs, no federal or state law requires the lenders to
deliver settlement costs in the amounts stated in the estimates. As a result,
consumers often receive unexpected fees at closing, and these unexpected fees can
sometimes be hundreds and even thousands of dollars more than expected. Changes
to both current GFE disclosure forms as well as the information disclosed within
them could arguably lead to less confusion about loan and settlement costs. HUD has
proposed changes to RESPA designed to enhance the ability of homebuyers to
understand mortgage terms and associated costs as well as enhance their ability to
shop for the best deals. (For more information about HUD’s proposed changes, see
CRS Report RL34442, HUD Proposes Administrative Modifications to the Real
Estate Settlement Procedures Act, by Darryl E. Getter.)
12 The $561 figure is for 2008. The Federal Reserve Board adjusts this number annually
based upon changes to the Consumer Price Index.
13 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.
CRS-15
In addition to changes proposed by HUD, legislation has been introduced in the
110th Congress that would make changes to RESPA. Some of the provisions in
proposed bills include the following:
! requiring additional disclosures about loan characteristics such as
variable interest rate adjustments, the monthly payment, and the
existence of a balloon payment (H.R. 3725 and H.R. 3915);
! shielding borrowers, in certain circumstances, from liability for fees
that were not disclosed on a settlement statement given to the
borrower within three days of application for the loan (S. 2343);
! requiring the disclosure of additional information when a mortgage
is assigned, transferred or sold to a new mortgage holder (S. 2452);
and
! proscribing force-placed insurance14 unless there is a reasonable
basis to believe the borrower has not maintained required property
insurance (H.R. 3837 and H.R. 3915).
Home Mortgage Disclosure Act. The Home Mortgage Disclosure Act
(HMDA), was enacted in 1975 (P.L. 94-200) to help regulators determine where it
was necessary to further investigate redlining or geographical discrimination.15
HMDA requires covered institutions16 to report home mortgage originations by
geographic area, financial institution type, borrower race, sex, income, and whether
the loan is for home purchase or refinance. In 1989, Congress expanded HMDA to
include the race, sex, and borrower income of those applicants who were rejected for
loans.17 In 2002, Congress expanded HMDA again to include the annual percentage
rate and to require lenders to identify loans subject to HOEPA requirements; the law
requiring loan rate or pricing information was implemented in 2004.18
Currently, HMDA does not require lenders to report every variable used to
evaluate applicants. Because the collected data are released to the public, there is
concern about protecting the privacy of individuals. However, HMDA requirements
14 Force-placed insurance is insurance coverage obtained by a servicer to protect the
mortgagee’s interest in the property.
15 HMDA is implemented by the Federal Reserve Board Regulation C (12 C.F.R. Part 203).
16 Covered institutions or those required to report HMDA data include banks, savings and
loans, credit unions, and mortgage and consumer finance companies depending upon the
size of their assets and percentage of business related to housing-lending activity. Although
most home-secured mortgage loans are reported under HMDA, there are some exceptions.
Home equity loans taken out for purposes other than those related to the home, such as home
improvements, are not reported under HMDA. Also, lenders that do not have offices in
metropolitan statistical areas are not required to report HMDA data. See the FDIC website
at [http://www.fdic.gov/news/news/press/2005/pr3005a.html].
17 P.L. 101-73, 103 Stat 183. Sections 1211(d) and 1212.
18 P.L. 107-155, 116 Stat 81.
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have been criticized for not including more variables that could be used to help verify
or rule out discrimination, such as borrower credit history information. Some
borrowers pay more for their loans relative to others because they exhibit higher
levels of credit risk. Having credit history information would be necessary to
determine if observed pricing differentials reflect differences in financial risk or
discrimination. Other useful variables include borrower characteristics such as total
assets and debts as well as loan characteristics, such as the loan-to-value ratio.
Suggested additions to the information required to be disclosed to HMDA include
discount points, origination fees, financing of lump sum insurance premium
payments, balloon payments, prepayment penalties, loan-to-value ratios, debt-to-
income ratios, housing payment-to-income ratios, and credit score information (H.R.
1289).
Predatory Lending and Fraud
As discussed earlier in this report, the subprime mortgage market has made it
possible for borrowers with poor credit, low income, or little savings to qualify for
mortgage loans. “Predatory lending” is a term that is sometimes used
interchangeably with “subprime lending,” but although prime loans also may be
predatory, the majority of predatory loans are confined to the subprime mortgage
market. Commentators have had a difficult time coming up with an explicit
definition of “predatory lending.” A Joint Report issued by HUD and the Department
of Treasury offered this definition: “In a predatory lending situation, the party that
initiates the loan often provides misinformation, manipulates the borrower through
aggressive sales tactics, and/or takes unfair advantage of the borrower’s lack of
information about the loan terms and their consequences. The results are loans with
onerous terms and conditions that the borrower often cannot repay, leading to
foreclosure or bankruptcy.”19
Drawing the line between valid subprime lending and predatory lending has
proven to be a difficult task.20 Determining at what point higher rates and fees and
more onerous loan terms become predatory is a fundamental factor in adopting
appropriate legislation to curb these practices. If restrictions on lending practices go
too far, the availability of credit for those with damaged credit profiles could dry up,
leaving them without the option of homeownership. On the other hand, if the
restrictions are too loose, then borrowers may be stripped of the equity in their homes
by unscrupulous lending practices. The unnecessary loss of equity caused by points,
fees, or rates that make a loan more expensive than what a borrower should qualify
for considering the borrower’s financial and other relevant characteristics is
detrimental to borrowers. It can be especially harmful to low-income, subprime
borrowers who have little savings other than the equity in their home. (For more
information about predatory lending, see CRS Report RL34259, A Predatory
19 National Predatory Lending Task Force, Curbing Predatory Home Mortgage Lending: A
Joint Report, by the United States Department of Housing and Urban Development and the
United States Department of the Treasury, 17 (June 2000); available at [http://www.hud
user.org/Publications/pdf/treasrpt.pdf].
20 Ibid.
CRS-17
Lending Primer: The Home Ownership and Equity Protection Act, by David H.
Carpenter.)
The 110th Congress has begun to examine the practices of predatory lending, and
legislation with the following provisions has been proposed:
! ensuring that certain refinances provide a net tangible benefit to the
borrower (H.R. 3915 and S. 2452);
! imposing civil and criminal penalties for committing fraud in the
extension of credit (S. 1222), or imposing civil penalties for
committing unfair and deceptive acts and practices (H.R. 2061 and
H.R. 3915);
! amending the Community Reinvestment Act (CRA) so that loans
resulting from practices such as predatory lending would not count
toward determining whether an institution is meeting the credit
needs of the entire community under CRA (H.R. 1289); and
! authorizing the appropriation of funds to assist the Department of
Justice and Federal Bureau of Investigation to prevent, investigate,
and prosecute mortgage fraud.
Efforts to Assist Troubled Borrowers
In addition to initiatives to modify the homebuying process for future buyers,
efforts have also been made to assist borrowers who are currently at risk of losing
their homes. Congress is considering legislation — and administrative agencies have
taken action — aimed at encouraging borrower workouts and improving the
availability of refinancing options.
Borrower Counseling and Workouts
One of the ways in which Congress has proposed to assist troubled borrowers
is through assistance for housing counseling organizations. Much of the focus of
housing counseling for troubled borrowers involves working with lenders to arrive
at payment plans or other options to make up arrearages — often referred to as
borrower workouts — or helping borrowers refinance into loans with better terms.
The FY2008 Consolidated Appropriations Act (P.L. 110-161) provided $180 million
to the Neighborhood Reinvestment Corporation (NRC) for mortgage foreclosure
mitigation activities and $50 million for HUD’s housing counseling program.
Additionally, legislation has been introduced that would provide more funds for
borrower counseling through the NRC (H.R. 3221 as passed by the Senate and by the
House, H.R. 5830, H.R. 5855, S. 2636, and S. 2791).21
21 Securitization of loans may present an obstacle to borrower workouts in some cases. For
more information on this issue, see CRS Report RL34386, Could Securitization Obstruct
(continued...)
CRS-18
One vehicle for encouraging borrower workouts is the “HOPE Now Alliance,”
an arrangement among lenders, servicers, and investors brokered by the
Administration. The program sets voluntary guidelines under which some borrowers
whose mortgage payments are set to rise may get temporary relief. The plan would
provide a five-year freeze on mortgage interest rates for certain subprime mortgage
borrowers. The plan is designed to buy time for both homeowners and lenders so
that borrowers can refinance into more affordable fixed-rate loans in order to limit
the number of mortgages going into default and reduce the number of homes for sale
in an already saturated market.22
To qualify, at least six conditions must be met: (1) borrowers must reside in the
residences covered by the mortgage, (2) borrowers must be current with their
mortgage payments, (3) the loans must have been taken out between January 1, 2005
and July 31, 2007, (4) the loans must have an adjustable interest rate that will reset
between January 1, 2008 and July 31, 2010, (5) payments would increase by more
than 10% after the scheduled reset; and (6) borrowers must have credit scores below
660 and less than 10% higher than their scores at the time of origination.
(For more information on HOPE NOW, see CRS Report RL34372, The HOPE
NOW Alliance/American Securitization Forum (ASF) Plan to Freeze Certain
Mortgage Interest Rates, by David H. Carpenter and Edward Vincent Murphy.)
Refinancing Loans by Expanding the Authority
of GSEs and FHA
Some overextended borrowers, or those facing interest rate resets, have had
difficulty refinancing their loans on better terms, in part because of a lack of liquidity
in the private market. Fannie Mae and Freddie Mac (known as government
sponsored enterprises, or GSEs) purchase mortgages from lenders so that the lenders
have funds available to make additional loans. The law limits both the total value of
loans that the GSEs may purchase as well as the dollar value of individual mortgages
that are available for purchase. The latter limit is referred to as the conforming loan
limit. Proposals have been made to increase the purchasing power of the GSEs and
to raise conforming loan limits.
In addition to the need for liquidity, another issue is protection for lenders. The
Federal Housing Administration (FHA) loan insurance program insures lenders
against loss from loan defaults by borrowers. Through FHA insurance, lenders make
loans that otherwise may not be available to borrowers. Under current law, like that
for the GSEs, FHA is limited in the total value of loans that it may insure as well as
the dollar value of individual mortgages that may be insured. Proposals have been
made to increase the number and principal value of loans that FHA may insure in
order to help borrowers refinance their mortgages.
21 (...continued)
Voluntary Loan Modifications and Payment Freezes?, by Edward Vincent Murphy.
22 For more information about the Hope Now Alliance, see the program’s web page,
available at [http://www.hopenow.com/].
CRS-19
The Economic Stimulus Act of 2008 (P.L. 110-185), which was enacted on
February 13, 2008, includes provisions that temporarily increase the size of loans that
Fannie Mae and Freddie Mac can purchase and that FHA can insure. The stimulus
bill increases the GSE conforming loan limit for mortgages originated between July
1, 2007, and December 31, 2008, to a maximum of $729,750 in high-cost areas. This
means that Fannie Mae and Freddie Mac can purchase mortgages in these areas
above the current conforming loan limit of $417,000 up to the new limit. In addition,
FHA is able to insure mortgages in high-cost areas up to this same $729,750 limit.
The authority for FHA to insure these mortgages expires December 31, 2008. Outside
of the limits set by the stimulus bill, the FHA limit ranges from $200,160 to
$362,790 in high-cost areas. (For more information about these provisions, see CRS
Report RS22799, The Recovery Rebates and Economic Stimulus for the American
People of 2008 Act and Jumbo Mortgages, by N. Eric Weiss.)
In September 2007, the Administration announced a new, temporary program
through which the Federal Housing Administration (FHA) will insure refinanced
mortgages of troubled borrowers; the program is called FHASecure. The program
applies to borrowers with non-FHA-insured, adjustable rate mortgages who had been
able to make timely payments prior to their interest rate resets. These borrowers may
be eligible to refinance their loans with FHA insured mortgages (if they are able to
find FHA lenders to extend credit), as long as they can meet certain criteria, such as
having sufficient income to support payments on the new loans.23 The program will
only accept loan applications signed no later than December 31, 2008.
In addition, legislative proposals that would increase the involvement of the
GSEs and FHA in the refinancing of mortgages have been introduced. Features of
these bills include the following:
! increasing the total value of the loans that FHA may guarantee in
order to encourage lenders to refinance mortgages (H.R. 3221 as
passed by the House and as passed by the Senate on July 11, 2008;
H.R. 5830; and the unnumbered bill passed by the Senate Banking
Committee on May 20, 2008). These bills would authorize FHA to
insure refinanced mortgages up to a total principal balance of $300
billion; and
! making permanent the provisions in the Economic Stimulus Act of
2008 to increase the FHA loan limits (H.R. 3221 as passed by the
House, H.R. 5958, and S. 1805) and the GSE conforming loan limits
(H.R. 3221 as passed by the House and H.R. 5958); P.L. 110-185
temporarily increased these limits. H.R. 3221 as passed by the
Senate on July 11, 2008, would increase GSE conforming loan
limits, but not to the level in the Economic Stimulus Act.
(For more information about the legislative proposals regarding the GSEs, see CRS
Report RL33940, Reforming the Regulation of Government-Sponsored Enterprises
23 For HUD guidance on FHASecure, see the FHA website at [http://www.hud.gov/offices/
adm/hudclips/letters/mortgagee/files/07-11ml.doc].
CRS-20
in the 110th Congress, by Mark Jickling, Edward Vincent Murphy, and N. Eric
Weiss.)
Assisting Communities with Foreclosed Properties
Grants and Loans to Assist States and Communities. In some
communities, high numbers of foreclosures have resulted in numerous vacant
properties, leaving some neighborhoods subject to falling property values, crime, and
deterioration. Several large cities, including Baltimore and Cleveland, have sued
lenders, alleging damages such as reduced property tax revenue, the increased costs
for police and fire personnel, and the costs associated with maintaining lots and
rehabilitating foreclosed and abandoned properties.24 The U.S. Conference of
Mayors, at its winter meeting in January 2008, called on Congress to appropriate
additional Community Development Block Grant (CDBG) funds to help cities cope
with the costs arising from increased foreclosures.25
Bills have been introduced in the 110th Congress that would provide funds to
states and local communities to purchase and rehabilitate foreclosed properties.
Some proposals would direct grants through the CDBG program, although they
would not use the CDBG formula (H.R. 3221 as passed by the Senate on July 11,
2008, S. 2636, and S. 2791). Instead, these proposals would use factors such as the
number of foreclosures in a state or local community, the number of subprime loans,
the number of mortgages in default, and the number of abandoned homes. Another
approach would distribute funds for grants and loans to communities independent of
an existing program like CDBG, but would similarly use the number of foreclosures
as a factor in determining how funds would be distributed (H.R. 5818). (For more
information about the proposal to assist communities with foreclosed properties, see
CRS Report RS22919, Community Development Block Grants: Legislative
Proposals to Assist Communities with Home Foreclosures, by Eugene Boyd and
Oscar R. Gonzales.)
Expanding the Use of Mortgage Revenue Bonds. Mortgage revenue
bonds are issued by states and local governments, and the proceeds are used to assist
first-time homebuyers.26 The proceeds of the bond issuance are exempt from federal
taxes as long as they meet certain requirements: (1) at least 95% of the proceeds must
be used to finance the residences of homebuyers who have not owned a principal
residence during the past three years; (2) the homebuyer’s family income cannot
exceed 115% of the applicable median family income, though this limitation is
adjusted in certain cases (e.g., it is increased up to 140% if the residence is in an area
with high housing costs); and (3) the residence’s purchase price generally cannot
24 See, for example, Grethen Morgenson, “Baltimore is Suing Bank Over Foreclosure
Crisis,” New York Times, January 8, 2008, p. A12.
25 U.S. Conference of Mayors Press Release, “Mayors Urge Congress and Lenders to
Implement Recommendations to Help Mitigate Economic Distress of Mortgage
Foreclosures,” January 24, 2008, available at [http://usmayors.org/76thWinterMeeting/
release_012408d.pdf].
26 Mortgage revenue bonds are also used to multifamily housing. They are governed by the
Internal Revenue Code, 26 U.S.C. §143.
CRS-21
exceed 90% of the average purchase price of single-family residences sold in the area
during the past year.
Proposals have been introduced in the 110th Congress that would expand the
reach of mortgage revenue bonds in order to address the growing number of
homeowners facing foreclosures. Proposed changes include allowing mortgage
revenue bonds to be used to refinance mortgages that were originally financed by
qualified subprime loans (H.R. 3221 as passed by the Senate, H.R. 5720 (which was
incorporated into H.R. 3221 as passed by the House), and S. 2636). In these
proposals, a qualified subprime loan would be considered any adjustable rate
single-family residential mortgage originated between December 31, 2001 and
January 1, 2008 that the bond issuer determines would be reasonably likely to cause
financial hardship to the borrower if not refinanced. This proposed change would
mean that borrowers need not meet the first-time homebuyer requirement. Another
proposed change would increase the volume cap on the amount of mortgage revenue
bonds that may be issued by each state. Funds under the increased cap could be used
for both mortgage revenue bonds and for exempt facility bonds — used to finance
rental projects in which a portion of units must be occupied by low-income renters.
(For more information about legislative proposals regarding mortgage revenue bonds,
see CRS Report RS22841, Mortgage Revenue Bonds: Analysis of Section 101 of the
Foreclosure Prevention Act of 2008, by Pamela J. Jackson and Erika Lunder.)
Issues in Bankruptcy
Several legislative proposals have been made to amend bankruptcy law to help
borrowers keep their homes after filing for bankruptcy. Under current law, a
bankruptcy court does not have the authority to modify the debt that is secured by a
debtor’s primary residence.27 Section 1322(b)(2) of the Bankruptcy Code states in
relevant part, “the plan may ... modify the rights of holders of secured claims, other
than a claim secured only by a security interest in real property that is the debtor’s
primary residence.” By virtue of this provision, a court may modify the debt of a
mortgage secured by a debtor’s vacation home, for instance, but may not modify the
debt on a mortgage secured by the same debtor’s primary residence.
At least five bills seeking to amend § 1322 of the Bankruptcy Code have been
introduced in the 110th Congress. These bills are H.R. 3609 (the Emergency Home
Ownership and Mortgage Equity Protection Act); S. 2133 and H.R. 3778 (the Home
Owners’ Mortgage and Equity Savings Act, or HOMES Act); S. 2136 (the Helping
Families Save Their Homes in Bankruptcy Act of 2007); and S. 2636 (the
Foreclosure Prevention Act of 2008). Each of these bills would allow for the
modification in bankruptcy of debts secured by the debtor’s primary residence under
certain circumstances. These proposals could make it easier for some debtors to
protect their homes from creditors in bankruptcy. (For more information about these
bills see CRS Report RL34301, The Primary Residence Exception: Legislative
Proposals in the 110th Congress to Amend Section 1322(b)(2) of the Bankruptcy
Code, by David H. Carpenter.)
27 11 U.S.C. §1322(b)(2).
CRS-22
Taxing Debt Forgiveness
As lenders and borrowers work to resolve indebtedness issues, some
transactions are resulting in cancellation of debt. Mortgage debt cancellation can
occur when lenders restructure loans, reducing principal balances, or sell properties
— either in advance, or as a result, of foreclosure proceedings. If a lender forgives
or cancels debt, current tax law may treat it as cancellation of debt (COD) income,
which is subject to tax.
On October 4, 2007, the House passed the Mortgage Debt Forgiveness Relief
Act of 2007 (H.R. 3648) by a vote of 386 to 27. As passed by the House, the act
would have permanently excluded discharged, or canceled, qualified residential debt
from income. The Senate modified H.R. 3648 by proposing a temporary three-year
exclusion of COD income. The Senate passed H.R. 3648 on December 14, 2007; the
House passed the modified version of H.R. 3648 on December 18, 2007. The bill
was signed into law (P.L. 110-142) on December 20, 2007, with the temporary
exclusion of COD income rather than a permanent exclusion. (For more information
on this issue, see CRS Report RL34212, Analysis of the Proposed Tax Exclusion for
Canceled Mortgage Debt Income, by Pamela J. Jackson and Erika Lunder.)
Reforming Federally Sponsored
Financing Institutions
GSE Regulation
Fannie Mae, Freddie Mac, and Federal Home Loan Bank Regulation.
Fannie Mae and Freddie Mac are federally chartered, privately owned corporations
charged with supporting the secondary mortgage market. They are not allowed to
lend directly to homeowners, but by purchasing mortgages from the original lenders,
they free up funds to be lent for more mortgages. After Fannie Mae and Freddie Mac
purchase mortgages, they either package and sell them to investors or keep them in
their own portfolios. To finance their portfolios, they sell bonds and other debt to
investors.
This buying and selling of existing mortgages has created a secondary mortgage
market that has improved the efficiency of mortgage lending and lowered the interest
rate that homeowners pay. Many economists and other analysts believe that because
of their ties to the federal government, Fannie Mae and Freddie Mac (also known as
government-sponsored enterprises, or GSEs) can borrow at lower interest rates than
they could otherwise and that some of this advantage accrues to stockholders and
employees. Regulation of Fannie Mae and Freddie Mac is split between two parts
of HUD. The independent Office of Federal Housing Enterprise Oversight (OFHEO)
is the safety and soundness regulator, whereas HUD’s Financial Institutions
Regulation Division establishes and monitors affordable housing lending goals.
The Federal Home Loan Bank System consists of 12 regional banks (the Banks)
that collectively comprise the third housing GSE. Started in 1932 as lenders to the
savings and loan associations that were the primary lenders for home mortgages, the
CRS-23
Banks have undergone major changes, particularly since the cleanup of the savings
and loan association failures of the 1980s. As a result, membership in the Banks has
changed, today encompassing more commercial banks than savings associations and
including credit unions, insurance companies, and some associated housing
providers. Purposes of lending — although still primarily housing-related — now
include agricultural and small business lending. The changes also have resulted in
special mission set-asides for low- and moderate-income housing, special programs
for community development, and a continuing responsibility for paying debt raised
to fund deposit insurance payouts in the 1980s. For both mission and safety and
soundness, the five-member Federal Housing Finance Board (FHFB) regulates the
System. (For information on the FHLBs, see CRS Report RL32815, Federal Home
Loan Bank System: Policy Issues, by Edward Vincent Murphy.)
On May 24, 2007, the House passed H.R. 1427, the Federal Housing Finance
Reform Act of 2007. The bill would change the regulation of the GSEs, consolidate
oversight, and create the Federal Housing Finance Agency (FHFA) as an independent
regulator with authority similar to that of bank regulators. H.R. 1427 would give the
Federal Housing Finance Agency explicit authority to adjust the enterprises’ risk-
based capital and, in specific circumstances, to limit the size of their portfolios for
limited periods of time. The bill would also create an affordable housing fund (see
discussion below). On May 8, 2008, many portions of H.R. 1427 were added as an
amendment to the American Housing Rescue and Foreclosure Prevention Act (the
House version of H.R. 3221), which was passed by the House on that same day.
On July 11, 2008, the Senate approved a bipartisan manager’s amendment to the
House-approved version of H.R. 3221. In general, the Senate and House versions
are similar in that a new, more powerful regulator would be created to replace
OFHEO and HUD as GSE overseer. The House version would create the new
regulator six months after enactment, while the Senate version would create the
regulator upon enactment. The House version would make permanent the high cost
exception to the conforming loan limit at 175% of the median house price while the
Senate version would make the high cost limit 150% ($729,750 verus $625,500).
Although the GSEs would be allowed to purchase such mortgages, the House bill
would require the GSEs to securitize and sell them to other investors, rather than hold
them in their own portfolios; the Senate bill states that it is the sense of Congress that
such mortgages should be securitized and sold to investors. In addition, both
versions would create a Housing Trust Fund (see the discussion below for more
information).
(For more information about GSE reforms, see CRS Report RL33940,
Reforming the Regulation of Government-Sponsored Enterprises in the 110th
Congress, by Mark Jickling, Edward Vincent Murphy, and N. Eric Weiss.)
Affordable Housing Fund. As noted earlier, both the House and Senate
versions of H.R. 3221would create an affordable housing fund, which would be
funded by contributions from Fannie Mae and Freddie Mac. The primary purpose
of the fund in the House bill, called the Affordable Housing Fund, would be to
increase housing opportunities for extremely low- and very low-income homeowners
and renters. Specifically, the funds could be used for the production, preservation,
CRS-24
and rehabilitation of rental and homeownership housing, as well as for related
infrastructure costs.
In the first year of the Affordable Housing Fund, money would be allocated to
areas affected by the 2005 hurricanes. In years two through five, H.R. 3221 would
distribute the funds to the states and recognized Indian tribes using a formula to be
developed by HUD. The states would develop plans to further distribute the funds
to for-profit, not-for-profit, and faith-based organizations. The bill would end the
requirement for Fannie Mae and Freddie Mac to contribute money to the fund after
five years.
The House bill contains a provision that would transfer the affordable housing
funds to a National Affordable Housing Trust Fund, if such a trust fund is enacted
(see discussion below).
The Senate bill would create two GSE affordable housing programs with
contributions from Freddie Mac and Fannie Mae. However, between 2009 and 2011,
a decreasing percentage of the contributions would go to provide additional funding
for the HOPE for Homeowners Program. HOPE for Homeowners would be a
program through which homeowners at risk of foreclosure could refinance their
current mortgages with FHA-insured loans. In addition, 25% would go for a HOPE
Reserve Fund, even after 2011. The first of the new programs, which would be
called the Affordable Housing Block Grant Program, would distribute 65% of GSE
contributions by formula to the states. The states, in turn, could use the funds to
increase and preserve rental housing for very low- and extremely low-income
households, as well as to promote homeownership among these households. Money
would be distributed by the Secretary of HUD to states and tribally designated
housing entities based on a formula. The bill would require the Secretary to develop
a formula to distribute funds that would be based on (1) population, (2) the 90-day
delinquency rate, and (3) the ratio of foreclosures to owner-occupied households in
the state.
The remaining 35% of GSE contributions in the Senate version of the affordable
housing fund would be directed to a second affordable housing program, the Capital
Magnet Fund, that would be within the existing Community Development Financial
Institutions (CDFIs) Fund in the Department of the Treasury. The CDFI Fund
promotes economic and community development through assistance to community
development financial institutions, which typically provide loans and financial
services in under-served neighborhoods. The new Capital Magnet Fund would award
competitive grants with the purpose of attracting private capital and supporting
investment in housing for low-income, very low-income, and extremely low-income
households, as well as economic development activities and community service
facilities. Grantees, including community development financial institutions and
private nonprofit organizations, could use funds to capitalize a revolving loan fund,
an affordable housing fund, or a fund to support economic development activities,
to provide loan loss reserves, and for risk-sharing loans.
The Senate version of H.R. 3221 would combine the GSE-supported affordable
housing fund with any similar fund created in the future. This is similar to the
House’s approach, but the Senate does not name the future trust fund.
CRS-25
National Affordable Housing Trust Fund. The affordable housing fund
portions of the House version of H.R. 3221 include a provision requiring that the
affordable housing funds be transferred to a National Affordable Housing Trust Fund
upon enactment of such a trust fund. A National Affordable Housing Trust Fund
would provide a dedicated source of revenue to support affordable housing. A
coalition of low-income housing organizations, led by the National Low Income
Housing Coalition (NLIHC), has advocated establishment of such a trust fund for
several years. Legislation to create a National Affordable Housing Trust Fund using
a portion of Federal Housing Administration (FHA) receipts as the dedicated source
of revenue was introduced, but not enacted, in the 106th, 107th, and 108th Congresses.
Because FHA receipts are currently deposited in the U.S. Treasury, diverting them
to a housing trust fund would count as new spending. In the 109th and 110th
Congresses, the NLIHC advocated including an affordable housing fund provision
funded by non-federal resources in GSE reform legislation.
The most recent National Affordable Housing Trust Fund bill was introduced
on June 27, 2007, by House Financial Services Committee Chairman Barney Frank
and several bipartisan cosponsors. The National Affordable Housing Trust Fund Act
of 2007 (H.R. 2895) proposes to use affordable housing funds created by the GSE
and FHA reform bills (discussed below) to provide formula grants to states and
localities and competitive grants to Indian Tribes. The funds could be subgranted to
for-profit and non-profit organizations for the creation, rehabilitation, or financial
support of rental housing as well as downpayment and closing cost assistance for
first-time homebuyers. The bill would require that all funds be used to benefit
families at or below 80% of local area median income, and that 75% of all funds be
used to benefit families at the higher of 30% of local area median income or the
poverty line. The bill was approved by the House Financial Services Committee on
July 31, 2007, and was passed by the House on October 10, 2007.
On December 19, 2007, Senator John Kerry introduced legislation to create a
National Affordable Housing Trust Fund (S. 2523). The Senate bill is largely the
same as the House bill.
FHA Reform
The Federal Housing Administration (FHA), an agency within HUD, oversees
a variety of mortgage insurance programs that insure lenders against loss from loan
defaults by borrowers. Through FHA insurance, lenders make loans that otherwise
may not be available to borrowers and enable borrowers to obtain loans for home
purchase and home improvement, as well as for the purchase, repair, or construction
of apartments, hospitals, and nursing homes. The programs are administered through
two program accounts: the Mutual Mortgage Insurance/Cooperative Management
Housing Insurance fund account (MMI/CMHI) and the General Insurance/Special
Risk Insurance fund account (GI/SRI). The MMI/CMHI fund provides insurance for
home mortgages. The GI/SRI fund provides insurance for more risky home
mortgages, for multifamily rental housing, and for an assortment of special-purpose
loans such as hospitals and nursing homes. (For more information on FHA, see CRS
Report RS20530, FHA Loan Insurance Program: An Overview, by Bruce E. Foote
and Meredith Peterson.)
CRS-26
In 1934, FHA was established to provide consumers with an alternative during
a lending crisis. Since then, FHA has insured more than 34 million properties. In
recent years, however, its market share has been dropping. In 1991, FHA loans
accounted for about 11% of the market; by 2004, that share had dropped to about
3%.28 The mortgages insured through the FHA program are also judged to have
become increasingly risky.29 Default rates and the amounts of insurance claims have
grown even as participation in the program has declined, raising the need to both
increase participation in the program and improve its financial stability by ensuring
that participants are credit-worthy in order to maintain the viability of FHA.30
The Expanding American Homeownership Act (H.R. 1852). On
September 18, 2007, the House passed H.R. 1852, the Expanding Homeownership
Equity Act. On May 8, 2008, the bill was added as an amendment to H.R. 3221, the
American Housing Rescue and Foreclosure Prevention Act, which passed the House
that same day. The bill aims to make FHA loans more marketable by increasing the
loan amount insured under the program, making it easier for low-income borrowers
to get FHA loans without down payments, and pricing mortgage insurance premiums
according to borrower risk.
FHA mortgage limits are set on an area-by-area basis, and under current law,
loans on one-family homes are limited to the lesser of 95% of the median home price
for an area, or 87% of the conforming loan limit for Freddie Mac and Fannie Mae.
As passed by the House, H.R. 1852 would limit FHA loans to the lesser of 125% of
the area median or 175% of the Freddie Mac conforming loan limit. In addition, H.R.
1852 would give HUD authority to raise these resulting loan limit amounts by up to
$100,000 by area and/or by unit size if market conditions warrant. The bill would
also increase the maximum loan term from 35 to 40 years, and allow first-time home
buyers to be exempt from the 3% down payment requirement.
Under current law, HUD may collect from borrowers an up-front FHA mortgage
insurance premium of up to 2.25% of the loan amount.31 HUD may also collect an
annual premium of up to 0.55% of the loan balance for the full term of the loan from
borrowers making downpayments of less that 5%. HUD may collect an annual
insurance premium of 0.50% of the loan balance from borrowers making
downpayments of 5% or more, but borrowers making downpayments in excess of
10% only have to pay this annual insurance for the first 11 years of the mortgage.
28 Alan Greenspan and James Kennedy, Estimates of Home Mortgage Originations,
Repayments, and Debt on One-to-Four-Family Residences, Federal Reserve Board.
September 2005, available at [http://www.federalreserve.gov/Pubs/feds/2005/200541/
200541pap.pdf].
29 Senate Appropriations Committee, report to accompany H.R. 5576, the Transportation,
Treasury, Housing and Urban Development Appropriations Act 2007, 109th Cong., 2nd sess.,
S.Rept. 109-293, July 26, 2006.
30 Ibid.
31 Administratively, HUD has set the insurance premium at 1.5% of the loan amount.
CRS-27
For zero or low downpayment borrowers, H.R. 1852 would allow FHA to
increase its up-front premium to 3% and would increase the annual premium to
0.75%. HUD would be directed to establish underwriting standards to provide
mortgage insurance for borrowers with FICO credit scores of less than 560, and such
borrowers would pay an up-front mortgage insurance premium of up to 3% of the
mortgage amount. For loans insured after October 1, 2007, HUD would have the
flexibility to charge up front and annual insurance premiums based upon the risk that
the low downpayment and high risk borrowers posed to the FHA insurance fund. (For
more information about this issue, see CRS Report RS22662, H.R. 1852 and
Revisiting the FHA Premium Pricing Structure: Proposed Legislation in the 110th
Congress, by Darryl E. Getter.)
H.R. 1852 would allow FHA to set mortgage insurance premiums on the basis
of the risk that the borrower poses to the FHA insurance fund. The bill would then
permit FHA to reduce the insurance premiums for borrowers who establish a record
of timely mortgage payments. HUD would have the discretion to reduce the
insurance premiums to high-risk borrowers who make timely payments for three
years. HUD would be required to reduce the insurance premiums to high-risk
borrowers who make timely payments for five years.
Under present law, HUD may insure no more than 275,000 home equity
conversion mortgages (HECMs), a limit that HUD has already reached. The
maximum mortgage limit for HECMs is set on an area-by-area basis. H.R. 1852
would amend the National Housing Act to remove the limit on the number of
HECMs that may be insured and provide that the national mortgage limit for
HECMs would be 100% of the Freddie Mac limit. The bill would also permit
HECMs to be used for the purchase of a one- to four-family home by an elderly
borrower who would occupy one of the units as a principal residence. HECMs could
also be used to purchase shares in cooperatives. Limits would be placed on the
amount of origination fees that may be charged to HECM borrowers. (For more
information on HECMs, see CRS Report RL33843, Reverse Mortgages:
Background and Issues, by Bruce E. Foote.)
In addition to the provisions noted above, H.R. 1852 would require HUD to
include the rate of default and foreclosure on zero and no downpayment mortgages
in its annual reports to Congress. The report would also include actions taken by
HUD with respect to loss mitigation on its single-family housing programs.
Borrowers would be able to use FHA insured home loans to purchase single-family
homes to be used as child care facilities, and the maximum loan could be increased
by up to 25%. The National Housing Act would be amended to permit FHA-insured
loans to borrowers who wanted to refinance out of high cost privately-insured
mortgages. Borrowers in default or at risk of default would be able to refinance into
FHA-insured loans. For each fiscal year, the net increase in the negative credit
subsidy for the mortgage insurance programs under Title II of the National Housing
Act would be appropriated for several purposes. For FY2008 through FY2012, up
to $100 million would be appropriated for increased funding for housing counseling;
up to $25 million would be appropriated for improving technology, procedures and
salaries; and the remainder would be appropriated for an Affordable Housing Fund
(discussed previously).
CRS-28
The FHA Modernization Act (S. 2338). On December 14, 2007, the Senate
passed S. 2338, the FHA Modernization Act. The bill would increase the FHA loan
limit to 100% of the conforming loan limit for Freddie Mac. Currently the loan limit
on one-family homes is the lesser of 95% of the median home price for an area or
87% of the conforming loan limit for Freddie Mac and Fannie Mae. The bill would
require borrowers to contribute 1.5% in cash or its equivalent towards the purchase
of the home. The required funds could come from relatives of the borrower, but
borrowers could not use funds from either sellers or third parties reimbursed by
sellers. According to the Senate Banking Committee’s report, both HUD and the
Government Accountability Office have found that loans with seller-funded down
payments “have led to significant losses for the FHA fund.”32 Another provision of
S. 2338 would place a 12-month moratorium on the implementation of risk-based
premiums for FHA-insured mortgages.
The Senate bill would make changes to the Home Equity Conversion Mortgage
(HECM) program that are similar to those proposed in the House bill. Like H.R.
1852, the Senate bill would remove the limit on the number of HECMs that may be
insured through the FHA program. In addition, the mortgage limit for HECMs would
be set at 100% of the Freddie Mac limit. The Senate bill would also permit HECMs
to be used for housing cooperatives. Under S. 2338, HECMs could be used for the
purchase of one- to four-unit properties as long as the borrower occupied one of the
units as a principle residence. Origination fees on HECMs would be limited to 1.5%
of the value of the home.
The Senate bill would also establish a five-year pilot program that would allow
lenders to use an automated process to underwrite FHA-insured loans to borrowers
without sufficient credit histories. This process would allow lenders to take account
of payment histories that are not always included in credit reports. According to the
Senate Banking Committee’s report, borrowers with low credit scores may have a
history of on-time payments for items such as rent or utilities, for example, but these
payments are not necessarily included in credit reports (S.Rept. 110-227).
Another provision in the Senate bill would increase the loan limits on the Title
I Manufactured Housing Loan Insurance program. Under current law, the FHA loan
limit on manufactured homes is $48,000; S. 2338 would increase the loan limit to
more than $69,000. Future increases in the manufactured loan limit would be made
annually and would be based on an index that HUD would be directed to develop.
The bill would also prohibit the charging of kickbacks and unearned fees in
transactions involving manufactured housing.
Additional provisions in S. 2338 would direct HUD and FHA, in consultation
with the lending industry, to develop and implement a plan to improve FHA’s loss
mitigation process. The bill would also establish a three-year pre-purchase
counseling demonstration program. The demonstration program would test
alternative forms of pre-purchase counseling, including telephone counseling, in-
person counseling, web-based counseling, and counseling classes.
32 See S.Rept. 110-227.
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Housing After the 2005 Hurricanes
Hurricane Katrina, and to a lesser extent, Hurricanes Rita and Wilma, which
struck Gulf Coast states in the fall of 2005, had enormous effects on the housing
stock in that region. Studies estimate that the hurricanes and the related flooding
damaged 1.2 million housing units in Louisiana, Mississippi, Florida, Texas, and
Alabama. The level of damage wrought by the storms was unprecedented and has
resulted in a large federal commitment of resources and a revisiting of the way that
the government responds to large-scale disasters.
Rebuilding
The re-building of housing in the Gulf Coast has been a slow process.
Questions about insurance payouts, future flood maps, the integrity of levees after
repairs, and the character of new communities have all contributed to the pace of
recovery. The federal government — through the Federal Emergency Management
Agency (FEMA) as well as many other federal agencies, including HUD — has
invested tens of billions of dollars in resources to aid in the recovery and rebuilding
process, but those funds have also not always been used as quickly as desired, in
some cases because of local planning issues, in other cases because of the complexity
of federal program rules.
FEMA Assistance. On October 4, 2006, the Post-Katrina Emergency
Management Reform Act was enacted as part of the FY2007 Department of
Homeland Security Appropriations Act (P.L. 109-295).33 The act made significant
revisions to FEMA’s structure and mission in response to perceived weaknesses
following the 2005 hurricanes. Although components of the act could contribute to
post-disaster rebuilding after future disasters (these components include lifting the
cap on home repairs,34 providing FEMA the authority to construct semi-permanent
or permanent housing,35 and establishing a pilot program for the use and repair of
rental units for temporary housing36), the legislation was not retroactive and did not
address the immediate needs along the Gulf Coast. To address some of the recovery
needs, the House passed H.R. 3247, the Hurricanes Katrina and Rita Recovery
Facilitation Act of 2007. However, its provisions for retroactivity apply only to
public infrastructure repairs. The Senate Homeland Security and Governmental
Affairs Committee subsequently amended H.R. 3247 to make the pilot program for
the repair of rental units, as well as a case management37 provision from the Post-
Katrina Act, retroactive to the hurricane disasters of 2005. The Senate Committee
ordered the bill to be reported on April 10, 2008.
33 For more information, see CRS Report RL33729, Federal Emergency Management Policy
Changes After Hurricane Katrina: A Summary of Statutory Provisions.
34 P.L. 109-295, Sec. 686, 120 Stat. 1448.
35 P.L. 109-295, Sec. 685, 120 Stat. 1447.
36 P.L. 109-295, Sec. 689i, 120 Stat. 1454.
37 P.L. 109-295, New Sec. 426 of the Robert T. Stafford Disaster Relief and Emergency
Assistance Act, 120 Stat. 1453.
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The Road Home. Louisiana’s state-run program to repair and restore the
housing stock is called the “Road Home” program; it has been funded primarily
through $13.4 billion in emergency Community Development Block Grant (CDBG)
funds provided by Congress.38 The Road Home program, and particularly its
Homeowners Assistance Program, is intended to help homeowners repair or replace
their homes. The program sets a threshold for eligibility and provides varying
degrees of assistance to homeowners depending on the program option they select.
Those options include staying in their home, relocating to another home in Louisiana,
or selling their home. The amount of compensation provided to homeowners depends
on the option they select.
Mississippi Waiver. Mississippi has also received a substantial amount of
CDBG funding, approximately $5.5 billion, for their disaster recovery efforts. From
that total, $3.4 billion was allocated to repair or replace some of the large number of
homes that were damaged or destroyed by Hurricane Katrina. Not all homeowners
could meet the criteria developed by the state, so Mississippi officials requested a
waiver from HUD to use $600 million on the port of Gulfport, MS. HUD granted
the waiver in late January;39 it has been a controversial decision because of concerns
about outstanding housing problems in the area.40
Rebuilding Public Housing. Some Members of Congress, as well as low-
income housing and tenants’ rights advocates, have questioned HUD’s plans to
demolish public housing units in New Orleans that were damaged by the 2005
hurricanes. In June 2006, a group of tenants filed a class action suit claiming that
tenants rights are not being protected and seeking an injunction to block the
demolition of housing units by the Housing Authority of New Orleans (HANO);
however, a judge ruled that HANO could continue with demolition while the lawsuit
is pending. In mid-September 2007, HANO announced that HUD had approved the
agency’s plan to demolish 4,500 of the agency’s over 7,000 public housing units,
with plans to rebuild 7,000 units: 3,300 public housing units, 1,800 units for voucher
holders, and the rest market-rate houisng.41 The demolitions were initially delayed
awaiting action by the New Orleans City Council, but all four have now been
approved and the demolition has begun.42
38 See CRS Report RL34410, The Louisiana Road Home Program: Federal Aid for State
Disaster Housing Assistance Programs, by Natalie Love.
39 HUD approved the waiver in a letter sent by then-Secretary Alphonso Jackson to
Governor Haley Barbour. The letter was not made public, however the approval was
reported in the news media. See, for example, Mike Stuckey, “Feds OK Mississippi’s
Katrina Grant Diversion,” MSNBC, January 28, 2008, available at [http://www.nbc6.net/
msnbcnews/15138281/detail.html].
40 See House Financial Services Committee Press Release, “Frank and Waters Call on HUD
to Deny Waiver to Re-Program CDBG for Mississippi Port,” October 17, 2007.
41 Gwen Filosa, “HANO Gets OK to Raze 4,500; Those with Vouchers Will Keep Benefits,”
Times-Picayune (New Orleans), September 22, 2007.
42 Katy Reckdahl, “Nagin OKs Demolition of Lafitte Housing Complex,” The
Times-Picayune (New Orleans), March 25, 2008.
CRS-31
Ongoing Housing Assistance
Families who remain displaced following the 2005 hurricanes are generally
receiving one of two types of assistance: (1) manufactured housing or trailers
(referred to by FEMA as direct assistance) or (2) rental assistance (referred to by
FEMA as financial assistance).
Manufactured Housing. Although FEMA has traditionally used
manufactured housing as a last resort in providing temporary housing (when home
repairs and available rental units are not sufficient), in the case of Hurricane Katrina
that last resort became the prime option. FEMA purchased over 144,000
manufactured housing units at a cost of more than $2.7 billion.43 In a House hearing
in July of 2007, the House Government Reform and Oversight Committee heard
testimony regarding high levels of formaldehyde in the trailers and mobile homes that
FEMA had purchased and used as temporary housing.44 Although FEMA has been
working to move disaster victims out of the trailers by providing alternative housing
options, as of April 23, 2008, more than 27,000 households were still in trailers. The
great majority of those households — over 22,000 — are living in trailers parked on
private sites (generally in the yards and driveways of homeowners) awaiting the
repair or replacement of their original homes.45
Rental Assistance. FEMA began providing short-term rental assistance to
disaster victims shortly after the 2005 hurricanes. After six months, in February
2006, FEMA began to convert the short-term assistance to longer-term rental
assistance (up to 18 months).46 On April 26, 2007, the President announced that
HUD would assume administration of the program beginning September 1, 2007, and
that assistance would be extended through March 1, 2009.47 Prior to that
announcement, HUD had only been tasked with providing assistance to families that
were displaced from HUD-assisted housing or were homeless before the storm.
After an initial delay, HUD assumed administration of FEMA’s rental
assistance program on December 1, 2007, renaming it the Disaster Housing
43 Testimony of DHS Deputy Inspector General Matt Jadacki, in U.S. Congress, House
Committee on Appropriations, Subcommittee on Homeland Sccurity, 110th Congress, 1st
sess. March 14, 2007; [http://www.dhs.gov/xoig/assets/testimony/OIGtm_MJ_031407.pdf].
44 U.S. Congress, House Committee on Oversight and Government Reform, 110th Cong., 1st
Sess. March 14, 2007, at [http://oversight.house.gov/story.asp?id=1413].
45 U.S. Department of Homeland Security, Federal Emergency Management Agency, Gulf
Coast Recovery Office, Individual Assistance, Global Report, Executive Summary, at
[http://www.fema.gov/pdf/hazard/hurricane/2005katrina/gulf_wide_iag.pdf].
46 See HUD News Release, “Housing Assistance Extended for Gulf Coast Hurricane Victims
for Another 18 Months,” April 26, 2007, available at [http://www.hud.gov/news/release.
cfm?content=pr07-051.cfm], and HUD News Release, “Fact Sheet: Providing Continued
Assistance for Gulf Coast Hurricane Victims,” available at [http://www.hud.gov/news/
releases/pr07-051.cfm].
47 FEMA Press Release HQ-07-042, “Fact Sheet: Providing Continued Assistance For Gulf
Coast Hurricane Victims,” April 26, 2007.
CRS-32
Assistance Program (DHAP). The program initially served the 28,000 households
that were being aided by FEMA rental assistance, with HUD and FEMA transitioning
those families out of trailers and into rental assistance.48
Under a FEMA and HUD joint agreement, beginning in March 2008, families
receiving rental assistance as well as those living in trailers are required to pay a
portion of the cost of their housing.49 The amount they are required to contribute will
increase each month, with an exemption made for elderly and disabled families. The
assistance is scheduled to end on March 1, 2009.50
In his FY2009 budget request, the President requested funding for permanent
rental vouchers for elderly, disabled, and formerly homeless families who are facing
the expiration of their DHAP voucher. (For more information, see CRS Report
RL33173, Hurricane Katrina: Questions Regarding the Section 8 Voucher Program,
by Maggie McCarty.)
Legislative Initiatives
H.R. 1227 and S. 1668. On March 21, 2007, the House approved the Gulf
Coast Hurricane Housing Recovery Act of 2007 (H.R. 1227). The bill contains a
wide range of provisions, including those that would make modifications to, and
increase reporting on, assistance provided in earlier supplemental appropriations acts.
The bill would also clarify the treatment of certain federally assisted properties. On
June 20, 2007, the Gulf Coast Housing Recovery Act of 2007 (S. 1668) was
introduced in the Senate. The bill contains many of the same provisions as H.R.
1227; it was referred to the Senate Banking Committee, which held a hearing on
September 25, 2007.
Disaster Housing Strategy. P.L. 109-295 directed FEMA to develop a
Disaster Housing Strategy in conjunction with HUD, the U.S. Department of
Agriculture, and other federal entities, as well as the Red Cross and state, local, and
tribal governments. The law directs FEMA to develop a broad strategy assessing
current resources and policies “concerning the cooperative effort to provide housing
assistance during a major disaster.”51 Congress requested that the strategy be
delivered within 270 days after enactment — July 6, 2007. As of April 2008, it has
not been completed. FEMA Administrator David Paulison testified that the draft of
the strategy still needed to be reviewed at several levels, including by FEMA’s
48 See HUD New Release, “Rental Payments Continue for Remaining Katrina/Rita
Households in Rental Housing: FEMA-HUD Disaster Housing Assistance Program (DHAP)
Launched December 1, 2007,” December 4, 2007, available at [http://www.hud.gov/news/
release.cfm?content=pr07-176.cfm].
49 According to HUD Notice PIH-2008-21 (HA), issued April 16, 2008, families
transitioning from trailers and other temporary housing will not be required to make rental
payments, although families that transitioned from FEMA’s rental assistance program will
be required to make rental payments.
50 Ibid.
51 P.L. 109-295, § 683, 120 Stat. 1446.
CRS-33
National Advisory Council.52 A FEMA official more recently testified that the
strategy would cover three basic areas: the division of tasks among levels of
government, development of a planning process, and federal agency responsibility.53
(For more information about FEMA housing policy, see CRS Report RL34087,
FEMA Disaster Housing and Hurricane Katrina: Overview, Analysis, and
Congressional Options, by Francis X. McCarthy).
Housing Assistance
The U.S. Housing Act of 1949 (P.L. 81-171) established a national goal of “a
decent home and a suitable living environment for every American family.” Since
the enactment of P.L. 81-171, a number of HUD programs have been established to
provide rental housing assistance for low-income individuals and families who
struggle to afford housing.54 Affordable housing remains beyond the reach of many,
however. According to the Harvard Joint Center for Housing Studies, in 2005, 8.2
million low-income renter households were severely cost burdened (paying more
than 50% of their income toward housing), an increase of over one million from
2001 (and an increase from 18.9% of all renter households to 22.3%).55 Although
moderate-income renters were not immune from severe rent burdens, low-income
renters faced the greatest burdens; over 85% of severely cost burdened renters were
in the bottom quintile of the income distribution.56 Further, HUD, in its most recent
report on worst case housing needs, found that 5.99 million unassisted, very low-
income renters either paid more than half their income in rent or lived in severely
substandard housing in 2005.57 This was an increase from 5.01 million renters in
2001, and from 4.76% of all households to 5.50%.58 The federal government’s role
in addressing worst-case housing needs is increasingly in question as deficits grow
and pressure to restrain domestic spending mounts.
52 U.S. Senate Committee on Homeland Security and Governmental Affairs, “The New
FEMA: Is the Agency Better Prepared for a Catastrophe Now Than It Was in 2005?” April
3, 2008.
53 Daniel Fowler, “FEMA Deputy Gives a Preview of Disaster Housing Strategy,” CQ
Homeland Security, April 9, 2008, at [http://homeland.cq.com/hs/display.do?docid=2700581
&sourcetype=31].
54 Housing is generally considered affordable if it costs no more than 30% of a family’s
income.
55 Joint Center for Housing Studies of Harvard University, The State of the Nation’s Housing
2007, June 2007, pp. 25, 37 available at [http://www.jchs.harvard.edu/publications/markets/
son2007/son2007.pdf].
56 Ibid., p. 37.
57 U.S. Department of Housing and Urban Development, Affordable Housing Needs 2005:
Report to Congress, May 2007, p. 11, available at [http://www.huduser.org/Publications/
pdf/AffHsgNeeds.pdf].
58 Ibid., p. 13.
CRS-34
The HUD Budget
Funding for HUD’s assisted housing programs has been affected in recent years
both by the efforts of the Administration and Congress to contain discretionary
spending and by concerns internal to the HUD budget. In his FY2009 budget, the
President has proposed to hold the growth in non-defense discretionary spending to
less than 1% in the coming year, and to keep discretionary spending below the rate
of inflation.59 The majority of the HUD budget is discretionary funding, and the
President requested large cuts for several programs in FY2009, including Housing
for the Elderly and Persons with Disabilities and the Community Development Block
Grant. However, the President’s FY2008 budget recommended similar cuts to
housing programs, and Congress appropriated over $2 billion more than was
recommended by the President for FY2008. (For more information about FY2009
HUD funding, see CRS Report RL34504, The Department of Housing and Urban
Development: FY2009 Appropriations, coordinated by Maggie McCarty.)
Within the HUD budget, the cost of the Section 8 voucher program — which
accounts for over a third of the total HUD budget — generally requires increased
funding to serve the same number of people each fiscal year. (The program is
partially pegged to housing costs, which have risen faster than inflation in recent
years.) Since HUD’s overall budget has been constrained, any increases in funding
for the voucher program have come at the expense of other programs. Another
internal HUD budget pressure involves the contribution of the FHA insurance
program. FHA collects fees from participants, and excess fees are used by Congress
to offset the cost of the HUD budget. FHA’s market share has been dropping in
recent years, and as a result, the amount of excess fees has been declining. With
fewer fees to offset the cost of the HUD budget, the President and Congress have had
to find additional dollars in order to keep the overall budget at the same level.
The Position of HUD Secretary
On March 21, 2008, Senators Patty Murray and Christopher Dodd — the
respective chairpersons of the Departments of Transportation and HUD
Appropriations Subcommittee and the Banking, Housing, and Urban Affairs
Committee — sent a letter to President George W. Bush requesting the resignation
of the Secretary of HUD, Alphonso Jackson. The letter noted several allegations
made against the Secretary and the Department for inappropriate contracting
practices. The letter stated that “despite four separate allegations of impropriety, as
well as damning testimony by senior staff to the HUD Inspector General regarding
Secretary Jackson inappropriately advising senior staff to take political affiliation into
account in awarding contracts, the Secretary refused to answer legitimate
Congressional inquiries about his conduct and the use of taxpayer funds at the
Department.” The Senators argued that “the allegations surrounding Secretary
Jackson, as well as his rejection of appropriate Congressional oversight of his
59 Overview of the President’s 2009 Budget, p. 5, available at [http://www.whitehouse.gov/
omb/budget/fy2009/pdf/budget/overview.pdf].
CRS-35
Department, undermine his ability to effectively address the current housing crisis.”60
Although HUD did not issue a response to this letter, a White House spokesperson
stated that the President “continues to have confidence in Secretary Jackson.”61
On March 31, 2008, Secretary Jackson stated that he was resigning from his post
at HUD, effective April 18, 2008, citing a desire to “attend more diligently to
personal and family matters.”62 The same day that Secretary Jackson’s resignation
became effective, President Bush nominated the Administrator of the U.S. Small
Business Administration, Steve Preston, to be the new HUD Secretary.63 On June 5,
2008, the Senate unanimously confirmed Mr. Preston as the new HUD Secretary, and
he was sworn in the next day.
Federally Assisted Housing Funding and Reform
Section 8 Voucher Reform. The Section 8 voucher program provides
portable housing subsidies to low-income families that they can use to subsidize the
cost of rental housing in the private market. Since 2003, HUD has advocated that the
existing Section 8 housing choice voucher program be abolished and replaced with
a new program. Part of the Administration’s rationale for advocating major program
changes was a desire to curb cost growth in the program. However, the effects of
earlier program reforms, market changes, and recent funding allocation changes64
have all worked together to limit growth in the cost of a voucher within the structure
of the current program. The other rationale for program reform has to do with
reducing administrative complexity in the program and providing the public housing
authorities (PHAs) that administer the program with more flexibility. It is generally
agreed, by the Administration, low income housing advocates, and PHA industry
groups, that the voucher program is too complex and administratively burdensome.
However, the Administration, low-income housing advocates, and PHA industry
groups do not necessarily agree about the best way to reduce that complexity without
compromising the level of assistance provided to low-income tenants.
In the 109th Congress, a bipartisan Section 8 voucher reform bill was approved
by the House but not enacted before the end of the Congress (H.R. 5443). A similar
bill, the Section 8 Voucher Reform Act of 2007 (H.R. 1851), was introduced in the
110th Congress. The bipartisan bill is sponsored by Chairwoman Maxine Waters of
the House Financial Services Committee Subcommittee on Housing and Community
Opportunity. The bill would change the way income is calculated for the purposes
of eligibility and rent-setting (for the voucher program, as well as public housing and
60 See press release, Senator Christopher Dodd, “Senate Housing Leaders Call for HUD
Secretary Jackson’s Resignation,” March 21, 2008. The letter is at [http://dodd.senate.gov/
multimedia/2008/032108_DoddMurraytoPOTUS.pdf].
61 “2 Senators Want HUD Official Out,” New York Times, March 22, 2008, p. A11.
62 HUD Press Release, “Jackson to Step Down as HUD Secretary,” March 31, 2008.
63 White House Press Release, “President Bush Announces Nomination of Steve Preston as
Secretary of Housing and Urban Development,” April 18, 2008.
64 For more information, see CRS Report RS22376, Changes to Section 8 Housing Voucher
Renewal Funding, FY2003-FY2006, by Maggie McCarty.
CRS-36
project-based Section 8) and adopt a new method for allocating voucher funds,
among other changes. On May 25, 2007, the House Financial Services Committee
passed H.R. 1851 with a number of amendments. Among them were provisions to
expand the Moving to Work program (renamed the Housing Innovation Program)
and authorization of up to 20,000 new incremental vouchers in each of the next five
years. On July 12, 2007, the bill was approved by the full House.
On March 3, 2008, S. 2684, the Section 8 Voucher Reform Act of 2008, was
introduced in the Senate by Senator Christopher Dodd, Chairman of the Senate
Banking Committee. It is similar to H.R. 1851, but it does not contain provisions to
expand the Moving to Work demonstration and does include provisions designed to
improve coordination with the Low Income Housing Tax Credit program, among
other differences. The Housing, Transportation, and Community Development
Subcommittee of the Senate Banking Committee held a hearing on S. 2684 on April
16, 2008. (For more information, see CRS Report RL34002, Section 8 Housing
Choice Voucher Program: Issues and Reform Proposals in the 110th Congress, by
Maggie McCarty.)
Public Housing Operating Funds. In January 2007, HUD began using a
new formula to distribute public housing operating funds to public housing
authorities. Under the new formula, some PHAs’ eligibility for funding increased,
and others decreased. Those increases and decreases are phased in over two and five
years, respectively. However, any funding increases will be reduced and any funding
decreases will be further deepened if the appropriations provided by Congress are not
sufficient to fund all PHAs at their full eligibility levels.
Operating funds make up the difference between what tenants pay in rent and
the cost of running public housing. The amount a PHA receives is based on a set of
allowable expenses set by HUD. PHAs calculate their budgets by totaling up the
allowable expenses for all of their units and subtracting the amount they receive in
tenant rents. HUD then adds together all of the agencies’ budgets and compares the
total to the amount Congress appropriated for the operating fund that year. Typically,
Congress appropriates less than the full amount that PHAs qualify for under the
formula, so HUD applies an across-the-board cut to agencies’ budgets, called a
proration. The 2008 proration is estimated to be 84%, meaning that agencies will
receive 84% of their budgets.
The new funding formula for FY2007, established by HUD through regulation
with input from PHA industry groups, adopted new allowable expense levels. It also
required PHAs to adopt a new form of property management — called asset-based
management — by FY2011. Some agencies qualify for a higher budget under the
new allowable expense levels and others face reductions, although both increases and
decreases will be phased in. Those that face a decrease can transition to asset-based
management sooner to help limit their losses. However, the magnitude of gains and
losses under the new formula will depend on how much is appropriated for the
operating fund and, subsequently, how low a proration HUD will set. (For more
information, see CRS Report RS22557, Public Housing: Fact Sheet on the New
Operating Fund Formula, by Maggie McCarty.)
CRS-37
Asset-Based Management. The new operating fund rule contained a
requirement that PHAs convert to a new type of management, called asset-based
management, by 2011. Currently, PHAs are able to centrally manage their public
housing stock, meaning a PHA can receive funding, budget, and provide services for
all of their units in the same way, on a portfolio-wide basis. Under asset-based
management, PHAs will receive funding and will be required to budget for their units
on a project-by-project basis. PHAs will still maintain central offices; however,
under the new funding formula, the central office will not receive funding directly
from HUD. Instead, central office funding will come from fees charged by the
central office to individual properties for the services the central office provides. As
noted earlier, PHAs that are slated to lose funding under the new operating fund rule
can convert to asset-based management before the 2011 deadline in order to limit
their losses. In order for PHAs to limit their losses in 2009, they must prove that they
have converted to asset-based management by the deadline set by HUD.
There has been some controversy surrounding how PHAs demonstrate that they
have successfully converted to asset-based management in order to stop their losses.
HUD published preliminary guidance in September 2006.65 PHA industry groups
have argued that HUD’s guidance is “overly prescriptive” — particularly the
guidance related to funding for the central office — and have lobbied for HUD to
make modifications.66 On January 16, 2007, the Chairmen of the Senate Banking and
House Financial Services Committees sent a letter to HUD asking the Department
to suspend implementation of the conversion to asset-based management until after
the authorizing committees have “had the opportunity to look into the issue
further.”67 HUD published revised guidance on April 10, 2007,68 although it did not
make all of the changes requested by the industry groups.69
H.R. 3521, the Public Housing Asset Management Improvement Act of 2007,
would prohibit HUD from publishing a management fee schedule before FY2011 and
without first undertaking negotiated rulemaking; it would extend an exemption from
asset-based management requirements from agencies with 250 or fewer units to those
with 500 or fewer units; and it would prohibit HUD from placing restrictions on
65 HUD, PIH Notice 2006-35, Operating Fund Program Final Rule: Transition Funding and
Guidance on Demonstration of Successful Conversion to Asset Management to Discontinue
the Reduction of Operating Subsidy — Extension of Stop Loss Deadline to April 15, 2007,
issued September 25, 2006.
66 For example, see Public Housing Authority Directors Association, “PHADA makes
recommendations to HUD on dealing with budget gap,” PHADA News, July 3, 2006,
available at [http://www.phada.org/news.php?id=248].
67 “Committee Chairs Weigh In on Asset Management Implementation,” National Low
Income Housing Coalition, Memo to Members, vol. 12, no. 3, January 19, 2007.
68 See PIH Notice 2007-9 Subject: Updated Changes in Financial Management and
Reporting Requirements Public Housing Agencies Under the New Operating Fund Rule (24
C.F.R. part 990).
69 For a summary of comments and requests submitted by industry groups and HUD’s
responses, see the HUD website at [http://www.hud.gov/offices/pih/publications/notices/07/
pih2007-9comments.pdf].
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PHAs’ ability to transfer funds from their capital fund to their operating fund for
central office needs. Provisions similar to those in H.R. 3521 — raising the threshold
for exemption from 250 to 400 units and limiting HUD’s ability to restrict capital
fund transfers — were included in the FY2008 appropriations law.70
The House Financial Services Committee approved H.R. 3521 on September
25, 2007. On February 12, 2008, a rule for floor debate on the bill was adopted
(H.Res. 974). Following the adoption of the rule, the President issued a Statement
of Administration Policy strongly opposing the provisions of H.R. 3521, noting the
Administration’s concern that the bill would “severely undermine PHAs’
long-awaited conversion to asset management and the adoption of conventional
business practices.” On February 26, 2008, during floor consideration of the bill, a
motion to recommit related to restricting a PHA’s ability to regulate gun possession
in public housing was offered. In response to the motion to recommit, the chair
indefinitely postponed further consideration of the bill.
On April 17, 2008, the Public Housing Asset Management Improvement Act of
2008 (H.R. 5829) was introduced. It contains all of the provisions of H.R. 3521, as
well as the language from the motion to recommit that was offered during floor
consideration of H.R. 3521. Other provisions include reauthorizing the Public
Housing Drug Elimination grant program and making enforcement of a community
service requirement in public housing optional.
HOPE VI Reauthorization. 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 it has been
criticized by the Administration, which argues that grantees spend money too slowly,
and by tenant advocates, who argue the program displaces more families than are
housed in new developments. Reflecting these criticisms, HUD has requested no
new funding for HOPE VI each year since FY2004. Congress has continued funding
the program, although at lower levels than in previous years (the FY2008
appropriation was $100 million, compared with $570 million in FY2003).
The statute authorizing the HOPE VI program includes a sunset clause. The
sunset date was September 30, 2006. However, the FY2007 funding bill (P.L. 110-5)
provided an extension of the HOPE VI program through the end of FY2007, and the
FY2008 funding bill (P.L. 110-161) extended the program through the end of
FY2008. On March 8, 2007, the HOPE VI Improvement and Reauthorization Act
of 2007 (S. 829) was introduced by Senator Barbara Mikulski and Senator Mel
Martinez. It would reauthorize the program through FY2013 and, according to the
sponsors’ press release, make “several improvements to ensure grants are
cost-efficient, and effective at improving resident and community life.”71
70 See Sections 225 and 226 of Division K of P.L. 110-161. Section 225 relates to the small
agency threshold for exemption from asset-based management; HUD has interpreted the
language to only be in effect for calendar year 2008. Section 226 relates to capital fund
fungibility. HUD has interpreted this language to be permanent (and extend beyond 2008).
71 Press release from the office of Barbara Mikulski, Mikulski Introduces Legislation To
(continued...)
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A House HOPE VI reauthorization bill, The HOPE VI Improvement and
Reauthorization Act of 2007 (H.R. 3524),72 was approved by the full House on
January 17, 2007. The bill is sponsored by Representative Maxine Waters, who
chairs the Housing and Community Opportunity subcommittee of the House
Financial Services committee. It would reauthorize the HOPE VI program through
FY2015 at $800 million per year and make a number of changes to the program.
According to the committee’s press release, the bill would “provide for the retention
of public housing units, prevent re-screening of returning residents, protect residents
from disruptions resulting from the grant, increase resident involvement, improve the
efficiency and expediency of HOPE VI construction, and achieve green
developments.”73 (For more information, see CRS Report RL32236, HOPE VI
Public Housing Revitalization Program: Background, Funding, and Issues, by
Maggie McCarty.)
Assisted Housing Preservation
Assisted housing preservation involves efforts to maintain the affordable nature
of federally assisted housing. Many affordable housing projects were developed by
private owners with assistance from the government, including programs
administered by HUD, the Low Income Housing Tax Credit (LIHTC) program, and
the programs of the Department of Agriculture’s Rural Housing Service. In
exchange for government assistance in developing their properties, building owners
entered into contracts with the government in which they agreed to serve low-income
families through reduced rents and/or federal rent subsidies for a certain number of
years. Depending on the assisted housing program, the duration of these contracts,
or “use restrictions,” range from 15 to 50 years.74 In recent years, these contracts
have begun to expire or, in some cases, property owners have chosen to pay off their
mortgages early and end the use restrictions. Contracts for rental assistance,
including project-based Section 8 rental assistance, have also begun to expire. By
2005, nearly 200,000 formerly assisted housing units were no longer subject to use
restrictions due to mortgage prepayment or expiration of project-based rental
assistance.75 The mortgages on a further 2,328 HUD properties, representing 237,000
71 (...continued)
Continue, Strengthen Hope VI Program, March 8, 2007, [http://mikulski.senate.gov/record.
cfm?id=270346].
72 This bill is similar to a bill with the same title and sponsor, but a different bill number
(H.R. 3126) that was introduced on July 23, 2007.
73 Press release from the House Financial Services Committee, Financial Services
Committee Passes Housing Measures, September 26, 2007, [http://www.house.gov/apps/
list/press/financialsvcs_dem/press0926073.shtml].
74 Programs in which assisted housing preservation is an issue include the Section 221(d)(3)
program, the Section 236 program, the Section 202 and 811 programs, the Section 515 rural
housing program, and the Low Income Housing Tax Credit program.
75 National Housing Trust, HUD-Assisted, Project-Based Losses by State, March 2, 2005,
available at [http://www.nhtinc.org/prepayment/State_Loss_Report.pdf].
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housing units, are expected to mature by 2013.76 These properties make up 21% of
the total number of properties with HUD-assisted mortgages.
Previous Legislative Efforts to Preserve Affordable Housing.
Beginning in 1987, Congress started to enact legislation to help preserve affordable
rental housing. Congress first attempted to address the problem through the
Emergency Low-Income Housing Preservation Act (ELIHPA).77 The act temporarily
prevented owners of Section 221(d)(3) and Section 236 developments from
prepaying their mortgages without approval from HUD. In 1990 Congress enacted
the Low-Income Housing Preservation and Resident Homeownership Act
(LIHPRHA) as part of the Cranston-Gonzalez National Affordable Housing Act (P.L.
101-625). The program created incentives for building owners to continue offering
affordable housing through the Section 221(d)(3) and Section 236 programs.
LIHPRHA has not been funded since FY1997 (P.L. 104-204), but during the 1990s
it is estimated to have preserved 100,000 units of Section 221(d)(3) and Section 236
housing.78
In 1997, the Multifamily Assisted Housing Reform and Accountability Act
(MAHRA, P.L. 105-65) created the Mark-to-Market program.79 The program applies
to owners of multifamily housing projects that have HUD-insured or HUD-held loans
as well as project-based Section 8 rental assistance contracts in which the rent
collected is considered above-market. (Market rent is based on either the rent levels
of comparable unassisted properties in a building’s area or on area fair market rent
levels as determined by HUD.) Mark-to-Market allows those owners with above-
market rents to renew their rental assistance contracts with HUD, although at a lower
rate, while also restructuring their outstanding debt on the property. The program is
designed both to ensure that HUD pays reasonable market rents for subsidized
properties and to provide incentives for owners of assisted properties to renew their
contracts with HUD. Mark-to-Market allows rents on up to 5% of units eligible for
the program to be set at levels that exceed market rents, as long as they do not exceed
120% of market rent. The FY2007 year-long continuing resolution (P.L. 110-5)
extended the Mark-to-Market program through the end of FY2011.
The Mark-to-Market Program. On January 23, 2007, Representative
Maxine Waters introduced the Mark-to Market Extension Act (H.R. 647), a bill that
would make changes to the Mark-to-Market program. On October 23, 2007, the
House Financial Services Committee held a hearing regarding the bill. Two days
later, Representative Waters introduced a nearly identical bill but with additional
76 U.S. Government Accountability Office, More Accessible HUD Data Could Help to
Preserve Housing for Low-Income Tenants, GAO-04-20, January 2004, p. 4, available at
[http://www.gao.gov/new.items/d0420.pdf].
77 ELIHPA was part of the Housing and Community Development Act of 1987 (P.L. 100-
242).
78 Emily Achtenberg, Stemming the Tide: A Handbook on Preserving Subsidized Multifamily
Housing, Local Initiatives Support Corporation, September 1, 2002, p. 2, available at
[http://www.lisc.org/content/publications/detail/893].
79 Mark-to-Market is codified at 42 U.S.C. §1437f, note.
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provisions. The new bill, the Mark-to-Market Extension and Enhancement Act (H.R.
3965), was approved by the House Financial Services Committee on October 31,
2007.
H.R. 3965 would extend the Mark-to-Market program until the end of FY2012
and would make eligible for the program certain properties where rent is not
considered above-market, as long as the HUD Secretary determines that debt
restructuring is necessary to preserve the property. The bill would also allow the
Secretary to waive the requirement that rent levels be above market for properties in
federally declared disaster areas (as long as uninsured damage is likely to exceed
$5,000 per unit). In addition, the bill would increase the cap on the percentage of
units eligible to restructure rents to levels above market rents from 5% to 9% and
would waive the cap in disaster areas. It would also permit certain non-profit owners
to participate in mortgage restructuring. Another provision of H.R. 3965 would
apply to late Section 8 payments from HUD to property owners. The bill would
require HUD to alert owners at least 10 days before the Section 8 payment due date
if it anticipates that a payment will be late. If a Section 8 payment is more than 30
days late, HUD would be required to pay interest to the building owner. An
amendment adopted at the markup of H.R. 3965 would make changes to the Mark-to-
Market provisions that encourage resident involvement in the preservation and
improvement of their low-income housing developments. As amended, H.R. 3965
would authorize not less than $10 million for technical assistance that may be used
to train tenants and provide for capacity building.
Section 202 Housing for the Elderly Program Preservation.
Properties developed as part of HUD’s Section 202 Housing for the Elderly program
are aging, and their mortgages are beginning to mature. Between 1959, when the
Section 202 program was established, and the early 1990s, the program loaned
money to developers of projects for low-income elderly persons (defined by HUD as
those age 62 and older). Beginning in 1974, the program also provided Section 8
rental assistance. Legislation has been introduced that would address aspects of
refinancing Section 202 projects in order to maintain their affordability and prevent
physical deterioration.
Two similar bills, both entitled the Section 202 Supportive Housing for the
Elderly Act (H.R. 2930 and S. 2736) have been introduced in the 110th Congress. On
December 5, 2007, H.R. 2930 was approved by the House. Both bills would expand
the circumstances under which a building owner may refinance a Section 202 loan.
Under current law, a Section 202 loan may only be refinanced if the new loan has a
lower interest rate. H.R. 2930 and S. 2736 would expand circumstances in which a
loan may be refinanced to include cases in which the proceeds from the new loan are
used to address the project’s physical needs, the rent charged to tenants does not
change, and the cost of any Section 8 contract is not increased. The two bills would
also expand the ways in which project owners may use proceeds from refinanced
loans. Funds could be used to provide supportive services without limitation (current
law limits 15% of funds for this use), for payment of developers fees, and for equity
returns to nonprofit sellers.
In addition, H.R. 2930 and S. 2736 would create Preservation Project Rental
Assistance to assist residents who live in Section 202 units that do not currently
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receive rental assistance (these include a portion of units financed prior to 1974).
Another provision in H.R. 2930 and S. 2736 would limit HUD’s ability to put
conditions on the amount of proceeds that Section 202 owners may realize from a
sale or refinancing, or the way in which owners use the proceeds. HUD would only
be able to impose conditions on the amount or use of proceeds if there were an
existing contract between HUD and the project owner that authorized such conditions
to be imposed. (For more information on the Section 202 program, see CRS Report
RL33508, Section 202 and Other HUD Rental Housing Programs for the Low-
Income Elderly Residents, by Libby Perl.)
Other Preservation Legislation. The Section 515 Rural Housing Property
Transfer Improvement Act (H.R. 3873) would facilitate the preservation of affordable
housing developments that are located in rural areas. The Section 515 program is
part of the Department of Agriculture’s (USDA’s) Rural Housing Service. The
program provides low-interest loans to housing developers to make it possible to
build multifamily housing that is affordable to low-income families and individuals.
H.R. 3873 would make it easier for an owner of a Section 515 building owner to
transfer the property to another owner while maintaining the property’s affordability.
The House approved H.R. 3873 on January 24, 2008. (For more information about
USDA rural housing programs, see CRS Report RL33421, USDA Rural Housing
Programs: An Overview, by Bruce Foote.)
Recent HUD appropriations have also contained preservation-related provisions.
Section 318 of the FY2006 HUD appropriations law (P.L. 109-115) authorized HUD
to transfer project-based rental assistance contracts, debt, and low-income use
restrictions from one multifamily property to another, subject to some criteria. The
provision was designed to ensure that, if a property is no longer available or viable,
the rental assistance contract can be maintained at another property. Although this
provision has been generally supported by preservation advocates, they have argued
that some of the criteria — such as the requirement that the transferring property and
the receiving property have the same number of units — should be lifted in order to
make the transfers more workable. This authority was extended in the FY2007
continuing resolution (P.L. 110-5) and the FY2008 HUD appropriations law (Sec.
215 of P.L. 110-161).
Section 311 of the FY2006 HUD appropriations law also contained a similar
provision, requiring HUD to maintain rental assistance contracts on any properties
held by the Secretary (generally, as a result of mortgage foreclosure), or to transfer
the contracts to another viable property. In the past, when HUD took possession of
a property, it would generally terminate the rental assistance contract and provide the
tenants with vouchers. This authority was also extended in the FY2007 continuing
resolution, and similar language was included in the FY2008 HUD appropriations
law (Sec. 220 of P.L. 110-161).
Native American Housing Assistance
and Self-Determination Block Grant
The Native American Housing Assistance and Self-Determination Act of 1996
(NAHASDA, P.L. 104-330), reorganized the system of federal housing assistance to
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Native Americans by separating Native American programs from the public housing
program and by eliminating several separate programs of assistance and replacing
them with a single block grant program. In addition to simplifying the process of
providing housing assistance, the purpose of NAHASDA was to provide federal
assistance for Indian tribes in a manner that recognizes the right of Indian self-
determination and tribal self-governance.
The act provides block grants to Indian tribes or their tribally designated housing
entities (TDHE) for affordable housing activities. The tribe must submit an Indian
housing plan (IHP), with long- and short-term goals and proposed activities, which
is reviewed by HUD for compliance with statutory and regulatory requirements.
Funding is provided under a needs-based formula, which was developed pursuant to
negotiated rule-making. Tribes and TDHEs can leverage funds, within certain limits,
by using future grants as collateral to issue obligations under a guaranteed loan
program.
Different versions of the Native American Housing Assistance and Self-
Determination Reauthorization Act of 2007 have been passed by the House and
Senate. The House passed H.R. 2786 on September 6, 2007, and the Senate passed
S. 2062 on May 22, 2008. The bills have differences. For example, the House bill
would prohibit funding to the Cherokee Nation unless the rights of Freedman are
restored and would prohibit the use of NAHASDA funds for unauthorized aliens as
defined by the Immigration and Nationality Act. The Senate bill would amend
NAHASDA to direct that the federal government “shall” provide housing assistance
and “shall” provide assistance in a manner that recognizes Indian self-determination
and tribal self-government. Under S. 2062 the term housing-related community
development would be redefined to include any facility or infrastructure that is owned
by an Indian tribe or tribally designated housing entity (TDHE), necessary for the
provision of housing in an Indian area, and that would make housing more
affordable, accessible, or practical in an Indian area.
Low Income Housing Tax Credits
The Low-Income Housing Tax Credit (LIHTC) program was created by the Tax
Reform Act of 1986 (P.L. 99-514) to provide an incentive for the acquisition
(excluding land) and development or the rehabilitation of affordable rental housing.
These federal housing tax credits are awarded to developers of qualified projects.
Sponsors, or developers, of real estate projects apply to the corresponding state
housing finance authority for LIHTC allocations for their projects. Developers either
use the credits or sell them to investors to raise capital (or equity) for real estate
projects. The tax benefit reduces the debt or equity that the developer would
otherwise have to incur. With lower financing costs, tax credit properties can
potentially offer lower, more affordable rents. (For more information on the LIHTC
program, see CRS Report RS22389, An Introduction to the Design of the
Low-Income Housing Tax Credit, by Mark Patrick Keightley.)
In order to be eligible for the LIHTC, properties are required to meet certain
tests that restrict both the amount of rent that is assessed to tenants and the income
of eligible tenants. The “income test” for a qualified low-income housing project
requires that the project owner irrevocably elect one of two income level tests, either
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a 20-50 test or a 40-60 test. In order to satisfy the first test, at least 20% of the units
must be occupied by individuals with income of 50% or less of the area’s median
gross income, adjusted for family size. To satisfy the second test, at least 40% of the
units must be occupied by individuals with income of 60% or less of the area’s
median gross income, adjusted for family size.80 A qualified low-income housing
project must also meet the “gross rents test” by ensuring rents do not exceed 30% of
the elected 50% or 60% of area median gross income, depending on which income
test the project elected.81
The nature of the low-income project determines the credit rate that it may be
awarded. Rehabilitation and federally subsidized projects are eligible to receive what
is generally referred to as the “4%” credit. New construction is eligible for the “9%”
credit. References to the “4%” credit and “9%” credit are, perhaps, misleading
because they imply that these rates are fixed and certain. In actuality, the credit rates
awarded vary each month so that the present value of the effective subsidy, as a
fraction of a project’s cost, is equal to either 30% or 70%, depending on whether the
building is rehabilitated or new construction. (For more information about tax credit
rates, see CRS Report RS22917, The Low-Income Housing Tax Credit Program: The
Fixed Subsidy and Variable Rate, by Mark Patrick Keightley.) The credit rate is then
multiplied by the project’s qualified basis to determine the annual tax credit award.
The qualified basis generally equals the fraction of a project’s development costs
(minus the cost of land and federal grants) that is occupied by low-income tenants.
Buildings located in qualified census tracts or difficult to develop areas are eligible
for an enhanced eligible basis.
The 110th Congress has proposed several changes to the LIHTC program. The
Housing Assistance Tax Act of 2008 (H.R. 5720), approved by the House Ways and
Means Committee on April 9, 2008, and later added to H.R. 3221 as an amendment
which passed the House on May 8, 2008, would make temporary and permanent
changes to the LIHTC program. Specifically, the bill would increase the per capita
tax credit allocation to states by $0.20 for calender years 2008 and 2009. Currently,
the tax credits are allocated to states at a rate of $2.00 per capita. The proposed tax
credit allocation would be in addition to the annual inflation adjustment.
H.R. 5720/H.R. 3221 would also change the method used to determine the
applicable credit rate for new construction projects. Under the proposed legislation,
newly constructed buildings would receive the greater of the credit rate calculated
under the current method or the average credit rate from the previous calendar year.
The legislation would also extend the higher credit rate to non-federally subsidized
buildings that are substantially rehabilitated. Currently, new construction projects
that receive a below market federal loans are awarded the lower “4%” credit rate
reserved for rehabilitated and subsidized projects. H.R. 5720/H.R. 3221 would
remove this restriction and allow projects financed with below market federal loans
80 U.S. Department of Treasury, Internal Revenue Service, Internal Revenue Code, Section
42(g)(1).
81 U.S. Department of Housing and Urban Development, Office of Policy Development and
Research, Updating the Low-Income Housing Tax Credit (LIHTC) Database Projects
Placed in Service Through 2003 (Washington: January 2006), p. 1.
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to receive the higher credit rate. In addition, H.R. 5720/H.R. 3221 would allow states
to designate certain buildings as being in difficult to develop areas and thus eligible
for an enhanced eligible basis.
H.R. 5720/H.R. 3221 would also enhance the ability of low-income projects to
take advantage of federal grants, allowing for more mixed-financing. Under current
law, most federal rental assistance is considered a federal grant that may not count
toward a project’s eligible basis. H.R. 5720/H.R. 3221 would distinguish between
rental assistance and federal grants if the assistance was received prior to the
beginning of the 15-year compliance period (See H.Rept. 110-606). As a result,
rental assistance would not reduce a project’s eligible basis. Among the types of
rental assistance affected by this provision are Section 202 and Section 811 project
rental assistance, Section 236 interest reduction payments, rental assistance under the
Housing Opportunities for Persons with AIDS program, rental assistance provided
through the McKinney-Vento Homeless Assistance Grants, and Rent Supplement
payments. In addition, under current law, buildings developed using funds from
HUD’s Section 8 Moderate Rehabilitation program are not eligible for LIHTCs.
H.R. 5720/H.R. 3221 would eliminate this restriction.
A manager’s amendment to H.R. 3221, which the full Senate approved on July
11, 2008, proposes to temporarily institute a minimum credit rate not less than 9%
for new construction placed in service before December 31, 2013. A similar proposal
is contained in S. 2666. Under this bill, low-income rehabilitation projects would
receive a credit not less than 4%, while the credit rate awarded to new construction
would be not less than 9%.
Homelessness
The HUD homeless assistance grants, established as part of the McKinney-
Vento Homeless Assistance Act (P.L. 100-77), consist of four separate grant
programs. The Emergency Shelter Grants (ESG) Program distributes funds to
communities through a formula allocation, and they, in turn, may use the funds for
the renovation, major rehabilitation or conversion of buildings into emergency
shelters. Grantees may also use funds to provide services to homeless individuals,
and for homelessness prevention activities, although not more than 30% of funds may
be used for either of these purposes. The grants for the other three homeless
assistance grant programs are awarded competitively through HUD’s continuum of
care (CoC) system. These programs are the Supportive Housing Program (SHP),
Shelter Plus Care (S+C) program, and the Section 8 Moderate Rehabilitation
Assistance for Single-Room Occupancy Dwellings program (SRO). Unlike the ESG
program, the three competitive grant programs focus on transitional and permanent
supportive housing for the homeless. (For more information on the homeless
assistance grants, see CRS Report RL33764, The HUD Homeless Assistance Grants:
Distribution of Funds, by Libby Perl.)
In the 110th Congress, two bills have been introduced that would reauthorize the
housing programs of McKinney-Vento. The Homeless Emergency Assistance and
Rapid Transition to Housing (HEARTH) Act of 2007 (H.R. 840) was introduced on
February 6, 2007, and the Community Partnership to End Homelessness Act of 2007
CRS-46
(S. 1518) was introduced on May 24, 2007. On September 19, 2007, the Senate
Banking, Housing, and Urban Affairs Committee unanimously approved S. 1518.
The two bills, H.R. 840 and S. 1518, are similar in that they would both
consolidate the three competitive homeless assistance grants (S+C, SHP, and SRO)
into one consolidated grant, called the Continuum of Care Program in H.R. 840 and
the Community Homeless Assistance Program in S. 1518 (the President has also
urged the consolidation of these three programs in his last seven budgets). The two
bills would also codify the system through which the funds are distributed, retaining
many aspects of the current Continuum of Care system. H.R. 840 would authorize
the homeless assistance grants at $2.5 billion for FY2008, and S. 1518 would provide
an authorization level of $2.2 billion. However, in S. 1518, permanent housing
contracts would be renewed through the Section 8 program rather than through the
funds made available for the homeless assistance grants.
Both bills propose to expand the definition of “homeless individual,” although
each would do so in a different way. Under the current definition, a homeless
individual is one who lacks a fixed, regular, and adequate nighttime residence, and
who resides in a temporary shelter (including transitional housing for the mentally
ill), an institution (with qualifications), or a place not designed for human habitation.
H.R. 840 would include in the definition persons who are sharing housing due to
economic hardship and those living in hotels, motels, or campgrounds due to a lack
of alternative accommodations. H.R. 840 would also include in the definition those
individuals residing in transitional housing, not just transitional housing for the
mentally ill, as in current law. In addition, H.R. 840 would include substandard
housing in the list of accommodations in which a person would be considered
homeless (the list also includes cars, parks, abandoned buildings, and bus or train
stations).
S. 1518 would also expand the definition of “homeless individual” to include
individuals and families who are sharing housing, but unlike H.R. 840, those
doubled-up households must also (1) lack the resources to pay for decent and safe
housing, (2) only be permitted to remain in the shared housing for a short period of
time, (3) have moved three or more times in the past year or at least two times within
the last 21 days, and (4) not be able to make a significant financial contribution
toward the shared housing. S. 1518 would also include among homeless individuals
those persons residing in a hotel or motel, with the same reservations as those sharing
housing, however. In addition, S. 1518 would change the definition of chronically
homeless to include families with an adult member who has a disability (currently
only unaccompanied individuals are included). The definition would also include
persons released from institutions as long as, prior to entering the institution, they
otherwise met the definition of chronically homeless, and had been institutionalized
for fewer than 90 days.
Both S. 1518 and H.R. 840 would allow more funds to be used for homelessness
prevention activities. Under current law, only ESG funds can be used for
homelessness prevention activities; the other three homeless assistance grants cannot
be used for prevention. H.R. 840 would allow up to 3% of Continuum of Care
Program funds to be used to prevent homelessness, and would remove the ESG
restriction that not more than 30% of funds be used to prevent homelessness. S. 1518
CRS-47
would allocate 20% of funds made available by Congress for the homeless assistance
grants to the newly-named Emergency Solutions Grants program; of those funds, at
least 40% would be available for activities such as rental assistance and housing
relocation for persons at risk of homelessness.
S. 1518 would also create a separate process for rural communities to apply for
grants, whereas in the House bill, rural communities would be part of the same
application process in the Continuum of Care Program as non-rural areas. S. 1518
would allow grantees in rural communities to apply separately for funds that would
otherwise be awarded as part of the consolidated Community Homeless Assistance
Program. Unlike the Community Homeless Assistance Program, however, rural
communities would be able to serve persons who do not meet HUD’s definition of
“homeless individual;” the bill provides that HUD may award grants for the costs of
assisting those in the worst housing situations in their geographic area, those in
imminent danger of losing housing, and the lowest-income residents in the
community.
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CRS Reports on Housing
In General
CRS Report RL34504, The Department of Housing and Urban Development (HUD):
FY2009 Budget, by Maggie McCarty, Libby Perl, Bruce Foote, Eugene Boyd,
and Meredith Peterson.
CRS Report RL33879, Housing Issues in the 110th Congress, by Libby Perl, Maggie
McCarty, Bruce E. Foote, Eugene Boyd, Darryl E. Getter, Oscar R. Gonzales,
Francis X. McCarthy, Edward Vincent Murphy, N. Eric Weiss, David H.
Carpenter, and Meredith Peterson.
CRS Report RL33421, USDA Rural Housing Programs: An Overview, by Bruce
Foote.
Section 8 Rental Assistance
CRS Report RL32284, An Overview of the Section 8 Housing Program, by Maggie
McCarty.
CRS Report RL34022, Section 8 Housing Choice Voucher Program: Issues and
Reform Proposals in the 110th Congress, by Maggie McCarty.
CRS Report RL33929, Recent Changes to the Section 8 Voucher Renewal Funding
Formula, by Maggie McCarty.
Public Housing
CRS Report RS22557, Public Housing: A Fact Sheet on the New Operating Fund,
by Maggie McCarty.
CRS Report RS21591, Community Service Requirement for Residents of Public
Housing, by Maggie McCarty.
CRS Report RL32236, HOPE VI Public Housing Revitalization Program:
Background, Funding and Issues, by Maggie McCarty.
Housing for Special Populations
CRS Report RL30442, Homelessness: Targeted Federal Programs, and Recent
Legislation, coordinated by Libby Perl.
CRS Report RL34024, Veterans and Homelessness, by Libby Perl.
CRS Report RL33956, Counting Homeless Persons: Homeless Management
Information Systems, by Libby Perl.
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CRS Report RL33764, The HUD Homeless Assistance Grants: Distribution of
Funds, by Libby Perl.
CRS Report RL33508, Section 202 and Other HUD Rental Housing Programs for
Low-Income Elderly Residents, by Libby Perl.
CRS Report RL34318, Housing Opportunities for Persons with AIDS (HOPWA), by
Libby Perl.
CRS Report RL31753, Immigration: Noncitizen Eligibility for Needs-Based Housing
Programs, by Alison Siskin and Maggie McCarty.
Federal Housing Finance Programs
CRS Report RS20530, FHA Loan Insurance Program: An Overview, by Bruce E.
Foote and Meredith Peterson.
CRS Report RS22662, H.R. 1852 and Revisiting the FHA Premium Pricing
Structure: Proposed Legislation in the 110th Congress, by Darryl E. Getter.
CRS Report RL33843, Reverse Mortgages: Background and Issues, by Bruce E.
Foote.
CRS Report RS20533, VA-Home Loan Guaranty Program: An Overview, by Bruce
E. Foote and Meredith Peterson.
Subprime Mortgages, Markets, and Regulation
CRS Report RL33930, Subprime Mortgages: Primer on Current Lending and
Foreclosure Issues, by Edward Vincent Murphy.
CRS Report RL33775, Alternative Mortgages: Causes and Policy Implications of
Troubled Mortgage Resets in the Subprime and Alt-A Markets, by Edward
Vincent Murphy.
CRS Report RL34423, Government Interventions in Financial Markets: Economic
and Historic Analysis of Subprime Mortgage Options, by N. Eric Weiss.
CRS Report RL34232, Understanding Mortgage Foreclosure: Recent Events, the
Process, and Costs, by Darryl E. Getter.
CRS Report RS22919, Community Development Block Grants: Legislative
Proposals to Assist Communities with Home Foreclosures, by Eugene Boyd and
Oscar R. Gonzales.
CRS Report RS22722, Securitization and Federal Regulation of Mortgages for
Safety and Soundness, by Edward Vincent Murphy.
CRS-50
CRS Report RL34372, The HOPE NOW Alliance/American Securitization Forum
(ASF) Plan to Freeze Certain Mortgage Interest Rates, but David H. Carpenter
and Edward Vincent Murphy.
CRS Report RL34442, HUD Proposes Administrative Modifications to the Real
Estate Settlement Procedures Act, by Darryl E. Getter.
CRS Report RL34212, Analysis of the Proposed Tax Exclusion for Canceled
Mortgage Debt Income, by Pamela J. Jackson and Erika Lunder.
CRS Report RL34386, Could Securitization Obstruct Voluntary Loan Modifications
and Payment Freezes?, by Edward Vincent Murphy.
CRS Report RS22799, The Recovery Rebates and Economic Stimulus for the
American People Act of 2008 and Jumbo Mortgages, by N. Eric Weiss.
CRS Report RS22841, Mortgage Revenue Bonds: Analysis of Section 101 of the
Foreclosure Prevention Act of 2008, by Pamela J. Jackson and Erika Lunder.
Legal Issues in the Current Mortgage Market
CRS Report RL34301, The Primary Residence Exception: Legislative Proposals in
the 110th Congress to Amend Section 1322(b)(2) of the Bankruptcy Code, by
David H. Carpenter.
CRS Report RL34369, Constitutional Issues Relating to Proposals for Foreclosure
Moratorium Legislation That Affects Existing Mortgages, by David H.
Carpenter.
CRS Report RL34379, Constitutional Issues Relating to Proposals for Legislation
to Impose an Interest Rate Freeze/Reduction on Existing Mortgages, by David
H. Carpenter.
CRS Report RL34259, A Predatory Lending Primer: The Home Ownership and
Equity Protection Act, by David H. Carpenter.
Economic Implications of the Current Mortgage Market
CRS Report RL34244, Would a Housing Crash Cause a Recession?, by Marc
LaBonte.
CRS Report RL34412, Averting Financial Crisis, by Mark Jickling.
CRS Report RL34182, Financial Crisis? The Liquidity Crunch of August 2007, by
Darryl E. Getter, Mark Jickling, Marc Labonte, and Edward Vincent Murphy.
CRS-51
Housing Government-Sponsored Enterprises (GSEs)
CRS Report RL33940, Reforming the Regulation of Government-Sponsored
Enterprises in the 110th Congress, by Mark Jickling, Edward Vincent Murphy,
and N. Eric Weiss.
CRS Report RL34236, Fannie Mae and Freddie Mac: Proposals to Regulate Their
Mortgage Portfolio Size in the 110th Congress, by N. Eric Weiss.
CRS Report RL33756, Fannie Mae and Freddie Mac: A Legal and Policy Overview,
by Michael V. Seitzinger and N. Eric Weiss.
CRS Report RL34158, Creating GSE Affordable Housing Funds: Proposed
Legislation in the 110th Congress, by N. Eric Weiss.
CRS Report RS21724, GSE Regulatory Reform: Frequently Asked Questions, by N.
Eric Weiss.
CRS Report RL32815, Federal Home Loan Bank System: Policy Issues, by Edward
Vincent Murphy.
CRS Report RS22172, The Conforming Loan Limit, by Mark Jickling and N. Eric
Weiss.
CRS Report RS21567, Accounting and Management Problems at Freddie Mac, by
Mark Jickling.
Housing Tax Policy
CRS Report RS22389, An Introduction to the Design of the Low-Income Housing
Tax Credit, by Mark Patrick Keightley.
CRS Report RS22917, The Low-Income Housing Tax Credit Program: The Fixed
Subsidy and Variable Rate, by Mark Patrick Keightley.
CRS Report RL34535, Net Operating Losses: Proposed Extension of Carryback
Period, by Mark Patrick Keightley.
CRS Report RL33904, The Low-Income Housing Tax Credit: A Framework for
Evaluation, by Pamela J. Jackson.
CRS Report RL33025, Fundamental Tax Reform: Options for the Mortgage Interest
Deduction, by Pamela J. Jackson.
CRS Report RL32978, The Exclusion of Capital Gains for Owner-Occupied
Housing, by Jane G. Gravelle and Pamela J. Jackson.
CRS-52
Disaster Relief
CRS Report RL34087, FEMA Disaster Housing and Hurricane Katrina: Overview,
Analysis, and Congressional Options, by Francis X. McCarthy.
CRS Report RL33761, Rebuilding Housing After Hurricane Katrina: Lessons
Learned and Unresolved Issues, by N. Eric Weiss.
CRS Report RS22358, The Role of HUD Housing Programs in Response to
Hurricane Katrina, by Maggie McCarty, Libby Perl, Bruce E. Foote, and
Eugene Boyd.
CRS Report RL33078, The Role of HUD Housing Programs in Response to Past
Disasters, by Maggie McCarty, Libby Perl, and Bruce Foote.
CRS Report RL33173, Hurricane Katrina: Questions Regarding the Section 8
Housing Voucher Program, by Maggie McCarty.
CRS Report RL33330, Community Development Block Grant Funds in Disaster
Relief and Recovery, by Eugene Boyd.
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