LOAN GUARANTY PROGRAM The Loan Guaranty Program provides housing credit assistance to eligible veterans and service personnel through guarantees of loans made by private lenders and through direct loans to severely disabled veterans on more liberal terms than generally available to non-veterans, without the assumption of undue risks by the Gov ernment. The Loan Guaranty Revolving Fund finances the operation of the Loan Guaranty Program for loans closed on or before December 31, 1989, and manufactured home loans guaranteed under 38 U.S.C. 1812, excluding administrative costs. The new Guaranty and Indemnity Fund finances the operation, excluding administrative costs, for loans closed on or after January 1, 1990. The Guaranty and Indemnity Fund was authorized by legislation, Public Law 101-237, enacted in December 1989. The fund was established to finance the operation of the Loan Guaranty Program for loans made on or after January 1, 1990. In the event of an insoluble default, DVA, through its contract of guarantee, stands ready to make good any loss sustained by the holder of the loan up to the amount of the guarantee. To offset program expenses, an indemnity fee of 1.25 percent is collected on guaranteed loans and is deposited in the Guaranty and Indemnity Fund. On loans with 5 or 10 percent downpayments, the loan fee is reduced to 0.75 percent and 0.50 percent respectively. Permanent, indefinite budget authority (estimated to be $80.8 million in 1991) will provide for Government contributions to the fund as required by law. The Secretary of the Treasury is required to invest the portion of the Guaranty and Indemnity Fund that is not required to meet current payments in U.S. Government securities or U.S. Government guaranteed securities. During 1989, 189,705 loans were guaranteed. The DVA estimates that loan guaranty activity will decline. The projection of 176,204 guaranteed loans for fiscal year 1991 reflects this assumption. Administration and Committee Legislative Proposals.-1. The Administration is proposing legislation to increase the indemnity fee from 1.25 percent to 1.75 percent of the loan amount on guaranteed loans, except for service-connected veterans with a 30 percent or more rating. Public Law 101-237 established the guaranty and indemnity fund effective January 1, 1990 and CBO estimates that this new fund will be self-supporting through the late 1990's. Based on CBO's projections and the fact that the newly created fund just started in January, the Committee is opposed to any change in the fee structure at this time. 2. The Administration is proposing to require a downpayment of 4 percent on loans over $25,000, with the first $25,000 being excluded. According to DVA officials, this would result in a $2,200 downpayment for the average $80,000 loan. Under current law, veterans are able to purchase homes up to $184,000 with no downpayment requirements. A keystone of the loan guaranty program has always been the no-downpayment feature. The Administration's budget projects savings of $900,000 if the downpayment requirement were enacted. The Committee does not believe that those minimal savings justify changing the basic feature of the program . or justify requiring veterans to increase their costs for acquiring housing. The Committee also points out that the recently enacted Public Law 101-237 encourages downpayments by veterans by offering them the opportunity to decrease their funding fee cost if a downpayment of at least five percent is made. 3. The Administration is also proposing legislation to change the net value calculation when determining whether or not a loan holder can convey property to the government. Under current law, "net value" is the fair market value minus costs the Department would incur, if it acquires the property, manages, and disposes of the property. Generally, the Department may acquire the property if the net value exceeds the unguaranteed portion of the loan, and the loan holder acquires the property for the lesser of net value or the veteran's total indebtedness. This provision has provided a useful framework to determine when it is cost-effective either to acquire a DVA guaranteed property at foreclosures to pay the full guaranty amount. The Administration is requesting that the Department's new net value calculation contain the assumption that all properties would be sold at a substantial loss. Although some properties have been sold at a loss because of property depreciation, particularly in the oil belt areas, the economy in these areas is showing improvement. In fiscal year 1989, the Department did not acquire the properties in 18 percent of the foreclosures. These cases are commonly referred to as "no-bids". It is the Committee's understanding that this proposed change would increase overall no-bids to 35 percent 40 percent. The Congress addressed the property acquisition formula in Public Law 101-237, which became effective December 18, 1989. The Committee does not endorse this proposal. 4. Legislation is being proposed by the Administration to eliminate the manufactured home loan program due to the high foreclosure rates in this program. Since 1984, slightly more than one-half of manufactured home loans were made to active duty personnel even though veterans outnumber active duty personnel by about 13 to 1. Active duty borrowers have a higher foreclosure rate on manufactured home loans than veteran borrowers. In 1989, only 834 manufactured home loans were guaranteed by the Department. Over the last several years, the number of manufactured home loans guaranteed by DVA has been steadily decreasing. The savings estimated in the Administration's budget for elimination of this program are $300,000. The Committee does not believe that action should be taken at this time to eliminate the program. The Subcommittee on Housing and Memorial Affairs will be holding a hearing on the manufactured home loan program during this session to explore other alternatives. 5. Legislation is also being proposed by the Administration to allow a holder of a manufactured home loan to submit a claim upon receipt of DVA's resale price. Any loss on the eventual resale would be absorbed by the holder, and any profit would be retained by the holder. DVA experience in GI manufactured home loan terminations indicates that repossessed homes are not always disposed of in a prompt and efficient manner. Lenders must rely on dealers to sell these homes in most areas. The dealers have many such homes to sell, and little financial incentive to do so, since a larger profit is obtained from the sale of new homes. Delays in resale result in continued carrying costs for the lender, and the eventual resale proceeds may be reduced due to declining property value and the increased possibility of vandalism. If lenders were permitted to file their claims upon receipt of the Department's resale price, these problems would be avoided. The Department calculates that this procedure will reduce claims since the Department would not reimburse lenders for costs incurred after repossession, including accrued interest (DVA normally allows 60-90 days' interest after repossession) and sales commission. The Department's experience also shows that DVA's minimum resale price, which represents the actual value of the home at repossession, generally equals or exceeds the eventual resale price. Accordingly, adoption of this procedural modification would generally result in an unchanged or reduced debt to the veteran following repossession. Lender costs would also be reduced. The savings estimated in the Administration's budget are $4.5 million. The CBO estimates indicate no budgetary effect from this proposal. The Committee endorses this proposal. 6. The Administration is proposing two legislative amendments affecting the Direct Loan Revolving Fund (DLRF). The Administration states that due to the low level of direct loan activity, it is no longer desirable to maintain separate accounting and reporting of budgetary data for both funds and that the consolidation of these funds will allow the submission of one comprehensive housing budget for loans made prior to the establishment of the Guaranty and Indemnity Fund. Public Law 81-475, effective July 25, 1950, authorized DVA to provide mortgage monies in certain geographic areas where private sources of mortgage funds were unavailable. The program was expanded in 1970 to permit the Secretary to also make direct loans to disabled veterans who have been approved for Specially Adapted Housing Grants. Since 1981, direct loans have been restricted, by appropriation language, to only severely disabled veterans who require specially adapted housing assistance. The current maximum loan amount is $33,000 with a 30-year maturity. The Committee does not endorse this proposal and believes that the funds should remain separate. 7. The Administration also proposes a technical amendment waiving the Direct Loan Revolving Fund's liability of $1.7 billion to the Treasury Department. The indebtedness is the result of monies advanced to the DLRF by the Treasury Department from 1951 through 1963. This is essentially a bookkeeping procedure. The Committee is not convinced that this is a necessary or desirable change. UNITED STATES COURT OF VETERANS APPEALS The Veterans' Judicial Review Act established an independent United States Court of Veterans Appeals to review decisions of the Board of Veterans' Appeals. Up to seven judges, who are appointed by the President with the advice and consent of the Senate, may serve on the Court. The Court began operations on October 16, 1989. Three judges are presently serving on the Court, and the budget projects that the Court will require 45 FTEE during fiscal year 1990 and 99 FTEE during fiscal year 1991. Obligations are projected to be $6.8 million for fiscal year 1990 and $9.0 million for fiscal year 1991. The Committee recommends the levels of funding requested by the Court. |