Housing Issues in the 108th Congress

CRS Report for Congress
Housing Issues in the 108 Congress
Updated January 24, 2005
E. Richard Bourdon
Analyst in Housing
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Housing Issues in the 108 Congress
The major housing issue before the second session of the 108th Congress was
the proposed budget for the Department of Housing and Urban Development (HUD).
On December 8, 2004, the President signed the Consolidated Appropriations Act,
2005 (H.R. 4818, P.L. 108-447), which provides $32.0 billion for HUD. This is an
increase of $838 million, or 2.7% above the FY2004 enacted level. In addition,
under the new law, HUD’s budget is subject to an 0.80% across-the-board rescission
of approximately $256 million. With this reduction, the increase from FY2004 to
FY2005 for HUD will be about $582 million, or 1.9%. (Budget figures discussed in
this report do not reflect this rescission.)
Congress did not adopt HUD’s controversial Flexible Voucher Program, which
sought to slow spending in the Section 8 program, instead adding $1.6 billion more
for the voucher program than the Administration’s request. However, to pay for this
increase, all other HUD programs were reduced below their FY2004 appropriations
levels (not including the 0.80% rescission), including the Community Development
Block Grant program (down $225 million), HOME (down $91 million), and housing
for the elderly (down $27 million). While the Administration had proposed no
funding for the HOPE VI program, the conferees appropriated $144 million. The
American Dream Downpayment Act to help first-time homebuyers, requested at
$200 million, was funded at $50 million.
The Administration’s main focus in respect to housing has been to increase the
homeownership rate for lower-income and minority households. One initiative would
have allowed 150,000 first-time homebuyers a year to purchase with no downpayment
or closing costs (H.R. 3755). On June 3, 2004, the House Financial Services Committee
passed an amended H.R. 3755. While the Administration projected no cost, the
Congressional Budget Office estimated a cost of $562 million over the period 2006-2009
(see H.Rept. 108-748). The approved FY2005 HUD budget did not include funding for
this proposal. The President also proposed an “affordable housing tax credit”(H.R.
839/S. 198), which would encourage builders to fix up for sale thousands of abandoned
homes in inner cities; this proposal was not approved.
Numerous additional housing related bills were before the 108th Congress. H.R.
1102 would create a National Affordable Housing Trust Fund. With about 214
largely Democratic co-sponsors, the bill proposed the building of 1.5 million
affordable housing units over ten years. A Government Accountability Office report
found that 101,000 affordable rental units might be lost over the next 10 years when
HUD subsidized mortgages mature; H.R. 4679 later was introduced to address this
matter. A provision to repeal the “Ten-Year Rule” for the Mortgage Revenue Bond
program for first-time homebuyers was dropped from a “working families” tax bill,
H.R. 1308, signed into law (P.L. 108-311). Bills to address predatory lending, a new
more aggressive regulator for Government-Sponsored Enterprises, and
Administration efforts to reform the Real Estate Settlement Procedures Act (RESPA)th
were left unresolved in the 108 Congress. Not all bills discussed in this report are
cited in this summary. This is the final update for Housing Issues in the 108th

In troduction ..................................................1
Major Policy Issue: The Increasing Number of Renters and
Owners with “Severe Affordability” Problems...................1
HUD Budget for FY2004 (P.L. 108-199)...........................2
Administration Seeks to Refocus Major HUD Programs...............3
Highlights of the HUD Budget Request for FY2005 ..................4
Congressional Response to Proposed HUD Budget
The Major Budget Issues .......................................5
Section 8 Voucher Reform...................................5
PHA Budget Calculation Changes in the Voucher Program.........6
Public Housing Issues......................................7
National Affordable Housing Trust Fund ...........................9
H.R. 1102................................................9
S. 1411.................................................10
Issues and Concerns.......................................11
Potential Loss of HUD-Subsidized Rental Housing..................11
Increasing Homeownership for Lower Income Households
Administration’s Homeownership Proposals...................14
Homeownership Policy Issues...............................16
Other 108th Congress Homeowner Proposals...................18
Predatory Lending............................................19
Real Estate Settlement Procedures Act............................21
The Mortgage Revenue Bond Program for First-Time Homebuyers
— and the Proposed Repeal of the “Ten-Year Rule”.............22
Fannie Mae and Freddie Mac....................................23
Samaritan Initiative ...........................................25
Brownfields .................................................25
List of Tables
Table 1. Department of Housing and Urban Development Appropriations,
FY2001 to FY2005............................................4
Table 2. Homeownership Rates, by Household Category.................13
Table 3. Homeownership Rates, by Area..............................17

Housing Issues in the 108 Congress
Housing issues in the second session of the 108th Congress centered around the
Administration’s proposed FY2005 budget for the Department of Housing and Urban
Development (HUD) and the congressional response. The budget included efforts
by the Administration to restructure and limit spending on the Section 8 housing
voucher program, to defund the HOPE VI program, and initiatives to increase
homeownership for lower-income households. Other congressional interests
included (1) legislation to combat predatory lending, (2) proposals to establish a
National Affordable Housing Trust Fund, (3) concerns that landlords could raise
rents rapidly on more than 100,000 affordable housing units in the years ahead as
HUD subsidized mortgages are paid off, (4) a Samaritan Initiative to help end long-
term homelessness, (5) legislation to create a new more vigilant supervisor for
Government-Sponsored Enterprises, and (6) and omnibus tax bills that would repeal
the “Ten-Year Rule” in the Mortgage Revenue Bond program for first-time home
Major Policy Issue: The Increasing Number of Renters and
Owners with “Severe Affordability” Problems1
With mortgage rates continuing near 40-year lows, home sales have been robust
and housing prices have increased sharply in many areas. (The National Association
of Realtors reported that the median price of an existing single-family home
increased to $188,200 in October 2004, a 10% increase in the past 12 months, and
the biggest 12-month jump since July 1987.) Many existing homeowners have
benefitted from rising equity. However, higher housing prices are causing problems
for moderate income households, both would-be homebuyers and those who rent
(about 40% of renters live in single-family homes). The 2003 report, The State of the
Nation’s Housing, by Harvard’s Joint Center For Housing Studies, found that “A
staggering three in ten U.S. households have affordability problems.” The report
found that fully 14.3 million households are severely cost-burdened (spending more
than 50% of their incomes on housing) and another 17.3 million are moderately cost-
burdened (spending 30-50% of their incomes on housing). Some 9.3 million
households live in overcrowded units or housing classified as physically inadequate.

1 Housing costs that account for no more than 30% of a low-income family’s adjusted
income is considered an acceptable cost burden under most HUD assisted programs. For
example, most HUD low-income housing programs require participants to pay 30% of their
adjusted income towards rent.

Interestingly, the Joint Center report found that for the first time ever, more
homeowners are cost-burdened than renters. While there has been a surge in lower-
income homeowners over the past five years, many owners are having trouble paying
their housing costs as property taxes and other costs increase at a faster rate than
expected. Others moderate-income owners have lost jobs or have only been able to
find part-time work. The percent of FHA insured mortgages that were delinquent 30
days or more stood at 12.22% at the end of the third quarter of 2004, a very high rate.
Before the year 2000, the delinquency rate had never been as high as 9%. Along with
the growing affordability problems faced by homeowners and homebuyers, very low-
income renters also face difficulties. In many cases, the rents they can afford to pay
are not enough for landlords to cover the cost of utilities, property taxes, and
maintenance; however, only about a third of renters in the bottom fifth of the income
distribution receive rental assistance.
A study released in December 2004 by the U.S. Conference of Mayors, Sodexho
Hunger and Homelessness Survey 2004, showed that the number of homelessness
continued to rise in major American cities over the last year, and that the lack of
affordable housing was the leading cause identified by city officials. Others believe
this shortage is reducing the chances that welfare recipients will be able to achieve
economic self-sufficiency. Lower-income households must often make long and
expensive commutes to their jobs because they cannot afford to live near their work.
The lack of affordable housing also makes it difficult for employers to find help for
low paying jobs as retail salespersons, home health aides, child care workers,
preschool and kindergarten teachers, and many who work at hospitals, nursing and
retirement homes. Many local officials say that newly hired teachers, firefighters,
and police officers are finding it increasingly difficult to live near their job.
The 2003 Joint Center report concluded that “Progress in tackling the nation’s
housing challenges has stalled.” With an FY2005 HUD budget increase (1.9%) of
less than the rate of inflation (3.5% for the most recent 12 months), and cuts to most
programs, housing advocates fear that housing problems will only get worse.
HUD Budget for FY2004 (P.L. 108-199)
On January 23, 2004, the President signed the Consolidated Appropriations Act,
2004 (P.L. 108-199), which funded numerous federal agencies, including HUD. The
Senate had passed this bill on December 22, 2003 (H.R. 2673) and the House, on
December 8, 2003. The FY2004 HUD budget figure of $31.2 billion, which includes
the 0.59% across the board rescission approved by Congress, was about $184 million
above the FY2003 enacted level. Highlights included:
!Housing Certificate Fund provided with $19.3 billion, a significant
increase from the previous year, but with no incremental vouchers;
!HANF (Housing Assistance for Needy Families), Public Housing
Reinvestment, Samaritan, and Colonias initiatives not approved;
!Large reduction for HOPE VI, at $149 million compared to $570
million in FY2003;
!HOME funded at $2.0 billion, with $87 million for Administration’s
American Dream Downpayment Initiative;

!Near level funding for Public Housing Capital and Operating
programs, together at just under $6.3 billion;
!Homeless programs received $1.26 billion, up about $40 million;
!Community Development Block Grants funded at about $4.9 billion,
near level funding with FY2003.
For more details on housing issues in the HUD budget for FY2004, see CRS
Report RL31804, Appropriations for FY2004: VA, HUD, and Independent Agencies.
Note: there have since been some minor revisions in the budget figures in this report.
Administration Seeks to Refocus Major HUD Programs
During the past several years, the Administration has sought through its HUD
budget proposals to change the direction of several major housing programs. For a
variety of reasons, the cost of the rental housing voucher program has increased much
more rapidly than the overall inflation rate, a particular concern expressed by the
Congress in the FY2004 Consolidated Appropriations Conference Report (H.Rept.
108-401) and in the Administration’s proposed budget for FY2005. The
Administration has also stated that too often HUD programs address symptoms rather
than focus on the root causes of low-income households’ difficulties in finding
affordable housing. Rather than increasing the HUD budget, which will continue to
become increasingly difficult in the immediate years ahead due to large deficits, the
Administration has stated that a better approach for helping more lower income
households is to make existing programs work more efficiently — insuring that
correct incentives are in place both for management and tenants.
Similar to proposals in the FY2004 budget, the proposed FY2005 budget sought
to promote market-based operations which would encourage Public Housing
Agencies to control costs. This approach also means removing confusing and
restrictive federal regulations that may prevent state and local governments from
developing creative and efficient approaches to their particular concerns. By getting
housing program administrators focused on ways to increase the self-sufficiency of
the assisted tenants and by offering them a chance to accumulate financial assets
through homeownership, the Administration asserts that lower-income households
will have a better chance of moving into the social and economic mainstream — and
ending their need for federal rental housing assistance. This would free up resources
so that other needy families could be assisted. Supporters of this approach point to
the 1996 welfare reform, which sharply reduced welfare rolls.
Critics have viewed the Administration’s proposals as designed to further
defund HUD programs and reduce the federal government’s involvement in
subsidized housing for low-income people. Housing advocates point to the end in
FY2001 of the $310 million public housing drug elimination grant program, the $250
million “shortfall” in public housing operating funds in FY2002, and the proposal not
to fund the HOPE VI program in the proposed budgets for FY2004 and FY2005. In
addition, the Administration’s housing voucher proposals have been viewed by some
as a first step in financially downsizing and weakening the program that many
consider the most successful of all federal low-income housing programs. Critics
also note that while welfare reform moved people from welfare to work, thereby
improving their self-sufficiency, it did not necessarily increase their incomes.

Table 1. Department of Housing and Urban Development
Appropriations, FY2001 to FY2005
(Net budget authority in billions)
F Y 2001 F Y 2002 F Y 2003 F Y 2004 F Y 2005
$28.48 $30.15 $31.00 $31.20 $32.04
Source: Budget levels remain uncertain until all program activity has been recorded, and any
supplemental appropriations or rescissions have been taken into consideration. Amounts for FY2001-
FY2004 are from reports of the Appropriations Committee accompanying the appropriations bills for
the following years. The FY2005 figure is from the House Appropriations Committee’s funding table
in H.Rept. 108-792 in the Congressional Record of Nov. 20, 2004 beginning at page H10178. The
table does not include the effects of the 0.80% across-the-board reduction in most discretionary
accounts, as called for in P.L. 108-447.
Highlights of the HUD Budget Request for FY2005
!Proposed budget of $31.5 billion;
!Housing Certificate Fund requested at nearly $18.5 billion;
!New Flexible Voucher Program to convert the current
voucher program to block grants to Public Housing Agencies
with fixed dollar amounts to control costs;
!Public Housing Capital and Operating programs proposed at
near level funding of $6.25 billion;
!New “Freedom to House” Public Housing Reform
Demonstration program to increase local flexibility;
!No funding for HOPE VI, Brownfields, or rural housing;
!HOME requested at $2.1 billion (with $200 million for
Homeownership Downpayment Assistance Initiative), up by
about $80 million from last year ;
!Community Development Block Grant fund requested at $4.6
billion, down about $300 million, with no funding proposed
for Economic Development Initiative Special Purpose
!New FHA Zero Down Payment Program to help 150,000 first-
time homebuyers annually purchase with no money down and
financing of all settlement costs (resulting in $180 million of
net revenues);
!New FHA Sub-Prime loan product to help 60,000 families
with poor credit records avoid excessive interest rates;
!Homeless Assistance Grants of nearly $1.5 billion, including
a $50 million Samaritan Initiative (H.R. 4057) to end chronic
homelessness, level with last year’s funding; and
!A Faith-Based Prisoner Re-entry Initiative of $25 million.

Congressional Response to Proposed HUD Budget
On November 20, 2004, the House and Senate passed the Consolidated
Appropriations Act, 2005 (H.Rept. 108-792, H.R. 4818). The President signed P.L.

108-447 on December 8, 2004.

!HUD funded at $32.04 billion, up $838 million or 2.7% above
the enacted level in FY2004 (not including a rescission of

0.80% also included in P.L. 108-447);

!The proposed Flexible Voucher Program not approved, with
$1.6 billion more for the Section 8 program ($20.226 billion)
than the requested level ($18.466);
!To pay for the increase in Section 8 vouchers, all other HUD
programs were reduced below their FY2004 appropriations
levels, including the Community Development Block Grant
Program, down $225 million; HOME down $91 million,
housing for the elderly, down $27 million; and housing
opportunities for people with AIDS, down $11 million.
!HOPE VI provided with $144 million, down $5 million from
!Rescissions (call backs of previous budget authority) of $2.32
billion, including $1.58 billion from the Housing Certificate
Fund (Section 8) and $675 million from rental housing
assistance accounts;
!The American Dream Downpayment Assistance Initiative
received $50 million, considerably less than the
Administration’s $200 million request.
The Major Budget Issues
Nearly 80% of the HUD budget goes to support the Section 8 and public
housing programs, more than $25.4 billion of the $32.0 billion agency total. These
are the areas where the major budget and program issues occurred during the 108th
Section 8 Voucher Reform. In both its FY2004 and FY2005 budget
requests, the Administration proposed major reforms of the Section 8 Housing
Choice Voucher program, designed to reduce costs in the program and eliminate
most of the current program rules and regulations. In FY2004, the Administration
proposed to convert the Section 8 voucher program into a block grant to the states.
States opting to participate would have received a fixed budget, based on prior years’
allocations and the flexibility to run their programs outside of many of the current
program rules. The proposal, titled, Housing Assistance for Needy Families (HANF),
was introduced in both the House (H.R. 1841) and the Senate (S. 947), but no further
action was taken. HANF received strong opposition from low-income housing
advocates and PHA groups, who feared that HANF would erode the size of the
current program and not serve the neediest families. The Consolidated
Appropriations Act, 2004, signed by the President on January 23, 2004 also did not
include this proposal.

The Flexible Voucher Program (FVP) proposed in the President’s FY2005
budget for HUD would have converted the current housing voucher program into a
block grant to the local public housing agencies (PHAs). Rather than receiving
funding based on the per-voucher costs of the program, PHAs would have received
a fixed amount of money annually to spend, with most of the regulations on how to
spend it eliminated. The Administration argued that FVP would save almost $2
billion dollars in FY2005 and would provide PHAs with the regulatory relief that
they have sought for many years. FVP was vigorously opposed by low-income
housing and PHA advocacy groups, who argued that it did not contain sufficient
protection against erosion in funding or enough protection for very low income
families. FVP was never introduced legislatively and was not enacted in the FY2005
appropriations bill.
For more details, see CRS Report RL31930, Section 8 Housing Choice Voucher
Program: Funding and Related Issues, and CRS Report RL32284, An Overview of
the Section 8 Program.
PHA Budget Calculation Changes in the Voucher Program. In the
HUD funding bills enacted for FY2003, FY2004, and FY2005, Congress made
changes to the way that it provides funds to the PHAs who administer the Section
8 voucher program. Prior to FY2003, PHAs were funded based on the total number
of vouchers they were authorized to lease in a year and the average cost of those
vouchers. In FY2003, PHAs were funded based on the number of vouchers they
could reasonably be expected to use (rather than their authorized level) and their cost,
as reported in the most recent quarterly data they had submitted to HUD. This had
little practical impact on PHAs, as they were still permitted to use up to their
authorized number of vouchers and still receive payment.
In FY2004, PHAs were again funded based on the number of vouchers they
could reasonably be expected to use, but the cost of those vouchers was fixed at the
August 1, 2003 level, plus an inflation adjustment. Practically, this meant that PHAs
could use up to their authorized number of vouchers, but if the cost of those vouchers
went above last year’s cost (plus inflation), then the PHA would not be reimbursed
by HUD for those increased costs. PHAs were notified of this change in a HUD
notice issued April 22, 2004 and many were faced with new, fixed budgets that were
lower than the actual costs that they were incurring. This led to some PHAs reducing
rents paid to landlords, freezing vouchers rather than reissuing them when families
left the program, and, in some cases, recalling vouchers from families who were
searching for housing but had not yet found a unit.
The FY2005 appropriations law continued the trend of capping PHA costs.
Under the law, agencies in FY2005 are to be funded based on the average number of
vouchers being used and their average costs (plus inflation) as of May, June, and July
2004. Unlike previous years, PHAs are not able to receive additional funding if they
are able to increase the number of vouchers being used up to their authorized level;
instead their funding is capped at the number of vouchers they were using in the third
quarter of FY2005. Again in FY2005, if the actual costs of a PHA’s vouchers are
higher than the May-July average (plus inflation), then the PHA will not receive
reimbursement from HUD for those extra costs.

All of the funding changes, but especially the FY2004 and FY2005 changes,
have led to concerns among low-income housing advocates and PHA advocacy
groups that the Section 8 voucher program is being eroded and slowly converted to
a block grant program. Congressional appropriators, in conference reports, have
reiterated that the measures undertaken are designed to control rapidly rising costs
in the program. For more details, see CRS Report RL31930, Section 8 Housing
Choice Voucher Program: Funding and Related Issues, and CRS Report RL32284,
An Overview of the Section 8 Program.
Public Housing Issues. There are about 1.25 million units of public
housing worth an estimated $90 billion in the United States. Many elected officials
and advocacy groups view the public housing stock as a national asset that provides
a last resort social safety net for the most disadvantaged and poorest households.
They believe it needs to be well maintained and protected particularly since it is so
difficult and controversial to find new sites for affordable housing.
However, the Administration and others believe the current public housing
program lacks the market-based incentives that are necessary for efficient operations.
They point to a number of big city public housing authorities that have been taken
over by HUD because of mismanagement and corruption. Furthermore, critics of
public housing argue that unlike portable vouchers, public housing can trap families
in areas of high poverty, crime, and little opportunity. Current issues involve the
desire both to protect the stock of public housing and ensure that it is well managed,
but also to re-orient the perception of the program from one of long-term (even
generational) housing to temporary assistance. The Administration proposed a new
“Voluntary Graduation Bonuses” initiative to move program participants away from
dependency. The approved FY2005 HUD budget, P.L. 108-447, appropriated $10
million “to provide bonus funding for PHAs that assist families moving away from
dependence on housing assistance programs.”
The Future of HOPE VI. The HOPE VI program, created in 1992, provides
grants to PHAs to demolish or rehabilitate severely distressed public housing, and
replace it with mixed income communities. Initially envisioned as a 10-year effort
to replace the 100,000 worst units of public housing, the HOPE VI program has
sparked both praise and criticism. Supporters, including many Members of Congress
from across the political spectrum, point to the program’s ability to transform
distressed communities, often attracting not only middle-income families, but also
new businesses, schools and cultural resources. Critics raise concerns that HOPE VI
developments take too long to complete, cost too much, eliminate many more units
of public housing than they replace, and displace too many residents. Citing several
of these concerns, the Administration proposed no new funding for HOPE VI in both
FY2004 and FY2005.
Congress responded by funding HOPE VI in both FY2004 ($150 million) and
FY2005 ($144 million) — a notable reduction from the program’s FY2003 funding
level ($570 million) — and reauthorizing the program through FY2006 (P.L. 108-
186). This new law requires that the selection criteria for awarding HOPE VI grants
consider the extent to which the plan for using HOPE VI funds minimizes the
permanent displacement of current residents of the public housing site who wish to
remain in or return to the revitalized community. It also authorizes a new form of

HOPE VI grant to be used to fund the redevelopment of distressed main streets in
small communities.
For more details, see CRS Report RL32236, HOPE VI: Background, Funding,
and Issues.
How Best to Maintain Public Housing. It is estimated that the nation’s
public housing units need $20-$22 billion in capital repairs, with new needs accruing
at the rate of $2-$3 billion annually. In HUD’s FY2004 budget request, the agency
proposed a program to allow PHAs to convert some public housing units to project-
based voucher assistance — wishing to tie federal assistance more closely to
individual projects rather than providing PHAs with a lump sum annual capital grant
for all their projects, as is now done. Along with new federal loan guarantees, the
stream of voucher subsidies would make it more possible for PHAs to turn to the
private sector for rehabilitation loans, pledging the project-based voucher revenues
as collateral.
In addition, in the FY2004 proposal, after receiving voucher assistance for a
year, a tenant at the project could take the voucher and move elsewhere if they chose
to, allowing families to move to areas of lower concentrations of poverty and greater
economic opportunity. HUD said this initiative would make public housing more
like privately owned rental housing, with more market-based decisions about
operations and maintenance. Because there are often long waiting lists to get into
public housing, tenants now may hesitate to leave even when the service and
conditions are less than desirable. The Administration said that by allowing more
tenants to leave with vouchers if so desired, PHAs could no longer take a tenant’s
occupancy for granted. There would be incentives to operate competitively.
The President’s proposal was not adopted for FY2004. The conferees cited the
number of PHAs who currently leverage private financing without the President’s
proposed program, highlighting Baltimore, Chicago and Philadelphia in particular.
Some housing organizations and PHAs are concerned that the Administration’s
encouragement to borrow in the private market for capital improvements is an
untested experiment that could lead to serious financial difficulties for PHAs and the
potential loss of large amounts of the nation’s low-cost housing stock.
The Administration proposed in its FY2005 budget submission a new Freedom
to House Public Housing Reform Demonstration program that would grant up to 50
PHAs the ability to combine the use of capital and operating funds, to set locally
determined rent structures, and to free themselves from many of the administratively
burdensome requirements of federal reporting. The PHAs in the demonstration
would be compared with 50 other PHAs serving as a control group. There would be
rewards for superior performance for those participating in the demonstration.
Neither the House, Senate, nor the final version of the FY2005 HUD funding bill
included the Freedom to House Demonstration.

National Affordable Housing Trust Fund
Housing trust funds are public accounts established by legislation or resolution
to receive specific revenues, which can only be spent on housing. The most
important feature of a housing trust fund is that it receives on-going revenue from
dedicated sources of funding, such as taxes or fees. According to the Housing Trust
Fund Project, more than 300 housing trust funds have been established by cities,
counties, and states. Estimates of how much these trust funds are now spending for
affordable housing are sketchy. Some say more than $500 million a year, although
a large majority of the spending is likely being made by a small number of the largest
trust funds. While housing trust funds use about three dozen sources of revenue, real
estate transfer fees and direct appropriations are the primary source of funds.
H.R. 1102 and S. 1411, similar but not identical bills, were introduced in the

108th Congress to establish a National Affordable Housing Trust (the “Trust Fund”)

in the Treasury of the United States. H.R. 1102 had 214 mostly Democratic
cosponsors. The goal of both bills would be to produce, rehabilitate, and preserve
at least 1,500,000 affordable housing units over the next 10 years, creating tens of
thousands of jobs that supporters say could not be exported or be “outsourced.” The
national trust would be financed “by using profits generated by Federal housing
programs to fund additional housing activities, without supplanting existing housing
appropriations.” The fund would focus on the production of rental housing for
families with the greatest need, in mixed income settings, and in areas where families
could gain access to the greatest economic opportunities.
H.R. 1102. Most of the grants made by the Trust Fund to state and local
governments would be required to be used for rental housing for “extremely low-
income families” (not less than 45% of grant amounts) and for “minimum wage-
income families” (not less than 30% of amounts). Up to 25% of the funds could be
used for rental housing and homeownership assistance for families with incomes up
to 80% of the greater of the median family income of the local area or of the state.
Source of Funds. Under H.R. 1102, the Trust Fund would be established and
an amount would have been appropriated annually to the Trust Fund equal to:
!the amount in the FHA Mutual Mortgage Insurance (MMI) Fund that
exceeds the legally required 2% capital ratio (the economic value of
the fund divided by the amount of insurance in force) each year; and
! the amount in the Government National Mortgage Association that
exceeds the funds necessary to ensure the safety and soundness of
the agency, as determined by the HUD Secretary.
Distribution of Funds. Of the total amount of funding available each year,
40% would go to states and 60% to participating local jurisdictions (PJs). Each state
would receive at least 1.0% of the total annual funds designated for states. A formula
would be established by the Secretary for allocating assistance to states and PJs based
on a comparison of the relative needs of eligible recipients and would include the
following factors:

!the percentage of families living in substandard housing, paying
more than 50% of their annual income for housing costs, and having
an income at or below the poverty line;
!the cost of developing or carrying out rehabilitation of housing; and
!counties that have extremely low vacancy rates or extremely old
In order to receive its annual Trust Fund allocation, an eligible state or PJ would
have to make a matching contribution from certain designated “non-federal sources.”
In general, eligible states or PJs would receive an allocation equal to four times their
matching contribution. Only funds from the following sources could be used for the
matching requirement:
!50% of funds from Low Income Housing Tax Credits;
!50% of funds from mortgage revenue bonds and tax-exempt bonds;
!50% of grants under the Community Development Block Grant and
the HOME program;
!50% of project-based housing voucher assistance;
!50% of funds from the rural housing assistance program;
!federal, state, or local amounts from the Temporary Assistance for
Needy Families program; and
!general state revenue (any state or local government revenue not
derived from federal sources, including any state tax revenue).
There would be a 50% reduction in the matching requirement for recipients in
fiscal distress, and a 100% reduction for those in severe fiscal distress.
Use of Trust Fund Assistance By Recipients. Once eligible “recipients”
(states and participating local jurisdictions) received funds, they would, in turn,
distribute grants to eligible “entities” or “subrecipients.” These could include any
public or private nonprofit or for-profit entity, unit of general local government,
regional planning entity, or any other entity engaged in the development,
rehabilitation, or preservation of affordable housing, as determined by the Secretary.
The HUD Secretary would establish dollar limits per unit for grant amounts that
could be used for eligible activities.
Grant assistance could be provided in the form of capital grants, noninterest
bearing or low-interest loans or advances, deferred payment loans, guarantees, and
other forms approved by the Secretary.
Appropriations would be authorized for Section 8 project-based vouchers for
units assisted under this act for families that would otherwise pay rents that exceeded

30% of their adjusted income.

S. 1411. With 22 cosponsors, this bill is similar to H.R. 1102. However, under
S. 1411, the Trust Fund would be financed by the amount in the FHA Mutual
Mortgage Insurance (MMI) Fund that is above what is necessary to maintain a 3%
capital ratio. (See above Source of Funds for H.R. 1102 for details). Under S. 1411,
75% of the grants would have to be used for the development of affordable housing
for rent by extremely low-income families, and 25% would have to be used for rental

housing or for homeownership — for low-income families. Three-quarters of money
from the Trust Fund would be given as matching grants to states and local
governments through a formula based on the need for housing (with similar matching
requirements by state or local governments from “non-federal” resources as in H.R.
1102); the remainder would be awarded by HUD through a national competition to
non-profit intermediaries. Assisted housing would have to remain affordable for 40
Issues and Concerns. The Administration does not support a national trust
fund for the construction of “project-based” assistance. They point to the very high
national rental vacancy rate of 10.1% reported by the Census Bureau in the third
quarter of 2004, just short of the highest level since the Census Bureau beganst
tracking it in 1960 (the highest was 10.4% in the 1 quarter of 2004). Housing
advocacy groups say however that most of these units are out of the price range of
low-income households, even with vouchers, or are not in areas that can be reached
by public transportation. The Administration also cites the existing $4.7 billion a
year (FY20005) Low-Income Housing Tax Credit program that provides financial
support for an estimated 100,000 new and rehabilitated units a year. Trust Fund
advocates respond that the Tax Credit program is targeted at renters with incomes of
50-60% of the local area median, while Trust Fund units would generally be directed
at households with “extremely low incomes” — those with incomes at or below 30%
of the local area median. The Administration also points to several other HUD
programs, including the HOME program that has supported the construction or
rehabilitation of more than 334,000 affordable rental units since 1992. The HOPE
VI public housing program is also being used to fund construction and rehabilitation
of rental housing (although as noted above, the Administration did not request
funding for this program for FY2004 nor for FY2005). Again, however, critics argue
that very few of the rental units constructed or rehabilitated under these other federal
programs have been targeted at “extremely low-income households.”
Potential Loss of HUD-Subsidized Rental Housing
In January 2004, the General Accounting Office (GAO)2 completed a study for
the House Committee on Financial Services: Multifamily Housing: More Accessible
HUD Data Could Help Efforts to Preserve Housing for Low-Income Tenants (GAO-
04-20). It found that over 101,000 households in buildings with HUD subsidized
mortgages are at risk of paying higher rents or being displaced over the next ten years
as these loans mature and landlords have the option of leaving the program, since
there are no requirements to protect the tenants. These vulnerable rent-restricted
units are generally affordable to households with incomes of 80% of the local area
median or less, and are specific units under the Section 202, Section 221(d)(3) BMIR
[below market interest rate], and Section 236 programs that do not receive rental
assistance. Owners are not required to notify tenants when a property’s mortgage is
about to mature. Whether property owners will continue to serve low-income renters
depends on a number of factors including the goals of the owners, the condition of

2 The General Accounting Office was renamed the Government Accountability Office
effective July 2004.

the property, and incomes in the neighborhood (for example, units in areas
undergoing gentrification are particularly vulnerable).
The GAO report found that a number of state and local housing agencies could
offer tools and incentives to keep properties affordable after mortgage maturity, but
that about three-quarters of those who responded to the GAO survey do not track the
maturity dates of HUD mortgages.
On July 20, 2004, the Housing and Community Opportunity Subcommittee of
the Financial Services Committee head a hearing on the GAO report. A number of
housing organizations testified on various proposals that could be used to encourage
the preservation of these units, including tax incentives to owners if they kept the
properties affordable to low income tenants.
Several bills were introduced in the 108th Congress to prevent the loss of
privately owned low- and moderate-income rental units with expiring federal
H.R. 3485, the Affordable Housing Preservation Tax Relief Act of 2003, would
have authorized states to allocate preservation tax credits to owners of affordable
housing properties who are willing to sell those properties to new owners committed
to preserving them for low-income use.
S. 2692, the Affordable Housing Preservation Act of 2004, would have
established a program of matching grants to states and localities to help preserve
affordable housing. Grants would be awarded based on a number of factors,
including the number of affordable units at risk in a particular area and the difficulty
residents would have in finding adequate, available, and decent housing if displaced.
A similar bill, H.R. 445, the Housing Preservation Matching Grant Act of 2003,
would have authorized the Secretary of HUD to make grants to states to supplement
assistance for the preservation of housing for low-income families.
H.R. 4679, the Displacement Preservation Act of 2004, would have authorized
the use of $675 million in unspent housing funds to help preserve Section 236 and
Section 221(d)(3) projects. The President’s FY2005 HUD budget called for the
rescission of the $675 million. The House Appropriations Committee report (July
22, 2004) said that “The Committee recommends this rescission with reservations
because these funds will need to be restored in future years to fund these contracts.
While the Committee has adopted this rescission proposed in the budget in order to
avoid significant cuts in departmental programs, the Committee believes it is
imprudent for the Department to propose additional rescissions from funding
required to fulfill existing long-term contracts in the future.” The FY2005 HUD
budget approved by Congress (P.L. 108-447), contained the $675 million rescission.
Increasing Homeownership for Lower Income Households
The national homeownership rate stood at 69.0% at the end of the 3rd quarter of

2004, near the record high of 69.2% reached at the end of the 2nd quarter of 2004.

Despite major gains in recent years, Table 2 below shows that homeownership rates

for lower income and minority households remain significantly lower than the rate
for whites. There are a number of reasons for these lower rates. Minorities have
lower incomes than whites and a larger percentage live in central cities, both of
which make it more difficult to find a desirable home to purchase. (Many larger
cities have thousands of decrepit boarded-up homes in distressed neighborhoods, but
the purchase and rehabilitation of individual units is rarely an option for lower-
income buyers without the help of a Community Development Corporation or some
similar organization.) See Table 3 for differences in homeownership rates by area.
For a variety of reasons, many lower income households have poor credit records
which makes obtaining a mortgage more difficult, more expensive, or impossible.
Table 2. Homeownership Rates, by Household Category
Household typeAnnual - 19943rd Quarter 2004
White, non-Hispanic69.8%76.1%
Hispanic 40.3.%48.7%
Households with family78.5%84.0%
incomes greater than or
equal to the median family
Households with family48.1%52.7%
incomes less than the
median family income
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.
While discrimination in mortgage lending and in the sale of homes has been
reduced over the past decade, it is still considered to play a significant factor in the
lower rate of homeownership for minorities.
The main homeownership tax incentives — the mortgage and property tax
deductions — provide substantial housing assistance to upper-middle and high
income homeowners, but are of little use to those in the bottom half of the income
distribution. Housing analysts have long pointed out that a change from the current
tax deduction to a tax credit would help put lower income homebuyers on a more
level playing field, since under a progressive tax rate structure, a tax deduction favors
those with higher incomes.
The Administration has made increasing homeownership for lower income
groups the centerpiece of its housing policy. In testimony before the House
Committee on Financial Services Subcommittee on Housing and Community
Opportunity on April 8, 2003, then HUD Secretary Martinez stated that
homeownership offers minorities the best opportunity to accumulate wealth that can
later be used for education, to start a business, or to take advantage of other
opportunities that may not be available to those without financial assets. Others

believe that increased homeownership can help economically distressed
neighborhoods to stabilize and revitalize themselves.
The Administration has proposed a number of homeownership initiatives over
the past several years, including the American Dream Downpayment Initiative, a
Single-Family Affordable Housing Tax Credit, and, for FY2005, a new Zero
Downpayment Program and a FHA Subprime Loan Product. These are summarized
Administration’s Homeownership Proposals.
!American Dream Downpayment Program. On December 16,
2003, the President signed P.L. 108-186 (S. 811), the American
Dream Downpayment Act, that authorizes the downpayment
assistance program. The HUD Secretary may award grants to state
and local governments to assist low-income families who are first-
time homebuyers with incomes at or below 80% of the local area
median income. Funds will be allocated to jurisdictions based on
the percentage of the national total of low-income households
residing in rental housing in the participating jurisdiction. The law
authorizes $200 million for each fiscal year from 2004 through 2007.
Up to 20% of the grant funds may be used to provide assistance to
the first-time homebuyers for home repairs. Downpayment
assistance to families is limited to not more than the greater of either
6% of the purchase price of the home or $10,000. The Consolidated
Appropriations Act, 2004 provided $87 million for this program.
The Administration estimated that grants would average $7,500 per
homebuyer, thus $87 million would assist about 11,600 buyers per
year. An interim rule was published in the Federal Register on
March 30, 2004 at pp.16758-16761. The approved FY2005 budget,
P.L. 108-447, provides $50 million for the program, considerably
less than the $200 million requested by the Administration.
!Zero Downpayment Program (H.R. 3755). The FY2005 HUD
budget request contained a new zero downpayment program for
first-time buyers who could purchase single-family homes without
any funds since settlement costs could be rolled into the mortgage.
For example, a buyer purchasing a $100,000 house with $3,000 of
settlement costs, could obtain a $103,000 mortgage. The
Administration estimates that 150,000 buyers a year could benefit
from this program, about 40% of them minorities.The 50% higher
mortgage insurance premium for buyers would produce $180 million
in net “offsetting receipts” for HUD (it would make money for
HUD). The House Financial Services Subcommittee on Housing
and Community Opportunity held hearings on the bill on March 24,
2004. There was general support for the proposal, but also concerns
and cautions expressed — discussed below in Homeownership
Policy Issues. On May 5, 2004, the Subcommittee passed an
amended H.R. 3755, adding a number of consumer protections, and
safeguards for HUD’s Federal Housing Administration’s (FHA)
mortgage insurance program. Pre-purchase counseling would be

required by buyers and they would have the option of receiving
foreclosure prevention counseling. There would be a limit on the
amount HUD could charge for the mortgage insurance premium and
the number of loans could not exceed 30% of all loans insured by
the FHA in the previous year. The program would be ended if more
than 3.5% of the mortgages are foreclosed in the preceding 12
months. Otherwise, the program would sunset (end) on September
30, 2011. The Consolidated Appropriations Act, 2005 did not
provide funding for this proposed program.
!New FHA Subprime Loan Product. A new FHA mortgage
insurance product was also proposed to help families that, due to
poor credit records, must often rely on high-cost subprime loans or
who are unable to borrow at all. Existing homeowners could use the
program to maintain their home, and others, to purchase a new
home. It would reward credit-risk borrowers who make timely
mortgage payments and is expected to help 60,000 families a year.
!Self-Help Homeownership Opportunity (SHOP). The
Administration proposed to expand the SHOP program (a set-aside
within the Community Development Block Grant program) by
reaching out to faith-based or other organizations to help more low-
income families become homeowners. Under SHOP, grants are
made to national and regional non-profit organizations such as
Habitat for Humanity. Homebuyers must contribute significant
amounts of volunteer labor to the construction or rehabilitation of
the property. The Consolidated Appropriations Act provided $27
million for FY2004. The FY2005 budget requested $65 million and
was expected to help produce 5,200 new homes nationwide. The
Consolidated Appropriations Act of FY2005 provides $25 million.
!Housing Counseling. Counseling helps families learn about the
process of buying a home and how to avoid predatory lending
practices. It also helps homeowners avoid foreclosure during
periods of financial stress. $40 million was provided for counseling
in FY2004 as a set-aside within the HOME program. The FY2005
budget requested $45 million for a separate housing counseling
program; the conferees provided $42 million, but not as a separate
!Single-Family Affordable Housing Tax Credit. The
Administration has proposed a homeownership tax credit to
stimulate the production of homes that are affordable to lower-
income households — and to help revitalize distressed communities.
Introduced as H.R. 839/S. 198, it is modeled after the popular Low
Income Housing Tax Credit for rental housing. At the end of the
108th Congress, the bills had more than 300 co-sponsors. The
ownership tax credits would provide tax credits to be taken by
homebuilders (developer or investor partnership) over five years to
encourage the rehabilitation of existing properties (including
abandoned housing in central cities) or new construction of about

40,000 affordable single-family homes a year in urban or rural areas.

Credits would be allocated to state housing credit agencies on the
basis of population ($1.80 per capita in the first year and indexed to

inflation thereafter). State agencies would award first-year credits
to single-family housing units in a project located in a census tract
with median income equal to 80% or less of the area median income.
The present value of credits, determined on the date of a qualifying
sale, could not be more than 50% of the cost of constructing a new
home or rehabilitating an existing property. The homeownership
credit was projected to cost $2.5 billion over 2005-2009.
Homeownership Policy Issues. An increasing number of housing
advocacy organizations and analysts are expressing concern that the Administration’s3
focus on homeownership is unbalanced. And while housing industry analysts deny
there is a “housing bubble,” a growing number of analysts outside of the industry say
that home purchases are risky today, particularly for lower income families who will
be least able to adjust to likely price corrections.4 Critics say that HUD’s policy
should have more emphasis on maintaining or increasing the choice of housing
available, including rental housing. The FDIC Outlook, Spring 2004 (Federal
Deposit Insurance Corporation) cautioned lenders that highly leveraged homeowners
(those who have purchased in recent years with very small downpayments) with
subprime and adjustable-rate mortgages may become stretched too much if interest
rates start to rise and local home prices decline.
“Homeownership may not be the best wealth-building strategy,” says Woody
Widrow, project director of the Texas Individual Development Account Network.
“Being a renter and owning a business or saving money to send your kids to college5
may be a better strategy.” Some also argue that without a cautious and thoughtful
homeownership program that avoids concentrations of lower-income homebuyers in
lower-income neighborhoods, potential benefits to buyers will be minimized. For
example, several recent studies have found that homeownership has positive effects
on children’s development. However, “... the positive effects of homeownership on
children are weakened in distressed neighborhoods, especially those that are
residentially unstable and poor. Thus, helping low-income families purchase homes
in good neighborhoods is likely to have the best effects on children.”6 Harm can be
done to both lower-income buyers and the neighborhoods where the homes are
frequently purchased if there are high default rates.
Some applaud HUD and others in the housing industry for giving more attention
to increasing the financial literacy of lower-income households, but others would like
more efforts to improve the credit record scores (“FICO”) of these households before
they buy a first home. Low scores result in higher mortgage rates being charged.

3 The Crisis in America’s Housing: Confronting Myths and Promoting a Balanced Housing
Policy, National Low Income Housing Coalition, Jan. 2005.
4 Bubble Bath: Will a Crashing Housing Market Sink Low-Income Homebuyers? Dean
Baker and Marya Murray Diaz, Journal of Housing and Community Development,
Sept./Oct. 2004, and Irrational Exuberance Part 2, Robert J. Shiller, Money, Feb. 2005.
5 Winton Pitcoff, Should Everyone Own Their Own Home? Shelterforce, Jan./Feb. 2003.
6 Joseph Harkness and Sandra J. Newman, Homeownership for the Poor in Distressed
Neighborhoods, Does This Make Sense? Housing Policy Debate, vol. 13, 2002.

Pre-purchase counseling has greatly increased in recent years and has been shown to
be helpful. As noted above, the Consolidated Appropriations Act, 2005 provides $42
million for HUD’s major housing counseling program, up from $40 million in the
previous year. Almost all financial advisors recommend that households have at least
three months and preferably six months of liquid assets available to cover potential
financial setbacks. Lower income households are most vulnerable to financial
setbacks. Many are households who have never been able to accumulate any savings,
who may have poor health and be without health insurance, and have little or no
financial knowledge about budgets, mortgages, and home repair contracts. They may
be especially vulnerable to layoffs and a variety of financial and housing-related
Some observers are uneasy with the Administration’s proposed Zero
Downpayment Program Initiative. While most who testified on the Zero
Downpayment initiative (H.R. 3755) before the House Financial Services
Subcommittee on Housing and Community Development on March 24, 2004, were
supportive (National Association of Realtors, National Association of
Homebuilders), others raised the issue of the huge disparity between the resources
the government “expends to underwrite homeownership” and that spent for renters
(Low Income Housing Coalition). The National Multi Housing Council pointed out
that “more than half the working families with critical housing needs are owners, not
renters,” raising questions about whether the promotion of homeownership for all
households is an appropriate national goal.
Table 3. Homeownership Rates, by Area
(3rd Quarter, 2004)
Area3rd Quarter 2004
U.S. 69.%
— In central cities 53.2%
— Suburbs75.9%
— Outside metropolitan areas 75.7%
Source: Table prepared by the Congressional Research Service (CRS) based on data from the U.S.
Census Bureau.
The Mortgage Bankers of America reported that 1.14% of all loans were in
foreclosure at the end of the third quarter of 2004, high, but not a record. Other
homeowners who are seriously behind in their mortgage payments are sometimes
able to avoid or defer foreclosure by filing for bankruptcy. HUD’s largest
homeownership program, its Federal Housing Administration (FHA) mortgage

insurance program, helps about 700,000 first-time buyers each year. However, as
noted above, this program continues to operate with very high delinquency rates —
12.22% of borrowers at least 30 days past due in the third quarter of 2004. Before
the year 2000, this rate was never above 9%. The Senate Appropriations Committee
wrote in its FY2003 report that ...” in some cases and in certain neighborhoods, FHA
has been misused to underwrite bad loans that lead to defaults and foreclosed homes,
contributing to neighborhood decline and destabilization,” and directed HUD to
report to the appropriate congressional committees on further actions that can be
taken to protect homebuyers and communities experiencing high rates of defaults and
foreclosures on FHA-insured loans. Part of the reason for high FHA foreclosure rates
has been traced to poor and even fraudulent appraisers — assigning high values to
homes that cannot be justified. A November 2004 report by the Government
Accountability Report, Single-Family Housing: HUD’s Risk-Based Oversight of
Appraisers Could Be Enhanced, concluded that HUD is doing better at monitoring
these appraisal firms, but that it needs to do better.
Increased homebuyer training may help to protect low-income and minority
homebuyers from another significant problem: predatory lending. Research has
shown that lower-income and minority buyers are more likely to receive “subprime”
mortgages with higher interest rates and higher fees, often higher than can be justified
by standard underwriting guidelines.7 Predatory lending has hurt lower-income and
minority homeowners most, often stripping away home equity accumulated over a
lifetime. When foreclosures are concentrated in certain areas, as FHA-insured homes
often are, they can pull property values down and do other damage to these
neighborhoods. These and other factors work against lower-income homebuyers
accumulating wealth. The Administration’s proposed FHA Subprime Loan product
is seen as an attempt to address some of these issues.
Other 108th Congress Homeowner Proposals. In addition to the
Administration’s proposals, a variety of homeownership proposals were pending inth
the 108 Congress. No hearings were held and none were reported out of committee.
!S. 875 would amend the Internal Revenue Code of 1986 to allow an
income tax credit to promote homeownership and community
development. (Very similar to the Administration’s H.R. 839/S.


!H.R. 1913 would amend the Internal Revenue Code to allow first-
time homebuyers credit for the purchase of principal residences in
rural areas equal to the lesser of 10% of the home purchase price or
!H.R. 133/S. 846 would amend the Internal Revenue Code of 1986
to allow a deduction for premiums on mortgage insurance.
!H.R. 1132, the Home At Last Tax Credit Act of 2003, would
provide a tax credit to promote homeownership among low-income
individuals. State housing finance agencies would receive annual
tax credits based on the state’s population. Qualified lenders would

7 Risk or Race? Racial Disparities and the Subprime Refinance Market — A Report of the
Center for Community Change, Congressional Record, May 1, 2002, pp. S3630-31.

use the tax credits to provide below-market rate mortgages to
homebuyers who, in general, have incomes of 80% or less of the
local area median and who attend pre-purchase homeownership
counseling. (This is similar to the existing Mortgage Revenue Bond
!S. 1175, the First-Time Homebuyers’ Tax Credit Act of 2003, would
provide a refundable credit (the Treasury writes a check to the
homebuyer if the credit is more than the first-time buyer owes in
taxes) equal to 10% of the purchase price up to $6,000 for a joint
return ($3,000 for a single) to be used for both closing costs and the
downpayment. The credit could be used in the year of the purchase
by transferring the tax credit to the mortgage lender.
Predatory Lending
Predatory lending involves home mortgages, mortgage refinancing, home equity
loans, and home repair loans with unjustifiably high interest rates, excessive fees,
balloon payments, prepayment penalties, and the imposition of other unreasonable,
and sometimes fraudulent, terms. By many accounts, these loans have grown rapidly
in minority neighborhoods in the past half dozen years, frequently targeted to the
elderly, often stripping away wealth that may have taken owners decades or a lifetime
to accumulate.
Congress has held a series of hearings on predatory lending, the most recent on
March 30, 2004, by the House Subcommittees on Financial Institutions and
Consumer Credit, and Housing and Community Opportunity. The focus was on the
nature of subprime lending and its overlap with predatory lending. As one Member
said, “Not all subprime lending is predatory, but too much of it is.” Despite the many
hearings and the bills that have been introduced over the last few years, industry,
consumer groups, HUD, and other interested parties have not been able to reach a
consensus on what legislation is necessary to address predatory lending. Some
financial organizations argue that more rigorous enforcement of existing federal laws
would be sufficient. A number of government agencies (Justice Department, the
Federal Trade Commission, the Federal Reserve, HUD, along with the government
sponsored enterprises, Fannie Mae and Freddie Mac) have become involved in
addressing various aspects of the predatory lending issue, and thus, some industry
groups say that additional legislation may not be necessary. On the other hand, some
consumer groups believe there should be more education initiatives to increase
financial literacy. One consumer advocacy group said that predatory lending is “so
hard to fight because so many people are making so much money,” and that only
comprehensive legislation can stem the problem.
The Neighborhood Reinvestment Corporation (NRC) argues that predatory
lending threatens to undo the work of many nonprofits that have worked with lenders
and local governments to improve distressed neighborhoods. They have worked with
Freddie Mac to develop a loan product for families that now have predatory loans.
The mortgage lending industry acknowledges that a small number of lenders on the
fringe give their industry a black mark, and say they are working to address the worst
abuses. However, they caution about an overreaction, with excessive regulations that
could increase the costs of borrowing and make it more difficult for those with

impaired credit records to get needed loans. Industry groups are concerned that states
are passing their own predatory lending laws, including California, North Carolina,
and Georgia, and that some are so severe that reasonable federal preemptive
legislation is now desired.
A number of bills designed to combat predatory lending were introduced in the
108th Congress. Representative Ney, chair of the Financial Services Subcommittee
on Housing and Community Opportunity, introduced H.R. 833, a bill to “combat
unfair and deceptive practices in the high-cost mortgage market” and preempt the
growing number of state and local predatory lending laws. H.R. 1663, the Predatory
Mortgage Lending Practices Reduction Act, also proposed to curtail abuses among
subprime lenders and encourage efforts to resolve complaints by consumers. These
bills are summarized below.
H.R. 833 would have amended the Truth in Lending Act “to combat unfair and
deceptive practices in the high-cost mortgage market, establish a consumer mortgage
protection board, and establish licensing and minimum standards for mortgage
Consumer protections in the bill included:
!prohibiting single premium credit insurance;
!prohibiting loans made without regard to the borrower’s ability to
repay them;
!limiting prepayment penalties to four years, rather than their current
five-year period;
!prohibiting refinancing during the first 12 months of the loan, unless
it benefits the borrower; and
!prohibiting lenders from profiting from foreclosure by only allowing
them to recoup costs.
The bill also included a number of new disclosure requirements:
!lenders must disclose that a loan has a balloon payment and that a
borrower is not required to have such a feature in their loan;
!lenders must report borrower’s favorable loan activity to credit
bureaus at least quarterly; and
!borrowers with high cost loans must receive a free copy of their
credit report upon request.
Since this bill would have preempted more stringent state and local laws, the
lending industry would have received protection from laws they believe raise the
costs of lending and encumber the national mortgage lending market. The legislation
would also have barred certain “frivolous” lawsuits that raise the cost of lending.
Some consumer groups opposed the bill because it would have eliminated what they
view as more consumer-friendly state and local laws. They claimed that this proposal
would have done little to curb the worst abusive-lending practices.
Another predatory lending bill, H.R. 1663, would have required the HUD
Secretary to establish, by regulation, standards and procedures for mortgage lenders

and brokers. Persons providing mortgage lending services or mortgage brokerage
services in connection with a subprime, federally-related mortgage would have been
required to be tested and certified in a variety of areas including the Truth in Lending
Act, the Equal Credit Opportunity Act, the Home Ownership and Equity Protection
Act of 1994, and the Real Estate Settlement Procedures Act. A creditor would have
been required to make a good faith effort to resolve any consumer complaint
concerning improper or questionable lending practices within 60 days. There would
have been prohibitions against charges by lenders that were not previously disclosed
to borrowers and on arbitration clauses imposed by lenders on consumers without
their consent. H.R. 1663 would also have provided grants to Community
Development Corporations to provide predatory lending education to borrowers, and
potential borrowers.
Real Estate Settlement Procedures Act
The major purpose of the Real Estate Settlement Procedures Act of 1974
(RESPA)8 is to encourage homebuyers or homeowners who are refinancing their
mortgages, to shop around for the best prices for settlement services (also referred
to as “closing costs”). Many contend that this act has failed in its purpose over the
decades, with many homeowners or homebuyers being overcharged or forced to buy
unneeded services. On July 29, 2002, the Administration proposed a rule that would
have made major changes in RESPA regulations to simplify and improve the process
of obtaining a home mortgage.9 Homebuyers would have the option of getting a
guaranteed “package price” including all of the required settlement services before
committing funds to any lender, so that they might compare this “one price” with
others from other settlement service providers. A number of lenders already offer
this as a “no closing costs”option, rolling the settlement costs into a higher mortgage
rate. The analogy for the one-price proposal is similar to WalMart (and Target and
a handful of other large chain stores) opening up a superstore, and because of its large
purchasing power (buying soap by the trainload), and efficient operations, it can
lower prices and outcompete local department stores, hardware stores, food stores,
and other businesses who cannot find niche markets or adapt in other ways.
Former HUD Secretary Martinez said that these reforms could save Americans
up to $8 billion a year — an estimated $700 of savings per homebuyer or those
refinancing a mortgage — but national organizations representing mortgage brokers
and real estate agents that benefit financially from the lack of competition among
settlement providers objected strongly. Some feared that under HUD’s proposed
RESPA rule, half a dozen large national lenders and real estate firms could come to
dominate the settlement service business. Senator Shelby, chair of the Senate
Banking, Housing and Urban Affairs Committee, said at a RESPA hearing that the
change would be “significantly damaging to small businesses” and Representative
Manzullo, chair of the Small Business Committee, spoke against this proposal,

8 12 U.S. C. Sec. 2601, et seq.
9 Federal Register, July 29, 2002, pp. 49134-49174.

saying that it could bankrupt thousands of small businesses across the country.10
Supporters of the proposed reforms, including the Consumer Federation of America
and the National Association of Consumer Advocates, argue that under the current
system, it is very difficult for homebuyers to avoid being overcharged and cheated.
Often the settlement process is a scam, with made-up and overlapping categories of
charges that must be paid because to delay or cancel a home purchase at the last
minute would have even more serious financial consequences. However, even these
consumer organizations were wary of what the final rule would contain. In a
December 3, 2003 letter to the Office of Management and Budget (OMB), a number
of consumer groups expressed concerns (although for different reasons than industry
groups) — including that they did not want the rule to facilitate predatory lending or
to preempt state consumer protection laws.
HUD has expressed frustration over the past two years at the lack of support
with its RESPA reform proposal during congressional oversight hearings. In late
December 2003, HUD sent a final RESPA rule to OMB for review. OMB had 90
days to decide whether to go forward or not. If OMB had signed off on it, it would
have then been published in the Federal Register, and according to some reports, the
reforms would have been phased in over a six to 12 month period. However, on
March 22, 2004, HUD’s then Acting Secretary, Alphonso Jackson, withdrew the final
rule. He said he planned to revise the rule, if necessary, and re-propose the rule after
briefing Members of Congress and meeting with affected consumer and industry
groups. Efforts to reform RESPA have been going on for more than 20 years, and
few expect genuine reforms any time soon.
The Mortgage Revenue Bond Program for First-Time
Homebuyers — and the Proposed Repeal of the “Ten-Year
The Housing Bond and Credit Modernization and Fairness Act of 2003 (H.R.
284/S. 595), with about 420 bipartisan co-sponsors, would have modified several
provisions in the existing Mortgage Revenue Bond (MRB) program for first-time
The MRB program is a provision in the tax code that provides reduced rate
mortgages to first-time homebuyers with incomes up to 115% of the local area
median. Many states also use their programs to provide help with downpayments and
closing costs. States raise funds for the program by selling tax-exempt bonds.
Investors who buy these bonds do not have to pay federal income tax on the interest
income they earn, so they are willing to lend to states at lower interest rates. At an
annual cost of $1.2 billion in lost tax revenue to the U.S. Treasury, the program
serves an estimated 100,000 buyers who receive reduced-rate mortgages each year
at a cost that averages about $12,000 per buyer. It is not clear how many of these
buyers might have been able to purchase a home without the discounted mortgage.

10 Current RESPA Proposal Doomed, Housing Affairs Letter, Apr. 11, 2003.

H.R. 284/S. 595 would have repealed the “Ten-Year Rule,” an obscure
provision now said to be preventing tens of thousands of qualified lower-income
first-time buyers each year from getting an affordable MRB-financed mortgage. The
rule,11 enacted before the MRB program was made permanent in 1993, requires
states to use the mortgage payments received from homeowners to pay off the bond
once the bond has been outstanding for 10 years, rather than using (or recycling)
these mortgage payments to make other loans to other first-time buyers. When
homeowners sell their home and pay off their mortgage, or refinance their loan, these
funds must also be used to pay down the bond principal.
The 1988 Ten-Year Rule started having an impact in 1998. Repealing the rule
would allow a recycling of funds and thus allow a larger volume of tax-exempt bonds
to remain outstanding for a longer period of time. This change is supported by the
National Council of State Housing Agencies and the National Governors
Association. The Joint Committee on Taxation has estimated that the repeal would
cost $770 million over five years and $2.4 billion over 10 years.
Those who oppose the repeal of the Ten-Year Rule maintain that the purpose
of the rule was to reduce the advantage that the MRB program has over other bond
users competing for the state’s limited bond authority. It is noteworthy that only
MRBs are subject to the Rule, not bonds for rental housing, airport construction,
sewage treatment facilities, or various other private activity bond categories. The
MRB program has always had a significant advantage over many other categories;
the uniqueness of the home mortgage program means that as homeowners make their
monthly payments, the money can be used to make more home loans. In effect, bond
authority used to finance mortgages can be stretched beyond the initial amount.
Other uses of bond authority — such as for a water treatment plant — do not have
this ability. Revenue from the water treatment plant would go directly to pay off the
bond without any recycling opportunity. Thus, even with the Ten-Year Rule, the
MRB program maintains a relative advantage over other bond programs.
An omnibus tax bill, S. 1637, which passed the Senate on May 11, 2004,
contained a provision to repeal the Ten-Year Rule, but the equivalent tax bill in the
House, H.R. 2896, did not contain this provision. Repeal of the “Ten-Year Rule”
was dropped from a “working families” tax bill, H.R. 1308, signed into law (P.L.


Fannie Mae and Freddie Mac
Government Sponsored Enterprises” (GSEs) Fannie Mae, Freddie Mac, were
in the spotlight during much of 2004 for questionable accounting and business
practices. In December 2004 a Securities and Exchange Commission audit
concluded that Fannie Mae had overstated its income by least $9 billion, leading to
the resignation of its top officer and the dismissal of two other high-ranking
administrators. There now appears to be a consensus on the need for more stringent
regulation of the GSEs. House Financial Services Chairman Oxley has scheduled
hearings in January 2005 and Andrew Gray, spokesman for Senate Banking

11 P.L. 100-647.

Committee Chairman Shelby said recently (“Congress Puts New Regulator on the
Fast Track,” Washington Post, December 20, 2004), “Senator Shelby believes that
now more than ever it’s time to act.”
Representative Richard Baker, chair of the House Financial Services
Government-Sponsored Enterprises Subcommittee, has long been a critic of Fannie
Mae and Freddie Mac, arguing that they have not been sufficiently accountable to the
public. He has also argued that HUD’s Office of Federal Housing Enterprise
Oversight (OFHEO) has been ineffective in its watchdog role of the GSEs. H.R.
2575, the Secondary Mortgage Market Enterprises Regulatory Improvement Act
(with 20 Republican cosponsors), would have abolished OFHEO, and created a new
Office of Housing Finance Supervision within the Treasury to oversee Fannie Mae
and Freddie Mac. This new entity would establish the duties and authorities for the
Director, provide for the public disclosure of information, risk-based capital tests for
enterprises, and for required minimum and critical capital levels. The proposed
legislation included provisions for prompt corrective actions and for the enforcement
of actions.
Additional bills were introduced in 2004 that would have abolished OFHEO and
established a new regulatory framework for the GSEs (H.R. 2803, S. 1508, and S.
1656). In addition, on April 1, 2004, the Senate Banking Committee reported
legislation sponsored by Chairman Shelby, which would have established an
independent regulatory agency to replace OFHEO and certain practices of the Federal
Housing finance Board. One controversial part of the bill was a provision that would
have provided the new regulator with the power of receivership over Fannie Mae and
Freddie Mac — if either were to get into serious financial trouble, the regulator could
take over the GSEs and sell their assets. Supporters of this provision believe this
would help convince investors that the government does not guarantee the debts of
the GSEs. The current belief that the government would come to the aid of the
GSEs (believing they are too big for the government to allow them to fail) allows the
GSEs to borrow funds in the capital markets at lower interest rates than their
competitors. Housing advocacy groups oppose this provision since they think it
could mean GSEs would have less funds to support affordable housing goals (set
each year by HUD).
For a side-by-side comparison of GSE regulation proposals, including Chairman
Shelby’s draft bill that was offered as a substitute for S. 1508 during the markup and
passed largely along party lines on April 4, 2004, see CRS Report RL32069,
Improving the Effectiveness of GSE Oversight: Legislative Proposals. Of particular
interest to housing advocacy groups, the Shelby proposal contained a requirement
that Fannie Mae and Freddie Mac spend 2.5% of their pre-tax profits on capital
grants to support production and preservation of low income housing. Another 2.5%
would go into a loan loss reserve fund to allow the GSEs to take greater risk in their
lending to serve lower income people. Five percent of Fannie Mae and Freddie
Mac’s pre-tax earnings for last year would have been about $1 billion. The bill
would have also significantly increased the GSE affordable housing goals.
A December 2003 report by the Federal Reserve, The GSE Implicit Subsidy and
Value of Government Ambiguity, concluded that Fannie Mae and Freddie Mac
provide very little help to homebuyers, reducing mortgage rates by only seven “basis

points” (1% equals 100 basis points), not enough to substantially increase the
homeownership rate. According to the author, economist Wayne Passmore, most of
the advantage the GSEs have in borrowing funds at lower rates in financial markets,
which occurs because investors incorrectly believe that the GSEs have implicit
government backing, benefits shareholders in these companies. The GSEs dispute
the findings and the chief economist of the National Association of Homebuilders,
David Seiders, says the results are very questionable and are in conflict with other
Samaritan Initiative
In both its FY2004 and FY2005 budget, the Administration proposed a $50
million Samaritan Initiative. The proposal would have provided coordinated grants
through HUD, the Department of Health and Human Services and the Veterans
Administration to provide new housing options and aggressive outreach and services
to chronically homeless people. The Samaritan Initiative was considered to be a tool
for use in the Administration’s larger goal of ending chronic homelessness in 10
years. The Samaritan Initiative was not funded in either FY2004 or FY2005. For
more information on the Samaritan Initiative, the President’s 10-year goal, or federal
homeless programs in general, see CRS Report RL30442, Homelessness: Recent
Statistics, Targeted Federal Programs and Recent Legislation.
The Brownfields redevelopment program is used to reclaim abandoned and
contaminated commercial and industrial sites — often as part of inner city
neighborhood redevelopment efforts. Some view these efforts as “smart growth,”
making use of the existing infrastructure. But much less progress has occurred than
hoped, with many projects taking three-four years to get started and others abandoned
because of complex environmental regulations and other difficulties. Brownfields
bills in the 108th Congress included H.R. 239, H.R. 1334, and S. 645. These bills
would have provided grants for projects for the cleanup and economic redevelopment
of Brownfields. While HUD’s Brownfields program received $25 million of
appropriations in each of FY2002, FY2003, and FY2004, the Administration’s
FY2005 budget requested no funding, recommending instead that brownfields
activities be turned over to the Environmental Protection Agency. The Consolidated
Appropriations Act, 2005 provided $24 million. For more details, see CRS Issueth
Brief IB10114, Brownfields and Superfund Issues in the 108 Congress and CRS
Report RL30972, The Brownfields Program Authorization: Cleanup of
Contaminated Sites.