Assistant Secretary for Housing - Federal
U.S. Department of Housing and Urban Development
UNITED STATES HOUSE OF REPRESENTATIVES
HOUSING AND COMMUNITY OPPORTUNITY SUBCOMMITTEE
March 24, 2004
Good morning, Chairman Ney, Vice Chairman Green, Ranking Member
Waters, and distinguished Members of the Subcommittee. Thank you
for the opportunity to testify today regarding the Administration's
Zero Down Payment Initiative. This major new mortgage insurance
product was included in the FY2005 Budget, and is specifically designed
to help first-time homebuyers purchase a home. I would like to take
this opportunity to thank Congressman Patrick Tiberi for introducing
H.R. 3755, the Zero Downpayment Act of 2004. I would also like to
thank the 30 Members of Congress --- both Democrats and Republicans
--- who have agreed to co-sponsor this important bipartisan legislation.
Under this new program, the Federal Housing Administration (FHA)
will insure 100 percent of the cost to acquire the home for first-time
homebuyers, allowing them to finance the full purchase price as
well as all of the closing costs. Potential homebuyers would not
have to make the minimum downpayment of three percent that is required
in our chief single-family insurance program, Section 203(b).
Studies have consistently shown that the single biggest obstacle
to homeownership for most families is the inability to come up with
enough cash to meet down payment and closing costs. Many potential
homebuyers pay the equivalent of a monthly mortgage in rent, but
are unable to save toward a down payment on a home purchase. Minority
families in particular are burdened by high down payment requirements.
This Administration is committed to helping all Americans address
this barrier to homeownership, including minority families who have
been shut out of homeownership opportunities in the past. We are
proud of this effort and the results. In the fourth quarter of last
year, the homeownership rate stood at an all-time record of 68.6
percent. There are now 72,650,000 American families who own their
own homes. For the year 2003 overall, the homeownership rate stood
at 68.3 percent, also a new record.
Minority homeownership also set records. For the first time ever,
the majority of minority households are now homeowners, with a record
rate of 50.6 percent in the fourth quarter of 2003. There are now
14,852,000 minority homeowners. We also set a new record of 49.5
percent for the year overall. All of this is good news and shows
the progress HUD and the rest of the housing industry is making
in increasing homeownership opportunity in this country.
This is a good record and we want to improve on it. There remains
a significant "homeownership gap" between non-Hispanic
whites and minorities. While more than half of minority households
own their own home, this compares with three-quarters of non-Hispanic
In June 2002, President Bush announced an aggressive homeownership
agenda to remove the barriers that block American families from
achieving homeownership with the goal of creating 5.5 million new
minority homeowners by the end of this decade. The Zero Down Payment
Program would move the nation significantly closer toward this goal.
Preliminary projections indicate that the new FHA mortgage product
would generate approximately 150,000 new homebuyers in the first
year alone. It would be structured to assist those creditworthy
but cash poor working individuals and families who have been excluded
from purchasing their first home. These families can afford monthly
mortgage payments, but due to their limited income have not been
able to save for a downpayment.
HUD has designed this program to minimize defaults and to protect
the Mutual Mortgage Insurance Fund. FHA has made conservative financial
assumptions regarding the program. In order to cover the costs of
the program, families who qualify for the Zero Down Payment Plan
would be charged a modestly higher insurance premium on their home
The upfront premium would be set at 2.25% as compared to 1.50%,
and the annual premium would be 0.75% as compared to 0.50%. After
five years, the annual premium would be reduced to 0.50%, the same
as the 203(b) program. For example, for a $100,000 mortgage, a Zero
Down Payment borrower would pay approximately a $50 a month more
than a regular FHA borrower.
There would be no net cost to the FHA Mutual Mortgage Insurance
(MMI) Fund. The President's Budget projects that the additional
$19 billion in mortgage commitments will generate revenue of about
$184 million in the first year.
Borrowers would be held to the same underwriting guidelines as
those who apply for FHA's standard three percent downpayment mortgage.
They must meet the same payment-to-income and debt-to-income ratios
and the same credit standards. We propose to add two additional
requirements, to help families become and remain homeowners and
to minimize risk to the MMI Fund. Our new FHA TOTAL (Technology
Open To Approved Lenders) Mortgage Scorecard must also be used to
evaluate the overall credit worthiness of borrowers. Lenders in
conjunction with an automated underwriting system to underwrite
an FHA-insured loan electronically utilize this mortgage scorecard.
The TOTAL Scorecard allows FHA lenders to better predict which
borrowers are good risks and also identify those that are bad risks.
In developing FHA's electronic scorecard, HUD took into account
studies that have shown that creditworthiness is a better predictor
of the homeowner's ability to pay mortgage payments than the amount
of the downpayment. By requiring that the Zero Down Payment Program
loans be risk- assessed by the TOTAL Scorecard, FHA will immediately
be able to determine the perceived risk of each loan.
To further minimize risk, the proposal for the Zero Down Payment
Program includes a housing counseling requirement. Specifically,
participants would be required to satisfactorily receive one-on-one
housing counseling from a HUD-approved housing counseling agency
before they enter into a sales contract.
Housing counseling has proven to be an extremely important element
in the purchase of a home. Reliable quantitative research demonstrates
that housing counseling can be very effective in reducing mortgage
delinquency. Homebuyers who undergo this pre-purchase counseling
are less likely to default than those that haven't. A recent study
by Freddie Mac concluded that housing counseling could reduce delinquency
by as much as 34%. By limiting delinquency and foreclosure, housing
counseling is a cost-effective way to reduce the FHA's exposure
to risk while contributing to the growth of communities and the
stability of new homeowners across the country.
HUD's Housing Counseling Program supports the delivery of a wide
variety of housing counseling services to homebuyers, homeowners,
low- to moderate-income renters, and the homeless. The primary objectives
of the program are to expand homeownership opportunities and improve
access to affordable housing. Counselors provide guidance and advice
to help families and individuals improve their housing conditions
and meet the responsibilities of tenancy and homeownership. Counselors
also help borrowers avoid predatory lending practices, such as inflated
appraisals, unreasonably high interest rates, unaffordable repayment
terms, and other conditions that can result in a loss of equity,
increased debt, default, and foreclosure.
Over the last three years, the Administration has doubled the
budget request for housing counseling funds - from $20 million to
$40 million - and Congress has responded by appropriating the funds.
The proposed FY 2005 HUD Budget proposes a further increase to $45
million. The increase reflects both the large unmet need for this
program as well as its significant contribution to the President's
goals of expanding national homeownership and adding 5.5 million
new minority homeowners by the end of the decade. HUD estimates
that approximately half of the $5 million increase, or approximately
$2.5 million in grant funds, will be spent on counseling in conjunction
with the Zero Down Payment Mortgage.
Finally, the Zero Down Payment Program is a natural complement
to other down payment assistance efforts. In December 2003, President
Bush signed into law the American Dream Down Payment Act that authorizes
$200 million in formula grants to help homebuyers with down payment
and closing costs. FHA's proposed Zero Down Payment Program will
complement this program by providing help to families who can afford
to buy a home without assistance based on their incomes but lack
the resources for the downpayment and closing costs.