    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                       H.R. 4110--FHA SINGLE FAMILY LOAN
                          LIMIT ADJUSTMENT ACT OF 2004

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       HOUSING AND COMMUNITY OPPORTUNITY

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 16, 2004

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 108-93

                        U.S. GOVERNMENT PRINTING OFFICE
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
    DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
    RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
    SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
    PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
    EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
    FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
    ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
    RON PAUL, Texas                      BRAD SHERMAN, California
    PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
    JIM RYUN, Kansas                     BARBARA LEE, California
    STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
        Carolina                         HAROLD E. FORD, Jr., Tennessee
    DOUG OSE, California                 RUBEN HINOJOSA, Texas
    JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
    MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
    PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
    CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
    JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
    VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
    GARY G. MILLER, California           JOE BACA, California
    MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
    SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
    PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
    MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
    TOM FEENEY, Florida                  DAVID SCOTT, Georgia
    JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
    SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
    TIM MURPHY, Pennsylvania
    GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
    J. GRESHAM BARRETT, South Carolina
    KATHERINE HARRIS, Florida
    RICK RENZI, Arizona

                     Robert U. Foster, III, Staff Director
               Subcommittee on Housing and Community Opportunity

                         ROBERT W. NEY, Ohio, Chairman

    MARK GREEN, Wisconsin, Vice          MAXINE WATERS, California
        Chairman                         NYDIA M. VELAZQUEZ, New York
    DOUG BEREUTER, Nebraska              JULIA CARSON, Indiana
    RICHARD H. BAKER, Louisiana          BARBARA LEE, California
    PETER T. KING, New York              MICHAEL E. CAPUANO, Massachusetts
    WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
        Carolina                         MELVIN L. WATT, North Carolina
    DOUG OSE, California                 WM. LACY CLAY, Missouri
    PATRICK J. TOOMEY, Pennsylvania      STEPHEN F. LYNCH, Massachusetts
    CHRISTOPHER SHAYS, Connecticut       BRAD MILLER, North Carolina
    GARY G. MILLER, California           DAVID SCOTT, Georgia
    MELISSA A. HART, Pennsylvania        ARTUR DAVIS, Alabama
    PATRICK J. TIBERI, Ohio
    KATHERINE HARRIS, Florida
    RICK RENZI, Arizona

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        June 16, 2004................................................     1
    Appendix:
        June 16, 2004................................................    53

                                   WITNESSES
                            Wednesday, June 16, 2004

    Berson, David, Vice President and Chief Economist, Fannie Mae....    29
    Eberhardt, Jon, President-elect, California Association of
      Mortgage Brokers...............................................    31
    Hellyer, Glenn, Realtor, Yorba Linda, CA.........................    33
    Kempner, Jonathan L., President and Chief Executive Officer,
      Mortgage Bankers Association...................................    34
    Nothaft, Frank E., Vice President and Chief Economist, Freddie
      Mac............................................................    36
    Petrou, Basil N., Managing Partner, Federal Financial Analytics,
      Inc............................................................    38
    Thompson, Barbara J., Executive Director, National Council of
      State Housing Agencies.........................................    40
    Weicher, Hon. John C., Assistant Secretary, Housing/Federal
      Housing Commissioner, U.S. Department of Housing and Urban
      Development....................................................    11

                                    APPENDIX

    Prepared statements:
        Oxley, Hon. Michael G........................................    54
        Miller, Hon. Gary G..........................................    56
        Berson, David................................................    59
        Eberhardt, Jon...............................................    84
        Hellyer, Glenn...............................................    89
        Kempner, Jonathan L..........................................    91
        Nothaft, Frank E.............................................    96
        Petrou, Basil N..............................................   102
        Thompson, Barbara J..........................................   113
        Weicher, Hon. John C.........................................   117

                  Additional Material Submitted for the Record

    Ney, Hon. Robert W.:
        America's Community Bankers, American Bankers Association,
          Financial Services Roundtable and Independent Community
          Bankers of America, letter, June 16, 2004..................   122
    Petrou, Basil N.:
        Supplemental Material Submitted in Response to a Request of
          Representative Barney Frank................................   123
    National Association of Home Builders, prepared statement........   124

                       H.R. 4110--FHA SINGLE FAMILY LOAN
                          LIMIT ADJUSTMENT ACT OF 2004

                                  ----------

                            Wednesday, June 16, 2004

                 U.S. House of Representatives,
     Subcommittee on Housing and Community Opportunity,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 10:11 a.m., in
    Room 2128, Rayburn House Office Building, Hon. Robert Ney
    [chairman of the subcommittee] presiding.
        Present: Representatives Ney, Miller of California, Tiberi,
    Waters, Carson, Lee, Clay, Scott, Davis and Frank (ex officio).
        Chairman Ney. [Presiding.] The hearing of the subcommittee
    on H.R. 4110, entitled ``The FHA Single Family Loan'' will come
    to order. Let me say for the record, without objection, all
    members' opening statements will be made part of the record.
    Hearing no objection, they will be made part of the record.
        Today, the Subcommittee on Housing and Community
    Opportunity will hold a legislative hearing on H.R. 4110,
    entitled, ``The FHA Single Family Loan Limit Adjustment Act of
    2004.'' This bill was introduced on April 1, 2004 by our
    subcommittee member, Congressman Gary Miller of California. And
    its primary cosponsor is the ranking member of the full
    Committee on Financial Services, Congressman Barney Frank.
        It is my hope that today's hearing will provide the
    subcommittee with the variety of perspectives necessary to form
    an opinion about the necessity of the legislation. I would like
    to note that the issue of FHA loan limits, particularly on the
    single family side, have always been a source of heated debate,
    as we know in previous congresses.
        In fact, the files will reveal testimony dating back to May
    5 of 1994, when advocates, some of who are represented here
    today, discussed the distinctive real estate markets of very
    high-cost areas. Those areas have traditionally been recognized
    as California, Hawaii, Alaska, New York and Massachusetts, to
    name a few.
        Over the past 10 years, Congress debated and later approved
    a proposal to index the FHA loan limits and tie them to loan
    limits established for the Federal Home Loan Mortgage
    Corporation, also known of course as Freddie Mac. It was
    clear--then and now--that linking the FHA loan limits to an
    established index or process would keep FHA current with
    relevant real estate markets.
        Today, we are faced with similar challenges raised 10 years
    ago. The central question is: how? And what is the proper role
    of the federal government to encourage homeownership,
    particularly among low-income families and other market
    segments that have traditionally been locked out of access to
    mortgage capital.
        Real estate markets vary. In Morgan County, Ohio--that is
    one of the 16 counties I represent--the average home price is
    $93,000 for a single family dwelling unit. Yet in Licking
    County, Ohio--also in the district--the average home price is
    $173,000.
        In Mr. Miller's 42nd congressional district in California,
    Orange County represents average home values of $357,000. In
    our ranking member, Ms. Waters' district, the subcommittee
    ranking member, the average Los Angeles home value in the 35th
    California district is $309,000.
        On the other hand, Richardson County, Nebraska in Mr.
    Bereuter's congressional district, is only $59,789. I mention
    the variety of loan limits because, as you can tell, geography
    most time dictates higher or lower average home values.
        Our FHA loan limit for high-cost areas is capped at
    $290,000 and the lowest FHA loan limit is $160,000. It is clear
    that some areas are not being served, therefore, by FHA.
        Whether the private sector is meeting those needs is
    something this subcommittee will need to examine as we further
    look at homeownership goals.
        I am pleased to see today's witnesses. And I look forward
    to hearing their views on this proposal.
        It is important, I think, to note that there are a host of
    policy questions that have to be addressed as we discuss the
    merits of the legislation. Those questions or issues include
    the following: what is the proper role of FHA?
        Can FHA manage its risks and provide adequate oversight of
    its underwriting standards? What is the role of the private
    sector in encouraging low-income homeownership? And does H.R.
    4110 complement or hinder that process?
        Finally, given the limited resources of the federal
    government, how can we limit as much as possible the federal
    government's potential liability? So I am hopeful that today's
    panelists will provide us with their perspective on these
    issues.
        During my chairmanship, I have attempted to include members
    as much as possible in the planning and implementation of
    housing hearings. As a result, I believe that the 22 housing
    hearings we have held to date have been balanced and have led
    to good legislation.
        And finally, I want to thank my colleague and our ranking
    member, Congresswoman Maxine Waters of California, for her
    leadership and partnership, which has, I think, resulted in the
    creation of very good legislation. I know we have many more
    obstacles and challenges that we have to face.
        I want to thank Chairman Oxley for his leadership; also our
    ranking member, Barney Frank and the members, frankly, of the
    Housing Subcommittee, both sides of the aisle. One thing I will
    note--and then I will conclude my opening statement--but one
    thing I think that has been good that we have all tried to do,
    working together both sides of the aisle, is to take pieces of
    legislation and try to move them forward, instead of maybe one
    omnibus bill that never sees light of day. And I think that has
    been one good approach.
        And the other is to understand each other's areas in the
    country, not just congressional districts, but regions, and the
    wide variety of prices. And some of the housing needs in larger
    states or larger cities is different and has to be addressed
    differently.
        So that is why I think this bill by Mr. Miller and
    Congressman Barney Frank is an important piece of legislation.
        With that, I will turn to our ranking member.
        Ms. Waters. Thank you very much. Good morning, Mr.
    Chairman. I would like to thank you for holding this hearing on
    this bill that was offered by Congressman Gary Miller, with my
    support and that of Congressman Frank, to increase the FHA
    single family loan limits in high-cost areas.
        I am pleased to be a cosponsor of H.R. 4110, which would
    increase the single family loan limit to 100 percent of the
    area median home price in each locality of the country. This
    legislation will be tremendously helpful to residents of Los
    Angeles, to residents of many other areas within my state of
    California and to residents of high-cost areas throughout our
    country.
        Obviously, changing the formula from 95 percent of the
    median home price also would benefit home buyers in every
    community in our country. In many areas in states such as
    California, New York, New Jersey, Maryland, Connecticut,
    Pennsylvania and Massachusetts, the median home price far
    extends the existing FHA loan limit of 87 percent of the
    confirming loan limit, which today computes to $290,319.
        The FHA loan limit for Los Angeles County is $290,319, the
    highest permissible under current law. Twenty-three of
    California's 58 counties, which have approximately 85 percent
    of California's total population, are currently at this
    $290,319 ceiling.
        As Mr. Eberhardt, president elect of the California
    Association of Mortgage Brokers, correctly observes in his
    prepared testimony today, for many home buyers in counties like
    Los Angeles, the FHA insured loan programs simply do not work.
    The Los Angeles Times recently reported the Los Angeles County
    median home price has jumped 20 percent in the past 12 months.
        And the new median home price is now $379,000. Much of this
    growth is in areas where first-time home buyers choose to
    purchase.
        Mr. Chairman, I believe that residents of high-cost areas
    should have the same opportunity to access FHA insured
    mortgages as those who live in other less expensive areas. In
    my view, the local median home price, not an artificial
    statutory ceiling on cost, should be the benchmark for
    determining a person's eligibility for an FHA insured mortgage.
        My constituents and all residents of high-cost areas who
    are credit worthy should have the same right to obtain an FHA
    insured mortgage as residents in other parts of the country. I
    know that there are some who contend that the conventional
    mortgage market and the GSEs are adequately serving high-cost
    areas.
        I simply do not agree with that. Whatever one's view on
    this issue, I also see this problem as both a consumer
    protection issue and an equal protection issue.
        Why should someone seeking a mortgage in Los Angeles have
    fewer mortgage products available simply because the person
    resides in a high-cost area? There is no reason for residents
    of high-cost areas to have fewer mortgage options.
        As we consider this issue, it is important to remember that
    we are not appropriating public funds to support FHA insured
    mortgages. The taxpayers do not pay for the FHA program. And
    they would not incur any costs if this change were enacted.
        In fact, the Mutual Mortgage Insurance Fund currently has a
    healthy surplus, as the premiums paid are more than adequate to
    cover the costs of defaults under the program, nor would
    adoption of this change in the law have any impact whatsoever
    on the judgment of a lender as to the creditworthiness of any
    proposed borrower.
        Those who would be helped by this change in the law would
    pay the premiums required by law for their mortgage insurance.
    So the Mutual Mortgage Insurance Fund will be fully protected.
        Consumers in high-cost areas would simply have more options
    when they seek a mortgage. And they would receive the
    competitive benefits that almost invariably result from an
    increase in the choices available.
        Mr. Chairman, it is also clear that when consumers have
    more choices available to them, they are far less likely to end
    up being victimized by a predatory lender.
        Finally, Mr. Chairman, I note that Secretary Weicher
    suggests in his prepared testimony that enactment of
    legislation to raise FHA's mortgage limits may result in a need
    for increased commitment authority. If the demand exists for
    this type of financing, why shouldn't we be meeting it?
        Mr. Chairman, FHA insured mortgages should be as available
    to residents of high-cost areas as they are to persons in less
    expensive parts of the country. We can and should raise the FHA
    loan limits to 100 percent of an area's median home price and
    thereby broaden the housing stock available to FHA borrowers in
    many high-cost areas, while maintaining the FHA's focus on
    first-time home buyers and the underserved.
        I would urge my colleagues to join me in supporting H.R.
    4110. And thanks again for scheduling this important hearing.
        I look forward to the testimony of our witnesses. And I
    yield back, if there is any balance of my time.
        Chairman Ney. Thank you.
        Ms. Waters. Thank you for your indulgence.
        Chairman Ney. The gentlelady yields back the balance of her
    time.
        Mr. Miller?
        Mr. Gary G. Miller of California. Thank you, Chairman Ney.
    I want to thank you for convening this hearing today.
        Mr. Frank and I have been talking about the situation with
    FHA for over a year. And when we did the zero down payment for
    FHA, we looked at the disparity amongst different states.
        And Mrs. Waters, I want to thank you for cosponsoring this
    bill. Mrs. Waters and I share a problem that FHA is just not
    available in California. And some say, ``Well, why do we worry
    about it? They will be setting a precedent.''
        But I would like to point out that FHA currently adjusts
    for those high-cost areas of Alaska, Guam, Hawaii and the
    Virgin Islands. In those areas, the limits are $435,000. And
    nobody is arguing that that is reasonable.
        The problem is Alaska and Hawaii are $35,000 less in price
    value than California. So if it makes sense in Hawaii and it
    makes sense in Alaska, certainly it makes sense in California
    and other high-cost areas.
        Barney Frank's district is a great example. FHA is just not
    available in his district.
        And I was talking to Secretary Jackson about 3 weeks ago.
    And we discussed the disparity we have in some of these states.
    And at that point, he fully understood the concept that we need
    to be able to make the programs available in these areas.
        And some might say, ``Well, are we just supporting through
    subsidies some program in these areas?'' But that is not the
    case at all because if you look at the FHA program, it is
    estimated that the federal government makes $1.73 off of every
    $100 in FHA loan insurance.
        So it is a program that pays for itself. In fact, the
    federal government makes money off of it.
        This is a first stage. We also believe--Mr. Frank and I--
    that conforming loan limits need to be adjusted too. Freddie
    and Fannie are having difficulty.
        Yet we are working with the bankers to come up with a
    reasonable limit to place conforming at because we understand
    that the conventional marketplace has grown tremendously. But
    how do you maintain a fair share of the marketplace for the
    private sector in consideration for what Freddie and Fannie
    might come into?
        And I believe we can also come to reasonable amounts that
    those can go to. We do understand that they just are not
    working today because they are just far too low.
        But this program that we have under FHA, people should not
    be discriminated against just because of the area they live in.
    And that is the fact we face today.
        Just on the Republican side of the aisle--and I did not
    bother to do the Democrat side because they are in the same
    situation Mrs. Waters and I are in--but just on our side of the
    aisle, Mr. Green's district in Door County, the median home
    price is $198,000. FHA does not go above $160,000. In Vilas
    County, it is $193,000; FHA stops at $160,000.
        In Katherine Harris' DeSoto County, it is $211,000 median
    income; FHA will go $191,000, which is closer.
        But you get down to Walter Jones' district, in Currituck
    County, it is $337,000 median income; it is $217,000 on FHA. In
    Dare County, it is $297,000 median income; FHA stops at
    $160,000. In Hyde County, it is $210,000; FHA stops at
    $160,000.
        In Peter King's district in Nassau, the median income is
    $357,000 and FHA stops at $290,000, which is much closer. In
    Doug Ose's district in Alpine County, it is almost $300,000
    median income; FHA stops at $160,000.
        And we can go on to Mr. Renzi. Chris Shays is really out of
    line. His is $411,000 median income. FHA goes to $290,000
    there.
        In Patrick Tiberi's district in Delaware, it is $259,000.
    FHA stops at $208,000.
        So we have a program that both conservatives and liberals
    alike support FHA because it is a program that has the
    marketplace available for people who want to own a home. It
    should be available to everybody, especially when it is a
    program that does make money. It is not a subsidy to anybody.
        Yet this program unintentionally, by the limits we have
    placed on it, discriminates on individuals based on where they
    live. And our concept is if it is a program that works and it
    is a program that is available and it is a program, especially
    with the new zero down payment law that is coming into effect,
    that is going to make homeownership available to more and more
    people throughout this nation, why in the world would we have a
    program that is proven to work and we are expanding in many
    areas and yet, we are going to say certain people because of
    the area they live in are not going to be available to
    participate in this program?
        So I want to once again applaud Chairman Ney for allowing
    this time to hear this bill. Maxine Waters, I want to thank you
    for supporting this also. She realizes that California has a
    tremendous problem with housing. We are about 10 percent under
    the national average in homeownership.
        Instead of 69 percent, we are at 59 percent. That is a
    problem.
        And when we can take a program like FHA that is proven to
    work over the years, and it is a very solid program and it is a
    good program, we can take that program and implement it in
    areas that people are having difficulties getting into homes. I
    see no reason why we would not do that and create opportunity
    for everybody, instead of just opportunity for a few.
        So I look forward to the testimony today.
        And again, chairman, I thank you for holding this hearing.
    And I yield back the balance of my time.
        [The prepared statement of Hon. Gary G. Miller can be found
    on page 56 in the appendix.]
        Chairman Ney. Thank you.
        The gentleman from Massachusetts?
        Mr. Frank. Mr. Chairman, I join in thanking you for your
    initiative here and the other initiatives you have been taking
    in the housing area. We have not done some of the major things
    I would like to do in some ways. But whenever we have been able
    to act, we have made things better. And your leadership has
    helped us, I think, significantly increase housing policy.
        This one seems to be very simple. And sometimes, when you
    advance something and you hear the arguments against it, you
    have to reexamine your position.
        But I must say that, having read the testimony that is not
    supportive of this bill, I feel reinforced by it. It is a very
    simple point.
        The United States is not a ``one size fits all'' nation.
    The policy of the FHA has been to deal with housing up to the
    median. The theory is they are not going to help the upper
    income people.
        We have in this country today wide variances in that
    median. For much of Massachusetts, the FHA might as well be in
    Ukraine.
        Now the question is: should we have a national program,
    supported by the taxes and administered entirely by all the
    people in the country, that simply is inapplicable in some
    parts of the country? All we are saying is that it should
    operate in California and Massachusetts and New York and
    elsewhere in exactly the same fashion as it applies in the rest
    of the country.
        And the notion that you set a dollar limit and ignore
    median income flies in the face of every intellectual principal
    we know. Now I noticed Mr. Petrou says on page two of his
    testimony, ``In my opinion, it is time that FHA became an
    income targeted rather than a loan amount targeted housing
    program.''
        Frankly, our bill moves in that direction because what we
    are saying is that one uniform loan limit throughout the
    country does not make sense when you have these variances. And
    in fact, what we are saying is that people who are at the
    income level where they can pay the median price in a
    particular locality should not be ruled out because of some
    arbitrary national standard.
        Now I should point out, of course, the FHA remains a loan
    program and not an income targeted one. It is unfair to exclude
    people from it.
        But I will say if you were concerned about the efficacy of
    that, but we are moving in that direction. The testimony of Mr.
    Weicher said, ``It is unclear that this is the market the FHA
    should serve.''
        I must say to Mr. Weicher that I am surprised at his lack
    of clarity after his many years in the housing business. My
    guess is that he is determined, in this case, to retire
    unclear.
        But I do not understand what is fogging his vision, to be
    honest. It is a fairly simple point.
        And the market that we are asking the FHA to serve here, as
    in almost every place else in the country, is the median house
    price. When did we decide that serving people who are trying to
    buy the median price in the community, that that is not the
    market we want to serve?
        I do note that he says that this may result in a need for
    increased commitment authority. As Mr. Weicher knows, we
    already need more commitment authority. And one of the things I
    think we should be doing, Mr. Chairman, is asking our friends
    on the Appropriations Committee and the rest of the
    appropriations committees to stop putting the FHA on the kind
    of yoyo where we keep running out of commitment authority.
        The FHA is making money for this government. And there is
    no reason for this kind of commitment authority to be cut back.
        And on that point, I would note, by the way, that people
    have said: might this squeeze out low-income borrowers? Exactly
    the reverse is the case.
        Loans at the upper level of what the FHA does make
    significant amounts of money. The repayment rate is very high.
    And they make a profit.
        To the extent that the FHA is internally financial, that
    the FHA surplus helps make a case for continued FHA work, this
    makes it possible for us to do more for people at the lower
    end, not less, because no one suggests that this will cost us.
    And as a matter of fact, last year, when the gentleman from
    California, Mr. Miller, and I collaborated on legislation,
    helped strongly by the gentleman from Ohio, the gentlewoman
    from California, the chairman and ranking members of this
    committee and the full committee chairman.
        And we got the bill enacted. We did this for FHA
    multifamily. In fact, we were told by CBO that it was not going
    to raise any money because nobody wanted to build any old
    multifamily in those areas anyway, really a rather
    extraordinarily foolish comment from CBO.
        And of course, they turned out not to be the case. And now
    we are told it has been so popular, it is putting a drain on
    the commitment.
        It cannot be that on the one hand, it is not going to be
    used because nobody cares and on the other, that it is going to
    cause a commitment drain. That is what they said about
    multifamily.
        So again, this is very simple. And I must say, I think the
    arguments against it kind of strange.
        The last issue is the Fannie-Freddie question. And we have
    two different views here. One from the mortgage bankers, which
    says it is okay to raise this--and I appreciate that--but do
    not go above the conforming loan limit of Fannie and Freddie.
        Freddie says, ``Yes, do this, but let us go up as well.''
    Let me make a plea to people. We all know we are in the midst
    of controversy over Fannie Mae and Freddie Mac. What the
    gentleman from California and I tried to do here was to set
    that controversy aside.
        He and I do agree that there is a case for increasing their
    loan limits as well. But we think there is a very clear-cut
    equity case. There is an economic case. There is a
    homeownership case.
        People who are trying to buy a home at the median price in
    Los Angeles and San Francisco and the rest of the California
    and in Greater Boston and in New York and in Chicago should not
    be turned away by the same federal program that would serve
    people similarly situated everywhere else. That is all we are
    asking.
        The conforming loan limits of Fannie and Freddie, let's
    cross that bridge when we get to it, probably now next year.
    There will be issues there. But it should not--that controversy
    should not--be allowed to stop Americans who pay taxes and
    follow the law like anybody else and are as interested in
    homeownership from being denied the same access to FHA in real
    terms that people get elsewhere in the country.
        Mr. Chairman, thank you for giving us a chance to have this
    hearing.
        Chairman Ney. Thank you.
        The gentlelady from California?
        Ms. Lee. Thank you, Mr. Chairman. And let me also thank you
    and our ranking member, Maxine Waters, and Mr. Frank and Mr.
    Miller for this bill and this very important hearing.
        As you know, the median housing price in the San Francisco
    Bay Area region, including my own district, is about $567,000.
    That is $567,000.
        So quite frankly, the American dream of homeownership is
    quickly turning into a nightmare for many people in California.
    As we push for more affordable, quality housing for all, the
    issue of FHA loan accessibility in many of our communities
    continues to be an issue.
        So I just want to thank the sponsors of this bill. I hope
    to join as a cosponsor of this bill.
        I know that in areas that have not benefited from FHA
    mortgages, this bill would certainly help families, individuals
    become homeowners, which of course really is the primary
    vehicle for the accumulation of wealth for sending one's
    children to college, for establishing a small business; really,
    for doing whatever an individual or family wants to do with
    their life. And so I just want to thank you very much for this
    bill.
        And just know that we in the Bay Area look forward to the
    movement of this bill because it certainly will help turn
    things around in terms of homeownership for our families in
    California. Thank you very much.
        Chairman Ney. Thank the gentlelady.
        Gentleman from Georgia, Mr. Scott?
        Mr. Scott. Thank you very much, Mr. Chairman. Chairman Ney
    and Ranking Member Waters, I want to thank you for holding this
    very, very important hearing today regarding single family loan
    adjustment act, H.R. 4110. I also want to thank the
    distinguished panel of witnesses today for their testimony.
        From July 2001 to July 2002, Georgia--my state--ranked
    fourth in the nation in housing growth, both in the number of
    homes built and the percentage increase in housing. Five of the
    top housing growth counties in Georgia are located in my
    suburban Atlanta district.
        Part of this explosive growth is due to low interest rates
    and part is due to the rapid expansion of the south and east
    and northern suburbs of Atlanta. And while Atlanta is not
    considered as high cost a city as compared to New York,
    California and certainly in the State of Massachusetts, I am
    concerned with our overall homeownership rates.
        The good news is that for the first time ever, the majority
    of low-income and moderate-income families are owning their
    homes at a rate of 50.8 percent. However, compared to the
    national average of 68.6 percent, minority families still have
    some catching up to do. And this is particularly true with
    African-American families.
        Based upon the information recently presented before this
    committee from both Fannie Mae and Freddie Mac, all of the
    groups are moving along and increasing their homeownership
    rates. But there is retrogression only among African-American
    homeownership.
        So we do have some catching up to do. With interest rates
    at historical lows, I believe that we must push even harder to
    help increase all homeownership and especially minority
    homeownership and, of that, especially African-American
    homeownership. And adjusting the FHA home mortgage rate limits
    is a very important part of that equation.
        And I want to commend Mr. Miller, Representative Frank and
    Representative Waters for working on this very, very important
    problem. And I would like very much to join with them as a
    cosponsor of House Resolution 4110.
        Mr. Chairman, given that June is indeed homeownership
    month, it is most fitting that this committee, during this
    month, is considering this very important policy to expand
    affordable homeownership to more individuals.
        Thank you very much.
        Chairman Ney. Thank the gentleman.
        Mr. Davis?
        Mr. Davis. Thank you, Mr. Chairman. I will not use anywhere
    near my four or five minutes, Mr. Secretary.
        But sometimes when I sit here, every now and then you have
    a sensation that you are feeling or hearing two ships passing
    in the night who really do not have any connection with each
    other. And I got a little bit of that sense after listening to
    some of the opening statements.
        I do not think any of us would take issue with the ranking
    member's comments or with Ms. Lee's comments from California
    about the need to obviously give FHA more capacity in high-
    income areas or high median income areas like California and
    parts of Massachusetts. I do not think there is a lot of
    opposition to that proposition from anyone here today.
        At the same time, it is certainly clear that nothing in
    this legislation really speaks to the ultimate issue, which is
    really finding ways to expand homeownership opportunities for
    families who are nowhere near being able to afford houses in
    this range. It is very much two ships passing in the night.
        So what I hope you will talk about in your testimony today
    or possibly in response to our questions is what we can do in
    the related area. How do we find some way to deal with the
    nagging homeownership gap that exists in this country between
    not just African-Americans and Caucasians but between Latinos
    and Caucasians and various other immigrant ethnic groups in the
    country?
        It strikes me that we are in need for some creativity in
    this area. It strikes me that we are in need for some fresh
    thinking in this area because we have these arguments and we
    have these conversations, but it does not seem that we have
    identified any significant manner to really allow FHA or the
    thrust of the housing market in this country to reach out there
    and sweep a lot of underserved members of the population.
        So again, I do not think there is any opposition to this
    bill or to the thrust of this bill. But I hope that we are able
    to broaden the discussion a little bit to talk about what some
    of your goals, the administration's goals might be in the
    related area of narrowing the gap that Mr. Scott talked about.
        And I yield back the balance of my time.
        Chairman Ney. I want to thank the gentleman. And with that,
    we will begin with Mr. Weicher, who is of course the assistant
    secretary for housing, Federal Housing Commissioner, at the
    U.S. Department of Housing and Urban Development. And he has
    been in that post since June of 2001.
        Prior to his appointment to HUD, Mr. Weicher was the
    director of the urban policy studies at the Hudson Institute
    and a member of the Millennium Housing Commission. Welcome. And
    we will begin with your testimony.

        STATEMENT OF HON. JOHN C. WEICHER, ASSISTANT SECRETARY,
       HOUSING/FEDERAL HOUSING COMMISSIONER, U.S. DEPARTMENT OF
                     HOUSING AND URBAN DEVELOPMENT

        Mr. Weicher. Thank you. And good morning, Chairman Ney,
    Ranking Member Waters and distinguished members of this
    subcommittee and full committee. And thank you for inviting the
    department to testify on the subject of H.R. 4110, the FHA
    Single Family Loan Limit Adjustment Act of 2004.
        We appreciate this opportunity to provide the subcommittee
    with the department's comments on this proposed legislation. In
    addition, on behalf of the administration, let me express our
    thanks for the committee's unanimous approval 2 weeks ago of H.
    R. 3755, the Zero Down Payment Act of 2004. In particular, let
    me also thank the authors of the proposal under consideration
    today, Representative Miller and Ranking Member Frank for their
    support of our zero down payment initiative.
        The Zero Down Payment Act, if enacted, will help at least
    150,000 creditworthy American families buy their first home
    each year. And HUD looks forward to continuing to work with the
    committee to move the Zero Down Payment Act toward enactment.
        The administration and the department are firmly committed
    to helping more American families achieve the dream of
    homeownership. Today, overall homeownership rates are at record
    high levels; 68.6 percent of all American families, almost 72.7
    million, own their own homes.
        Minority homeownership, as Mr. Scott noted, is also at an
    all-time record. For the first time ever, over half of all
    minority families, 50.8 Percent, are now homeowners. That is
    almost 14.9 million.
        This is a good record, but we want to improve on it. There
    remains a homeownership gap between non-Hispanic whites and
    minorities.
        So in June 2002, President Bush announced an aggressive
    agenda to clear away the barriers to homeownership and add 5.5
    million new minority homeowners by the end of the decade. Since
    the President announced that goal, more than 1.5 million
    minority families have moved into homes of their own.
        Our private sector partners, including the organizations
    testifying later this morning, have committed to increasing the
    number of loans to low-income families. This includes pledges
    to provide more than $1.1 trillion in mortgage purchases for
    minority homebuyers this decade.
        Congress has passed the American Dream Down Payment
    Initiative, which the President signed last December,
    authorizing $200 million a year to help homebuyers with down
    payment and closing costs.
        This administration has doubled the budget request for
    housing counseling funds from $20 million to $40 million. And
    Congress appropriated the funds. This year, we are asking for a
    further increase to $45 million.
        The federal government's primary vehicle for increasing
    homeownership in America is the Federal Housing Administration,
    now proudly celebrating its 70th anniversary. FHA extends
    access to homeownership to individuals and families who lack
    the savings, credit history or income to qualify for a
    conventional mortgage.
        FHA pioneered the 30-year, self-amortizing mortgage and has
    insured 34 million mortgages during its history. In fiscal year
    2003, FHA insured almost $150 billion in mortgages for 1.3
    million families.
        Over the last 3 years, FHA has taken a number of steps to
    reduce barriers to homeownership. Our TOTAL Mortgage Scorecard
    is now in place so we can better assess risk on individual
    loans.
        We have eliminated paper mortgage insurance certificates.
    We have eliminated planned unit development approval
    requirements. We have modified our minimum distance
    requirements between private wells and sources of pollution for
    existing properties, which is especially important in rural
    areas.
        We have simplified the mortgage calculation for streamlined
    refinances. And we have provided a low-cost alternative to the
    inspection requirements for new homes.
        The goal of H.R. 4110, as we understand it, is to raise FHA
    mortgage limits in high-cost areas. Currently, the FHA loan
    limit is capped at 87 percent of the Freddie Mac limit in the
    highest costs areas. This is about $290,000.
        In other areas, there is a lower limit, either 95 percent
    of the local median single family house price or 48 percent of
    the Freddie Mac limit, whichever is greater.
        While we recognize the worthy intention behind the
    proposal, the department does not support H. R. 4110 at this
    time. Our analysis indicates that the proposed changes to the
    law would result in the following: the 87 percent limit in
    high-cost areas would be removed; instead, the limit in these
    areas would be 100 percent of the local area median. In all
    other areas of the country, the limit would also be 100 percent
    of the local area median.
        The statutory floor limit of 48 percent of the conforming
    limit would remain intact at about $160,000. As it is now,
    nearly 90 percent of all U.S. counties are at the floor and
    would not benefit from this legislation.
        The effect of removing the cap would be to dramatically
    increase the mortgage limits in some extremely high-cost areas
    with more modest increases or no increases elsewhere.
    Specifically, lifting the 87 percent limit would affect only a
    few metropolitan areas, all either in California or in the
    Northeast.
        For example, the limit would rise to $568,000 in San
    Francisco, $374,000 in New York and $433,000 in Boston. It is
    unclear that this is the market that FHA should serve or that
    is not being served by the conventional market or the GSEs.
        Legislation to raise FHA's mortgage limits may result in a
    need for increased commitment authority. For example, two
    mortgages in San Francisco at the higher mortgage limit would
    amount to $1.2 million and would require as much authority as
    six mortgages in Columbus, Ohio, where I used to teach.
        FHA could expend more insurance authority that serve fewer
    households under this proposal.
        This concludes my statement, Mr. Chairman. And I thank the
    subcommittee for the opportunity to discuss this proposed
    legislation.
        [The prepared statement of Hon. John C. Weicher can be
    found on page 117 in the appendix.]
        Chairman Ney. I want to thank the assistant secretary for
    your testimony. The question I have is on the written, it says,
    ``It is unclear that this is the market the Federal Housing
    Administration should serve and that it is unserved by the
    conventional market or government sponsored enterprises.''
        So I just want to ask you: who do you think the FHA should
    serve, number one? And number two, what should be their role?
        Mr. Weicher. Our market, our public purpose, is to serve
    first-time homebuyers. And that tends to mean young families,
    young first-time homebuyers.
        Eighty percent of the business we do is first-time home
    buyers. Forty percent of that business is minority households.
        We are there to help families that are on the edge of
    homeownership to buy a home and to buy a home sooner than they
    otherwise would and get started on the path to building assets
    and establishing a solid place in our society. And we do serve
    that purpose and we serve it well.
        Chairman Ney. Wouldn't this bill help you? First of all,
    the first-time homebuyers, that is a rule within the
    department, right? It is not a statute.
        Mr. Weicher. It is neither. But we appeal to first-time
    homebuyers. Eighty percent of our business is first-time
    homebuyers.
        But if someone buying another home, already a homeowner
    buying another home, wanted FHA insurance, needed FHA
    insurance, was buying a home where the loan was within the FHA
    limit in that area, then we would in fact insure that loan.
    Someone buying a home under $160,000 in Morgan County, buying a
    second home, a home for the second time, would qualify if they
    would choose to.
        They might not need it because they might have a higher
    down payment. They might have improved their credit history.
    But the option is there.
        Chairman Ney. Taking into account that you do obviously
    tend to help the first-time homebuyer--and it does not matter
    whether it is a statute or not or regulation or how it just
    falls into place--but then how do you help those first-time
    homebuyers in California or New York or Massachusetts? And
    wouldn't this bill give the ability to help them more? Or would
    it?
        Mr. Weicher. Well, I think with the limits that I mentioned
    that would apply in some of these high-cost areas, in San
    Francisco at the ceiling of $568,000, you would need an income
    of about $115,000 to buy that home. There are not very many
    first-time homebuyers in that income range anywhere. At
    $115,000, you are well up in the income distribution for the
    United States.
        In Boston, the income that you would need to afford a
    $433,000 home would be something like $85,000. Again, that is
    well up in the income distribution. And there are not very many
    families buying a first home in that situation.
        Chairman Ney. The gentleman from Georgia, Mr. Scott?
        Mr. Scott. Mr. Weicher, would increasing the FHA loan
    ceiling limit the ability to insure mortgages in other places
    in the country?
        Mr. Weicher. It would affect it if we ran into our
    commitment authority limit, which Ms. Waters and Mr. Frank
    referred to. And as Mr. Frank said, that is a matter that is
    under the jurisdiction of the appropriations committees.
        And last year, we ran into that limit in the multifamily
    programs and had to suspend operations twice. And we almost ran
    into the limit on the single family programs.
        Given the fact that there is a commitment authority limit,
    then there is always the possibility that we will reach that
    limit. And we have reached it a couple of times in the last 5
    years.
        At this point in this year, we are not close to reaching
    the single family limit. But there would be no guarantee that
    we would avoid it, avoid reaching that limit in future years,
    in boom years.
        Mr. Scott. So your opposition to this is based on what?
    What evidence?
        Mr. Weicher. Well, we have had the experience of having to
    shut down access to FHA programs because we have reached
    commitment authority limits in the past. And that is a matter
    of concern.
        And, as I was saying in response to the chairman's
    question, the income levels needed to afford a home with FHA
    insurance, at the ceilings that this legislation would
    establish in many areas, are quite high and not really, in our
    judgment, are we reaching people who need FHA to buy a first
    home. At $85,000 or $115,000, we are well up in the income
    distribution.
        Mr. Scott. How do you address the concerns raised by Mr.
    Frank and Mr. Miller in terms of the inequities of the playing
    fields, especially facing states like Massachusetts and
    California? How do we handle that? How do we address that, if
    not through this bill?
        Mr. Weicher. Well, I think the problem is that we have some
    areas which have extremely high home prices. And those areas
    are not really markets in which first-time homebuyers are
    active.
        They are active in other parts of those metropolitan areas.
    They are not in San Francisco, particularly, but they are in
    other areas in the Bay Area, in Oakland and so forth, where
    prices are lower.
        Mr. Scott. All right. Thank you, Mr. Chairman.
        Chairman Ney. Mr. Miller?
        Mr. Gary G. Miller of California. Thank you, Mr. Chairman.
        Mr. Weicher, I have great respect for you. And some of my
    comments I am going to make are not an attack. I see things a
    little differently, in some fashion.
        I have been a developer for well over 30 years and a
    councilman and a mayor, state assemblyman and now a
    congressman. And housing is a passion for me.
        And we have talked about the regulatory barriers that have
    really impacted homeownership in this country. And our goal is
    to expand homeownership.
        And government's role, in many cases, is just to provide
    opportunity, not guarantees or subsidies in my mind, but to
    provide opportunity. The fact is that things have changed in
    this nation.
        There is staff who are sitting behind me now that were able
    to buy a home on the Hill here in years past just because FHA
    was available to them. That no longer exists on the Hill today,
    as you know, they are not available because the housing has
    increased in price range so much that FHA does them no good.
        And I look at the housing industry as a huge puzzle. And it
    is made up of many parts--the lenders, bankers, mortgage
    brokers, mortgage bankers, realtors, title companies. And when
    we deal with risk and other things, we look and say: how do we
    make all these things work? How does it come together?
        And you made one statement that kind of opened my eyes. You
    talked about the commitment authority limits.
        And you said that this year, we have not reached that for
    single family, but in a boom year--if it got any boomier, I do
    not know if you could be able to get realtors and builders down
    to the ground because they think this is wonderful. These are
    boom years.
        And even during boom years, we are having a problem. Things
    have just changed entirely. If you look and you say that you do
    not know that this is necessary in some areas, well, it has
    been necessary in Alaska, Hawaii, Guam and the Virgin Islands.
        And it has worked in those areas. And I do not know why it
    will not work in the other areas that are being underserved
    today.
        And we have a group out there in this nation I call the
    ``new homeless.'' And that is a husband and wife, they are
    working real hard. And they might just be out of school. And
    the wife is a schoolteacher and the husband is a fireman or a
    police officer.
        And combined income, they are somewhere in the $80,000
    range. And they are in their early 20s and they are out wanting
    to buy a house. And the fact is that in a little place called
    Diamond Bar, California, where I am from, which most people do
    not think is a real elite, exclusive area--I think it is a very
    nice community--but you are paying over $500,000 for a home.
        So if you can find a home out there for $400,000 that these
    people would love to be able to buy, that they can qualify for
    in the $80,000 price range, FHA is not available to them. Zero
    down payment is not available to them through the program.
        I am not sure what market FHA is trying to serve, based on
    some of the statements. Because if we are trying to serve
    first-time homebuyers and that is the goal, a homebuyer should
    not be discriminated against because they want to own a home in
    the community they grew up in.
        And the fact of life is beyond their control, the housing
    industry has kept this economy fairly strong in recent years
    during a recession because it has boomed. And it has put people
    to work. They pay taxes. And the governments are operating
    because I believe the backbone of this country in the last few
    years has been the housing industry and groups associated with
    it.
        So to tell somebody that we think a program should apply to
    first-time homeowners, yet we are going to discriminate against
    you because of where you want to live--that you want to live in
    Maxine Waters' district or you want to live in Oakland in
    Barbara Lee's district or you want to live in Orange County or
    L.A. County in my district--we are actually telling those
    first-time homebuyers that we have a program that obviously we
    believe works because we continue it, yet we are not going to
    make it available to you because you happen to have been raised
    in an area that the costs have gone so high that you do not
    qualify for a program that is proven to work.
        And when we talk about commitment on authority for limits,
    I always support those type of things. But you know, it might
    put a larger smile on my face if those limits were raised and
    it benefited the district I represent too.
        And I know Mr. Frank has a similar feeling. He has no
    problem with raising those limits.
        But it would be nice, when we raise those limits, if the
    people we represent, who are hardworking people and many first-
    time homebuyers, it is just the home they are trying to buy the
    first time is more expensive than they would like to pay. Yet
    they are stuck with a situation that they have no option but to
    pay it if they want to live in the community that they were
    raised in, that they understand, that they know the people,
    that their friends live in, their family lives in.
        And so I guess my main question: if truly FHA's goal is to
    help first-time homebuyers and that is their primary focus and
    then expanding it past there, how in the world can we say that
    a program that the government makes money on, is proven to
    work, if it works in Hawaii and Alaska, why will it not work in
    New York, in Boston and in California?
        Mr. Weicher. Let me start with your first point, Mr.
    Miller, about the boom years.
        Mr. Gary G. Miller of California. And many want to see
    these boom years continue, so I think they are that good.
        Mr. Weicher. We certainly want them to continue too. I do
    not think there is any disagreement there at all.
        The commitment authority limit, we will not reach the
    single family commitment authority limit this year for two
    reasons. One is last year, Congress did raise that limit very
    sharply for this year, compared to what it was the year before.
        And second of all, the refinancing boom has finally lost
    some steam, as rates have risen a little bit lately. And that
    makes a difference.
        But last year, we came very close. We came very close to
    having to close down the single family programs in late summer
    at a time when it would not have been possible for Congress to
    increase our commitment authority limit. It does happen.
        Chairman Ney. Time is expired.
        Mr. Gary G. Miller of California. Thank you, Mr. Chairman.
    I will come back to this.
        Chairman Ney. We will come back to it.
        The gentleman from Massachusetts, Mr. Frank?
        Mr. Frank. To begin where you just ended, why does the
    department not ask for enough commitment authority so you have
    a margin of error? There is no downside whatsoever, it seems to
    me, to being somewhat over.
        Have you done that? Why not ask for enough so that you will
    not be in danger of running out?
        Mr. Weicher. It is always a projection, Mr. Frank, of what
    commitment authority will be needed for a year that starts 8
    months after the President's budget.
        Mr. Frank. Once you start, you have not been willing enough
    to ask for extensions. Is there a downside if you ask for more
    commitment authority than is needed and get more commitment
    authority than is needed?
        Mr. Weicher. There is no budgetary downside at all.
        Mr. Frank. Is there any other downside? Does it hurt your
    feelings? What is the downside?
        Mr. Weicher. No, I----
        Mr. Frank. Then there is no downside.
        Mr. Weicher. Not that I see.
        Mr. Frank. Okay, given that there is--I am sorry, finish.
        Mr. Weicher. I am sorry, if I could respond. It always
    takes time for an action when we see a problem.
        Mr. Frank. I agree.
        Mr. Weicher. And last year, we did in fact, as you know,
    have to shut down the GSRI fund.
        Mr. Frank. Let me say two things. First of all, since there
    is no downside, overshoot. There is no downside, so why not ask
    for enough so it is very, very unlikely.
        Secondly, I agree that the Appropriations Committee was too
    slow and we should push for it. But if in fact you have enough
    commitment, the key policy point is that giving you commitment
    authority that would handle any increase that would result in
    this bill has no downside, correct?
        Mr. Weicher. That is right.
        Mr. Frank. Okay. So then the question is this: given that--
    and that is the only possible thing, you say. And the gentleman
    from Alabama said we want to help low-income people. I agree.
        I spend most of my time in this committee trying to help
    lower-income people get housing. So I have no apology to make
    about now being for a bill that focuses only on this.
        I would like to have an omnibus bill. We do not have one.
    And is there anything in this bill, if we can resolve the
    commitment authority issue by you asking for more than enough,
    with no downside, is there anything in this bill that would
    impinge on our ability to help lower-income people?
        Mr. Weicher. There is not anything in the bill which would
    limit that. It would simply depend on the willingness of our
    lenders who make the loans.
        Mr. Frank. I understand that. But would the willingness of
    your lenders to make loans to people at the lower end be
    somehow negatively affected by this?
        Mr. Weicher. I doubt it, Mr. Frank.
        Mr. Frank. So do I. Good.
        Mr. Weicher. But I do hear that question. I do hear that
    comment being raised from time to time when loan limits----
        Mr. Frank. Well, you do not believe it and I do not believe
    it. So when we find somebody who does believe it, we will talk
    to him. Because I think it becomes very clear.
        Nothing in this bill has any negative effect on lower-
    income people. And as a matter of fact, to the extent that it
    affects them, it can help them.
        Because if we go forward with this with enough commitment
    authority--and there is no good reason not to have a good
    commitment authority--the FHA surplus will go up and the FHA
    will be in better shape. This improves the status of the FHA.
        So then I want to respond to one point you made. Because
    all we are asking for is that people who are trying to buy a
    median house price anywhere in the country get the same.
        If somebody came in and said the fair market value for
    Section 8 should be the same dollar amount everywhere in the
    country, we would all be outraged because we recognize that
    housing prices differ. In fact, many of our housing programs
    take into account this differential.
        I mean, realtors tell me: location, location, location--
    except where the FHA is concerned? The FHA is going to ignore
    location.
        All we are asking for, again, is the median price. Now I
    thought I heard you tell the gentleman from Georgia or that
    your response was that there will be certain areas of the
    country where first-time homebuyers will just have to be shut
    out. I find that really a very inappropriate response.
        You say, ``Well, in parts of Massachusetts, parts of
    California, we just will not be able to accommodate first-time
    homebuyers.'' I do not want to tell people--you know, we are
    talking about Boston.
        We are talking about big cities. We are talking about
    places where minorities live. What is the justification for
    saying we are just going to have to accept the fact that you
    will not have first-time homebuyers there when we could aid
    them with no downside?
        Mr. Weicher. My point in response to Mr. Scott was that the
    income levels needed to support the ceilings in the highest-
    cost areas were very high for any family at that income level
    to really be a first-time homebuyer; $115,000 would be what you
    would need in San Francisco. And that is way up in the income
    distribution for the United States and way up in the income
    distribution in San Francisco.
        Mr. Frank. It is. And these are, to some extent, where the
    median house prices are, the median income is somewhat higher.
    It is not always the same. But why do we then walk away from
    them?
        I mean, what is your reason for saying that people at that
    median should not be allowed to take advantage of FHA if they
    want to buy a median house price when it has no negative--I
    guess, that is? What negative effects will this have from a
    public policy standpoint?
        Mr. Weicher. Our point is that there are----
        Mr. Frank. I did not ask for your point, Dr. Weicher. You
    had a chance to make your statement. I am asking my question:
    what negative effects would raising the FHA limit to the median
    have, from the public policy standpoint?
        Mr. Weicher. The public purpose of FHA is to help----
        Mr. Frank. Okay, let me try one more time. I am not asking
    you for your lecture on the public purpose of FHA. You have
    said that. I am asking you what negative effects this would
    have.
        If the answer is none, then I want you to say ``none'' and
    I will be through.
        Mr. Weicher. We are here to serve the first-time homebuyer.
    And the first-time homebuyer is seldom in this income----
        Mr. Frank. Okay, I understand that. Some first-time
    homebuyers will not be helped by this. We will not reduce the
    incidence of firefighters. It will probably do very little to
    cure public health diseases. I understand that.
        This is a limited bill that does limited things. If I had
    more time, I could join with you in a list of things it will
    not do and does not pretend to do.
        Now would you please, I am asking you as a personal favor,
    answer my question. What negative effects from the public
    policy standpoint would this bill have?
        Now a negative effect is not the fact that it does not do
    what it does not claim to do. A negative effect is something
    that it does that would not be useful. Please tell me if there
    are any negative effects that will result from passing this
    bill from the public policy standpoint.
        Mr. Weicher. Our----
        Mr. Frank. That is not a hard question. If you want to
    evade the question----
        Mr. Weicher. Let me try again. FHA is here to do a job that
    the private sector does not.
        Mr. Frank. Oh, you know better than that. I understand
    that.
        Mr. Weicher. No, sir. I did not finish my answer.
        Mr. Frank. Excuse me. Your answer is----
        Mr. Weicher. FHA is here to do a job that the private
    sector does not do. The private sector does serve families with
    incomes of $85,000----
        Mr. Frank. And what negative effects? I mean, you know
    better than this. What game are you playing here? If the answer
    is none, if you are saying it does not do anything negative,
    but we do not want to do it because that is not the purpose of
    the FHA, kind of teleological, glad.
        But I am asking you a question that I really would like you
    to answer honestly. I am really getting frustrated here.
        What negative effect is there? The fact that the FHA has
    this purpose or that purpose, you know that is not a negative
    effect. What negative effects would it have, if any?
        Mr. Weicher. Mr. Frank, I am sorry. I have tried to answer
    the question.
        Mr. Frank. No, you have not. Do you know what a negative
    effect is? A negative effect is something that makes something
    worse. How does this make a situation worse? What would be
    worse in terms of public policy if we pass this bill, in terms
    of societal effect?
        Mr. Weicher. We do not think FHA should be serving markets
    that are served by the private sector.
        Mr. Frank. I understand that.
        Mr. Weicher. Because we have an advantage because we have
    the full faith and credit of the government of the United
    States.
        Mr. Frank. So this would be unfair to the private sector,
    is that what you are saying?
        Mr. Weicher. Yes.
        Mr. Frank. Why didn't you say that first? You think that
    the reason not to do this is it would be unfair to the private
    sector for the FHA to cover median prices in this regard?
        Chairman Ney. With this point, the time has expired. But we
    are going to get to Mr. Davis and then back, if you would like
    to----
        Mr. Frank. He will not answer it in the next five minutes.
    But I understand that we cannot have the median house price in
    high-cost areas because you think it would be unfair to the
    private sector?
        Mr. Weicher. Yes.
        Chairman Ney. Mr. Davis?
        Mr. Davis. Mr. Weicher, let me shift direction a little
    bit, but not too far from the thrust of what Mr. Frank is
    asking you. Your assertion, as I understand it in response to
    Mr. Miller's comments and Mr. Frank's comments, was something
    to the effect that if we expand the limit from 87 percent to
    100 percent, that we frankly will not really be impacting a
    whole lot of people; that the FHA somehow does not really have
    the ability, as a general rule, to really serve a San Francisco
    or a Boston because as a practical matter, the cost in those
    markets is out of the range of the average FHA customer. That I
    understand to be your point.
        Let me try to introduce a little bit of evidence into the
    abstract argument that we are having here. The 87 percent
    level--and I am not a mathematician--but if you look at San
    Francisco, if 100 percent level would be $500,000 or if the
    median price is $568,200, 87 percent of that would be somewhere
    around $540,000 or $530,000.
        Right now, does the FHA play in the San Francisco market?
    Does the FHA play in the New York market where 87 percent would
    be presumably around $340,000 and Boston where 87 percent would
    be around $410,000? Does the FHA currently play in those
    markets?
        Mr. Weicher. We do not do very much business in those
    markets because the limit, as----
        Mr. Davis. But do you do any business in those markets?
        Mr. Weicher. A little.
        Mr. Davis. Okay, so if you do any business in those
    markets, then wouldn't it be obvious--I mean, it seems that Mr.
    Frank's point would probably be if you do any business in those
    markets, you will do a little bit more business in those
    markets if the cap goes up. So doesn't that serve the ultimate
    public policy purpose of the FHA?
        Mr. Weicher. I think the point is the current limit in all
    of those areas is $290,000 because that is the national cap. We
    do not go over $290,000 anywhere.
        And in those markets, we do a little bit of business at
    $290,000. Going to $568,000 or $374,000 is a big increase. It
    is not simply moving up to the national conforming loan limit
    of $333,000. That, I think, is the answer.
        It is not 87 percent of the current median----
        Mr. Davis. I see.
        Mr. Weicher.--when you get above $290,000.
        Mr. Davis. Well, let me ask this question then. What I
    expected you to say to Mr. Frank was that the negative impact
    or the perverse impact of this change is that it would somehow
    limit the FHA's ability to serve areas that are very much
    within the intended coverage--low-income areas or areas that
    are generally underserved by the market that exists--whether it
    is the GSEs or the regular market.
        That is the answer I would have expected you to give to Mr.
    Frank's question. So I guess I want to spend a little bit of
    time figuring out why you did not give that answer.
        You have 100----
        Mr. Frank. Will the gentleman yield briefly?
        Mr. Davis. Not until I finish the round of questions. You
    have $165 billion in last year's fiscal year for FHA
    commitment. Is that about right? Is that the number in your
    opening statement, around $165 billion?
        All right. Now it seemed that your initial point was
    because the number is a finite number--let's say it goes up to
    $190 billion this year; it will be a finite number--if the FHA
    is having to make more of a commitment in upper income areas, I
    suppose logically one could ask that that would mean that
    somewhere you are going to have to lessen the commitment. Does
    that mean that you are going to have to say, ``I am going to
    take something out of this pot to put it over in this pot?"
        That is not the answer that you gave. So I am trying to see
    what it is that I am missing about the way this program works.
        Right now, there are no regional quotas in the way the FHA
    administers its program, right? There are no State by State
    quotas?
        Mr. Weicher. That is correct.
        Mr. Davis. So what I am trying to do is to understand your
    position and understand the way the program works. If you have
    a finite number--$190 billion--and the FHA is having to make a
    larger commitment in high-income areas, why doesn't that
    somehow pull from the pot of money that is available in more
    traditional areas?
        Mr. Weicher. We have a national commitment authority. But
    within that limit, we are a demand program. If a mortgage meets
    our standards, we approve it. We approve them in the order in
    which they come in.
        The commitment authority limit only bites when we get close
    to it late in the fiscal year. If the commitment authority
    level were high enough, as Mr. Frank said and as I said also,
    this would not be a problem.
        Mr. Davis. Is there a way that you could--I am going to cut
    you off for a second--is there a way that you can carve out a
    portion of the commitment level that will meet underserved
    areas specifically or low-income areas specifically? So that if
    there is any additional amount of money that has to be put on
    the table, it is only coming from what is serving a San
    Francisco or a Boston already?
        The number you give in your opening statement is that two
    mortgages in California might amount to six mortgages in Ohio.
    I understand that. Not all parts of Ohio are underserved areas.
        If the goal of the FHA is to target a particular class of
    individuals, those whom you have defined as those outside the
    reach of the normal market, is there any way that a carve out
    could be set up or that some kind of ceilings could be set up
    within the FHA to guarantee that you are not pulling from that
    pool, but you are only pulling from the pool in relatively
    high-income areas anyway?
        Mr. Weicher. Not without substantial resources being
    devoted to trying to estimate demand in each market and manage
    the program within each market on a day-to-day basis. We do not
    have those resources. You all have not appropriated those
    resources to us and we have not asked for those resources.
        Mr. Davis. Let me ask this question. Going back the last 3
    or 4 fiscal years--I guess the whole life of the Bush
    Administration--how many times has the FHA exceeded its
    commitment level in the last 4 years?
        Mr. Weicher. Twice on the GSRI fund, which includes
    condominiums and home equity conversion mortgages. It includes
    some single family mortgages. And we have come very close once
    in the Mutual Mortgage Insurance Fund, which is the basic
    homeownership program.
        Mr. Davis. And did you respond to that gap by coming back
    to Congress and asking for a supplemental appropriation?
        Mr. Weicher. Yes.
        Mr. Davis. Okay.
        Mr. Weicher. And we received it in one case and not in
    others.
        Mr. Davis. Okay.
        Mr. Weicher. In the single family case, we managed to avoid
    it.
        Mr. Davis. In the 4 years, the 4 fiscal years of the Bush
    Administration, has the FHA asked for a larger commitment level
    each year?
        Mr. Weicher. Yes, I believe that is accurate. We have two
    programs. And I believe that is accurate. We have never asked
    for a reduction. I might have to answer the specifics for the
    record.
        Mr. Davis. Okay. Well, that is not that hard a question, I
    mean whether or not the FHA has sought a higher number. You
    just happen to not know that.
        Mr. Weicher. I just do not have the four-year numbers in
    mind.
        Mr. Davis. Okay. All right. I think my time is expired.
        Mr. Frank. Mr. Chairman?
        Chairman Ney. What I am going to do, if the gentleman could
    yield, I am going to come back to Mr. Miller and another round
    over here and then we will move on to panel two.
        Mr. Miller?
        Mr. Gary G. Miller of California. Okay, thank you, Mr.
    Chairman.
        Let us make a few assumptions: first of all, that we will
    acknowledge the buyer has to qualify for a loan. So it does not
    matter what the person wants to buy. If it is $400,000,
    $435,000, $500,000, you have to qualify. So we will set that
    aside.
        And I think I can speak for Mr. Frank and I and probably
    every member of this committee, we will do everything in our
    power to make sure that if this becomes law, that we are going
    to give you more authority to be able to accomplish that. So
    let's set that aside too as an issue.
        I guess the question is: how will the current FHA program
    be negatively impacted if this bill becomes law?
        Mr. Weicher. I do not think the program will be negatively
    impacted.
        Mr. Gary G. Miller of California. Thank you. I think that
    is what Mr. Frank was trying to get to. And we agree with you.
    We do not think it will be either.
        I mean, we understand that if we do not set parameters,
    there could be things that go wrong. But if we say that the
    buyer has to qualify, we have to provide authority and if that
    happens, the FHA program really will not be impacted in a
    negative fashion.
        The problem we face and I guess the reason this bill is
    here, if you take the average increases in home prices in not
    high-cost areas throughout this nation, from 1992 to 2002, it
    was 52.7 percent or 4.3 percent annually. And based on those
    type of increases, I am sure that FHA works in many of those
    areas. Not a problem.
        The problem we face is in the areas we are talking about,
    in high-cost areas--Mr. Frank's State and my State, New York
    and some others and many of the members of this committee, if
    you look at individual counties within their states--the home
    prices have increased by 169.7 percent or 10.4 percent
    annually. That is the problem.
        It is not that the program does not work. It is not that
    Congress is not trying to provide authority. It is not that we
    would ever assume anybody should be made a loan who does not
    quality for a loan.
        The fact is that if you are willing to buy entry level
    housing in these high-cost areas, you did not increase 4.3
    percent in costs over the 10 year period. You increased 10.4
    percent.
        That puts those people who want to be first-time homebuyers
    out of the equation. And that is something that is absolutely
    beyond their control. I mean, if it could be controlled, they
    would control it.
        If the local housing market could control it, they would
    control it. The problem is with the regulatory barriers, the
    demands on these areas, the basic costs associated with the
    Endangered Species Act in California that we have that really
    impacts our marketplace and other things, we have created a
    situation or the situation has been created whereby a good
    program--FHA--is just not available because of change.
        And that is what we are trying to do here. We are saying
    things have changed. Now we need to change to accommodate that
    change.
        We are not trying to do something that is unreasonable. We
    are not trying to create an impact on the program where it will
    not be solvent in the coming years.
        We are saying that things have changed. And when you go to
    Congress and you say we need to increase authority for the
    amount you can lend, it is based on change. And we can say,
    based on this bill, how that will change the situation to
    expand the program to create equality and equity throughout
    this nation for first-time homebuyers. It is going to take more
    authority.
        I do not think you are going to have a problem at all
    having Congress come back and say, ``We are going to give you
    more authority.'' The problem is if we do not change things, if
    we do not look realistically at this, if we do not look
    realistically at conforming loan limits--and understand that
    the private sector, the bankers and stuff, have to be
    safeguarded on the conventional market--if we do not start
    looking at some of these things, the situation we have in this
    country for housing is going to become worse.
        The goal is to provide available, ready financing that
    makes sense to people. The zero down payment that Mr. Tiberi
    introduced, I think it makes a lot of sense.
        I am just envious. I am envious. And even Mr. Tiberi is
    going to be envious when he looks at the fact that Delaware
    County, the median income--the median home price is $259,000
    and FHA only goes to $208,000, so that will not even work in
    his district and he is the author of the bill.
        So we are trying to say we do not want to do anything that
    has a negative, detrimental impact on FHA. I do not want to do
    that. That is not my goal. I am not trying to create a subsidy.
    I am not trying to create anything other than a program that
    works.
        And I believe when you take the issues off the table that
    need to be taken off--like that yes, you have to qualify; yes,
    we need to increase loan authority--what we are trying to do
    has no negative impact on FHA. In fact, we believe that it
    enhances FHA and it goes in the direction we want HUD to go.
        And I saw the red light come on. So I am going to have to
    yield back the balance of my time.
        But I know Mr. Frank wants to expand on that. But I think
    we got our answer, Mr. Frank. It has no negative impact, I
    think, aside the couple of issues that we have set aside that
    we know are understandable.
        And I would love to talk to you about this further
    privately. We are going to run out of time. And with that, I
    yield back the balance of my time.
        Chairman Ney. The gentleman from Massachusetts?
        Mr. Frank. I just want to return to the argument we got,
    which is that the negative is that it somehow is unfair to the
    private sector. But the private sector is a differentiated
    group.
        One very important part of the private sector in the
    housing areas is the realtor profession, a very important
    profession when it comes to single family homes. They are very
    much in favor of this bill. The realtors are pretty private
    sector.
        The mortgage bankers are in favor of some increase. They
    have a question about the interaction with the conforming loan
    limit.
        The home builders similarly think we should raise the
    limit, although they do not want it to go without limit, they
    said. They want it to be above the current ceiling but less
    than the median house price.
        So we are talking about at least three important groups
    here--the mortgage bankers, the realtors and the home
    builders--who are supportive of some increase. The realtors are
    very enthused.
        Which--and let me also ask you this because in other parts
    of the country where the FHA lends to the median, where the
    median is within range, is the existence of an FHA lending to
    people who are buying homes within the median income unfair to
    the private sector in Kansas and Nebraska and Kentucky and
    places? Do you think it is unfair to the private sector in
    those places?
        Mr. Weicher. We do not quite go to the median. We go to 95
    percent of median.
        Mr. Frank. Okay.
        Mr. Weicher. But----
        Mr. Frank. Do you think it is unfair to the private sector
    in those places where you go to 95 percent of median?
        Mr. Weicher. No, I do not think it is unfair. I do think
    that the----
        Mr. Frank. Why not?
        Mr. Weicher.--the institutions, the segments of the
    industry that I am referring to are the lending side.
        Mr. Frank. Okay, just the lenders.
        Mr. Weicher. Not the builders and realtors. We do not
    compete with them.
        Mr. Frank. So the question is: why is it unfair to the
    lenders to have the FHA lend to the median in Boston?
        Mr. Weicher. The median in Boston----
        Mr. Frank. But why is it unfair to them?
        Mr. Weicher.--carries you so far into the high end of the
    income distribution that you are really not serving the first-
    time homebuyers that we are there to serve.
        Mr. Frank. No, no. I did not ask you what----
        Mr. Weicher. In other areas, we are serving----
        Mr. Frank. You understand English better than you pretend.
    Why is that unfair? You just restated the point. Why is that
    unfair to the private lender?
        Mr. Weicher. Why is it unfair to serve up to $430,000 in
    Boston?
        Mr. Frank. Why is it unfair? No, you said the harm was that
    it was unfair to the private sector. And you said you meant the
    lenders. I am listening to you and I am trying to ask: what is
    unfair about that to the private lender, having it be FHA
    eligible?
        Mr. Weicher. Our purpose----
        Mr. Frank. What is unfair about it for the private lender?
        Mr. Weicher. Our purpose is to serve first-time homebuyers.
    And that is who we try to serve. And in those ranges, we are
    not reaching first-time homebuyers.
        Mr. Frank. Okay, Dr. Weicher----
        Mr. Weicher. We are reaching people who the----
        Mr. Frank. You are being deliberately evasive.
        Mr. Weicher. I am not trying to be, sir.
        Mr. Frank. You keep restating that. I understand that. I
    asked you what the harm was in that. And you said it is unfair
    to the private sector. You said that. Do you remember that?
        Mr. Weicher. Yes, certainly.
        Mr. Frank. And I am asking you now, I want to understand
    the mechanism by which it is unfair in the Boston area or in
    parts of California. How is it unfair if the FHA guarantees the
    loan? How is that unfair to the private lender?
        Mr. Weicher. Private lenders serve that market. And they
    serve that market----
        Mr. Frank. So if there is a market that is being served by
    the private lender, it is unfair to the private lender for the
    FHA to step in?
        Mr. Weicher. It is unfair to use the full faith and credit
    of the government of the United States----
        Mr. Frank. Which is the FHA.
        Mr. Weicher.--where there are private alternatives that
    serve the market.
        Mr. Frank. In Kansas and Nebraska and the Dakotas, does the
    private market serve people who are trying to buy homes at 95
    percent of median?
        Mr. Weicher. The private market serves them. But it is also
    true----
        Mr. Frank. No, no. Just answer my question.
        Mr. Weicher. It is also true that we serve them. And we
    have no protection from competition.
        Mr. Frank. Okay. You want to evade the question here.
        Mr. Weicher. No.
        Mr. Frank. Does the private market--I am talking now only
    about the unfairness element--does the private market fail to
    serve 95 percent of median in those states that I have been
    talking about?
        Mr. Weicher. Those are the markets we serve.
        Mr. Frank. Excuse me, does the private sector----
        Mr. Weicher. Those people we serve. The private sector,
    which has no bar to serving, to competing with us in those
    markets, does not compete with us.
        Mr. Frank. If there was no FHA, do you think there would be
    a failure to serve people at 95 percent of the market in those
    areas?
        Mr. Weicher. I think there would be a failure to serve many
    of the people we now serve or they would be served at
    substantially higher costs than they are being served.
        Mr. Frank. Okay, so that is the issue.
        Mr. Weicher. Well, either could----
        Mr. Frank. Either way, right. So that you think it is
    unfair to the private sector if, as a result of the FHA, some
    people who would be served would be served at lower costs. And
    I think that is right.
        But what you are telling people who happen to live in an
    area where they are already penalized because the home price--
    median home price--is so high that, to the extent that they can
    get some help with the cost, we will not give it to them even
    though there is no harm. And that is my problem.
        I think the fact that, even without the FHA, yes there
    would be private lenders who would help people in these 95
    percent median areas. They would have to pay more.
        And what you are saying is that people who live in high-
    cost areas, they should have to pay more, even though, as we
    said, no harm is being done.
        Mr. Weicher. Again, we are trying to serve the first-time
    homebuyer.
        Mr. Frank. I do not care. But you keep saying that. And
    that is not the answer--do you really not understand the
    difference between a statement as to what the purpose of the
    program is and then a question as to what harm is being done?
        Let me put it to you this way. It will make you feel
    better.
        Given that this is the purpose as you see it, what harm is
    done from deviating from the purpose. I guess that would be the
    way to put it. You really cannot answer that by just restating
    the purpose, can you?
        Mr. Weicher. FHA is not harmed, to our knowledge, by
    serving people who are buying homes in this price range.
        Mr. Frank. Who is harmed?
        Mr. Weicher. We are----
        Mr. Frank. Who is harmed?
        Mr. Weicher. We are----
        Mr. Frank. Who is harmed?
        Mr. Weicher. The private lenders who would serve that
    market are at a disadvantage.
        Mr. Frank. Okay. So your basic point is that we should not
    give FHA coverage of median prices in our high-cost areas
    because it would harm the private lenders who would otherwise
    be able to make more money than they make.
        Thank you.
        Chairman Ney. Thank you.
        Mr. Miller?
        Mr. Gary G. Miller of California. Thank you, Mr. Chairman.
    Expanding on what Mr. Frank is getting to--and I agree--I am
    very concerned that whenever we do something, we are not
    cutting into some private sector marketplace. And I have talked
    to the bankers about this.
        When we are talking about conforming loan limits, my first
    meeting was with bankers saying, okay, the conventional market
    has grown tremendously because the cost of housing has risen so
    much that many of the programs are not available that currently
    were available. And FHA is one of those.
        If you look at what marketplace FHA has in some of these
    areas, like in Orange County, only 9.2 percent of the loans
    would have been available for FHA. In Santa Clara County, only
    two percent of the loans made would ever qualify for FHA.
        In Ventura County, only 7.7 percent of the loans made would
    qualify for FHA. And that is just qualifying; not saying they
    got it, but they have qualified for it.
        And that is the problem today. I would never propose a bill
    to come in and cut into the private marketplace. But the
    problem is the market has grown to such a degree that we are
    going out of the marketplace because we are not trying to keep
    up with it in having a share that we normally have historically
    had in the past.
        I mean, the conventional marketplace has grown
    tremendously, percentage-wise, from what it used to be. I am
    not looking at impacting bankers and lenders. That is not my
    goal.
        The goal is: how do you keep up with change? Things are
    changing. I believe it is our responsibility to try to keep up
    with change. And this bill, I believe, goes a lot in that way.
        And maybe we need to look at something on tying this in
    some way back into conforming, as the process goes through. But
    I think conforming has to be addressed too, which we are not
    doing today.
        So Mr. Frank and I are not closed to the concept of: we
    will look at FHA; let us look at something with conforming so
    there is some rationality here. But conforming is not where it
    should be today.
        But I am not willing to move that until we come to some
    agreement with the private sector on where it should go to. And
    that is a process we are undergoing.
        And I am well aware of that. And I do not want to infringe
    upon their fair share of the market. So we need to go there. It
    is not ready today. But I think we are ready with this in some
    fashion. Maybe it is a modified fashion. But we do need, I
    believe in all fairness, to move this. And at that, I thank you
    for your time, Mr. Secretary.
        Chairman Ney. I want to thank the members of the committee.
    I want to thank Mr. Weicher for participating in the energetic
    give and take of public debate in the U.S. Capitol. Thank you.
        Mr. Weicher. Thank you, Mr. Chairman.
        Chairman Ney. With that, we will move on to panel two. Give
    a minute for panel two to come forward.
        I want to thank the panel. The first witness on the panel
    is David Berson. And he is Fannie Mae's vice president and
    chief economist. He is responsible for managing the economics
    department at Fannie Mae, including forecasting and analyzing
    the economy, interest rates and housing and mortgage finance
    markets.
        Mr. Berson also advises Fannie Mae's chairman and operating
    committee on finance, economic, tax and housing policy issues.
    Welcome.
        The next two witnesses I will defer to Congressman Miller
    for introductions.
        Mr. Gary G. Miller of California. Thank you, Mr. Chairman.
    There are two individuals I would like to introduce. John
    Eberhardt, first, it is my pleasure to introduce him today. He
    is president-elect of the California Association of Mortgage
    Brokers. Mr. Eberhardt has been a mortgage broker for over 13
    years. And after moving from Wisconsin to California, he opened
    Prime Equity Management, which is located in Torrance,
    California, with this father-in-law, Fred Barth.
        He is very active in this company. He is no stranger to the
    political arena. He had civil involvement where it began in
    Wisconsin when he served as legislative aid to then-governor
    Lee Dreyfus.
        More recently, in 2002, Mr. Eberhardt was selected by the
    National Association of Mortgage Brokers to their task force to
    formulate recommendations for change to the good faith
    estimate. So I am really looking forward to your testimony
    today.
        The next one is Glenn Hellyer, who I have known for years.
    He is from my home district. Mr. Hellyer is a realtor,
    providing real estate services in Southern California for over
    25 years.
        For the past 4 years, Mr. Hellyer has operated an
    independent real estate broker and realtor in Yorba Linda,
    California, offering residential and commercial real estate
    services. Owing to his vast accomplishments at promoting
    homeownership, Mr. Hellyer was appointed honorary director for
    life of the California Association of Realtors and served as
    president of the Anaheim Board of Realtors.
        And I welcome both of you here today. And the panel, it is
    good to have you here.
        Chairman Ney. I want to thank the gentleman and also thank
    the witnesses today.
        Next is Jonathan Kempner. And he is president and chief
    executive officer of the Mortgage Bankers Association. Prior to
    assuming his present role in April of 2001, Mr. Kempner was
    president of the National Multihousing Council for 14 years.
        Welcome.
        Next witness is Frank Nothaft. And he is Freddie Mac's
    chief--did I say it correctly? Thank you. He is Freddie Mac's
    chief economist, where he is responsible for primary and
    secondary mortgage market analysis and research, macroeconomic
    analysis and forecasting. He is also involved in the analysis
    of affordable lending activities and policy issues affecting
    the housing industry.
        Welcome.
        Next is Basil Petrou, who is a principal and managing
    partner of Federal Financial Analytics, Incorporated. The
    company provides financial analytical services on legislative
    and regulatory issues to non-bank financial institutions such
    as insurance companies and mortgage corporations.
        Welcome.
        And last, but not least, is Barbara Thompson, who is the
    executive director of the National Council of State Housing
    Agencies, a national, non-profit organization committed to
    advancing the interests of lower-income and underserved people
    through the financing, development and preservation of
    affordable housing. Ms. Thompson also serves as vice president
    of the National Housing Conference.
        And we will begin with our first panelist, Mr. Berson.

    STATEMENT OF DAVID BERSON, VICE PRESIDENT AND CHIEF ECONOMIST,
                               FANNIE MAE

        Mr. Berson. Thank you, Chairman Ney and members of the
    committee. My name is David Berson. I am vice president and
    chief economist for Fannie Mae.
        I want to thank you for inviting me to testify about this
    important issue of homeownership affordability in high cost
    areas. I commend the members of the subcommittee for your
    attention to and leadership on this issue.
        By most national statistical measures, the past 3 years
    have been the best in history for American housing, homeowners
    and mortgage finance. The housing boom has reached most regions
    in the country, including central cities, suburbs and rural
    areas.
        Low mortgage rates and overall record affordability have
    combined to create 3.2 million more homeowners since 2000,
    benefiting families and helping energize the nation's economy.
    And homeownership has been a sound investment. Since 2000,
    house prices have appreciated on average by about 26 percent
    nationally.
        However, in a growing number of areas, strong housing
    demand and limited supply has generated even more dramatic
    price appreciation. Combined with a relatively slow pace of
    income growth, this is putting homeownership increasingly out
    of reach for working American families, especially now that
    interest rates are rising.
        Mr. Chairman, in addition to my testimony, I am submitting
    data for the record that demonstrates this effect and
    highlights some of the specific areas that are impacted most.
        To summarize briefly, home price gains closely track income
    growth in the long run. If home prices rise consistently faster
    than income, homes will become unaffordable and demand will
    drop. Over the past 3 years, home prices nationwide have
    appreciated on average by 7.6 percent per year, significantly
    above the rate of income growth, which has averaged 4.5 percent
    over the same period.
        So far this year, home price gains continue to be strong.
    In several markets, particularly in the East and West Coasts,
    double-digit home price appreciation has dramatically outpaced
    income growth. These areas may be susceptible to sharp declines
    in housing demand, especially when mortgage rates rise.
        Although housing affordability remains high nationally, it
    has become a serious issue for some states. For example,
    between February and March of this year, the share of
    households in California able to afford a median-priced home
    declined by three percentage points to 21 percent.
        The California Association of Realtors has recently
    reported that affordability in the state has fallen to an all
    time low. Monterey, Northern Wine Country, Orange County and
    Santa Barbara regions were the least affordable in the state,
    with only 14 percent of households being able to afford the
    median-priced home.
        The problem is most acute in California, New York and
    Northeast states such as Massachusetts, Maine, Delaware, New
    Hampshire and a few others. House prices in California
    increased more than 14 percent last year, while incomes rose by
    just over two percent.
        In New York and New Jersey, house prices increased by over
    12 percent in 2003, while incomes rose by just under 2.5
    percent. And in Massachusetts, where home prices went up by
    over 10 percent, incomes increased by about two percent.
        But the problem is even wider than that. We see similar
    trends in Florida, Maryland, Virginia, Minnesota and even
    Nevada.
        Currently, the median home price in nine metropolitan
    Statistical areas is above the conforming loan limit. In 1999,
    that was true in only three MSAs.
        These affordability problems emerged in a period of 45-year
    low interest rates, which helped to offset some of the negative
    affordability effects of higher prices. The period ahead is
    likely to be marked by higher interest rates which will erode
    affordability further even if incomes rise.
        Over the long run, home prices and incomes have moved
    together, and that is our expectation going forward as well.
        Mr. Chairman, I recently participated in writing a paper
    for the Homeownership Alliance entitled, ``America's Home
    Forecast: The Next Decade for Housing and Mortgage Finance,''
    that discusses this in greater detail. I will also submit this
    paper for the record.
        In the short run, however, recent increases in interest
    rates in response to stronger economic growth and signals from
    the Federal Reserve of tighter monetary policy will only make
    affordability an even greater problem. We are already seeing
    families shift to adjustable rate mortgages or ARMs, especially
    interest-only ARMs, in order to be able to afford the purchase
    of a home.
        These loans expose homebuyers to greater risk once the
    initial period of payment stability is over. With short-term
    interest rates at 45-year lows and likely to rise over the next
    several years, these homeowners are most exposed to interest
    rate risks going forward.
        Fannie Mae is a private, shareholder-owned company with a
    public mission to promote and expand homeownership. Our mission
    is to tear down barriers, lower costs and increase the
    opportunities for homeownership and affordable rental housing
    for all Americans.
        We take our mission very seriously. Lenders, especially
    small community banks, depend on us to develop new mortgage
    products, processes and technology solutions so they can serve
    more families, serve them better and make the mortgage process
    faster, easier and cheaper for all involved.
        Our investments in technology have increased underwriting
    flexibilities, expanded markets for our lender partners and, by
    reducing the cost of originations, enhanced affordability for
    the home buyer. This January, Fannie Mae took its mission
    commitments one step further. We launched our Expanded American
    Dream Commitment, pledging to help 6 million families--
    including 1.8 million minority families--become first-time
    homeowners over the next decade.
        With this pledge, we set a goal of raising the minority
    homeownership rate from the current 49 percent to 55 percent by
    2014, with the ultimate goal of closing the gaps between
    minority homeownership rates and non-minority homeownership
    rates entirely.
        Addressing the needs of borrowers in high-cost areas will
    be crucial to meeting our corporate objectives.
        Mr. Chairman, we are very glad to have this opportunity to
    discuss the very real problems of families living in high-cost
    areas who do not have access to the benefits provided by Fannie
    Mae and Freddie Mac. As you know, the families who find
    homeownership unaffordable in these areas are not just low-or
    moderate-income families, but also middle-income families.
        Many two-earner households cannot afford homes in some of
    these high-cost areas in the country today. Congress chartered
    Fannie Mae to expand access to mortgage credit for all of these
    households--low-income and middle-income.
        In 1992, Congress complemented that mission with explicit
    requirements----
        Mr. Gary G. Miller of California. [Presiding.] You will
    need to wrap this up. Your time is expired.
        Mr. Berson. All right. I will wrap it up.
        Mr. Gary G. Miller of California. So much to say; so little
    time, right?
        Mr. Berson. Exactly.
        Mr. Chairman, thank you for holding this hearing
    highlighting the critical issues for millions of families
    around the nation.
        Let me conclude, Mr. Chairman, by stating that Fannie Mae
    is in favor of legislation that helps homeownership
    opportunities, especially for underserved populations.
        Thank you, Mr. Chairman.
        [The prepared statement of David Berson can be found on
    page 59 in the appendix.]
        Mr. Gary G. Miller of California. Well, you have done a
    wonderful job. Thank you, Mr. Berson.
        Mr. Eberhardt?

        STATEMENT OF JON EBERHARDT, PRESIDENT ELECT, CALIFORNIA
                    ASSOCIATION OF MORTGAGE BANKERS

        Mr. Eberhardt. Mr. Miller, Mr. Frank, thank you for having
    me here today.
        My name is Jon Eberhardt. And I am the president-elect for
    the California Association of Mortgage Brokers, a state
    affiliate of the National Association of Mortgage Brokers,
    NAMB. And NAMB is the largest organization of individual loan
    originators in the country.
        NAMB has a membership of over 24,000 originators and
    affiliates and supports consumer education and a code of
    ethical conduct by its members. Like my NAMB colleagues, I
    originate loans for a living and have done so since 1991.
        My company, Prime Equity Management, located in Torrance,
    California, is a medium-sized shop with 10 originators. We are
    certified to originate FHA insured loans as an FHA
    correspondent.
        I am here today to speak in support of H.R. 4110.
        The Los Angeles Times recently reported that Los Angeles
    County's median home price jumped 20 percent in the past 12
    months to $379,000. Entry level houses in Los Angeles County
    that traditionally sold for $280,000 are now selling anywhere
    between $360,000 and $380,000 at the entry level. Yet the FHA
    loan limit for L.A. County is $290,319.
        Twenty-three of California's 58 counties are currently at
    this $290,319 FHA ceiling, with another six counties
    approaching the ceiling due to the latest jump in home prices.
    These 29 counties represent approximately 85 percent of
    California's population.
        California is not alone. High-cost areas exist in states
    across the country.
        Maryland, for instance, has five of 24 counties currently
    at the $290,319. They have another seven counties that are
    approaching the limit.
        These counties represent a great majority of the population
    of Maryland. States that currently feature counties at or
    approaching the maximum FHA loan limit include Pennsylvania,
    Connecticut, Massachusetts, New York, New Jersey, among others.
    If you go just south of Washington, D.C. into Virginia, I am
    sure you would find that they would be in a similar situation.
        Recognizing high-cost areas with regard to FHA loan limits
    is not new to this legislative body. Congress already
    recognizes high-cost areas in Hawaii, Alaska and various United
    States territories.
        These areas feature an exception that takes their available
    loan limit to 150 percent of the current FHA ceiling.
        The United States now boasts homeownership in excess of 60
    percent. Minority homeownership is over 50 percent. Both of
    these numbers are the highest in history.
        Home prices are driven by an increased demand for homes
    which outpaces sales of existing homes and new development. I
    would like to make the observation that if we put five million
    new homebuyers in homes before the end of the decade, that
    probably home prices will continue to increase.
        To facilitate the demand for homes, certain steps should be
    taken to accommodate buyers, particularly first-time
    homebuyers. FHA insured loans are more accommodating to first-
    time homebuyers than other types of loan programs, as they are
    designed to include flexibility for debt ratios, income and
    credit history. Such flexibility is not included in
    conventional lending guidelines.
        FHA insured loan programs should serve as a permanent
    backstop for all first-time homebuyer programs. By creating the
    ability for FHA loan programs to float up and down, matching
    100 percent of the local median home price, the legislation
    seeks a logical loan limit that will benefit both the housing
    industry and the consumer.
        Why is this particular solution needed? I am going to skip
    down, because I am going to miss my five minutes.
        So currently purchases of new homes are restricted through
    a legislatively mandated ceiling derived from a complicated
    formula. H.R. 4110 simplifies the process by instead tying the
    FHA loan limit to the local area median prices. The working
    families that live in areas that exceed the FHA ceiling, yet
    need and qualify for an FHA insured loan, should not be
    penalized because of where they live.
        This committee has already approved beneficial legislation
    in H.R. 3755, the Zero Down Payment Act of 2004. However, one
    must ask the question: how many homebuyers are not going to
    have access to the zero down program due to the current FHA
    ceiling?
        Finally, over the past several years, I have averaged three
    to four FHA deals a month. The last FHA insured loan that I did
    was in October of 2003. That is 9 months ago.
        In my experience, minority first-time homebuyers are often
    the hardest hit. The type of loan that has replaced the FHA
    insured loan has a higher incidence of default.
        Mr. Gary G. Miller of California. You need to wrap up.
        Mr. Eberhardt. Before I conclude, I would like to thank Mr.
    Miller for noting that this bill would not just serve high-cost
    areas. His remarks contained a list of counties across the
    country where the FHA loan limit is well below the median home
    price in those counties. I am thinking of Delaware County in
    Ohio, Door County in Wisconsin.
        This legislation has the support of mortgage brokers
    throughout the country.
        Mr. Gary G. Miller of California. You will need to wrap up,
    sir.
        Mr. Eberhardt. H.R. 4110 is an essential tool to further
    increase homeownership. Thank you.
        [The prepared statement of Jon Eberhardt can be found on
    page 84 in the appendix.]
        Mr. Gary G. Miller of California. Thank you, Mr. Eberhardt.
        Mr. Hellyer? Yes, you may proceed.

          STATEMENT OF GLENN HELLYER, REALTOR, YORBA LINDA, CA

        Mr. Hellyer. Sir, it is an honor that you invited me to be
    here today. And I appreciate your invitation.
        My thanks to Chairman Bob Ney, Vice Chairman Mark Green,
    Ranking Member Maxine Waters and all the members of the
    subcommittee for inviting me here today to testify on H.R.
    4110.
        This bill will enable more prospective homebuyers to
    achieve the American dream of homeownership.
        My name is Glenn Hellyer. And I have been a realtor in
    Orange County, California for over 25 years. I have represented
    homebuyers and homeowners all throughout Orange County and the
    neighboring counties.
        In years past, I have used FHA loans to help first-time
    homebuyers, low- and moderate-income buyers and buyers who
    could not qualify for conventional loans because of high loan-
    to-value ratios or high payment-to-income ratios. FHA loans are
    no longer a useful product for prospective homebuyers in high-
    cost areas of the country like my area because its maximum loan
    limits are restrictive.
        As a result, working families such as teachers, police
    officers, fire fighters, nurses and others have all been left
    behind just because of their location, their geographic
    location. H.R. 4110 would correct this inequity.
        Housing prices in California, Massachusetts, New Jersey,
    New York, Connecticut and I am sure other states, have
    experienced tremendous growth over the past few years.
    Unfortunately, the FHA loan limits have not grown in a manner
    to mirror the growing cost of homeownership in these areas.
        Another burden that has not been discussed today has been
    those workers who may only qualify under FHA loan guidelines
    but are restricted by the current loan limits we find on our
    already overcrowded roads, having to commute long distances
    every morning and evening.
        FHA has played an enormous role in helping families realize
    the dream of homeownership at no cost to taxpayers. However,
    there are many Americans who are not able to realize this
    dream. Those who happen to live in communities with high
    housing costs are not afforded the benefits of FHA simply
    because of the current loan limits.
        H.R. 4110 would eliminate the current loan limit ceiling
    and allow FHA limits to rise to the median home price in each
    locality. Working families who need and qualify for FHA should
    not be penalized because of their geographic location. H.R.
    4110 would correct this disparity and make FHA loans available
    to all prospective homeowners nationwide.
        I appreciate the opportunity to provide you this testimony.
    And I will be happy to answer any questions you may have.
        [The prepared statement of Glenn Hellyer can be found on
    page 89 in the appendix.]
        Mr. Gary G. Miller of California. Thank you, Mr. Hellyer.
        Mr. Kempner?

     STATEMENT OF JONATHAN L. KEMPNER, PRESIDENT AND CEO, MORTGAGE
                          BANKERS ASSOCIATION

        Mr. Kempner. Thank you.
        Good morning, Congressman Miller. I am Jonathan Kempner,
    president and CEO of the Mortgage Bankers Association. Thank
    you for inviting MBA to share its views on H.R. 4110.
        We believe that H.R. 4110 highlights the critical and
    unique role of FHA in expanding homeownership opportunities for
    those families that are unserved or underserved, especially
    first-time, low- and moderate-income and minority homebuyers.
    To this purpose, FHA has a tremendous track record.
        Over the past 70 years, MBA and our members have worked in
    close partnership with FHA to deliver affordable, long-term
    financing. Today, MBA members originate and service the vast
    majority of FHA loans each year.
        Nowhere inside or outside the Beltway will you find a
    stronger advocate for FHA than the Mortgage Bankers
    Association. In 1998, MBA strongly advocated for the successful
    increase in FHA's maximum mortgage limits that raised the
    minimum limit to 48 percent and the maximum limit to 87 percent
    of the Freddie Mac conforming loan limit.
        This incremental change broadened the housing stock that
    was available to FHA borrowers and allowed FHA to serve a
    larger number of high-cost areas. H.R. 4110 proposes to adjust
    the FHA mortgage limit from 95 percent of an area's median home
    price to 100 percent.
        Additionally, H.R. 4110 would remove the 87 percent ceiling
    on FHA mortgage limits. This latter provision would result in
    FHA mortgage limits in certain areas of the country exceeding--
    and in some cases, far exceeding--the conforming limit.
        We support raising FHA's mortgage limits to 100 percent of
    an area's median home price, but believe it best to cap these
    mortgage limits at the conforming limit. We believe that
    aligning FHA's loan limits with the conforming limit will
    appropriately broaden the housing stock available to FHA
    borrowers in many high-cost areas without shifting FHA from its
    stated mission of serving first-time homebuyers and the
    underserved.
        MBA bases our position on the following three principals:
    first, FHA's core mission should stay squarely focused on the
    modest end of the mortgage market. Fannie Mae and Freddie Mac,
    as federally charted enterprises, define the conforming market
    that includes the majority of first-time and low-income
    homebuyers, which are FHA's primary target. FHA's primary
    mission should be to operate within this conventional market
    and not exceed it.
        Second, the benefits of FHA mortgage limits in excess of
    conforming loan limits are unclear. Currently, the jumbo
    mortgage market is robust, with private lenders providing a
    wide range of jumbo products throughout the country. Greater
    analysis is necessary before it is clear whether FHA could
    develop a product that would bring improvement to the jumbo
    mortgage market.
        Finally, FHA may not be well positioned to step outside its
    core mission and manage a jumbo loan program. Currently, FHA is
    focused on providing homeownership opportunities for those with
    less income, poorer credit or no credit. While FHA has had
    success with these borrowers, it has not been without
    management challenges. It is unclear whether or not FHA, in its
    current structure, has the capacity to appropriately identify
    and manage the risks of jumbo mortgage products.
        In closing, I would like to reiterate MBA's support for an
    incremental approach in raising FHA's mortgage limits by
    benchmarking mortgage limits to 100 percent of an area's median
    home price and capping the maximum FHA mortgage limit at the
    conforming limit.
        Thank you for giving MBA the opportunity to testify on H.R.
    4110. We look forward to working with Representative Miller,
    Representative Frank and the subcommittee on this important
    legislation.
        [The prepared statement of Jonathan L. Kempner can be found
    on page 91 in the appendix.]
        Mr. Gary G. Miller of California. Thank you, Mr. Kempner.
        Mr. Nothaft? Is the correct, Nothaft?

      STATEMENT OF FRANK E. NOTHAFT, CHIEF ECONOMIST, FREDDIE MAC

        Mr. Nothaft. Yes, that was pretty good.
        Thank you, Chairman. I am Frank Nothaft, vice president and
    chief economist of Freddie Mac.
        Mr. Gary G. Miller of California. Excuse me, you need to
    turn your microphone on.
        Mr. Nothaft. Thank you. I welcome the opportunity to be
    here today to discuss H.R. 4110, the FHA Single Family Loan
    Limit Adjustment Act of 2004. Freddie Mac supports efforts by
    Chairman Ney, Congressmen Miller and Frank, Congresswoman
    Waters and other members of the committee to help meet
    affordable housing needs in all neighborhoods, and especially
    in high-cost markets.
        We believe that these needs are best served by a higher
    loan limit for FHA, coupled with a higher loan limit for
    Freddie Mac and Fannie Mae, in high-cost markets. This will
    expand the market, provide more access to credit and lower
    homeownership costs.
        H.R. 4110 is an important vehicle to focus congressional
    attention on meeting the urgent need for affordable housing.
        Housing affordability is an issue in all high-cost markets
    across the nation. As an example, in March, the median sales
    price of a single family home was $428,000 in California and
    was $560,000 in San Francisco.
        In 2003, the median price of a home in Boston was $413,000.
    In these and other high-cost markets around the nation, a
    higher FHA loan limit and a higher loan limit for Freddie Mac
    and Fannie Mae would be vehicles for bringing low-cost,
    accessible mortgage credit to more families.
        Today, I will first discuss general effects of an FHA loan
    limit increase upon the overall mortgage market and then
    provide some specific comments on H.R. 4110.
        There are two effects of raising the FHA loan limit on the
    overall mortgage market. First, a higher limit will draw
    additional borrowers into the market, expanding the overall
    size of the home purchase origination market.
        Second, by providing an alternative source of mortgage
    insurance, it will draw some borrowers from the conventional
    market. We have conducted analysis at Freddie Mac to parse out
    both effects with market data. Our analysis was focused on the
    previous jump in FHA loan limits that was enacted in 1998.
        What we found was that the higher FHA limits increased
    overall home purchase for the population of loans that fell
    within the new, higher FHA loan limits. The number of
    conventional loans and the number of privately insured loans
    was reduced.
        We estimated that the overlap with the conventional market
    was between 22 percent and 49 percent of the new volume of FHA
    loans. The midpoint of this range, or 35 percent, is very close
    to the estimate of the overlap computed by the General
    Accounting Office in a 1996 report.
        I will now describe some observations I have on H.R. 4110.
    H.R. 4110 alters the FHA loan limit in two respects. First, it
    eliminates a maximum loan limit by decoupling the link to the
    Freddie Mac loan limit. Second, it sets the FHA loan limit at
    100 percent of the median house price, up from 95 percent.
        Eliminating the maximum loan limit means that the FHA limit
    will exceed the Freddie Mac and Fannie Mae loan limit of
    $333,700 in a number of markets. In Manhattan, the median value
    of owner-occupied single family homes is in the neighborhood of
    $1.5 million. Likewise, the FHA loan limit in the San Francisco
    metropolitan area would approach $750,000.
        Congress should consider carefully what it wants the FHA
    program to accomplish and how best to achieve its policy
    objectives. Currently, there are 82 counties that are at the
    FHA maximum loan limit, including the New York, San Francisco
    and Boston metropolitan areas.
        Maintaining a maximum loan limit, perhaps linked with the
    Freddie Mac loan limit, would assure that FHA continues to
    serve its intended borrower population, while assuring families
    greater access to a wider alternative of housing finance
    options.
        A second part of H.R. 4110 increases the loan limit for
    those areas where it is currently set at 95 percent of the
    median house price. The proposed increase to 100 percent of the
    median house price will affect 539 counties in the nation.
        The families who will benefit from FHA's lower down payment
    requirements and higher payment-to-income ratios will tend to
    be lower-income, have less savings and be first-time
    homebuyers. However, some of these borrowers would also have
    qualified for a conventional, privately insured loan.
        We estimate that several thousand lower-income and minority
    homebuyers, who otherwise would have qualified for and taken
    out a conventional mortgage, will opt for the FHA insured loan.
        Because the FHA program touches so many aspects of the
    mortgage market, it is also important to look at how the
    overall strength of the FHA insurance fund could be impacted by
    the legislation. Increasing the FHA loan limit would also have
    an impact on our ability to meet the affordable housing goals
    proposed by HUD.
        HUD's market analysis was completed months ago and did not
    factor in an FHA loan limit increase. Thus, the FHA loan limit
    increase will make it more difficult for us to make the
    proposed goal levels.
        Dick Syron, Freddie Mac's new CEO, has defined a mission-
    centric focus to our activities. Included within this is a new
    product development to help meet the affordable housing needs
    in all neighborhoods.
        Congressional action to support affordable housing
    throughout the nation, and especially in high-cost markets, is
    well justified. And we support your efforts to ensure that
    America's families have affordable housing in the cities in
    which they work.
        Mr. Gary G. Miller of California. You will have to wrap up.
        Mr. Nothaft. As I have stated, we believe that these
    families are best served by a higher loan limit for FHA,
    coupled with a higher loan limit for Freddie Mac and Fannie
    Mae. This will expand the market, provide more access to credit
    and lower homeownership costs and make home possible for more
    of America's families.
        Thank you.
        [The prepared statement of Frank E. Nothaft can be found on
    page 96 in the appendix.]
        Mr. Gary G. Miller of California. Thank you, sir.
        Mr. Petrou?

     STATEMENT OF BASIL N. PETROU, PRINCIPAL AND MANAGING PARTNER,
                   FEDERAL FINANCIAL ANALYTICS, INC.

        Mr. Petrou. Thank you. Discussion of the FHA loan limits
    usually fail to address a key fact. Raising the FHA loan limits
    only serves those borrowers who already have the high income
    necessary to otherwise qualify for the loan.
        Uncapping the FHA loan limit will not allow a borrower with
    a $50,000 income to qualify for a $300,000 FHA insured, 30-
    year, fixed rate mortgage, even at today's low rates. If
    interest rates rise, the larger FHA loan is placed that much
    further out of the reach of the moderate income borrower.
        Mr. Weicher addressed some of these income classification
    issues. But no matter how one looks at these income
    requirements for the new, higher FHA loan limits that would be
    resulting from this bill, they target the very top of
    individual income taxpayers.
        Only the top 8.5 percent of all individual income tax
    returns in 2001 had adjusted gross income of over $100,000. And
    only the top two percent were above $200,000, where some of the
    high limits would take us. Furthermore, 77 percent of the tax
    returns between $100,000 and $200,000 reported a deduction for
    home mortgage interest, indicating the filer already owned a
    residence.
        In short, if FHA starts targeting loan amounts where
    borrowers are required to have incomes of $135,000 to $200,000
    or more, then it can safely be said that these borrowers are at
    the very top income categories and are almost assuredly not
    first-time homebuyers. In my view, this is not and was never
    meant to be the target market for FHA single family mortgage
    insurance.
        Additionally, uncapping FHA limits in high-cost areas may
    act to push some housing further out of reach of low- and
    moderate-income borrowers. There is some evidence from previous
    FHA loan debates that higher FHA limits may serve to raise the
    cost of new housing that is made available to FHA-eligible
    borrowers in an area subject to the higher limits.
        Moreover, the higher FHA loan limit does nothing for the
    moderate income borrower who qualifies for a loan amount below
    the old FHA limit. While that borrower gains nothing, he or she
    may well suffer as the market focuses on the new availability
    of FHA insurance at the high end.
        Implicit in H.R. 4110 is the assumption that the current
    way FHA sets area loan limits falls short of matching the
    area's true median house price. In fact, just the opposite is
    the case.
        The current system ties the calculation of the median house
    price for an MSA to the median house price in the highest-cost
    county within the MSA. The result is that the FHA limit for the
    MSA is clearly not reflective of the true median house price
    for the entire MSA. It is higher.
        Shifting the FHA area limit calculation from 95 to 100
    percent of the calculated amount will only aggravate the
    current distortion. It is commonly assumed that borrowers with
    higher incomes are for, some reason, safer credits than low-
    and moderate-income borrowers.
        Evidence from private industry shows that this is not the
    case when considering low down payment borrowers during periods
    of regional economic stress and falling home prices. Past
    experience with regional downturns in house prices has shown
    that houses at the upper end of the house price distribution
    scale are likely to suffer more serious declines in property
    values than more moderately priced houses.
        During a period of economic stress and falling home prices,
    the lack of liquidity at the higher end of the house price
    market will be felt to the detriment of the holder of these
    mortgages. Since FHA insures 100 percent of the loan amount,
    the FHA stands to lose a great deal in this situation.
        Just as new borrowers paid the higher FHA loan premiums
    needed to return the single family mortgage fund to economic
    solvency in the early 1990s, so too will future moderate income
    borrowers bear the higher cost associated with the losses
    resulting from defaults on larger FHA loans in the event of a
    future regional decline in house prices.
        Will there be a regional house price decline that will
    result in higher losses to FHA? We do not know. But we do know
    that low- and moderate-income borrowers gain nothing and may
    well lose from retargeting FHA to higher-income borrowers.
        Why would Congress want to run that risk when so much more
    needs to be done to provide affordable housing for minorities
    and low- and moderate-income borrowers and renters? Unlike the
    current process of targeting borrowers by setting FHA loan
    limits, targeting FHA to borrower income would ensure the
    program promotes homeownership for those borrowers whose needs
    remain unmet by private markets.
        Income targeting would enhance homeownership even in high-
    cost areas without creating a subsidy for higher-income
    borrowers or an incentive for higher home prices that may cut
    lower income borrowers out of homeownership. Income targeting
    does not mean that every area of the country must have the same
    top limit--be it 80 percent, 100 percent or even 120 percent of
    area median household income.
        However, it is critical to set the income limits in a way
    that puts taxpayer-supported programs to work for those
    potential borrowers in the neighborhood who need them the most.
    Income targeting the FHA single family program also assures
    that the insurance subsidy remains with targeted borrowers
    during periods of rising interest rates. As mortgage interest
    rates rise, the amount of income needed to qualify for a given
    FHA loan amount also rises.
        In other words, the FHA loan limit approach of targeting
    borrowers leaves low- and moderate-income families behind
    during periods of rising interest rates. In my opinion, the FHA
    program should do just the opposite. During periods of rising
    rates, it should assure that its subsidy remains targeted to
    the low- and moderate-income borrower and first-time homebuyer.
        Income targeting the FHA single family program will assure
    that this happens. If we increase the----
        Mr. Gary G. Miller of California. You will need to wrap up
    your testimony, sir.
        Mr. Petrou. If we increase the scope of FHA without
    focusing it on the real needs of underserved borrowers, we run
    the risk of undercutting the program and its ability to serve
    those who need it at the time when they need it the most.
        [The prepared statement of Basil N. Petrou can be found on
    page 102 in the appendix.]
        Mr. Gary G. Miller of California. Thank you, sir.
        Mrs. Thompson?

    STATEMENT OF BARBARA J. THOMPSON, EXECUTIVE DIRECTOR, NATIONAL
                   COUNCIL OF STATE HOUSING AGENCIES

        Ms. Thompson. Thank you, Representative Miller and Ranking
    Member Frank. I am Barbara Thompson, executive director of the
    National Council of State Housing Agencies. Thank you for this
    opportunity to testify on behalf of NCSHA in support of H.R.
    4110.
        NCSHA represents the housing finance agencies of the 50
    states, the District of Columbia, the Commonwealth of Puerto
    Rico and the U.S. Virgin Islands. State HFAs issue tax-exempt
    private activity bonds, allocate the Low-Income Housing Tax
    Credit and administer HOME funds to finance affordable
    homeownership and rental housing for lower-income and moderate-
    income families.
        I want to thank you, Representative Miller, and Ranking
    Member Frank for introducing H.R. 4110, which will help many
    more families in this country achieve homeownership.
        FHA Mortgage Insurance is essential to the success of the
    Mortgage Revenue Bond first-time homebuyer program, which HFAs
    operate in every state. MRBs have made homeownership possible
    for more than 2.4 million low- and moderate-income families.
    Another 100,000 families become homeowners each year with MRB
    mortgages.
        In 2002, nearly 60 percent of all MRB loans financed by
    state HFAs were insured by FHA. In some states, including Ohio,
    Utah, and Mississippi, that percentage was 90 percent.
        MRB borrower use of FHA insurance is widespread for many
    reasons. FHA is frequently less expensive for the borrower than
    private mortgage insurance. FHA down payment requirements are
    generally lower. And, FHA is often the best option--sometimes
    the only option--for homebuyers with low credit scores.
        Unfortunately, in some high-cost areas of the country, FHA
    insurance is not as useful as it might be because its maximum
    mortgage limits lag median home prices. As a result, some
    working families have limited or even no access to FHA
    insurance, making it difficult for them to buy homes in the
    communities where they live and work.
        Current FHA limits constrain the availability of MRB first-
    time homebuyer loans in some metropolitan areas of many states.
    The maximum mortgage limit is simply too low in some high-cost
    areas for MRB borrowers to purchase MRB-eligible homes with FHA
    insurance.
        In Boston, for example, a family earning the maximum income
    allowable under the MRB program could afford a home priced at
    78 percent of the median purchase price. However, this family
    could not buy that home with FHA insurance because the FHA
    maximum mortgage limit is 71 percent of the median purchase
    price.
        In Oakland, an MRB-qualified family earning the maximum
    allowable income could afford a home priced at 67 percent of
    median purchase price but could not buy that home with FHA
    insurance, which in that area is limited to 59 percent of the
    median purchase price.
        FHA limits also constrain MRB borrowing in places you might
    not think of, like Madison, Wisconsin, Minneapolis, Minnesota
    and Ann Arbor, Michigan.
        H.R. 4110 would enable families living in these and other
    high-cost areas to access FHA-insured MRB loans and a larger
    universe of moderately priced homes.
        Before closing, I want to thank you for your continued help
    and ask for your continued help in removing another serious
    constraint on the MRB program, the Ten-Year Rule. This rule
    each year prevents tens of thousands of first-time homebuyers
    from benefiting from MRB mortgages. It forces states to use
    payments on MRB mortgages to retire bonds outstanding, rather
    than fund new mortgages to low- and moderate-income families.
        The Ten-Year Rule will cost states $3 billion in MRB
    mortgage money this year. Massachusetts loses $288,000 a day;
    Ohio, $450,000; and California, $1 million a day to the Ten-
    Year Rule.
        The Housing Bond and Credit Modernization and Fairness Act,
    H.R. 284, would repeal this rule. It has 348 House cosponsors.
    The corporate/jobs tax legislation passed by the Senate last
    month and reported by the Ways and Means Committee just this
    week appears to be the only possible vehicle for passage of
    Ten-Year Rule relief this year.
        The House bill does not contain the relief. The Senate bill
    includes a one-year repeal of the rule and prospective repeal
    for bonds issued after the bill's date of enactment.
        Please help us ensure the survival of the Senate Ten-Year
    Rule relief provisions in conference. Please communicate your
    support for it to Ways and Means Chairman Thomas and House
    leaders.
        Thank you for this opportunity to testify.
        [The prepared statement of Barbara J. Thompson can be found
    on page 113 in the appendix.]
        Mr. Gary G. Miller of California. Thank you, Mrs. Thompson.
        Mr. Nothaft, you made a couple of good points, I think. You
    talked about the median income home in certain areas. And you
    talked about in some areas it goes to $1.5 million and whatever
    and somewhat tying the maximum in with conforming in some way.
    Not a bad concept, I think. Maybe Mr. Frank and I would look at
    that as this bill proceeds.
        You had a concern with FHA's capacity to manage this new
    program. I would like you to expand on that and then would you
    give me an idea on the cost of a conventional versus FHA to a
    buyer?
        Mr. Nothaft. I do not have the information on the price.
        Mr. Gary G. Miller of California. Is your microphone on?
        Mr. Nothaft. I think so.
        Mr. Gary G. Miller of California. Okay. Yes, that is
    better.
        Mr. Nothaft. I do not have the information on the pricing
    at my fingertips. But as I recall, let's say comparing FHA
    Mortgage Insurance with private mortgage insurance, they are
    very competitive for loan-to-values of around 95. FHA becomes a
    little less expensive relative to private insurance when you
    get up to about 97 LTV. When you are below a 95 loan-to-value
    ratio, generally the private mortgage insurance is less
    expensive than FHA Mortgage Insurance.
        I do not recall mentioning any concerns I had about
    capacity. I think the capital markets are actually very broad.
    And the FHA loans are financed primarily through the Ginnie Mae
    mortgage-backed securities program.
        Ginnie Mae mortgage-backed securities are issued into the
    broader capital markets, which are very deep. So I do not think
    there would be any capacity concerns.
        Mr. Gary G. Miller of California. The new zero down payment
    we are hopefully going to be able to start through FHA, if we
    somewhat had a cap on this thing so it just did not go through
    the roof, you know, to conforming or whatever, wouldn't you
    think this would be a beneficial program to have an increase
    in, to provide that opportunity for people who are working real
    hard, but they are renting right now? They do not have
    discretionary 20 percent down or whatever would be required.
    Wouldn't you think that would be a tremendous benefit?
        Mr. Nothaft. There are parts of the bill that are very much
    aligned with the objectives that Freddie Mac has too, such as
    the increased homeownership.
        Mr. Gary G. Miller of California. The limit is the main
    concern. Okay, thank you.
        Mr. Nothaft. Absolutely. Absolutely.
        Mr. Gary G. Miller of California. Mr. Petrou, you talked
    about the concern that you had with difficult situations in the
    economy or whatever, if FHA was in the marketplace. During the
    1990s recession--you do recall that one; I recall it well as a
    developer--that was as severe as I have seen, for a more
    protracted time even than most.
        I mean, if the 1980s recession was a good hit because prime
    went up to 24. I mean, that made it really tough so people
    could not sell their home to buy a home. It was a different
    type. We recovered from that much quicker.
        The 1970s was the same way. We had to move past that when
    the marketplace finally came back in the 1990s. It has been
    really, really strong since then.
        But even during those difficult times of the 1990s, there
    was no congressional appropriation to FHA for losses. I mean,
    they revamped the program somewhat.
        Generally, FHA makes money for the federal government.
    Before that, it was even giving money back to people.
        Don't you think the system is strong enough to deal with
    those?
        Mr. Petrou. You are right. There was no congressional
    appropriation during that time. And in part, it was because of
    FHA loan limits in California and Massachusetts, when both of
    those states incurred significant losses as home prices
    collapsed.
        The FHA loan limits were set at such a low level that FHA
    did not experience the kind of significant losses on high LTV
    properties in those states as did the private sector did.
        Mr. Gary G. Miller of California. Loan rates are relative
    to market addition. The home value in 1989 is not what the home
    value in the overall marketplace is today. I mean, it has grown
    tremendously. The upper end is nowhere near what it was in
    March of 1990.
        So based on the given marketplace is still relative. FHA is
    still going to be, if we do put some kind of a cap on it, it is
    still going to be at the bottom end of the market. And the
    bottom end of the market is safe because it is like in a
    marketplace where the economy goes bad, you are going to sell a
    whole lot more Fords than Mercedes.
        And we have a bigger market for Fords than Mercedes. And if
    anybody is going to take a big rebate, it is going to be
    Mercedes, rather than Ford because most people could not afford
    it.
        The homes we are talking about in the FHA price range are
    the homes that most people can afford and even people in the
    upper ranges, if they get in difficult situations, can afford
    that one. Don't you think there are safeguards built on in just
    the change in the economy alone, where it does not create a
    different situation than we faced earlier?
        Mr. Petrou. No, I do not. I think actually what happened
    was that the indexing of the FHA loan limit has moved FHA into
    the market you are talking about. I think this current bill
    would move FHA further into the market I was talking about,
    which suffered serious losses in the late 1980s and early 1990s
    in New England and in California.
        Mr. Gary G. Miller of California. In California, FHA had a
    larger share of the market in 1990 than it does by far today
    because we have priced FHA out. So FHA is not even there.
        Mr. Eberhardt, I guess the other question would be: what is
    the implication on working families that are working real hard
    out there if you do not have that access to an FHA program?
        Mr. Eberhardt. If I am buying a home in Wilmington or
    Carson or Long Beach and I am a first-time homebuyer and the
    home price there is probably $380,000 or so, and I want to buy
    that home, currently I have to take a look at other options
    opposed to or aside from FHA. I look at conventional.
        If I do not have a conventional type credit score, I cannot
    get a conventional loan. So then I would probably go backwards
    and take a look at sub-prime. Sub-prime loans----
        Mr. Gary G. Miller of California. So you are going the
    wrong direction?
        Mr. Eberhardt. Yes, you are going the wrong direction.
        Mr. Gary G. Miller of California. That is exactly what I
    thought and what I wanted to hear.
        Glenn, what do you think--Mr. Hellyer--would be the typical
    loan that replaces FHA? Is this back on the same line?
        Mr. Hellyer. It is more expensive, Mr. Miller. And that is
    the problem. You have those folks that may not have the FICO
    requirements to get a conventional loan, may not have the down
    payment. They have to now try to save. They have to work their
    credit up in order to get in to qualifying.
        I will give you an example as to how impossible that is in
    Orange County. Last month, the Orange County Register ran an
    article that said that the median price rose over the last year
    in an amount equal to--wait for it--$323 a day. Nobody can save
    that much. There is no way.
        And there are first-time buyers in the $400,000 range.
    There are those that can qualify on the payment, I mean with
    the current interest rates.
        But no conventional loan product that I know of enables
    those folks to buy, at least not buy in their marketplace in
    Orange County. We see--and I reference this in my earlier
    remarks--that we see people having to drive away from the
    employment center, crowd the freeways.
        And it is because they want to own. They want that
    opportunity to gain equity. But they do not have it in their
    locale.
        Mr. Gary G. Miller of California. So we are actually
    hurting the people that we are trying to help most by driving
    them to sub-primes instead of giving them the option they
    should have, basically?
        Mr. Hellyer. Sure.
        Mr. Gary G. Miller of California. Thank you.
        Mr. Frank?
        Mr. Frank. Mr. Petrou, you said that there was evidence
    that higher FHA area loan limits push up area home prices.
    Could you tell me about that evidence?
        Mr. Petrou. During the debates of the early 1990s, what it
    was--and it was anecdotal evidence. That is all.
        Mr. Frank. Oh, okay. Thank you. Just anecdotal. So there is
    nothing in writing you can send me?
        Mr. Petrou. I have to go check in the testimony.
        Mr. Frank. All right, would you? Because if it is just
    anecdotal evidence----
        Mr. Petrou. Okay.
        Mr. Frank. I was skeptical, to be honest, because it
    sounded to me like the kind of argument you throw in. If you
    have, I would be willing--I take it back. Send me your
    anecdotes. I will even be prepared to look at those.
        Mr. Petrou. Okay.
        [The following information can be found on page 123 in the
    appendix.]
        Mr. Frank. I will not even put them at the bottom of the
    page, like the Reader's Digest. I will read them up on the top.
        But I am skeptical that there is any significant evidence
    of the FHA loan limits pushing up home prices.
        You also say that, quite correctly, these higher loan
    limits will not do anything to help low- and moderate-income
    families obtain mortgages. As I said, I agree.
        It will not combat cancer. And it will not clean up the
    rivers. And it will not make America more secure against
    enemies foreign and domestic.
        I freely concede, most bills do not do most things. They
    tend to do one thing.
        But I am interested in your interest--I infer from this--in
    helping low- and moderate-income families obtain mortgages.
    Could you tell me some of the previous proposals you have put
    forward that would be helpful here? I mean, since you have
    raised the subject, what have you recommended or would you
    recommend that we do to help low- and moderate-income families
    obtain mortgages?
        Mr. Petrou. I actually testified in front of this committee
    a few months ago on the zero down payment program.
        Mr. Frank. Okay, we have already done that one. As you
    know, the committee has already voted that. And we are going to
    do that.
        So anything else besides that?
        Mr. Petrou. Well, I have worked with my clients on a
    variety of private sector affordable housing programs.
        Mr. Frank. Well, I understand. But you are here testifying
    in Congress. Are there other things we could do to help them?
        I mean, I welcome your interest in this. I spend a lot of
    time on it. I appreciate that you were for the zero down
    payment, which we have done. Are there any other proposals you
    would make to help low- and moderate-income families obtain
    mortgages?
        Mr. Petrou. I actually do believe that if you income
    targeted FHA, you would see, when the lenders and the builders
    and the realtors realize that it is in a particular area income
    targeted, there will be some creative work on the part of
    programs.
        Mr. Frank. Well, let's see how that works. When you income
    target, at what level would you income target?
        Mr. Petrou. That would vary to the area. I would let
    community groups and others determine and come and testify and
    talk to HUD about what the income target----
        Mr. Frank. That is a fascinating legislative process we
    have here. Congress would pass a statute with different income
    limits in different parts of the country?
        Mr. Petrou. Yes.
        Mr. Frank. Would they be different income limits--you were
    talking before--as percents of the median. Obviously, you have
    different median incomes. But would you have varying
    percentages of the median in different parts of the country.
        Mr. Petrou. I think there are several ways you could do it.
        Mr. Frank. But you would have different percentages of the
    median?
        Mr. Petrou. Yes.
        Mr. Frank. How will the areas be? Will there be standard
    metropolitan statistical areas or states or counties?
        Mr. Petrou. I would do it on median area income. You can do
    it on census tract if you wanted to get down to that area.
        Mr. Frank. So you would have FHA have different percentages
    of median incomes by census tract?
        Mr. Petrou. Well, right now they have different loan
    amounts tied to home price. And that is dramatically different.
        Mr. Frank. I understand. But what is the political body by
    census tract? You said we would have community groups decide.
    Would Congress sign off on this?
        We have not been that busy lately. You have given us a lot
    of work to do. I am just fascinated.
        Mr. Petrou. Congress also did not--you know, they told HUD
    to go to 95 percent.
        Mr. Frank. No, let's not change the subject. I welcome your
    interest in helping low- and moderate-income. I have to be
    honest with you. I mean, a lot of people, when we were talking
    about this bill, who said, ``Well, what about the poor people?"
        To be honest with you, much of the time when I am trying to
    help the poor people, a lot of these people are not around. So
    now that they have dropped in and now that they have this
    somewhat fortuitous interest in helping the poor people, I want
    to make hay while the sun shines. So I would like you to tell
    me how we do that.
        You are not seriously suggesting that by census tract, we
    have local groups recommend there would be 85 percent of the
    median in one census tract and 95 percent in the adjoining
    census tract?
        Mr. Petrou. Well, as you know, in some areas of the
    country, gentrification is an issue, especially in the inner
    city. And there are community groups that are very concerned
    that if you raise limits, if you target higher income people,
    you destroy the nature of the----
        Mr. Frank. So you would allow people in the census tract to
    tell the federal government to keep the income level for FHA
    down in that area and not in other areas? See, here is the
    problem. What about people who want to gentrify? They would be
    allowed to go up?
        Mr. Petrou. I think basically you could have a situation in
    which you would have a standard--you know, targeted to the MSA
    median income, but with exceptions for areas where people come
    in and appeal to HUD. I would think an affordable housing group
    should be allowed to appeal to HUD.
        Mr. Frank. To lower the percentage of income in a
    particular area?
        Mr. Petrou. Yes.
        Mr. Frank. Okay. And what would the general level be,
    percent of median?
        Mr. Petrou. That would be something for Congress to
    determine.
        Mr. Frank. Well, excuse me, but you are here recommending
    to Congress. That does not work.
        Mr. Petrou. Okay.
        Mr. Frank. I mean, you cannot come here as a witness to
    tell Congress what to do--which is a privilege of American
    citizens--and then say, ``Oh, but you do it.'' It is your idea.
        Because we have very radical differences. You have 70
    percent of median, 80 percent, 100 percent. I mean, this is not
    a detail. This is the heart of the issue.
        Mr. Petrou. I would start at 100 percent of area median
    income.
        Mr. Frank. Okay. But now let me just ask you a last
    question--100 percent of area median income, but would there
    then be a limit at 100 percent of median income on the price
    that they could get of the house? Or would you----
        Mr. Petrou. No, it is totally determined by the market.
        Mr. Frank. So you would just leave that? So at 100 percent
    of median income, if they can sort of work it out, they could
    go as high as they could show someone they could afford.
        Mr. Petrou. Exactly.
        Mr. Frank. Okay. Thank you, Mr. Chairman.
        Mr. Gary G. Miller of California. Mr. Clay?
        Mr. Clay. Thank you, Mr. Chairman. And I guess this
    question would be for the entire panel. Earlier today, HUD
    testified that the passage of this bill would be unfair to
    private sector lending institutions.
        And I just wanted to know: do you share? I mean, do you
    agree or disagree with this position? And explain for me in
    detail, if you could.
        We will start with you, Mrs. Thompson.
        Ms. Thompson. We are all for competition. And we think that
    it will not be harmful to the private sector. In fact, the very
    lenders you are talking about are the lenders that make the
    Mortgage Revenue Bond loans that our agencies issue bonds to
    finance. So we are not concerned about that.
        Mr. Clay. Okay. Thank you.
        Mr. Petrou?
        Mr. Petrou. Actually, I would probably say it probably
    would, as currently written, harm some lenders. I am more
    concerned about the harm it would do to the FHA insurance
    program in the event of an economic downturn.
        Mr. Clay. Thank you.
        Mr. Nothaft. No, it is not unfair. It gives more options,
    more loan products for consumers to choose from. And anything
    that does that, I think helps to expand the market.
        Mr. Clay. Thank you.
        Sir?
        Mr. Kempner. I would not use the word ``unfair.'' We are
    very sympathetic to the bill. But we want to make sure that we
    know all of the consequences, especially of raising the limit
    above the conforming line.
        As all of you know, especially Congressman Frank, a key
    issue now in the GSE debate is the affordable housing goals.
    And there are all kinds of cross currents, ripples. A term that
    keeps coming up is ``unintended consequences.''
        So as the mortgage bankers, we are quite comfortable going
    up to the conforming limit 100 percent. But after that, in our
    institutional gut, we start getting a little concerned that we
    do not fully understand, fully appreciate what those ripples
    are.
        Mr. Frank. Will the gentleman yield to me? I think the
    chairman would give him an extra minute, if he would.
        Let me just follow up with this. This is a legitimate
    concern. But I really have a serious question here. Is your
    concern about our going above the conforming loan limits the
    FHA effect or the bootstrapping effect it might have and then
    the conforming loan limits might come up after it?
        If you knew that we were going to do this and never raise
    the conforming loan limits for Fannie and Freddie to catch up,
    would you have the same concern?
        Mr. Kempner. The honest answer is that we do not know.
    There is a lot swirling around.
        Mr. Frank. That is not only an honest answer, it is the
    most honest answer I ever got.
        Mr. Kempner. Well, the fact is that our notion is that we
    would like to study it more. And we do not mean that as a way
    of just pushing this away because we are very sympathetic to
    the bill and we applaud you for proposing it. But there is so
    much going on here, especially in that, the interplay between
    the GSEs, affordable housing and FHA and the consequences on
    FHA.
        We cannot give you an honest answer at this point.
        Mr. Frank. Excuse me? And I think the chairman will
    accommodate me.
        But there is an interplay between theoretically the jumbo--
    the conforming loan limits at Fannie and Freddie and Fannie and
    Freddie's housing goals. I do not see an interplay between the
    FHA loan limit and the affordable housing goals for Fannie and
    Freddie, unless you implicitly assume that the conforming loan
    limits are going to follow the FHA limit up.
        What is the interconnection between the FHA limit and the
    affordable housing goals of Fannie and Freddie?
        Mr. Kempner. My understanding is depending on how
    aggressive those goals are, it will have definite possible
    rippling effects on FHA and its health. The jumbo market is
    quite different.
        And as people know, jumbo by definition is above
    conforming. It has definite characteristics that are not the
    same as the conventional market.
        And again, our honest answer, we have spent hours on this.
    We wanted to come forward and help the committee.
        Mr. Frank. I understand that. But just to pursue this a
    little, by definition we are talking about loans that would be
    above what Fannie and Freddie could do.
        And I do not understand how the FHA guaranteeing loans that
    are above what Fannie and Freddie can do can have an affect on
    the affordable housing goals of Fannie and Freddie, especially
    when they are expressed in percentages. I mean, they are just
    off their charts.
        That does not mean there are not issues here. But I do not
    see how they interact with the affordable housing goals.
        Mr. Kempner. I appreciate that. And again, I cannot tell
    you definitively what those are. But I can tell you that there
    are consequences.
        And our feeling is that the more time we would have to
    study it, in our institutional gut, we felt very comfortable
    coming up and applaud you coming up to 100 percent. But when
    you start going into by definition the jumbo market, we start
    getting queasy and at least want to spend time understanding.
        There are all kinds of cross currents. I can give you a
    couple of bullet points.
        Mr. Frank. No, I am talking only about the affordable
    housing goals, not general ones. That was my only question.
        Mr. Kempner. I understand that.
        Mr. Clay. Mr. Chairman, reclaiming my time.
        Mr. Gary G. Miller of California. Mr. Clay, you have an
    additional four minutes, sir.
        Mr. Clay. Thank you, Mr. Chairman.
        Mr. Hellyer, I will ask the same question: would this bill
    be unfair to private sector lending institutions?
        Mr. Hellyer. No, I appreciate the opportunity to respond to
    that. I was wrestling with what I wanted to say while I was
    listening to the other witnesses here.
        And I think if I took that notion back to my realtor
    friends in Orange County, that we ought not have this bill
    because it would do harm to the lending community, they would
    find that amusing. Because the fact of the matter is there is
    not a product there right now that enables buyers in our area
    to do that. There is no existing product.
        Maybe if FHA provided it, maybe there would be more
    competition. But absent that, there is not. They are going
    elsewhere. They are having to commute to own a home.
        Mr. Clay. Thank you.
        Mr. Eberhardt?
        Mr. Eberhardt. Two answers. First of all, I fully agree
    with Glenn. It is important that you note that FHA is a
    guarantee. It is a guarantee of private mortgage insurance or
    mortgage insurance, not private, by the government.
        So if you are talking private sector versus public sector,
    the only real people that FHA is competing against is the
    private mortgage insurance companies. That is the private
    sector they are talking about because the money is being loaned
    by the lender irregardless.
        To answer Gary Miller's question to Mr. Nothaft, .25
    percent is the difference between Fannie, Freddie and FHA. FHA
    is probably that much more expensive.
        Mr. Clay. Okay, thank you.
        Mr. Berson?
        Mr. Berson. I think we would welcome the opportunity to
    compete head to head, in a fair manner. I do not see unfairness
    in this at all, as long as the limits are similar between the
    conforming market and FHA.
        Mr. Clay. Okay, let me start with you.
        Mr. Gary G. Miller of California. So we did ask the
    mortgage private group to come and testify. So they were
    invited, but they were not able to attend today for some
    reason.
        Mr. Clay. Thank you, Mr. Chairman.
        Housing prices in the past few years have exponentially
    increased, faster than the increase in the number of low-income
    households. Would not the passing of this legislation result in
    relief for homebuyers in high-cost areas? And doesn't the
    current FHA ceiling preclude potential homebuyers in high-cost
    areas from participating in the zero down payment legislation
    that recently passed this committee?
        I will start with you, Mr. Berson.
        Mr. Berson. We are in favor of policies that increase
    homeownership. Because in high-cost areas, prices have gone up
    so much faster than income, you have excluded--and not just in
    the FHA market, but in the conforming market as well--a
    substantial number of households from participating in the
    market. Proposals that would reinclude them we think would be
    good policy.
        Mr. Clay. Thank you.
        Anybody else on the panel want to take a stab at it?
        Mrs. Thompson?
        Ms. Thompson. Yes. This proposal would only help. And I
    just want to emphasize, because I think it is so very
    important, that the greatest single producer of homeowners from
    a federal program perspective--the greatest two--are the
    Mortgage Revenue Bond and the FHA insurance program that often
    goes with it.
        So here you have a federal program, the Mortgage Revenue
    Bond program, that allows a certain income level person to
    participate and buy a home up to a certain level, but the
    insurance does not extend to that level. That just does not
    make sense.
        I mean, to say that first-time homebuyers do not benefit
    from this, as the assistant secretary said, is simply wrong.
    The MRB program is only available to first-time homebuyers. It
    won't work everywhere, as you point out, Mr. Frank. There are
    places where homes are just unaffordable to MRB qualified
    first-time homebuyers.
        But there are many states--we think more than a dozen--
    where qualified MRB borrowers cannot buy the homes that
    Congress said they could buy--they are within the MRB limits--
    because they cannot get the other federal help, the FHA
    insurance. It is absurd.
        Mr. Clay. Anyone else? Yes, sir?
        Mr. Petrou. I would like to address two points. The MRB is
    targeted to 115 percent of median family income in an area. And
    this is one of the issues you would get when you start talking
    about going over 100 percent of median family income.
        It is a special program. And whether or not there is a
    match, this is exactly the kind of thing where people could
    discuss with HUD whether 100 percent is appropriate or 115, et
    cetera.
        The second thing I would like to point to is the zero down
    payment program. I testified in favor of that program. But I
    made it quite clear that I thought it should be targeted only
    to low- and moderate income borrowers.
        I think the concept of the FHA insuring a $600,000 mortgage
    with no borrower equity is a pretty scary thought.
        Mr. Clay. Thank you.
        Mr. Frank. Would the gentleman yield? The zero down payment
    program does that, correct?
        Mr. Petrou. Correct.
        Mr. Frank. Yes, not this though.
        Mr. Petrou. No, not this.
        Mr. Clay. Yes, that is on the zero down payment. Anyone
    else? If not, thank you very much for your answers.
        Mr. Gary G. Miller of California. Are there any more
    closing questions, Mr. Frank or Mr. Clay? We will wrap this up.
        Mr. Frank. Mr. Clay generously accommodated me and you he,
    so I am through.
        Mr. Gary G. Miller of California. We are even. Okay.
        Well, I want to thank the witnesses today. You have
    provided a lot of good information. And this was a hearing for
    that purpose, to bring in the information. I have heard some
    very good points that I think Mr. Frank and I will take into
    consideration before this bill comes to markup.
        I would like to ask for unanimous consent that a statement
    be introduced in the record from the National Association of
    Homebuilders. Without objection.
        The chair notes that some members may additional questions
    for this panel, which they may wish to submit in writing.
    Without objection, the hearing record will remain open for 30
    days for members to submit written questions to these witnesses
    and to place their responses in the record.
        Thank you for attending our hearing. Meeting is adjourned.
        [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 June 16, 2004

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