Section VI: Mortgage and Loan Insurance and Coinsurance

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(Administered by the Office of Housing)

Through the Federal Housing Administration (FHA), HUD provides insurance for mortgages and loans placed by private lenders on manufactured homes, single family and multifamily properties, and certain health and related facilities. This Federal role is designed to encourage lenders to make mortgage credit available in areas and to borrowers who may not otherwise qualify for conventional loans on affordable terms, such as first-time homebuyers.

Under FHA's authorities, which are numerous and contain a host of differing features, the Department's role is essentially that of an insurance company. Consistent with statutory requirements, HUD will make insurance available in connection with lenders, borrowers, and properties that meet minimum requirements. Down payment requirements vary by program, but are generally less rigorous than those required by conventional lenders. All borrowers pay interest on the loan at a rate that is negotiated with the lender.

All borrowers must pay a mortgage insurance premium (MIP) to offset the insurance risk involved. HUD uses both "one-time" (for most single family mortgages) and "periodic" methods of collecting MIP. The one-time MIP is collected at the front end (insurance endorsement). It cannot exceed 2.0% for FY 1997 , and may be added to the loan amount and paid off along with the rest of the loan. In addition, for the basic single family mortgage insurance program, an annual premium is payable, which may not exceed 0.5% of the outstanding principal balance for the full term of the mortgage or a shorter period for lower-risk loans with lower loan-to-value ratios.

Borrowers who prepay their loans in the early years of the mortgage are entitled to a "rebate" of the part of the one-time MIP that HUD has collected but not "earned."

The periodic MIP alone is used for certain other single family programs (such as the condominium unit insurance program), and for all multifamily authorities. The periodic MIP is assessed by applying a fixed percentage (generally up to 1% per year by statute, less by regulation) to the outstanding balance of the loan during amortization.

If a loan goes into default, HUD will provide insurance benefits to the lender consistent with the contract of insurance.

For the multifamily program, this is normally accomplished by HUD taking an assignment of the mortgage. In return for paying insurance benefits to the lender, the lender turns the mortgage over to HUD, which makes HUD the owner of the mortgage. HUD then forecloses on the mortgage. For the single family program, the lender ordinarily acquires title through foreclosure or deed in lieu of foreclosure. The home is then conveyed to HUD in exchange for the payment of insurance benefits. For both the multifamily and single family programs, HUD offsets its insurance losses through the foreclosure of insured mortgages and sale of the properties.

With full insurance, HUD insures the entire loan indebtedness, pays insurance claims on this 100% basis, and generally takes an assignment of the mortgage. The multifamily Coinsurance programs have either been terminated, due to structural flaws, or are inactive. The single family Coinsurance program is being brought to a close, and no new business has been done since December 29, 1994.

FHA operates its programs through four Insurance Funds. The two largest are the Mutual Mortgage Insurance Fund (MMIF) and the General Insurance Fund (GIF). The MMIF is the largest of the Funds, and includes HUD's basic single family home mortgage insuring program.

The GIF is the "catch-all" Fund. It includes a number of insurance programs, including most of FHA's multifamily insuring authorities, and single family insurance for condominium units, Indians, and Hawaiian Homelands. The GIF operates "in the red," and needs annual appropriations to make it whole. The other funds are the Special Risk Insurance Fund (SRIF) and the Cooperative Management Housing Insurance Fund (CMHIF).

These Funds receive premium income and make necessary payments (such as the payment of insurance benefits in the event of borrower default). For budget purposes, the funds are grouped into two accounts (MMI/CMHI and GI/SRI).

The following is a brief description of the most significant insuring authorities.

A. SINGLE FAMILY PROPERTIES

Section 203(b) is HUD's most active single family insuring authority. The maximum mortgage dollar amount is $164,950 for a one-family dwelling effective January 1, 1997.

Legal Authority: Section 203(b) of the National Housing Act (12 U.S.C. 1709(b)); 24 CFR Part 203.

Program Status: Active.

2. Other Programs.

HUD administers a number of programs that are based upon section 203(b), but that have special features. The major ones are:

• Adjustable Rate Mortgages. This program provides for reduced-rate financing, with periodic increases in the effective interest rate based on market indices approved by HUD. Any single interest rate increase may not exceed 1%, with a maximum 5% increase over the life of the loan.

  Legal Authority: Section 251 of the National Housing Act (12 U.S.C. 1715z-16); 24 CFR 203.49.

• Single-Unit Condominiums. Insurance for mortgages covering single units in condominiums. Similar to the basic home mortgage insurance program.

  Legal Authority: Section 234(c) of the National Housing Act (12 U.S.C. 1715y(c)); 24 CFR Part 234, Subpart A.

• Home Equity Conversion Mortgages. This demonstration program provides for insurance of mortgages that permit elderly homeowners to receive monthly payments secured by the insured mortgage. Repayment is deferred until the sale of the home, death of the homeowner, or other events specified by regulation. The program demonstration expires September 30, 2000.

  Legal Authority: Section 255 of the National Housing Act, 12 U.S.C. 1715z-20; 24 CFR Part 206.

B. MULTIFAMILY PROPERTIES

The most widely used "full insurance" multifamily authorities are sections 207 and 221(d)(4) of the NHA. These provisions offer essentially similar ways of encouraging the construction and substantial rehabilitation of multifamily housing.

Legal Authority: Sections 207 and 221(d)(4) of the National Housing Act (12 U.S.C. 1713 and 17151(d)(4)); 24 CFR Parts 207 and 221. Section 203 of the Housing and Community Development Amendments of 1978 (12 U.S.C. 1701z-11) covers the management and disposition of multifamily housing projects that are owned by HUD or that are subject to a mortgage held by HUD.

Program Status: Active.

2. Multifamily Mortgage Credit Demonstrations.

The 1992 Act established two demonstrations to demonstrate the effectiveness of providing new forms of Federal credit enhancement for multifamily loans.

The section 542(b) program provides for HUD to enter into reinsurance agreements with FNMA, FHLMC, qualified financial institutions (QFIs), qualified HFAs, and the Federal Housing Finance Board. The agreements provide for risk-sharing and other forms of credit enhancement, including reinsurance with respect to pools of loans on multifamily housing properties.

The section 542(c) program requires HUD to carry out a pilot program in conjunction with qualified HFAs to test the effectiveness of Federal credit enhancement for loans for affordable multifamily housing through a system of risk-sharing agreements.

Legal Authority: Section 542 of the 1992 Act. 24 CFR Part 266.

Program Status: Programs underway. Commitment authority expired at the end of FY 1996.

3. Coinsurance.

The Department formerly operated coinsuring authorities for the construction or substantial rehabilitation of multifamily properties (24 CFR Part 251) and the refinancing of multifamily projects (24 CFR Part 255).

Legal Authority: Sections 221 and 223(f) of the National Housing Act (12 U.S.C. 1715l and 1715n(f)); 24 CFR Parts 251 and 255.

Program Status: Terminated or inactive.

4. FHA Multifamily Demonstration Authority ("Mark-to- Market")

See Section II Part J of this document.

C. HEALTH and RELATED FACILITIES