[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


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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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