Subcommittee on Housing and Transportation

Hearing on Congressional Proposals Impacting FHA Reserves

Prepared Testimony of Mr. Thomas A. Schatz
Citizens Against Government Waste

9:30 p.m., Tuesday, September 12, 2000 - Dirksen 538

Mr. Chairman, members of the subcommittee, thank you for the opportunity to testify today. My name is Thomas A. Schatz. I am president of Citizens Against Government Waste (CAGW), a nonprofit organization dedicated to eliminating waste, fraud and abuse in government with one million members and supporters throughout the country. In the interest of full disclosure, I am pleased to inform you that Citizens Against Government Waste has not received any federal grant and we do not wish to receive any in the future.

CAGW was created 16 years ago after Peter Grace presented to President Ronald Reagan 2,478 findings and recommendations of the Grace Commission (formally known as the President's Private Sector Survey on Cost Control). These recommendations provided a blueprint for a more efficient, effective and smaller government.

Since 1984, the implementation of Grace Commission recommendations has helped save taxpayers more than $650 billion. CAGW has been working tirelessly to carry out the Grace Commission's mission to eliminate government waste.

CAGW very much appreciates the committeeís interest in mortgage insurance overpayments being held by the Federal Housing Administration (FHA) in the Mutual Mortgage Insurance Fund (MMIF).

The MMIF is authorized to fund all operations of the FHA. It collects mortgage insurance premiums in order to cover any losses to the government that result from FHA-insured mortgage defaults and to fund the administrative costs of the FHA insurance program. First-time homebuyers of low- to moderate-income pay these mortgage insurance premiums.

In short, it is a specific fee paid for a specific service.

The FHA single family mortgage program was designed to operate as a mutual insurance program where the homeowners who paid the premium were rebated excess premiums in the form of "distributive shares." Until 1990, millions of Americans had received rebates on insurance premium overpayments.

The rebates stopped in 1990 because the FHA insurance fund was technically insolvent. In order to put the fund back on stable footing, Congress passed legislation to strengthen the fund. The reforms included increased premiums, improved downpayment requirements, increased oversight, and the establishment of a mandatory 2 percent capital reserve ratio.

Those changes combined with our healthy economy have resulted in the MMIF enjoying an economic value of $18.9 billion in capital reserves and a capital reserve ratio of 3.81 percent Ė almost twice the level mandated for actuarial safety and soundness. The fund is projected to run at a surplus of more than $5 billion during the next five years. Clearly, the fundís solvency has been restored.

A surplus of this size and fiscal health of this strength would normally be good news in the form of rebates to those individuals who had dutifully paid their insurance premiums and home loans. But one of the changes made to ensure the solvency of the MMIF a decade ago was to make the overpayment rebates discretionary. Rather than rebate the overpayments that were charged low- to moderate-income homeowners, the Clinton Administration and some members of Congress have predictably proposed to fund a new spending program with the overpayments.

This proposal turns the intent of FHA insurance on its head. It was created to broaden homeownership and make it easier to obtain a home loan. Once the premiums that are paid by homeowner for insurance are diverted to pay for a different government program, it becomes a de facto tax on low- and moderate-income homeowners. As we all know, or all should know, if you tax something you get less of it. In this case, low- to moderate-income homeowners.

The excess premiums should be rebated to those that paid them instead of being kept by the government to spend. Iíd like to ask anyone who advocates keeping this money in the governmentís hands the following question. If one of these low- to moderate-income homeowners went to a furniture store and was overcharged on their purchase, would you advocate the store keep the money to use anyway it wanted or would you insist that they refund the overpayment?

Leaving aside the fact that changing the insurance premium into a tax is wrong, the wisdom of the proposed program is highly questionable at best. President Clinton issued a directive to HUD requesting "recommendations on how newly available funds can be used." First, that request eliminates any consideration of rebates. Second, this reflects the tendency in Washington to see taxpayer overpayments as found money rather than the result of taxpayersí hard work.

Not surprisingly, the folks at HUD and others came up with a very creative way to spend the money rather than rebate it back to the people who were overcharged. They proposed that a "National Housing Trust Fund" within HUD be created.

Creating a new program in HUD would be like throwing gasoline on a fire.

In 1997, HUD identified one of its two key missions as "restoring the public trust by achieving and demonstrating competence." An agency that receives about $30 billion per year, insures loans for multifamily rental housing properties, provides rental assistance for about 4.5 million low-income residents, distributes money to more than 4,000 localities, provides mortgage insurance to about 7 million homeowners and is also one of the nationís largest financial institutions, couldnít manage to get more specific with what it was supposed to be doing.

Since 1994, the General Accounting Office (GAO) has identified HUD as a "high-risk" agency. Last year, GAO found that "internal control weaknesses and problems with information and financial management systems persist" and "that these deficiencies, taken together, place the integrity and accountability of HUDís programs at high risk."

An example of HUDís highly suspect competence can be found in the so-called "Community Builders Program." This program was created by the Secretary of Housing and Urban Development without the authorization of Congress. In testimony before this committee, a representative of HUDís own inspector general (IG) flatly stated that they found "problems with the Community Builder concept, its implementation, and its impact on HUD." In short, the whole program has been rife with problems and mismanagement since its unauthorized beginning. In fact, the IG has recommended the Community Builder program be terminated.

In testimony before the House Budget Committee, HUDís IG was highly critical of HUD overall. She said, "HUD could do a much better job with the resources it has if it dealt more with the substance, that is the infrastructure, rather than the ministerial aspects of reform. In other words, HUD needs to deal with the material weaknesses and not just the checkbook balance if it is to assure that increased funding truly assists the rightful beneficiaries."

In sum, should surplus Mutual Mortgage Insurance Fund money should be rebated back to those who were overcharged. It should not be converted into a regressive tax on homeownership to establish a new program with vague goals that will duplicate other housing programs at a department that canít even manage what it does already.

This concludes my testimony. I'll be glad to answer any questions you may have.

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