Subcommittee on Housing and Transportation


Hearing to Examine Proposals to Promote Affordable Housing

STATEMENT OF THE
NATIONAL ASSOCIATION OF REALTORS®

June 20, 2000


INTRODUCTION

Mr. Chairman and members of the Subcommittee, my name is Cathy Whatley. I am a REALTOR® from Jacksonville, Florida and First Vice President of the NATIONAL ASSOCIATION OF REALTORS® . On behalf of the more than 760,000 members of the NATIONAL ASSOCIATION OF REALTORS® I am pleased to appear before you today to testify regarding affordable housing.

Mr. Chairman, the NATIONAL ASSOCIATION OF REALTORS® represents a wide variety of housing industry professionals committed to the development and preservation of the nation's housing stock and making it available to the widest range of potential homebuyers. The Association has a long tradition of support for innovative and effective Federal housing programs and we work diligently with the Subcommittee and the Congress to fashion housing policies that ensure Federal housing programs meet their mission responsibly and efficiently.

Mr. Chairman, the NATIONAL ASSOCIATION OF REALTORS® wholeheartedly commends you and the Subcommittee for examining the important challenges confronting our national housing objectives and developing creative approaches aimed at improving housing opportunities for many deserving Americans. Our nation is experiencing unprecedented economic prosperity, yet critical housing needs continue to go unmet. The NATIONAL ASSOCIATION OF REALTORS® welcomes the opportunity to work with you and the Subcommittee to forge viable solutions that broaden housing opportunities for all Americans.

OVERVIEW

Mr. Chairman, housing has always been and continues to be one of the highest personal and social priorities in America. Homeownership serves as a cornerstone of our democratic system of government and deserves a preferred place in our system of values as it contributes to community responsibility; civic, economic, business, and employment stability; family security; and well being.

As real estate professionals we reaffirm the national goal of "a decent home and a suitable living environment for every family." The NATIONAL ASSOCIATION OF REALTORS® is unwavering in its commitment to assure that every American has the opportunity to attain a decent, safe and affordable home. Yet, this commitment must be addressed at the highest level of national priorities and must include the complete spectrum of the housing ladder -- from the homeless to the first-time homebuyer.

As a nation, we must ensure that every citizen has the opportunity to enter the housing arena. Housing should be viewed as a series or ladder of opportunities -- the first few rungs represented as steps through rental housing, the middle rungs representing first-time homebuyers, and the upper rungs symbolic of repeat homebuyers.

The NATIONAL ASSOCIATION OF REALTORS® recognizes that homeownership is a primary goal of American families. Housing has always been and continues to be one of the highest personal and social priorities in America with study after study affirming that a large proportion of Americans would rather own than rent a home.

Homeownership directly benefits society by fostering pride and participation in one's community, encouraging savings and promoting social and political stability. Homeownership has been emulated on television, romanticized in literature, and coveted in the popular social consciousness. It is advocated by private enterprise and encouraged by government policy. Clearly, it is the proud achievement of most American families, the ultimate assimilation for generations of immigrants to this country, and the pinnacle for Americans generally as they climb the ladder of economic success.

For the past 50 years, public policies have been pursued to ensure an effective system for the delivery of housing to all Americans, and significant progress has been made toward achievement of that goal. National housing policy emanating from the landmark National Housing Act of 1949 has traditionally been directed toward two primary goals: providing an adequate supply of affordable housing for all Americans, and promoting widespread homeownership opportunities.

While the NATIONAL ASSOCIATION OF REALTORS® acknowledges that the private sector is the best mechanism for meeting the demands for housing, we wholeheartedly and firmly believe the Federal government must take a concomitant role and work in concert with the private sector to ensure an adequate supply of affordable housing. The tremendous housing needs that confronted the nation in the 1930's and the war years have been alleviated today by the combination of robust economic growth, successful Federal policies, and an active and vibrant private mortgage marketplace. These gains have brought the country much closer to its housing goals and are resulting in a record homeownership rate.

Yet, there continues to exist underlying housing problems that are impacting the ability of our citizens to climb the housing ladder to homeownership. The nation's severest housing problems increasingly have been those faced by first-time homebuyers and lower income households in rental housing.

The NATIONAL ASSOCIATION OF REALTORS® applauds the private sector for the recent development of innovative and affordable housing products that are providing viable housing opportunities for many deserving families. However, despite the emergence of its affordable housing programs, many housing needs continue to go unmet by the private market. Chief among these is the homeownership needs of low- and moderate-income Americans, minorities, and average-earning families seeking to purchase homes in high-cost areas of the country. Consequently, the NATIONAL ASSOCIATION OF REALTORS® steadfastly maintains that government mortgage programs in general and the Federal Housing Administration in particular represent the most important source of homeownership for many American families.

THE IMPORTANCE OF FHA AND WHY IT IS VITALLY NEEDED

Mr. Chairman, the ability to afford a home remains the most challenging hurdle for many first-time homebuyers because of insufficient minimum qualifying incomes for a mortgage on the median-priced starter home. Further, the inequality in income distribution has widened considerably reflecting in a growing gulf between "haves" and "have nots" in the housing market. The declining share of income going to low- and moderate-income households has contributed to equally apparent housing problems, and in some instances deprivation, for many attempting to scale the housing ladder.

For many of these potential homebuyers, FHA is playing a major role in making available and expanding homeownership opportunities. FHA typically serves borrowers who have lower annual incomes, make smaller down payments, and purchase less expensive homes. FHA is also a key financing tool for first-time homebuyers because it has lower down payment requirements and less stringent loan qualification requirements than conventional financing.

FHA's single-family mortgage insurance program is a valuable government program that has proved highly beneficial in helping low-, moderate-, and middle-income people achieve the dream of homeownership. FHA insurance is available to individuals regardless of their racial, ethnic or social characteristics and its universal availability helps stabilize housing markets when private mortgage insurance is nonexistant or regional economies encounter disruptions.

While FHA provides most of its single-family mortgage insurance through its Section 203(b) program, FHA also operates some smaller, specialized single-family programs that assist low- and moderate-income home buyers by combining their assistance with FHA mortgage insurance. This interconnection of housing activity serves to promote innovative and creative affordable homeownership opportunities, assisting thousands of households who might otherwise be underserved through requirements placed on the private market.

Over the course of the last several years, both the Congress and the Administration have made constructive improvements to the FHA program. These enhancements have streamlined FHA, improved the quality of its programs and restored the financial health of the Mutual Mortgage Insurance Fund, making homeownership for qualified purchasers efficient, attainable and affordable. The NATIONAL ASSOCIATION OF REALTORS® commends you and the Subcommittee for your leadership in this regard and we look forward to the introduction of additional measures that will improve the way FHA operates for borrowers and the housing industry.

NECESSARY IMPROVEMENTS

Mr. Chairman, as you know we just concluded the celebration of National Homeownership Week in which many communities and neighborhoods throughout the country celebrated the benefits of homeownership. National Homeownership Week also brought attention to the continued plight of many deserving families struggling to overcome barriers preventing them from purchasing their own home. Last month the Department of Housing and Urban Development reported that America's homeownership rate reached a record high of 67.1 percent, translating to more than 70 million American families who own their own homes. The NATIONAL ASSOCIATION OF REALTORS® believes this is a phenomenal achievement and we wholeheartedly commend you and the Subcommittee for effecting favorable policies and initiatives to reach this historic mark.

Despite these important gains, the NATIONAL ASSOCIATION OF REALTORS® cautions that gaps in homeownership remain requiring the full collaboration and involvement of the housing and mortgage finance industry, all levels of government, private enterprises, charitable groups and those involved in the battle to ensure housing opportunity for every qualified American citizen.

Consider, if you will, the following:

Clearly, these population demographics will support strong housing demand and the need for affordable housing opportunities. Yet, there are ominous signs on the horizon that warrant urgent collaborative attention to our nation's housing needs and demand clear and compelling responses to strengthen federal efforts to assure adequate supplies of decent, safe and affordable housing for America's families.

Consider the following:

While some may portend these developments as a housing crisis worsened, the NATIONAL ASSOCIATION OF REALTORS® believes these trends and developments signal a clarion call to action for Congress, the Administration and the housing industry to jointly and cooperatively forge a new alliance to responsibly address salient housing and real estate finance issues well into the new millennium.

As a good first step, we call on Congress to enact The American Homeownership and Economic Opportunity Act of 2000 introduced by Representative Rick Lazio (R-NY) and passed overwhelmingly by the House April 6 by a vote of 417-8. The bill is good, sound legislation that fills the gap in homeownership and sustains the momentum in our nation's housing boom.

Mr. Chairman, the NATIONAL ASSOCIATION OF REALTORS® is a strong supporter of the House bill and encourages the Subcommittee to introduce similar legislation. The bill would help streamline the regulatory process and cut excessive red tape that customarily adds unnecessary costs to the price of housing. The bill contains important affordable housing provisions that will make homeownership easier and more affordable for many deserving American families if it is enacted by Congress this year. Let me share with you two of the provisions that NAR is particularly supportive of.

Simplifying the FHA Downpayment Calculation. Mr. Chairman, the bill makes permanent the FHA downpayment simplification calculation that is currently being used nationwide to calculate how much a person needs to pay at closing. The simplification calculation is simple to explain and easily understood but it is only temporary and will revert to a complex tiered formula if Congress does not act by September 30, 2000.

The revised calculation is a very user-friendly, easy-to-understand three-step process in which the maximum mortgage amount is based on a fixed percentage of the property's sales price (or appraised value, if less) exclusive of closing costs. Under the old system computing FHA down payments and maximum loan-to-value ratios was extremely complicated and required multiple calculations and closing costs as an input to the calculations. It was frustrating to the industry because of its complexity and frustrating to homebuyers because it was not easily comprehensible. Additionally, the old system placed significant administrative burdens on FHA, particularly in terms of maintaining and updating local schedules of recognized buyer-paid closing costs.

Implementation of the revised calculation has caused no negative changes to the cash requirements of FHA borrowers, and it has had no adverse effects on the FHA Mutual Mortgage Insurance Fund.

Given these beneficial effects, NAR believes Congress should make this law permanent. Congress did our industry a tremendous favor when it revised the old system in 1996 and extended it nationwide in 1998. Frankly, it was a regulatory burden to the private sector and it was severely hampering the effective and efficient operation of the FHA program. We now need Congress to make it a permanent fixture of the FHA program.

Providing FHA with the Authority to Develop a New Product. Mr. Chairman, the NATIONAL ASSOCIATION OF REALTORS® truly believes the FHA should have the authority to insure successful mortgage instruments already proven in the marketplace. We believe the FHA should have the authority to insure hybrid FHA adjustable-rate mortgages (ARMs) to complement the private sector which is already providing these valuable homeownership products. Extending this authority to FHA will help modernize the single-family program to benefit its core customers. Making this product offering available will also help to close the homeownership gap for a majority of first-time, low-income and minority households who need FHA insurance to qualify for homeownership.

The House-passed legislation includes a provision that creates an FHA hybrid ARM, providing a fixed interest rate for at least three years with a variable rate thereafter. Currently, FHA is restricted to authorizing ARMs that carry a fixed interest rate for only one year.

Mr. Chairman, ARMs serve a valuable purpose by enabling borrowers to qualify for lower interest rates than are available for fixed rate mortgages. This translates to lower and more affordable monthly payments, making homeownership an affordable reality especially for first-time buyers with limited financial resources.

We believe the hybrid ARM provision will serve as an additional benefit to FHA consumers who may be reluctant to seek homeownership due to the recent rise in interest rates. A hybrid ARM will provide borrowers with the security of fixed-rate mortgages since the interest-rate period is extended to a minimum of three years or more. By combining elements of a fixed-rate mortgage and a traditional one-year ARM, the hybrid ARM serves as a convenient and affordable tool for FHA home buyers seeking a hedge against the rising cost of traditional fixed-rate mortgages.

Additionally, we believe a hybrid ARM lessens consumer worries stemming from the initial "teaser" rates of traditional ARMs which customarily convert to a higher interest rate after the first adjustment. With a fixed interest rate period of at least three years, hybrid ARM users will experience less "payment shock" offering home buyers the opportunity to save money during the early years of the mortgage.

Mr. Chairman, creating a hybrid FHA ARM will prove to be a valuable tool for stimulating new affordable housing opportunities. However, some will argue that a new FHA ARM product should be avoided because of concerns that it will expose the FHA Mutual Mortgage Insurance Fund to significant financial risk since ARM product users tend to first-time homebuyers who are characteristically greater default risks.

The NATIONAL ASSOCIATION OF REALTORS® believes these concerns are without merit. It is important to note that HUD strengthened the performance of its FHA adjustable-rate mortgage program in 1998 when the Department implemented important credit policy changes tightening the underwriting requirements pertaining to ARMs. The changes included the elimination of temporary interest rate buydowns, clarification of underwriting requirements and more thorough and effective home buyer education and counseling. The Department's action was undertaken in partnership with NAR and the housing industry and it brought FHA ARM policies in conformance with the secondary mortgage market and the private mortgage insurers to ensure FHA maintains actuarial soundness.

Mr. Chairman, the House-approved legislation contains other favorable provisions that facilitate homeownership opportunities for many deserving families and increase flexibility for communities to develop and implement their own homeownership tools. It is our hope that the Subcommittee will consider the inclusion of these provisions in any planned legislation it may consider this year.

NAR EFFORTS TO IMPROVE AFFORDABLE HOUSING OPPORTUNITIES

Mr. Chairman, at the outset I mentioned that improving affordable housing opportunities would require the ideas, visions, energies and innovations from across the spectrum of housing-related groups. I want to share with you and the Subcommittee a brief summary of the actions and activities the NATIONAL ASSOCIATION OF REALTORS® is undertaking to meet the demand for affordable housing.

The NATIONAL ASSOCIATION OF REALTORS® has produced an array of tools and products for REALTORS® to elevate the importance of open and free housing across the nation and to further REALTORS® knowledge and understanding of the fair housing laws and practices to ensure all Americans have equal opportunities to housing.

Through our local boards and state associations REALTORS® have planned homeownership fairs and homebuyer information booths and developed resource guides to assist the public in finding housing and qualifying for a mortgage. Many of our local associations of REALTORS® work in partnership with various housing-related organizations to build affordable homes for low-income families in conjunction with the Habitat for Humanity and other organizations on an ongoing basis.

Through our Federal Housing Policy Committee we have developed recommendations and guidance to facilitate the efficient and effective operation of HUD's single-family asset disposition program to enhance the availability and marketability of HUD foreclosed properties. In particular, we are providing HUD with our experiences and technical resources pertaining to the Multiple Listing Service to expose HUD-owned properties to more buyers at improved sales prices and more quickly.

In conjunction with the Mortgage Bankers Association of America, we have partnered with HUD to improve the quality and condition of homes insured through the FHA single-family program. REALTORS® throughout the country are making FHA home purchasers better aware of the importance and value of home inspections in the homebuying process and of the distinct purposes of an inspection and the appraisal of the home. Armed with this knowledge FHA homebuyers will know first-hand the condition and value of their home purchase, shielding them against costly repair items.

Finally, the NATIONAL ASSOCIATION OF REALTORS® recently established a major grassroots initiative to provide educational tools and advocacy resources to REALTORS® nationwide to help policy-makers address the challenge of growth through local decision-making, research, community consensus and creative problem-solving. The grassroots plan is based on the recommendations of an NAR presidential advisory group formed to examine the appropriate role for real estate practitioners in growth-related issues, and its principles include fostering housing opportunities at all market levels, encouraging economic development, protecting the environment, promoting fair and equitable financing mechanisms, stimulating community revitalization and protecting private property rights.

CONCLUSION

Mr. Chairman and Members of the Subcommittee, let me once again thank you for providing me this opportunity to testify today on behalf of the NATIONAL ASSOCIATION OF REALTORS® . We commend you for your continuing efforts on behalf of American families who need and desire homeownership opportunities. The NATIONAL ASSOCIATION OF REALTORS® believes the Subcommittee has before it a ripe opportunity to close the nation's homeownership gap and help deserving American families achieve the dream of owning their own home. We encourage the Subcommittee to introduce legislation similar to the House-approved American Homeownership and Economic Opportunity Act. I would be pleased to answer any questions or to provide further information for the hearing record.


EXECUTIVE SUMMARY
OF THE STATEMENT OF THE
NATIONAL ASSOCIATION OF REALTORS®

The NATIONAL ASSOCIATION OF REALTORS® recognizes that homeownership is a primary goal of American families. Housing has always been and continues to be one of the highest personal and social priorities in America with study after study affirming that a large proportion of Americans would rather own than rent a home.

Without a doubt, we are experiencing one of the strongest housing booms since post-World War II. Robust economic growth, successful Federal policies, and an active and vibrant private mortgage marketplace are bringing the country much closer to its housing goals and resulting in record homeownership rates. With four consecutive record years of home sales activity, a lot of people have fulfilled their dreams to buy homes.

But, unfortunately, even in these best of times, some prospective buyers are finding themselves unable to buy a home. Clearly, the ability to afford a home remains the most challenging hurdle for many first-time homebuyers because of insufficient minimum qualifying incomes for a mortgage on the median-priced starter home.

The NATIONAL ASSOCIATION OF REALTORS® calls on Congress to enact The American Homeownership and Economic Opportunity Act of 2000 passed overwhelmingly by the House April 6 by a vote of 417-8. The bill is good, sound legislation that fills the gap in homeownership and sustains the momentum in our nation's housing boom. We encourage the Subcommittee to introduce companion legislation so that many deserving American families may realize the prospects of homeownership.

Very simply, the bill contains several important affordable housing provisions that will make homeownership easier and more affordable. NAR is particularly supportive of two initiatives: (1) making permanent the FHA downpayment simplification calculation and (2) creating a new FHA hybrid adjustable-rate mortgage product.

The House-approved legislation contains other favorable provisions that facilitate homeownership opportunities for many deserving families and increase flexibility for communities to develop and implement their own homeownership tools. The NATIONAL ASSOCIATION OF REALTORS® encourages the Subcommittee to include these provisions in any planned legislation it may consider this year.

Home | Menu | Links | Info | Chairman's Page