House Financial Services Committee Approves Markup of H.R. 6694

As anticipated, the House Financial Services Committee approved the markup of H.R. 6694 effectively paving the way for future vote by the House of Representatives.  Click here to view hearing.  The adoption of H.R. 6694 is being celebrated as a victory by the non profit providers who generate millions in revenues annually from the distribution of seller funded grants.   

The committee, which consisted mostly of the sponsors for H.R. 6694, sounded more like a commercial for for seller-funded down payment assistance than a mark-up hearing.  Comments by Representatives Al Green (D-TX), Gary Miller (R-CA), Maxine Waters (D-CA), Melvin Watt (D-NC), Ginny Brown-Waite (R-FL) showed strong support for continuing seller-funded down payment assistance (SFDPA) and little concern over the consequences to the HUD program.  Only Representative Spencer Bachus (R-AL), showed any concern for the Department of Housing and Urban Development's lack of support for the proposed legislation, GAO recommendations, or IRS rulings.

Representative Al Green stated that loans involving seller funded assistance had a 94% success rate compared to 95% success rate for loans involving other types of down payment assistance, and 96% success rate for loans involving no assistance.  Representative Green also argued that the proposed risk based premiums addressed the risk to the program.  

Representative Gary Miller expressed his support indicating that higher premiums would allow HUD to serve more borrowers.  He also cited SFDPA program support from the National Home Builders, Realtors, and even the Christian Community Development Association (CCDA).   Representative Miller addressed that concerns over inflated appraisals were adequately addressed with the Brown-Waite amendment requiring stricter penalties for appraisal inaccuracies and fraud. 

Representative Maxine Waters stated that she has tried to understand what HUD's problem was with the SFDPA program and that HUD could not articulate what their problem was.  She stated that she has learned that if it were not for seller funded down payment grants, HUD would not have survived due to the market abandoning FHA programs in favor of other products.  Ms. Waters also stated that the information that HUD provided on the default rate for loans involving seller-funded assistance was not convincing.

Representative Melvin Watt stated that the product wasn't the problem, and that the failure was to properly market the product to the people who could afford to pay the loans.  He said the problem was that assistance was given to people with other problems resulting in the inability pay the loans.  He cited a lack of supervision and monitoring as being the issue and not a problem with down payment assistance itself.  Senator Watt also said that the the product was being made to be the scape goat.

Representative Spencer Bachus brought up the prior testimony of Assistant HUD Secretary and FHA Commissioner Brian Montgomery's which provided that loans involving seller funded down payment assistance were 3 times more likely to experience a serious delinquency than loans not involving seller-funded assistance.  Representative Bachus also stated that Brian Montgomery testified that the Department estimated $4.6 billion in losses from loans involving seller-funded down payment assistance.  Mr. Bachus also pointed out the IRS ruling which referred to these types of grants as being circular financial arrangements that resulted in inflated prices due to the addition of the down payment to the sales price.  He also mentioned the 2005 GAO report findings and recommendations, lack of HUD support for these type of grants, and the fact that legitimate down payment assistance was still available.  

Two amendments were also introduced and were approved by verbal vote.  The first amendment was offered by Representative Brown-Waite and sponsored by Representative Charlie Wilson.  The amendment provides civil money penalties for influencing an appraisal (click here to view amendment # 1)

Amendment # 2 was offered by the bill's original sponsors (Mr. Green, Mr. Miller, Mr. Shays, and Ms. Waters) and provides clarification for risk based premiums as follows (click here to view amendment):

• Credit Score at or greater than 680, no risk based premium regardless of down payment source.

• Loans involving seller-funded down payment assistance with credit scores between 620 and 679: mortgage insurance premiums would rise to 3.0% upfront and 1.25% annually.  This is an increase from current premiums of 1.75% upfront and .55% annually. 

• Loans involving seller-funded down payment assistance with credit scores below 620: HUD would have the option of creating a program for these borrowers that requires a higher upfront and annual premium structure to offset the risk to the FHA program.

• Loans not involving down payment assistance with credit scores below 600: HUD would have the option of creating a program and premium structure for these borrowers to offset the risk to the FHA program.  Said premium structure would require a lower upfront premium and higher annual premium.

• Payment Incentives: Authorizes the refund of all or part of the difference of the higher risk based premiums after a period of satisfactory payment between 3 and 5 years for loans subject to risk-based premiums.

For more information on H.R. 6694, click here for a link to the bill summary and status page on the Thomas Library of Congress site. 

Unfortunately, had the Representatives done their homework, they might have discovered key information  such as a recent report listed on Ameridream's website which they are using to refute GAO and HUD data.  Click here to view report. 

According to a report which analyzed a representative sample of FHA loans, 39% of loans had credit scores at or below 619 regardless of down payment source. For borrowers utilizing seller-funded down payment assistance, 48% had credit scores of 619 or less.  While 52% had credit scores at or over 620, only 19% had credit scores at or over 680.   Also, 33% of borrowers with self-funded down payments had credit scores at or below 600 and represented 16% of total loans in the data sampling.  Hence, based on the statistics and conclusions provided by Ameridream's commission reported, the proposed risk based premiums could possibly displace 48% of buyers utilizing down payment assistance while needlessly increasing the costs of 33% of the borrowers that fund their own down payment. Additionally, the proposed legislation could displace 39% of the borrowers that utilize this type of assistance while unnecessarily increasing premiums for borrowers with self-funded downpayments.  In other words, the proposal would not help the borrowers who need help the most, and would burden many of the borrowers who help themselves through hard work, sacrifice, and savings.

Furthermore, the proposal refund incentive defeats the purpose of risk based premiums whose purpose is to create a fund to cover the projected credit subsidy.  I am at a loss to figure out how refunding risk based premiums is going to offset risk to the Insurance Fund.  

Of even greater concern is the committee's failure to recognize and properly address the rising FHA delinquency rate and impact that declining (correcting) market values will have on future loss severities and claims.  Today's reports are looking in the rear view mirror at yesterday's market conditions which took place in a bubble atmosphere and skewed performance statistics.  Furthermore, the prior year claim rates are substantially lower due to reduced loss severity resulting in fewer claims. Just as rising markets concealed mortgage fraud (according to the MARI Institute), rising markets also concealed FHA loss severity, defaults, and claims.  A better barometer is the rising delinquency and default rate which has risen to an all time high of 18.655% in July 2008 according to the HUD Neighborhood Watch site.  While serious defaults are easier to cure in a rising market where the borrower has equity to protect, such is not the case during a depressed market.  

Even more disconcerting is Representative Maxine Waters continued display of an overall lack of understanding as to the real cause of the market's rejection of FHA- especially in high cost areas such as California.  FHA was abandoned due to the advent of the 100% loan programs that were not geared toward sustainable ownership.  The programs employed first and second trust deeds, interest only, adjustable, and negative amortization loans in addition to stated and no documentation loans.  In fact, Bear Stearns even had a 100% combined loan to value first and second trust deed combo that allowed negative amortization on the first and required no income or asset information.  Also, unlike FHA, subprime and Alt A companies would work with most brokers and did not have net worth or other requirements for program participation.  These programs drove up housing prices so high, that housing became unaffordable to most families earning the median family income for their area.  This floor statement from Ms. Waters in June 2006 is a prime example of an overall lack of understanding as to the problems facing the housing market (click here to view entire statement):

"In the 35th Congressional District in California that I serve, 2,064 loans were insured by FHA in 2001, but only 74 loans were made in 2005. Similarly, FHA programs have been seriously curtailed in just about every region of the country, resulting in fewer and fewer home purchases supported by FHA programs. H.R. 5121 will increase FHA home limits. In many areas of the country, the existing FHA loan limits are lower than the cost of new construction or the median home price. In other areas, FHA had been priced out of the market. As indicated in the committee report that we filed with this legislation, in 1999, FHA insured 127,000 loans in California, while a mere 5,000 loans were insured by FHA in 2005, representing less than 5 percent of the 1999 level. Because FHA business diminished dramatically during this period, in my view, American homeownership did not expand as much as possible. The FHA loan limit of $362,790 in Los Angeles, California indicated that FHA was essentially no longer relevant in that housing market."

As you can see Ms. Waters equates the lack of FHA transactions with the FHA loan limits and completely misses the fact that the $362,790 maximum FHA limit was beyond the reach of buyers earning the the median family income of $65,000 (in 2006).  While Representative Waters was aware that the median family price home in most areas in California was $500,000 or more in 2006, she did not seem to be aware that this displaced most residents of the state from purchasing and created an enormous hardship on all but the wealthy.  The reality is that it was not FHA that was no longer relevant to the market but the buyers themselves that were not relevant due to their incomes.  It is truly disturbing that instead of recognizing the housing crisis and what was fueling housing inflation, FHA was made the scapegoat. Basic math should have dictated that $65,000 a year (or $5416.67 a month) does not support a home price and mortgage of $362,790 (or $2,890 to $3,011 a month principal, interest, taxes, and insurance-PITI) let alone home prices in the $500,000 range.  Perhaps if the subprime and Alt A lenders had done the math, we wouldn't be dealing with the failure of institution after institution along with historical default levels.  Is it really wise to force FHA to adopt the failed zero-down, credit score driven practices of failing institutions just to sustain real estate inflation so that borrower's can be glorified renters from FHA?

Another disappointment was the committee's failure to address the market impact that seller funded down payment grants have on areas where they are prevalent.  Unfortunately, the committee did not seem to understand that these transactions effect the market as a whole in ways that cannot be combated by the mere threat of civil penalties for attempting to influence an appraisal.  The big problem associated with these transactions is the failure of most multiple listing services (MLS) to require that the seller contribution be shown as a sales concession.  This information is also not part of public records for transactions that do not involves agents or the MLS.  Therefore, it is impossible for appraisers to reasonably determine whether the comparable sales used for an appraisal were inflated due to the inclusion of seller funded down payment assistance.  

Hopefully, the members of the House of Representatives will conduct a thorough investigation and not just a cheer-leading session and rubber stamp. 

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