[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
H.R. 3043, THE ZERO DOWNPAYMENT
PILOT PROGRAM ACT OF 2005
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 30, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-43
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2006
29-459 PDF
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana JULIA CARSON, Indiana
WALTER B. JONES, Jr., North BARBARA LEE, California
Carolina MICHAEL E. CAPUANO, Massachusetts
CHRISTOPHER SHAYS, Connecticut BERNARD SANDERS, Vermont
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina
KATHERINE HARRIS, Florida DAVID SCOTT, Georgia
RICK RENZI, Arizona ARTUR DAVIS, Alabama
STEVAN, PEARCE, New Mexico EMANUEL CLEAVER, Missouri
RANDY NEUGEBAUER, Texas AL GREEN, Texas
MICHAEL G. FITZPATRICK, BARNEY FRANK, Massachusetts
Pennsylvania
GEOFF DAVIS, Kentucky
CAMPBELL, JOHN, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
June 30, 2005................................................ 1
Appendix:
June 30, 2005................................................ 33
WITNESSES
Thursday, June 30, 2005
Bowdler, Janis, Housing Policy Analyst, National Council of La
Raza........................................................... 5
Newman, Robert, Executive Vice Chairman and CEO, AmeriDream, Inc. 6
Petrie, Michael F., President, P/R Mortgage & Investment
Corporation, testifying as Chairman, Mortgage Bankers
Association.................................................... 8
Shear, William B., Director of Financial Markets and Community
Investment, U.S. Government Accountability Office.............. 3
Wilson, David F., President, Wilson Construction LLC, testifying
as President, National Association of Home Builders............ 10
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 34
Ney, Hon. Robert............................................. 37
Tiberi, Hon. Patrick......................................... 39
Bowdler, Janis............................................... 40
Newman, Robert............................................... 49
Petrie, Michael.............................................. 54
Shear, William............................................... 62
Wilson, David................................................ 79
Additional Statements Submitted for the Record
Department of Housing and Urban Development.................. 45
National Multihousing Council/National Apartment Association. 88
H.R. 3043, THE ZERO DOWNPAYMENT
PILOT PROGRAM ACT OF 2005
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Thursday, June 30, 2005
House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:07 a.m., in
Room 2128, Rayburn House Office Building, Hon. Robert Ney
[chairman of the subcommittee] presiding.
Present: Representatives Ney, Tiberi, Pearce, Neugebauer,
Waters, Davis of Alabama, Cleaver, and Green.
Chairman Ney. We will begin. I assume some other members
will be arriving.
This morning, the subcommittee meets to discuss Congressmen
Pat Tiberi's and David Scott's legislation to create more
homeownership opportunities for first-time homebuyers.
Reintroduced last week, H.R. 3043 would eliminate the
downpayment requirement for families and individuals who buy
homes with FHA-insured mortgages. Of course, we took this bill
up last time and moved it out of the committee.
Theoretically, downpayment requirements were established to
assure the lender that a borrower would be less likely to
default or risk foreclosure on a home if there was some
personal investment or stake. Through the invention of
automated or computerized underwriting to determine credit
scores, lenders believe that downpayments were one of the best
techniques for the credit-worthiness of a potential borrower.
At the hearings conducted on March 24, 2004, and the full
committee markup on June 3, 2004, on the previous bill, H.R.
3043 incorporated the 2004 reported bill as well as some key
revisions that will establish the bill as a pilot program, and
limit the pilot to 50,000 loans, and sunset the program in
2010. Today's hearing will allow us to continue our discussions
from the previous Congress as to whether this proposal would
increase defaults and foreclosures for FHA-related mortgages,
placing the Government at a higher liability.
The new legislation incorporates several safeguards to
protect FHA's mutual mortgage insurance and that fund would of
course enhance provisions developed during last year's markup.
These changes, I think, will help the pilot program to be
responsive to concerns that without adequate safeguards, zero
downpayment requirements will lead to increased foreclosures,
so I think that will help with the argument that it will not.
However, critics will continue to state that it is unclear
whether removing downpayment requirements could be a sound
underwriting decision or whether borrowers without downpayment
contributions from their own resources would pose a greater
credit risk. As we debate Congressman Tiberi's and Congressman
Scott's zero downpayment proposal, as we debated it last year,
we know that the biggest obstacle to homeownership for most
families is the inability to come up with enough cash to meet
downpayment and closing costs. Minority families in particular
are burdened by high downpayment requirements.
In the first quarter of 2005, the racial divide in
homeownership remains wide, with 76 percent of white households
owning their own home, compared with 48.8 percent of African-
American households and 49.7 percent of Hispanic households.
Lagging minority homeownership rates are a serious concern.
Minority households are expected to account for two-thirds of
the household growth over the coming decade. As we continue our
debate on legislation such as zero downpayment and other
homeownership initiatives, clearly the ability of such
households to make transitions to homeownership will be
especially important, and an important test of the Nation's
capacity to create economic opportunities for minorities and
immigrants and for all Americans.
This is an important piece of legislation. I have talked to
Mr. Tiberi and Mr. Scott. I hope people fully realize that a
lot of people are out there and they will struggle to make that
payment. They will do everything they can do, but sometimes
they have to save so long for the downpayment that they could
have had their children and their families into housing a long
time ago.
So I think this bill is a very, very reasonable balance,
with safeguards, more of them than the last piece of
legislation, so I look forward to working with the committee on
it.
With that, are there any other opening statements?
I ask unanimous consent to insert written testimony for the
record for the National Model Housing Council and the
Department of Housing and Urban Development.
I want to welcome our panel today.
We have Ms. Janis Bowdler. She is a housing policy analyst
with the National Council of La Raza. The Council was
established in 1968 and is a nonprofit organization established
to reduce poverty, reduce discrimination, and improve
opportunities for Hispanic Americans.
Robert Newman is the executive vice president and chief
operating officer of AmeriDream, Incorporated, a nonprofit
organization founded in 1999 to expand affordable housing
opportunities for underserved groups. AmeriDream seeks to
improve and promote the value of homeownership as the
foundation of building strong communities and individual
prosperity.
Michael Petrie is the president of P/R Mortgage &
Investment Corporation in Indianapolis, Indiana, and chairman
of Greensfork Township State Bank in Spartanburg, Indiana. Mr.
Petrie is the current chairman of the Mortgage Bankers
Association.
Mr. William B. Shear is Director of Financial Markets and
Community Investment at the United States Government
Accountability Office, GAO. Mr. Shear's work has focused on
Government-sponsored entities, the Federal Housing
Administration and the Rural Housing Service and community and
economic development programs. He is no stranger to the
committee, I would note.
Dave Wilson is a custom homebuilder from Ketchum, Idaho. He
serves on the board of the Idaho Housing Finance Agency and is
testifying today as the 2005 president of the National
Association of Home Builders. The Association's mission is to
enhance the climate for housing and the business industry.
With that, I am going to go just a little bit out of order.
I want to thank all the panelists, and we start with Mr. Shear.
STATEMENT OF WILLIAM SHEAR, DIRECTOR OF FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Shear. Mr. Chairman, members of the committee, I am
pleased to be here this morning to discuss methods the FHA can
use to manage risk in the new zero downpayment product.
My testimony is primarily based on our recent report on
actions needed to help FHA manage risk from new mortgage loan
programs. We reviewed a substantial amount of research
indicating that loan-to-value ratio, called LTV, and credit
score are among the most important factors when estimating the
risk level associated with individual mortgages. Our analysis
of the performance of low and no downpayment mortgages
supported by FHA and others corroborates key findings in the
literature.
Generally, mortgages with higher LTV ratios and lower
credit scores are riskier than mortgages with lower LTV ratios
and higher credit scores. In our report, we suggested that
Congress may want to consider limiting any new zero downpayment
product that it may authorize. We also recommended that HUD,
among other things, consider piloting new products such as a
zero downpayment product and that HUD establish a framework for
when and how to pilot programs. We also recommended other
actions HUD could take to mitigate the risk of new and changed
products that are discussed in my written testimony.
In this oral summary, I will focus on our suggestions and
recommendations pertaining to piloting a zero downpayment
product. In summary, there are several risk-management
practices mortgage institutions use in designing, implementing
and monitoring low and zero downpayment products. We believe
these practices could be instructive for FHA in managing risks
associated with the zero downpayment product.
Therefore, if Congress decides to authorize the zero
downpayment FHA product, we support piloting the product and
piloting is a major feature of H.R. 3043. Based on information
we obtained from selected conventional mortgage providers,
private mortgage insurers, and Fannie Mae and Freddie Mac,
mortgage institutions sometimes use pilots to limit the initial
availability of new products, to build experience, or to better
understand the factors that contribute to risk for low and no
downpayment products.
Some mortgage institutions also may limit the origination
and servicing of the product to their better lenders and
servicers. HUD officials told us that they face challenges in
administering the pilot program in limiting mortgage products
to certain approved lenders or servicers. However, there are
several available techniques for limiting an initial product
that could help to address HUD's concerns, including limiting
the time period in which it is available.
Further, we believe that in some circumstances the
potential cost of making widely available a product when the
risks of that product are not well understood could exceed the
costs of initially implementing such a product on a limited
basis.
I will provide some examples of how some mortgage
institutions limit availability of new products. Fannie Mae and
Freddie Mac sometimes use pilots for limited offerings of new
products to build experience with a new product type or to
learn about particular variables that can help them better
understand the factors that contribute to risks for these
products.
Freddie Mac and Fannie Mae officials also told us they
sometimes set volume limits for the percentage of their
business that could be low and no downpayment lending. Fannie
Mae and Freddie Mac officials provided numerous examples of
products that they now offer as standard products, but which
began as part of underwriting experiments. These include the
Fannie Mae Flexible 97 product, as well as the Freddie Mac 100
LTV product.
FHA has also utilized pilots or demonstrations as well when
making changes to its single-family mortgage insurance.
Generally, HUD has done this in response to legislation that
requires a pilot and not on its own initiative. For example,
FHA's home equity conversion mortgage insurance program started
as a pilot. Congress initiated the program, which is sometimes
called a reverse mortgage, in 1987 to provide elderly
homeowners the financial vehicle to tap the equity in their
homes without selling or moving from their homes.
Through statute, the program started as a demonstration
program that authorized FHA to insure 2,500 reverse mortgages.
Through subsequent legislation, FHA was authorized to insure an
increasing number of these mortgages until Congress made the
program permanent in 1998.
In summary, loans with low or zero downpayments carry
greater risk. Without any compensating measures such as credit
enhancements and increased risk monitoring and oversight of
lenders, introducing a new FHA zero downpayment product would
expose FHA to greater credit risk. We believe that FHA could
mitigate the risk and potential costs of a zero downpayment
program by conducting the program as a pilot. Because it may
take a few years to determine the risk of a new loan product,
even early termination of a fully implemented product could
still expose the government to significant financial risk,
without some types of limits on the number of loans insured.
Mr. Chairman, it is always a great privilege to be here. It
is wonderful to be here. I would be happy to answer any
questions.
[The prepared statement of Mr. Shear can be found on page
62 of the appendix.]
Chairman Ney. Thank you very much.
Ms. Bowdler.
STATEMENT OF JANIS BOWDLER, HOUSING POLICY ANALYST, NATIONAL
COUNCIL OF LA RAZA
Ms. Bowdler. Thank you, Chairman Ney, Ranking Member
Waters, and members of the committee for inviting me to speak
today.
I am Janis Bowdler from the National Council of La Raza. I
feel honored to be before this committee as part of such a
distinguished panel. Though I clearly do not have as many years
of experience as others here today, I do bring with me NCLR's
expertise and perspective on this important issue.
As NCLR's housing policy analyst, I conduct research,
policy analysis, and advocacy. I have published on fair and
affordable lending, housing counseling, and access to
homeownership. I also provide technical assistance to NCLR
grantees that operate housing counseling programs. NCLR is the
largest Hispanic constituency-based civil rights organization
in the Nation. We serve America's 40 million Hispanics in all
regions of the country through a network of more than 300
nonprofit affiliate organizations.
Today, I want to briefly talk about the importance of
increasing homeownership and building wealth in Latino
communities, offer NCLR's perspective on the Zero Downpayment
Act, and finally I will make a few recommendations to further
strengthen the bill.
Increasing Latino homeownership is critical to the
financial security of Latino families and the economic
stability of the broader community. In this spirit, NCLR has
been a leader in promoting and increasing Hispanic families'
access to fair and affordable homeownership for more than 20
years. Recently, we have begun focusing our efforts on helping
Latino families accumulate assets and build wealth for the
future. In 1997, we created the NCLR homeownership network to
provide homeownership counseling to Latino neighborhoods
through community organizations. Since then, more than 115,000
families have been counseled through our network. More than
17,000 of these families have become homeowners.
The Latino population continues to grow at rapid rates.
While the number of Latinos entering the homebuying market
continues to grow, Latino homeownership still lags behind that
of whites by 28 percentage points. Such low homeownership rates
translate into lower levels of wealth and fewer financial
opportunities in the form of tax benefits and home equity. For
this reason, Hispanic wealth is outpaced by that of whites by
27 to 1. As you all are well aware, wealth accumulated through
home equity is essential for sending children to college,
starting small businesses, or providing for a family during
retirement. This is especially true among low-and moderate-
income families.
While Hispanics face a number of barriers to homeownership,
affordability and lack of affordable mortgage products are two
key barriers. The zero downpayment pilot program addresses both
barriers. FHA has been a mainstay of affordable mortgages for
underserved populations for decades. This includes Latino
families as well. One in five Hispanic mortgageholders in 2004
had an FHA-insured mortgage.
However, FHA has also been plagued by high foreclosure
rates and lender and broker abuse. In 2004, the rate at which
FHA began foreclosures on their loans was more than 5 times
that of prime lenders. Foreclosures are devastating to these
families. FHA foreclosures, in particular, pose significant
costs to American taxpayers. As you consider this pilot
program, keep in mind the financial risk and potential for
abuse that it poses.
However, the addition of default counseling is a
significant improvement over earlier versions of the
legislation. Housing counseling is a powerful tool that
connects low- and moderate-income families with their first
homes. For example, in 2004, 90 percent of NCLR homeownership
network clients earned below 80 percent of the earned median
income. Of those who became homeowners, the average interest
rate was only 6 percent. Even more importantly, when
homeownership counseling is received before the time of
purchase, it significantly reduces the likelihood of 60-day
delinquency.
NCLR commends Congressman Tiberi and Congressman Scott and
the members of the committee for their diligent efforts on
affordable housing and housing counseling. That said, we do
have some ideas as to how the bill can be further strengthened.
NCLR makes the following three recommendations.
First, ensure adequate resources for housing counseling
agencies. This can be done by clarifying that counseling
agencies can be compensated by lenders based on the value of
their service. Consistent income based on the delivery of
service will allow counseling agencies to build capacity and
expand their operations. This is important, given the number of
families that will need counseling services because of the zero
downpayment pilot.
Second, ensure timely access to counseling, specifying that
counseling must be completed before the application is even
taken. It is critical that families are given an opportunity to
make fully informed decisions prior to beginning the loan
process.
Finally, prevent unethical lending practices by allowing
the products to be offered only by FHA-approved lenders who
perform well in HUD's Credit Watch program. I would like to
stress that fair, affordable, and flexible mortgage products
are important to increasing wealth through homeownership. The
zero downpayment product offers families a flexible mortgage
option and the addition of housing counseling will help
vulnerable families to decide if this product meets their
needs.
Thank you, and I would be happy to answer any questions.
[The prepared statement of Ms. Bowdler can be found on page
40 of the appendix.]
Chairman Ney. Thank you very much.
Mr. Newman.
STATEMENT OF ROBERT NEWMAN, EXECUTIVE VICE PRESIDENT,
AMERIDREAM, INC.
Mr. Newman. Good morning, Chairman Ney, Ranking Member
Waters, and distinguished members of the subcommittee. Thank
you for the opportunity to testify regarding H.R. 3043, the
Zero Downpayment Pilot Program Act of 2005.
My name is Robert Newman. I am the executive vice president
and chief operating officer of AmeriDream, Inc. The work of
AmeriDream began in February of 1999 to help reduce the
government's burden of increasing homeownership to everyone.
Since our inception, we have helped more than 160,000 low- to
moderate-income individuals and families become homeowners and
have given more than $500 million in downpayment gifts to
homebuyers nationwide.
We have provided homebuyer education to over 6,000 people;
counseled over 500 homeowners seeking help with loss
mitigation; invested over $12 million in community
redevelopment projects; and given over $2 million in funding to
other nonprofits to support their missions. All our services
are provided in both English and Spanish. It is important to
know that all these services have been provided free of charge
to homebuyers and have not used government funding or taxpayer
dollars.
Last year, Ann Ashburn, AmeriDream's president and CEO,
testified and provided testimony to this subcommittee and
suggested refinements to the Zero Downpayment Act. We commend
the subcommittee for listening to the input of everyone who was
here. It is only appropriate that I acknowledge some of those
improvements.
First, we are pleased that homebuyer education is now a
requirement for homebuyers participating in the zero-down
program. Second, we are grateful for the required disclosures
regarding the homebuyers' alternatives to the zero-down
program, as well as disclosing any increased costs associated
with the use of the program. Third, H.R. 3043 is improved by
the use of HUD's total scoring systems in the processing and
approving of applications. And fourth, by implementing the
zero-down program as a pilot program, it advances the important
policy objective in a way that reduces the potential risk and
enhances the program's likelihood of success.
In that same spirit of providing ongoing input for the
subcommittee, we would respectfully propose three additional
refinements for the bill. First, we encourage the subcommittee
to seek appropriate ways to leverage the substantial experience
and resources of charitable downpayment gift providers. We
believe this can be accomplished by recognizing in H.R. 3043
that nonprofit downpayment assistance providers are structured
to reduce the burdens on government's limited resources and are
viable options to the zero-down program for homebuyers who do
need downpayment assistance, but choose not to use the zero-
down program.
Second, we suggest that H.R. 3043 ensure homebuyers the
option of using nonprofit downpayment assistance program to
offset any fees associated with participating in the zero-down
program.
AmeriDream has created a place called ``home'' for more
than 160,000 individuals and families. In fact, from the time
we sat before you last year to now, AmeriDream alone has helped
an additional 30,000 homebuyers become homeowners. We
respectfully suggest that the members not overlook the integral
role that nonprofit organizations such as AmeriDream can
continue to play in helping low- to moderate-income homebuyers
achieve the dream of homeownership.
Third, we recommend that homebuyers using the zero-down
program have a 700 credit score. The amount of equity that a
family has in its home has been shown to be one of the
principal drivers of mortgage default. Most 100 percent no
downpayment programs in the conventional market require that
the borrower have a relatively strong credit score. A score of
700 will be consistent with the market and will coincide with
FHA's goals of fostering successful homeownership.
The refinements we propose are intended to enhance H.R.
3043's ability to increase successful homeownership. They are
offered in the spirit of partnership and are supported by the
experience and accomplishment of having successfully enabled
more than 160,000 families in this country to attain the
American dream of homeownership.
Mr. Chairman, I hope my comments and suggestions make clear
to you and your distinguished colleagues that we praise your
efforts in fostering homeownership for the low- to moderate-
income families of America. We also hope that under your
leadership and direction, our suggested refinements will be
included in H.R. 3043 as you consider what is best for those
among us who heretofore have had the greatest challenges in
gaining successful homeownership.
Thank you for your time, and I welcome any questions you
may have for me.
[The prepared statement of Mr. Newman can be found on page
49 of the appendix.]
Chairman Ney. Thank you for your testimony.
Mr. Petrie.
STATEMENT OF MICHAEL PETRIE, PRESIDENT, P/R MORTGAGE &
INVESTMENT CORPORATION, TESTIFYING AS CHAIRMAN, MORTGAGE
BANKERS ASSOCIATION
Mr. Petrie. Good morning, Chairman Ney, members of the
committee. Thank you for inviting the Mortgage Bankers
Association to share its views on H.R. 3043, the Zero
Downpayment Pilot Program Act of 2005. We applaud Congressman
Tiberi and Congressman Scott for recently introducing the bill.
My name is Michael Petrie and I am president of P/R
Mortgage, an investment corporation in Indianapolis, Indiana;
chairman of Greensfork Township State Bank, Spartanburg,
Indiana; and chairman of the Mortgage Bankers Association.
MBA believes FHA should have the ability to offer a no
downpayment home loan product to extend the opportunity of
homeownership to more American families. As this committee is
well aware, homeownership is one of the most significant
aspects of the typical family's financial health. While the FHA
began this success story for the American family over 70 years
ago, the private sector has continued with innovations,
especially over the past 15 years in developing sophisticated
credit qualifying tools and a diverse array of mortgage
products.
Over a year ago, MBA testified before this subcommittee in
support of an FHA zero downpayment product. While we celebrate
the U.S.'s high homeownership rate, the very same rate masks a
glaring disparity. Minorities have a much lower rate of
homeownership than non-minorities, and low- and moderate-income
families have a much lower rate of homeownership than most at
or above median-income levels. This was true a year ago and
unfortunately remains true today.
The downpayment hurdle disproportionately affects low- and
moderate-income families who may be able to make monthly
housing payments without difficulty, but find it problematic to
save for the downpayment. Members have discovered, and the
studies support, that a borrower's credit profile is a more
important indicator of the performance of a loan than is the
amount of the downpayment. The national credit information
system preserved under the Fair and Accurate Credit
Transactions Act of 2003, allows lenders to efficiently access
a borrower's credit information and effectively evaluate risk.
So in looking to remove the downpayment as an obstacle to
homeownership, MBA is not suggesting a homeownership at all
costs strategy. Rather, we are advocating a targeted and
measured attempt to remove the downpayment obstacle and close
the homeownership gap among ethnic groups and economic classes.
However, we understand the real estate finance system must
be careful and appropriate when lending money to families for
often the largest investments they will make. Recently, some
have expressed concern that lenders are extending too much
credit and these loans may pose a risk. All the more reason for
a strong FHA, an FHA that is empowered to pilot products, and
specifically a no downpayment mortgage financing product for
homebuyers with required counseling and with all the
protections that go along with FHA insurance. FHA's loss
mitigation program will ensure these borrowers have many
options at their disposal after the loan closes if they run
into difficulty.
With these safeguards, MBA is confident the FHA zero
downpayment product will allow good borrowers to become good
homeowners. When the bill was introduced last year, some in
Congress and in the industry were critical of the Zero
Downpayment Act of 2004. However, most of the concerns were
addressed by the Financial Services Committee when the bill was
marked up in the 109th Congress. H.R. 3043 also addresses those
concerns. Over the past year, some developments have occurred
to make an FHA zero downpayment program even more relevant
today. There was concern last year regarding FHA delinquencies
and foreclosures. There is good news to report. FHA
delinquencies and foreclosures have declined during the first
quarter of 2005 according to MBA's most recent national
delinquency survey.
Finally, last year the cost of the program to the Federal
treasury caused some apprehension. Recently, however, the
Congressional Budget Office lowered the program's financial
score over 5 years. It is important to remember that FHA
generates hundreds of millions of dollars through insurance
premiums. MBA does have suggestions for minor improvements to
H.R. 3043 that we believe would further strengthen the program.
First, MBA would suggest allowing classroom or group
counseling. This counseling resembles the type used by Fannie
Mae and Freddie Mac for meeting the mandatory counseling
requirements under their programs. Second, the statute should
explicitly state that generic examples of counseling documents
be used to educate potential borrowers.
MBA appreciates the opportunity to present its views on
this important potential option for FHA. We look forward to
working with the subcommittee and Congressmen Tiberi and Scott
on H.R. 3043.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Petrie can be found on page
54 of the appendix.]
Chairman Ney. Thank you.
Mr. Wilson?
STATEMENT OF DAVID WILSON, PRESIDENT, WILSON CONSTRUCTION LLC,
TESTIFYING AS PRESIDENT, NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Wilson. Good morning, Chairman Ney, members of the
subcommittee.
On behalf of the 225,000 members of the National
Association of Home Builders, I want to thank you for the
opportunity to testify today.
Let me begin by saying that the National Association of
Home Builders strongly supports H.R. 3043 as introduced by
Representative Tiberi. We believe passage of this proposal
would mean that some 50,000 families would be able to achieve
homeownership who otherwise would be denied this opportunity.
Furthermore, it enables FHA to do so in a prudent manner
without negatively impacting the mutual mortgage insurance fund
or the general insurance fund.
This legislation continues a long tradition of innovation
by FHA by addressing a primary obstacle for preventing minority
and low- and moderate-income families from becoming homeowners.
According to the Census Bureau's study, one of the top reasons
why families and individuals cannot afford to purchase a home
was the inability to come up with the up-front cash needed for
closing. Data from the Federal Reserve indicates that 87
percent of all renters have less than $50,000 in wealth
available to pay for a downpayment and closing costs on a new
home. For minority renters, that figure rises to 94 percent.
With so little wealth, and absent some form of downpayment
assistance, it is difficult for a large number of renters,
especially minority renters, to become homeowners.
In addition, many of these same families are not served by
the conventional mortgage products. Currently, the chief way to
address downpayment barriers for FHA borrowers is through
downpayment assistance programs facilitated by third parties.
While these programs have contributed positively to
homeownership expansion efforts, more options are needed. FHA
studies have indicated that loans to homebuyers who receive
third party assistance do not perform as well as other FHA-
insured loans.
The higher loan default rate is not in and of itself a
problem since these efforts are aimed at serving a borrowing
population that has traditionally been underserved. However,
loans assisted by these downpayment assistance programs do not
compensate the FHA insurance fund for their increased risk.
H.R. 3043 addresses the downpayment hurdle, while allowing FHA
to establish mortgage insurance premiums and underwriting and
counseling requirements targeted to this financing program.
I would like to take a moment to expand on why NAHB further
believes this program can be carried out in a safe and sound
manner without harm to FHA. First, the ability to differentiate
between high- and low-credit risk borrowers has been enhanced
through technology and advances in automated underwriting such
as FHA's Total Mortgage scorecard. This allows lenders to
better evaluate borrowers before bringing them into the
program.
Second, the risk to FHA can be mitigated through risk-based
pricing such as proposed by HUD in the form of higher up-front
and/or annual mortgage insurance premiums. HUD estimates that
this approach results in no net cost to FHA and increases the
monthly payment on a $100,000 mortgage by about $50 a month.
Finally, housing counseling can lower the risk to FHA by
ensuring the prospective first-time homebuyer understands the
responsibilities of actually being a homeowner. The value of
these programs is well documented. NAHB is pleased that H.R.
3043 would include condominiums and cooperatives as eligible
options. In many communities, these homeownership alternatives
are more than within the reach of low-and moderate-income
families, just as single-family detached homes, and can provide
the same wealth-building community and development benefits.
Mr. Chairman, thank you again for the opportunity to share
our views on the zero downpayment pilot program. The members of
the National Association of Home Builders work daily with
families who want to achieve the American dream of
homeownership. By implementing this program as a limited-scope
pilot, Congress can give this program a chance to prove its
worth.
We look forward to working with the subcommittee.
[The prepared statement of Mr. Wilson can be found on page
79 of the appendix.]
Chairman Ney. Thank you.
I am going to yield. It is Mr. Tiberi's bill. Mr. Scott is
not here, but I am going to yield for questions first to Mr.
Tiberi.
Mr. Tiberi. Thank you, Mr. Chairman.
For the record, I would like to submit my opening
statement.
Chairman Ney. Without objection.
Mr. Tiberi. Thank you. I apologize for being late. I am in
a markup in another committee. I want to thank you all for
testifying today. I want to expand a little bit on Mr. Petrie's
and Mr. Wilson's testimony that I was able to hear.
First off, Mr. Newman, thank you for being here today. We
share in our effort to try to put people in homes. In hearing
your testimony and looking at testimony, I was not quite sure
if you are for or against the bill.
Mr. Newman. We are for the bill.
Mr. Tiberi. You are for the bill?
Mr. Newman. We support the goal of the bill and we are
supporting the bill.
Mr. Tiberi. Okay. Your organization and I have talked in
the past. I know you have had discussions with others and our
House leadership. One of the issues that you talk about is a
concern of cost to the government. The issue of foreclosures
has come up. In Ohio, in fact, there has been a group that has
done a study on foreclosures that has yet to be printed, which
I am going to touch on. What was interesting is you mention in
your testimony, underlined, ``It is important to note that all
of these services have been provided free of charge to
homebuyers and have not used government funding or taxpayer
dollars.''
Can you kind of explain how you all worked, for the record,
for the committee?
Mr. Newman. Our downpayment assistance program works with
lenders and sellers primarily. The buyers go to lenders who
have to be qualified by lenders or brokers to get a loan. The
lender makes a determination as to whether or not this
individual needs some downpayment assistance to be able to
qualify for the loan. On the other side, builders and sellers
enroll their homes in our program and say that they are willing
to offer downpayment assistance to widen the pool of potential
buyers.
So the seller and the lender come together and make an
agreement that in effect they are willing to help out and meet
the seller's needs. We give a gift to the buyer, and in turn
the buyer is able to provide that to the seller when they
close.
Mr. Tiberi. Where does the gift come from, your gift?
Mr. Newman. The gift comes from a pool of funds that we
have. So it is a revolving pool. So sellers who have used the
program, who have registered with us maybe a year ago, maybe 4
months ago, they have paid us a service fee for the transaction
that we do. It goes into a fund. That fund is used for future
buyers.
Mr. Tiberi. So let me ask you this. My neighbor last year
sold their house for $168,000 or $169,000. Their house was
listed in the low-$160s. They ended up selling to a first-time
homebuyer who participated not in AmeriDream, but in a program
similar to AmeriDream; bought their home. The seller, my former
neighbors, actually ended up gifting to the program and in
exchange for that gifting, they raised the price of their home
to around $168,000, which was then financed by the buyer
through this gift program. Is that how it is normally done?
Mr. Newman. That is not something that we condone at all.
We do not advocate that. We depend tremendously on two people
in the transaction, really three. It is the lender to qualify
the buyer and the terms. The lender is also going to get the
appropriate appraisal for the property. After all of that is
done, then they reach out to us for the gift amount. We are not
involved in the qualification of the buyer nor are we involved
in the listing or the appraisal of the property. We do not
condone, and we do not advertise and we do not do any outreach
on the product to suggest to individuals to increase the price
of the home.
Mr. Tiberi. Here is my concern is that, let me go to the
foreclosure point, because you say there is no cost to
Government funding or taxpayer dollars. The study being done in
Ohio which has not been printed yet, my understanding in
talking to people who are doing it, shows that Ohio has the
second-highest foreclosure rate in the country, and central
Ohio is pretty up there.
They are tracking downpayment assistance programs as being
a large part of that; that people are going into these homes
and even though they are getting the downpayment assistance,
they are paying an inflated price for the cost of their home,
whether it is a newly built home or whether it is an existing
home, it is toward the higher price in that particular
neighborhood.
Most of the loans that are done, at least through the
study, are financed by FHA. I assume most of the homes that you
all are involved with are backed by FHA. So then the government
does have a hook. Taxpayers are on the hook for these homes
that are foreclosed. So I guess my point is, and my time has
expired, and I appreciate the chairman yielding his time to me,
my point would be that if we looked at this in a larger
picture, that we in this Financial Services Committee have an
obligation to protect taxpayers through FHA, at the same time
of trying to provide a lofty goal of homeownership.
That is why I introduced the bill, is to make sure that we
here in this committee and this Capitol could make sure that at
the same time as providing homeownership to as many Americans
as possible, protect taxpayers and protect the viability of
FHA. If we control it, I think we have the ability to do that.
I hope that most members of this subcommittee and full
committee look at the issue more broadly to find out exactly
how the market works today.
I yield back the balance of my time, Mr. Chairman.
Chairman Ney. Is there anything you want to respond to?
Mr. Newman. Well, thank you for your comments.
Chairman Ney. Briefly, because we are going to move on.
Mr. Newman. Very briefly.
Having not had an opportunity to read the study since it
has not been released yet, I think that our response would be
that we have long sought and heard the same type of statements
and comments that have been made, and we have long sought to
work with FHA to identify the actual cause of the problem and
to come up with solutions or recommendations as to how to
address that.
We continue to reach out, and with the new Commissioner of
FHA we are hoping to be able to reach out and develop some sort
of partnership to identify the true causes of the problems, not
just the results, but the true causes of the problems and see
if there is a way that we can work together to help mitigate
that. So we look forward to being able to address some of those
issues.
Mr. Tiberi. I hope this is an issue that we can work on
together.
Mr. Newman. I hope so as well.
Chairman Ney. Mr. Petrie?
Mr. Petrie. Mr. Chairman, can I respond also?
I would just like to add onto what the Congressman's point
is. Indiana last year was the number one foreclosure State. I
do not know if we are one or two now. We had some research also
done and completed that showed that we are a high-FHA State,
using FHA, and that the downpayment assistance loans were twice
the rate of foreclosures than the others. So our data shows the
same things. I think the HUD IG did a report 2 years ago. They
say that some of their data is flawed, but it showed that a
higher rate of foreclosure was in there, too, with these types
of loans. So we think this program will be very helpful in
working to reverse that situation.
Thank you, sir.
Chairman Ney. Mr. Shear?
Mr. Shear. At Chairman Ney's request, we are doing a study
now on downpayment assistance. I would say that the situation
that you brought up involving your neighbor is a matter of
concern that we have in looking at downpayment assistance. I do
not have results to report, but downpayment assistance has
become such a large share of newly originated FHA-insured
loans.
We do have the concern of the relationship with the seller
and we do have a concern as to how that can affect appraised
values, and how the premise of the program, which is a
promising premise, is to put equity in the home for the
borrower. One of the things that we are assessing is the
performance of these loans, but we are also looking at whether
the premise of whether equity is being put into these homes in
the sense of true equity, whether that is occurring.
Mr. Tiberi. Mr. Chairman, I just want to thank the
gentleman, because one of the criticisms last year that was
brought to the attention of our leadership in the House was the
fact that my program put a person into a home with no money
down and the value of the home, with costs, was less than the
payment, the borrowing amount.
My point has been, and my neighbor is a perfect example, is
the fact that my new neighbor has equity in the home through a
downpayment assistance program, but the problem is what he paid
is much higher than the value of the neighborhood. If something
would happen and he forecloses, he is in the soup and so is
FHA. That is something that has not been connected to a lot of
folks.
Whether it is a newly built home, and there are
unfortunately in Columbus, Ohio, subdivisions where this has
happened, or an existing home like my neighbor, where the
purchase price that he paid is far higher than the value of the
going rate in that neighborhood. So thank you for understanding
that.
Mr. Shear. Representative Tiberi, I thank you for your
comment. What I will point out is that in that situation, when
we say what is the true loan-to-value ratio, it is based on the
notion of really what is the true value of the house. So in
that situation, we would question, not based on the sales
price, but based on some sense of the true valuation of the
house, is there real equity in the home.
Chairman Ney. Thank you.
Speaking of successful lawmakers, our two colleagues to the
right passed the Fair Housing and HOPE VI last night, so maybe
Mr. Tiberi and I ought to consult with the two of you on how to
do that.
Mr. Green?
Mr. Green. Thank you so much, Mr. Chairman. I assure you as
a neophyte I was very fortunate. I was blessed because the
truth is, I did just about everything that I could to assure
the failure of the bill.
[Laughter.]
I had a great staff and great bipartisan support, Mr.
Chairman, and I thank you so much for your kind words.
I would also like to thank our Ranking Member,
Congresswoman Waters, and thank the members of this outstanding
panel. You have all spoken well.
I would like to know, without question, whether everybody
does indeed support this bill and if there is someone who does
not, if you will kindly extend a hand into the air, I will
address you. Is there anyone who does not support it? Okay. I
thought so. Everyone supports it.
There is a provision in the bill on page 13 starting at
about line 3 that deals with suspension in the event of what I
would call a default rate that exceeds 3.5 percent. My question
is: Does this language sufficiently cover concerns addressed
about the inability of some persons to pay a downpayment? Would
that help make you comfortable with the bill itself or does
that create an additional concern by it being there?
Let's start with Mr. Wilson.
Mr. Wilson. Thank you, Congressman.
No, we think that is a safety catch there that if the
program is not successful that then you have time to adjust for
it. We certainly do not want to create, and I think Congressman
Tiberi said it, added value to houses that really are not there
that could create a housing bubble, if you will. This will
allow the program to move forward. If it starts to get to that
3.5 percent rate, then you all could re-evaluate it to say that
maybe we are not doing the right thing here; that we are having
higher foreclosures than we really want with this program. But
we truly support the program from the standpoint that it will
allow a lot of underserved families to have the ability to own
a home.
Mr. Green. Before the next person responds, I would like my
colleague, Mr. Tiberi, to know that I greatly appreciate the
energy and effort that you have put into this. I would echo
that also to my colleague who is not here, Congressman Scott.
You are to be commended and I truly compliment you.
Now, to Mr. Shear.
Mr. Shear. Okay. You asked the question, do we support the
bill. We think it is a prerogative of Congress of whether you
want to offer zero downpayment products. There are certain
questions that come up having to do with the weighing of risk
versus the mission of the FHA program. But we do firmly support
the piloting nature of the bill. We are very much in support of
the pilot nature of this bill.
In terms of what I will call the ``trigger mechanism'' for
how well the loans perform, I would say that we agree with the
notion of having a triggering mechanism that if the loans do
not perform very well that you might want to, in a sense,
further limit the program. We would be glad to assist this
committee, in terms of the legislation, if you wanted to
consider other types of trigger mechanisms to serve that
purpose. So I will just point out a few.
Even though I will refer to defaults or delinquencies, HUD
gets data on 90-day delinquencies. Even though many
delinquencies are cured and do not lead to a claim on the
insurance fund, delinquencies can be a good early warning
indicator of how well loans are doing. So something that might
serve the purpose better would be to look at certain
delinquency data, rather than the claim rate.
If you wanted to use claim rates, another possibility would
be to have a triggering mechanism which, what we tend to look
at are what we call cumulative claim rates. So let's say a lot
of loans were made in 2006, we would look at claims in 2006,
2007, 2008 in a cumulative fashion, rather than in a 1-year
window each year. This is just a technical observation of what
could be done with this triggering mechanism--
Mr. Green. I do not mean to disrupt. In fact I do, I
apologize. I have a limited amount of time and I would like to
give the others a chance to respond.
Mr. Shear. Okay. Thank you.
Mr. Green. Okay. But thank you very much.
Mr. Shear. Okay.
Mr. Petrie. The Mortgage Bankers Association, on the
surface, does not have a problem with the 3.5 percent claim
rate, but I would like to state that FHA for 70 years has
successfully designed products that have provided substantial
revenue to the Federal Government and no cost to the taxpayers
of the United States. Whenever you have a pilot program, the
purpose of a pilot is to give the designer the ability to
structure a program. If you are overly prescriptive, you take
away their ability to manage the risk. This is a prescriptive
measure. A 700 credit score is a prescriptive measure. You
basically take away the power of FHA to design what is
appropriate.
The mortgage insurance premium for this product is already
priced higher than it normally would be, and by setting a pilot
limit of 50,000 loans, you have already kind of capped off the
top of your risk. Any other measures become more prescriptive,
which limits their ability to manage risk, and I think we would
like it less prescriptive, rather than more prescriptive.
The other thing, too, the way we look at it, the MMI
insurance fund is to cross-subsidize loans. When you are trying
to reach down farther, you are going to take on higher risk,
but that is the intent. The intent is to reach down farther to
meet those people that can make the monthly payment, but may
not have the downpayment. So you are going to have more risk,
but you have priced it for that and you have limited your risk
by the number of loans. To throw in a lot of other measures
just becomes prescriptive and handcuffs FHA and would stop
their creativity to best serve this group. I would think we
want to be less prescriptive now that you already have your
limits in place.
Thank you.
Mr. Green. All right.
Mr. Newman. We certainly support having that claim cap on
there. I differ a little bit with my fellow panel-member in
terms of having a little bit more prescriptiveness in it. I
think the role of FHA is to implement some protective measures,
but I am not sure that their first goal is to generate revenue
for the government as much as it is to ensure that the folks
who are most at risk have the best scenario of getting into
homes and being able to stay in their homes. By putting the
onus on them to continue to generate revenue for the
government, sometimes they may have differing agendas. Their
first agenda should be the protection of the homebuyer in
helping them to get into a home and to stay in their home.
I think that putting a little bit of prescription in there
also helps to mitigate some of the concerns that folks may
actually have about the downpayment assistance providers. Right
now getting the appraisal of a home at a certain height is not
the downpayment assistance's fault or it is not necessarily
FHA's. The people who do that are appraisers. The people who
qualify the individuals for the gift amount will be the
lenders. The same thing in this model. If you take away some of
those prescriptions, you will still have some of those same
players in there who can be as creative as they have been, but
sometimes not in the best interests of the homebuyer.
It is also important to remember that this bill, as well as
everything else that we have done in downpayment assistance, is
geared toward the people who are most at risk and invariably
have the higher probability of making a claim. So having some
of that cap on there so that it does not lose a lot of control
in spite of making additional revenue, as was mentioned that
they have higher costs in there, is not a bad thing to have in
there.
Mr. Green. Yes, ma'am?
Ms. Bowdler. I will only briefly echo some of the comments.
I think that the cap is a good idea. NCLR is very supportive of
the idea of running this as a pilot program. One hundred
percent financing is risky for most people that do it, so we do
want to make sure that we proceed carefully and cautiously,
keeping in mind the vulnerable families that are most likely to
use FHA.
Mr. Green. Thank you, Mr. Chairman. You have been more than
generous with my time and your time. I thank you very much.
I yield back.
Chairman Ney. Thank you.
Mr. Neugebauer?
Mr. Neugebauer. Thank you, Mr. Chairman.
I think the first question I would like to just throw out
to the panel is one of the things that when we talk about what
is causing low homeownership in our country, although it is
increasing and I am proud of that. In fact, I have been a
homebuilder for a number of years, so if there is anybody more
pro-housing than Randy Neugebauer, I do not know who is. But I
am interested in making sure we do this the right way.
The thing that I begin to wonder, is it downpayment or is
it credit quality that is keeping a lot of people out of the
homeownership business? When I talk to my friends in the
lending business, I hear more of them talk about poor credit
quality, poor credit scores than I hear about people not having
the downpayment to get into those homes.
And then when we start talking about going to a zero
downpayment scenario where we know the risk is going up and we
talk about raising the bar on what those credit scores are. So
if we do get to that point, if we have a program that says we
are going to let you in for zero down, but we are going to put
very high restrictions on your credit scores, how many people
are going to fall into that grid?
Ms. Bowdler. I think, at least within the Latino community,
they face a number of barriers to becoming first-time
homebuyers. Affordability is just one of them. Others include
credit scores, as you mentioned, but we have a little bit
different problem with credit scores in that too many Latino
families have thin or no credit scores. In other words, they do
not have enough information in their credit file. When you run
a traditional automated underwriting systems, it comes out as a
zero. So they may be a perfectly good credit risk, but it is
hard to gauge that with the automated underwriting system.
I just want to go back to one example. When NCLR began
their pilot program, Home To Own, which grew into our
counseling network, we helped over 400 families become
homebuyers. We used a combination of downpayment assistance,
individual counseling, and flexible mortgage products, which we
piloted with Fannie Mae. Afterwards, the Morrison Institute of
Arizona did a study to see what was it that helped families get
into homes. They found that while downpayment was an issue for
a lot of families, it was not their largest barrier. In fact,
it was the individual counseling and the flexible mortgage
products that were the most help in overcoming their barriers.
Mr. Neugebauer. Okay. Others?
Mr. Shear. We have not analyzed it directly, but we have
looked at some research that looks at that question. Most of
the research does not link together the ability to make a
downpayment with credit score. What we do observe is that from
a standpoint of risk mitigation, there are tradeoffs involved.
So we do not know how large the population is, but there could
be a number of potential homebuyers whose homeownership could
be facilitated if downpayment requirements were reduced, and
with higher credit scores being required.
Mr. Petrie. One of the things that you point out regarding
homeownership, homeownership today is the highest it has ever
been.
Mr. Neugebauer. That is right.
Mr. Petrie. I think with this program, what we are trying
to do is reach down to a segment that cannot conform to
conventional markets. They are not going to have the higher
income. The conventional markets do not serve lower incomes as
well as FHA as shown they can do, or the lower credit scores.
They have higher credit scores, especially when you combine it
with the 80-20 or the equity on the backside of that. So even
though there are a lot of different downpayment programs, some
of these people are locked out of that because their credit
scores may not be high enough or they have other issues there.
One of the things that we look at, and I have served 8
years on the board of a neighborhood housing partnership in
Indianapolis where we did housing counseling and provided
secondary financing to get lower-income and minorities into
homes. What you end up with is two mortgage payments, two
different types of lenders, different issues. This product is
very good from the standpoint that you have one fixed-rate loan
for the full thing so it is not confusing to the borrower.
They do not have two different lenders they have to deal
with. Plus the loss mitigation issues that HUD provides, that
FHA provides with regard to forbearance of interest or special
forbearance to keep them in the home longer, that is kind of
why their delinquency rates are higher is because they do keep
these people in homes better than some of the conventional or
other types of mortgage products out there.
So we think this product answers a need in the marketplace
for those types of people that we can get in, but may not be
able to access it today, or if they do access it, at a riskier
type product that may put them in more harm's way. So we think
that we are on the right track here and that is why we are so
supportive of this program.
Mr. Neugebauer. Should the mortgage insurance premium be
raised across the board? I think in Mr. Tiberi's bill I saw
something that led me to believe that we were talking about
moving from a rate of 1.75 percent to 2.25 percent or something
like that. Are we talking about making that the MIP for all FHA
loans or just for this one?
Mr. Petrie. Just this product.
Mr. Neugebauer. Just for this product.
Mr. Petrie. The reason why we are doing this product is it
has been scored as a higher-risk product. I would like to point
out that the current product that is out there generates
hundreds of millions of dollars over its cost, so that is not
what we would believe is appropriately scored for the risk. The
point being then that these products, this may be higher-priced
than it needs to be, but that is what HUD will determine or FHA
will determine over time. It then may be able to be brought
down.
Right now, they are just saying based on the way things
work, CBO, OMB, how things are scored, they have to be at this
level so it is kind of a break-even. But in essence, there are
plenty of funds in the insurance to cover these 50,000 loans if
there is any type of default rate.
So the point going back is why do we have to have a 3.5
percent claim rate to suspend the program when there are
sufficient funds to cover losses of any type in the insurance
fund for this type of program? It should be used because the
intent of the FHA is to broaden homeownership, so those funds
should be used to broaden at maybe greater risk to the
taxpayer, but it is going to be covered. You are not going to
have to go back and get funds from taxpayers to do it.
Mr. Neugebauer. Mr. Chairman, my time has expired.
Mr. Tiberi. Mr. Chairman, can I just add?
Chairman Ney. Sure.
Mr. Tiberi. We would love to have you run for Congress, by
the way, and come up here and help us on this.
[Laughter.]
Chairman Ney. Just not in our district.
[Laughter.]
Mr. Davis?
Mr. Davis of Alabama. I second that emotion.
[Laughter.]
Thank you, Mr. Chairman.
Let me begin by complimenting my friend from Ohio, Mr.
Tiberi, and Mr. Scott from Georgia for what I think is a good
bill that has very strong bipartisan support. Hopefully, it
will have a better fate than it did in the last Congress. I
want to try to use some of our experience with this bill to see
if it can give us some guidance on some regulatory issues that
we are facing regarding the conventional mortgage lending
market.
The instinct of this bill, if I understand it correctly, is
that we are going to take a group of relatively objectively
high-risk potential consumers, potential homeowners. We are
going to give them the benefit of this product and then we are
going to put certain requirements in place that minimize the
risk, an element of mandatory counseling, for example.
It occurs to me that this may give us some guidance on
another issue that we are facing. Right now this committee and
this Congress are trying to figure out how we regulate the
conventional mortgage lending market, particularly in the
context of subprime; particularly in the context of another
class of products that are available for potentially high-risk
consumers.
One of the features of this bill is that it contains a
mandatory counseling element. I know that there is some feeling
that it could be made stronger in the sense that there is a
thought that the counseling should have to be completed, not
just started, before the loan is approved, but there is a
mandatory counseling element here.
Let me ask some of you on the panel, and perhaps we can
start with you, Ms. Bowdler. Does this give us some guidance as
to how we ought to be thinking about subprime loans? Does it
make sense that if we require an element of mandatory
counseling for these kinds of loans that we ought to think
about mandatory counseling for subprime loans?
Ms. Bowdler. There are really two questions there, so let
me start with the first one, going to protections on FHA loans.
I think that is what you are getting at. We have all heard
stories and we have talked about some of the stories about the
abuse on FHA loans. There are a lot of really bad stories out
there. NCLR, for example, recently completed a report that
looked a predatory lending in the Latino community and we found
that like a lot of other studies that Latinos were in fact
over-represented in subprime and FHA loans.
That said, I think that this whole committee recognizes
that what we really need are stronger protections and housing
counseling is definitely not a panacea to predatory lending.
That said, in the absence of stronger protections at this
point, housing counseling is a really effective way to inform
consumers and help them make educated decisions about their
loan products.
Mr. Davis of Alabama. Should it be mandatory in the context
of subprime loans?
Ms. Bowdler. I think that I would recommend that every
first-time homebuyers receive pre-purchase counseling. I do not
think that you can make it mandatory for every loan. There are
a couple of reasons for that. In part, it is because the
counseling infrastructure at this point could not handle that
volume. So I think that we would have to look at what would be
the best way, how could we set families in counseling agencies,
how can we set them up for success to deliver that kind of
service. I think that we would be getting ahead of ourselves to
mandate counseling for millions of borrowers without them
having access to quality counseling.
Mr. Davis of Alabama. Could we put triggers into the
subprime market that if the loans had certain characteristics
that they would be required to undergo counseling? Maybe
instead of having the whole pool of loans that fit that
category, the loans that had certain characteristics or certain
criteria?
Ms. Bowdler. I think you could do that. What I would want
to caution against is the use of counseling as a deterrent to
getting financing. We definitely do not want to see that
happen, either. So we would have to be careful about how we
structure that.
Mr. Davis of Alabama. Any quick reactions from the rest of
the panel on that question?
Mr. Petrie. As part of my role as chairman of the MBA, I
did a housing panel in Gary, Indiana. We had all the various
housing providers, not-for-profits, counselors. We had all the
counseling agencies, the consumer credit counseling agencies.
We were all sitting around the table talking about how we can
better improve housing in Gary, Indiana, with downpayment
assistance and whatever.
What came up to a certain respect is that when people had
poor credit and they were counseled to, well, it is going to
take a year; we want you to work another year to get your
credit better. When people want to own a home, they will do
anything to own a home. They do not want to wait a week, a
month, a year or whatever. So the counseling aspect, you are
creating a hurdle which they are going to get around different
ways. When they want to get the home, they are going to do
that.
I would like to point out that although FHA and subprime
overlap a little bit, a lot of the borrowers are different
types of borrowers. They have different types of issues with
their credit that may not be the risk profile that we are
talking about for this type of program. But we would not be in
favor of mandatory counseling from that standpoint for all FHA
loans because we do not know the relationship to the problem of
foreclosure or delinquency.
Mr. Davis of Alabama. Let me close with one quick question.
I recognize that my time is a little bit over, but one other
aspect that I want to briefly touch on. My assumption, and
correct me if I am wrong, but my assumption is that FHA loans
do not include prepayment penalties. Am I right about that?
Mr. Petrie. That is correct.
Mr. Davis of Alabama. Okay. One of the issues that we are
debating obviously in the context of regulating the larger
mortgage lending market is the utility of prepayment penalties
and whether or not prepayment penalties provide some special
problem for consumers. Does the fact that FHA loans do not
include prepayment penalties suggest to us that we ought to be
more aggressive in our regulation of prepayment penalties in
the conventional market?
Mr. Petrie. Actually, I am a multifamily lender. We
actually use prepayment penalties to yield what we call ``call
protection''. The purpose of call protection is to reduce the
interest rate because the investor will take a lower amount of
interest if they know they have a steady stream. The purpose of
prepayment penalties is to reduce the interest rate. The way we
look it, you are taking an option away from the borrower of
this interest rate or that interest rate, but I have to stay in
it.
Mr. Davis of Alabama. Why not have them for FHA loans then?
Mr. Petrie. Pardon?
Mr. Davis of Alabama. Why not have them for FHA loans?
Mr. Petrie. FHA precludes that.
Mr. Davis of Alabama. That is begging the question. Is that
a good thing?
Mr. Petrie. In multifamily, the type of loans I do are FHA
and they do have call protection.
Mr. Davis of Alabama. Okay. Just the final point, as my
time is about to run out, do any of you think that FHA loans
ought to allow prepayment penalties? Ms. Bowdler, I am assuming
as the consumer advocate on the panel you certainly, I assume,
would not think that FHA loans should allow prepayment
penalties.
Ms. Bowdler. No. Actually, we would not recommend
prepayment penalties for FHA. I will say that I know that there
are the economic tradeoffs that Mr. Petrie was referring to.
That kind of discussion goes on in the marketplace all the
time, and families have to make decisions based on that. NCLR
want to work with this committee as they try to figure those
things out.
What I will say about prepayment penalties, though, is that
all it takes is to get them attached to one bad loan, and what
our counselors see all the time is when an abusive loan comes
through, it is the prepayment penalty that does not allow them
to help the family, that makes it too expensive to refinance
into another product. At least in FHA, you have the advantage
where if they were put there by mistake for whatever reason,
then you can easily refinance out of it.
Mr. Petrie. One final point on prepayment penalties with
FHA, we would not be for that because FHA predominantly serves
first-time homebuyers. We want them to be able as quickly as
possible refinance into a conventional market and lower their
rate. That is really the intent of the program, to get them in
and then move them down the stream to a better interest rate
however they can do it.
Mr. Davis of Alabama. Mr. Chairman, I think my time has
expired, unless one of you wanted to give a final answer.
Mr. Newman. I just want to piggyback on that because that
goes back to your first question about the homebuyer education
piece of it. Again, if the buyer knows about those realities
and some of the opportunities available to them, it is very
important. We cannot underscore the importance of education
before you get into your first home.
I have to absolutely concur that if there was going to be
any mandatory homebuyer education, it would have to be on the
first-time homebuyer education. I would not just limit it to
subprime. I did not go through a subprime. I had a couple of
degrees when I bought my first house. Going into the
homeownership experience was the most interesting thing I ever
went through in my life because it was a black box. I walked in
and came out shaken.
So I just think that if we are going to talk about
education, it is important for all first-time homebuyers to
have some level of experience. I do not know if we have to make
it required, but at least they are exposed to some of the minor
details or the higher details about the homebuying experience
so they can be successful homeowners.
Chairman Ney. Thank you.
Mr. Pearce?
Mr. Pearce. Thank you, Mr. Chairman.
I think we are all working toward a common goal here of
deepening that homeownership across the society. I have a
couple of questions here in the application.
Mr. Shear, what is the cost associated with this program
that we are talking about, the zero downpayment? In other
words, the cost per person, cost per loan, cost per whatever?
Mr. Shear. We have not costed-out the program. I know that
the Congressional Budget Office made estimates for a previous
bill, but we have not looked at the cost of the program.
Mr. Pearce. Mr. Petrie, I guess you might be the next one.
If we are to guess nationwide about non-performing loans, how
big a chunk of change does that take? Do you have any idea? You
may not know.
Mr. Petrie. Are you speaking with regards to FHA?
Mr. Pearce. Yes, the FHA.
Mr. Petrie. I can tell you right now. According to our
research, FHA delinquency dropped from 13 percent to 10.5
percent. Foreclosures are less than 1 percent. So they are
declining. Delinquency is a lagging indicator. Since the
economy has improved, you would expect delinquencies to go down
and that is exactly what is happening, even in the FHA
marketplace. So that is happening.
With regard to your question on cost, I believe the CBO
scored this bill at $38 million over 5 years based on the
insurance premium and the risk that they have. So you can take
$38 million and divide by 5, that is the annual cost over 5
years. That is the total cost for 5 years.
Mr. Pearce. I guess that would be very similar. We have
gotten numbers that show that in 2004 there was $7.2 billion
paid out to mortgage service providers. The average claimant
size was $93,000 in the mutual mortgage, and then special
mortgages were $83,000.
Mr. Petrie. I would like to point out that there is no
cost. After all those claims are paid, there are still hundreds
and hundreds of millions of dollars that flow to the treasury
from these programs.
Mr. Pearce. If there is no cost, why do we have a cap of
50,000? It seems like if this is a no-cost proposition, we
should really have 10 million instead of 50,000.
Mr. Petrie. The intent, I think, is to pilot the program. I
think if they going to say we are going to moderate the risk,
then you sort of cap to allow them to work through the program,
design it the best way they can. This 50,000 allows the
Congress to control the maximum extent of the risk.
The other point I was making, though, and I guess you are
making the point, is not to be prescriptive with other terms
and conditions if you have capped it at 50,000 loans.
Mr. Pearce. No, my point is that if it is no-cost, which I
have heard that said, why are we limiting it? I think there is
a cost, frankly. I think there is a cost. I think that we need
to be aware of that cost going in. None of us would want to
step in front of the idea of ownership, but we need to evaluate
correctly. That is the reason I started with Mr. Shear, and
just wondered if you all had done any evaluation. I don't know.
Do you evaluate where this money goes? In other words, when
the FHA or when HUD repossesses, when they go in and bail out,
our figures are that when they resold properties that they have
gone in and taken because they were not performing, that HUD
lost 29.3 percent on those sales, an additional $2.1 billion. I
do not mind what we are doing, but I think that we need to get
our numbers on the table. We need to be a little bit objective
and honest about what we are saying here.
Mr. Shear. Okay. I appreciate the question. One of the
studies that we are doing for this subcommittee is looking at
questions of the MMI fund and in particular looking at some re-
estimates that were done.
With respect to your question, when beginning a new
program, what does it cost? Certainly, we call the FHA program
a negative subsidy program, but even if that negative subsidy
in a sense becomes smaller and starts moving toward the subsidy
disappearing, any new activity that it goes into if it leads to
a lot of claims, there is a real cost on the fund. There is a
real cost to the taxpayer. There is certainly an economic cost
to that. And then you bring up the question, is it really
serving the mission.
So in terms of looking at this question, this is a program
where we think there would be higher risks than maybe some of
the other activities that FHA does. Those risks are really
largely unknown. So one of the reasons to have a pilot is to
see how well the program performs, because let's say if you had
a program and you did not limit and you found out that the
experience from that program was one of very high claims, then
it is very hard because those claims tend to evolve many times
3, 4, 5 years after a loan is originated or a group of loans is
originated.
So from a cost standpoint, there is a real cost to the
program and it is a question of how do you manage a program
where the risks are hard to determine.
Mr. Pearce. Mr. Chairman, I will wrap up with this point. I
need to follow closely that discussion. I appreciate the
responses from both the panelists. But the idea that we have to
deal with is that if we are getting these kinds of over-
valuations in one sector, I do not know exactly, we have to
deal with that. We have to be aware that in small increments,
and maybe a very small increment of instability is added into
our overall financial market.
If we get a small increment here and we get a small
increment there, and a small increment from GSE's and a small
increment from wherever, I think that we need to be very aware
of what we are doing and the different increments, and what
instability that we are building in for ourselves. About 3 or 4
weeks ago I made the point that in some of our Basel work, we
are not really changing the risk. We are exporting the risk
outside the field of measurement of the formula and we are
saying it is good. I am sorry. It is not good, and that has
been kind of the direction I wanted to go in these questions.
Thank you, Mr. Chairman.
Mr. Tiberi. [presiding] Thank you.
Ms. Waters?
Ms. Waters. Thank you very much, Mr. Chairman. I am sorry I
could not be here earlier. It appears that we have more and
more committees meeting at the same time. We are constantly
running from one to the other to try and participate, even if
in a small way.
The legislation that we are discussing is familiar to us
all because we voted on it before. We all appear to believe
that there are people who work every day, who pay their bills,
and who deserve to have a home, yet they cannot afford
downpayments, just as we know there are people who work every
day and they cannot afford the first and last month's rent to
get into rental units.
Therefore, this bill speaks to what do you do about hard-
working Americans who have a history basically of paying their
bills, who are credit-eligible, who have good credit scores and
a lot of other things, to get them into homeownership. So I am
supportive of this. I suppose there is some disappointment
about the fact that it is now narrowed to more of a pilot
project rather than a program that we have faith in that we
wish to put out there.
Some of the questions that have been raised I suppose are
legitimate, particularly those who feel that we are creating a
kind of risk that we do not understand and somehow must be very
cautious and very careful. I do not quite share that view.
However, certainly if we cannot get the whole enchilada, we can
take a piece of it and move forward to see if we can't expand
these homeownership opportunities.
My question about this pilot is, how are we going to market
it in ways that people have equal opportunity to have access to
it? If we are only talking about, as I understand it, 50,000 in
the pilot; is that what we are talking about? How do we propose
to market the program? Who do we market to? How does it work?
Does anybody know? I guess I am addressing it to the Chair.
Mr. Tiberi. We determined, the sponsors determined that to
move the bill forward, we would need to compromise. So one of
the things that we hope to do through this process is figure
out a way to work with FHA and the Government Accountability
Office to prove that we are going to create a program that will
be successful at the 50,000 mark level. One of the concerns
that some have shared, Ms. Waters, is that, and maybe I can let
the panelists speak, is that there is a larger risk to the
zero-down borrower than any of the current programs, which I
happen to disagree. I think you and I would share that. But
nevertheless, that concern has been brought up.
So by putting the 50,000 number on it, we have tried to
compromise just to move the bill forward and demonstrate the
fact that through our proposal that I, in fact, believe, and
this is me personally, that by some of the safeguards in the
measure that we can demonstrate that the foreclosure rate and
the homeownership rate will be stronger, meaning there will be
less foreclosures, higher homeownership, permanent
homeownership, with the safeguards that we put in the bill, and
that this will be a program directly through FHA, and that
there will not be homes that are overvalued in the marketplace;
that they will be valued at their appropriate level.
Ms. Waters. Well, I would like to thank the gentleman for
his comments. I thank the panelists for showing up here today.
Again, like I said, this is a political process where some
concessions and compromises oftentimes have to be made to move
new ideas forward. I do not like it, but I understand it, and
we will just move forward.
Thank you very much.
Mr. Tiberi. Mr. Cleaver?
Mr. Cleaver. Thank you, Mr. Chairman.
The issue that I am more concerned about is the foreclosure
rate. I am wondering whether the bill addresses in any way a
means by which we can address the foreclosure rate. If not, are
there recommendations that you might have to strengthen the
bill?
Ms. Bowdler. I believe that the legislation does include a
provision by which a client or a borrower would be able to let
the lender know the counseling agency that they have been
working with. That counseling agency would take on some
responsibility. The lender would agree to this idea and then in
the event of 60-day delinquency, would notify the counseling
agency which would get in touch with the borrower and try to
help them rectify their situation.
Mr. Cleaver. But is there a way that we can strengthen the
counseling provision in the bill? Do you think that it is
already at maximum strength?
Ms. Bowdler. No. We made a couple of recommendations. One
would be strengthening the counseling agencies and making sure
that they have the capacity to deal with the volume of clients
that they are likely to see in conjunction with the
legislation. Also, 60-day delinquency, by the time you are 60
days delinquent, there could be problems that are beyond
repair. I would not even mind seeing 45-day delinquencies,
getting in as early as possible. I know that is kind of a weird
mark. Usually it is 30 and 60, but really the sooner that you
can get in, especially with vulnerable families who are going
to have very little equity in their homes, in fact probably no
equity, especially if it is in within the first couple of
years.
Mr. Cleaver. Okay. The word ``grace period,'' you are
saying it should be 45 days?
Ms. Bowdler. Well, I am saying, the way the legislation is
now, if I am understanding it correctly, is a borrower can come
to the table with their counseling agency. If the lender
agrees, then the lender can send delinquency notice to the
counseling agency, and allow them to contact the family.
Mr. Cleaver. Okay.
Ms. Bowdler. What I am saying is that especially with an
FHA loan and especially with a zero-down program, where you are
going to have little to no equity that could cushion you in
this kind of situation, the earlier that a counseling agency
can help a family is always better.
Mr. Petrie. Congressman, FHA has a better mitigation of
foreclosure than any other conventional-type loan. FHA has set
up their loss mitigation to reduce foreclosures by special
forbearance, modifications, so that you work with the borrower
to make sure that they do not get foreclosed. That is why if
you have a delinquency rate of 10.9 percent, but yet a
foreclosure rate of less than 1 percent, you have 9 percent
that may be delinquent, but you are working with them so that
they can stay in the home. That is one of the keys about FHA is
their goal is to keep them in the home, not take it. So that is
a key component of this program.
The other part, as she stated, there is this counseling
after the fact. If there is some difficulty, then the lender
can work with the borrower through their counseling agency to
help them with what we call post-purchase counseling if there
are difficulties after the loan has been closed.
Mr. Cleaver. Is it automatic? Will the homeowner
automatically be contacted, advised of the counseling service?
Mr. Petrie. It is currently voluntary, but you have to
understand that if borrowers within FHA develop too high of a
foreclosure rate, they go up on their credit watch and they
then can be removed as FHA lenders. So the point would be, it
is voluntary, but you would do everything you could to make
sure that the person stays in the house, and therefore performs
this loss mitigation. So it is not in the lender who does FHA
loans best interest to have high foreclosure rates because
their Credit Watch score then goes up and then HUD can then
take them out of the program.
Mr. Cleaver. Thank you.
Ms. Bowdler. I was just going to piggyback on Mr. Petrie's
comments and say that is why NCLR also recommended that the
product only be offered through the FHA-approved lenders who
are high performers in the Credit Watch program.
Mr. Tiberi. Thank you, Mr. Cleaver.
Ms. Bowdler, just to follow up a bit on your concern about
no equity in the house. Would you have an equal concern if you
did have equity, but the value of the home was actually lower
than what the mortgage of the home was?
Ms. Bowdler. Right. I think if I understand the scenario
that you are talking about, it is that if the true value of the
home is, for example, at $100,000, but it was appraised at
maybe $120,000, and your mortgage then reflects that amount. I
would be equally concerned about that kind of situation, as I
think most people would. I know that inflated appraisals are an
issue in a lot of communities.
Mr. Tiberi. Thank you.
Mr. Newman, you mentioned in your testimony about the
credit score. Do you all apply that to your home borrowers?
Mr. Newman. No, we do not. It primarily goes back to my
earlier comment that we depend on the lender. They do the
qualification of the borrower and their credit-readiness and
their ability to get into a home. So we do not put it on there.
We depend tremendously on the lender.
Going back to your other question, we would not support
that either, the person going into the home with a value that
is higher or a mortgage or a price that is higher than the
actual value of the home. We do not support that.
Mr. Tiberi. Okay. Do you have any program that tracks the
borrowers that you help, the homebuyers that you help, to find
out what percentage of them after 2 years or 3 years or
whatever number of years are still in their home? Do you any
kind of follow-up with people you put in the homes?
Mr. Newman. No. We have attempted to do that, primarily
through working with FHA and with HUD to get some of that data.
Some of the recent reports that were done, one of the things
that were challenged about it was their inability to collect
the data and to break it down in an appropriate manner.
So that is why I mentioned earlier that we would look
forward to being able to work with the new Commissioner to see
if there is a way that we can actually get that data, parse it
out, and be able to do that kind of analysis, to really be able
to see how we do. Because as much as I support the downpayment
assistance industry, I also know that we at AmeriDream do a lot
more than a number of our colleagues in terms of loss
mitigation and homebuyer counseling. They stay in touch with us
and we stay in touch with them quite often.
Mr. Tiberi. But you do not do homebuyer counseling for
every homebuyer, do you?
Mr. Newman. No.
Mr. Tiberi. Why is that?
Mr. Newman. Again, it is one of those things where the
lender, we really depend on the lender. We make it available.
We have it online. We also do workshops throughout the country.
Anyone who does homebuyer education, and I really have to echo
something that Mr. Petrie said, homebuyer education to a lot of
people, as valuable as it is, is seen as an unnecessary
obstacle even by the buyers themselves. So we may make
available online to individuals in English and Spanish. We may
have classes available free of charge, English and Spanish, in
the various communities, but they do not attend.
Giving up 4 hours or 8 hours to do a homebuyer education
class that is not required by the lender or even the realtor is
seen as an unnecessary step. I think every lender would be able
to say the same thing, that sometimes if one lender says, I
have to do it; and the other lender say, no you don't; most
likely that buyer is going to go with the lender that does not
make that additional step in the process. We have been
challenged with that.
So we have made it available online and in person, but we
really depend on the lender to qualify and to make a
determination if that person actually needs it and it is an
available source there if that person actually needs the
homebuyer education.
Mr. Tiberi. Mr. Petrie?
Mr. Petrie. I would just like to make one comment to kind
of clarify something that Mr. Newman stated earlier when he
pointed out the various players that are involved in this, the
homebuilder, the appraiser and the lender. It is to me
disingenuous when you create the rules for a game that people
then play, and it has perverse effects, and say I am not
responsible for those perverse results. The rules of the game
can be changed to correct all of that if they want to do that.
I think you are trying to with this legislation, and we support
you with that.
So we think that those rules could be changed if they
wanted to, which may change some of those perverse effects, and
we would be supportive if they would change the rules. But to
stand back and say, we are not the ones doing it; it is the
lender, the appraiser, the home builder; I think that is
disingenuous when you have created the box by which they are
playing.
Thank you.
Mr. Tiberi. I appreciate that.
Mr. Newman, because I was going to have a follow-up, go
ahead.
Mr. Newman. I would more than welcome finding out and
working with Mr. Petrie, as well as anyone else, to find out
when they talk about making the rules of the game.
Mr. Tiberi. I was going to follow up on that. Thank you for
bringing that up.
The study that I talked about is an Ohio study that a major
newspaper is working on. If it should come out in that study
that, and I am not pointing to AmeriDream because obviously
there are dozens of nonprofits around the country, dozens in
Ohio actually, but if it should come out in the study that the
high foreclosure rate is directly linked to nonprofit activity,
do you think it is an obligation of this committee and this
Congress to put some rules and regulations into effect?
Let me give you an example from what a reporter told me,
that she was working on that a homebuilder had told her in Ohio
that they, in the first-time homebuyer market, are provided an
opportunity to work with low-income, first-time homebuyers and
essentially are providing the downpayments through nonprofits.
But the fact of the matter is, their home prices are going up.
So the point that I made before with respect to my neighbor who
increased the cost of their home in exchange for downpayment
assistance through a nonprofit, is happening not only with
sellers, but is happening with homebuilders as well.
Essentially, the homebuilders have a gun to their head
because they have a buyer who is coming with a gift program in
hand to the homebuilder. So one of the reasons why I have had
homebuilders in Ohio support my program is because they
essentially say, let's take out the middleperson right now; the
government is on the hook in the end for the foreclosures. You
all, Members of Congress, are in charge of FHA, so why don't
you just tighten the program?
We have the same goal in mind. You all could do that, in a
sense, I think is what Mr. Petrie is saying, because you
control the gift, in essence. You are the ones that are making
it possible for the buyer to get into a home through the gift
program because the seller cannot do it directly to the buyer,
nor can the homebuilder do it directly to the buyer, unless FHA
does it through a zero-down program.
I think that is what Mr. Petrie was getting to. If this
report comes out and says that the high delinquency rate is
tied to nonprofits, do you all have an obligation as the
nonprofit industry to tighten the rules and regulations by
which you all interact with appraisers, homebuilders and
lenders?
Mr. Newman. I am going to get to that answer in a second,
but I have to start off by, when we met, as you mentioned, and
also in Ann Ashburn's testimony last year, one of the things
that we put in our testimony was to seek a public-private
partnership with HUD to address a number of the issues that
were there. We made follow-up letters and follow-up phone calls
on that because we recognized that there are some of those
limitations, some of those challenges.
Quite candidly, if we as an entity, meaning AmeriDream, and
I need to speak specifically about AmeriDream, were to put a
lot of the safeguards that we can talk about that probably
should be there, homebuyer education, most of the people we
serve are first-time homebuyers. I, on the record, say that
homebuyer education is a critical component; loss mitigation
services so that they know there is a place for them to go to,
that if they run into some trouble making a payment, that there
is a place for them to call, and that nonprofit is equipped and
ready to be able to do that.
We recognize that if we are going to help get people in to
homes, we need to prepare them, as well as to help them stay in
the homes. But if AmeriDream were to do that in and of itself,
by itself, and no other downpayment assistance provider did
that, the lenders would not use AmeriDream because putting
those requirements on there would become friction in the
process, and they would go to another downpayment provider who
had no friction.
So now I get to the answer is, if that is the case, and we
recognize that reality, we seek to work with HUD to put to put
in the right type of relationship and the right type of rules
of the game that is across the board and is not just for one
entity. In the same way that one lender would not just want to
say, I am only going to do this deal, this transaction, with
homebuyer education, knowing that the broker or the lender next
door does not require it, they are putting themselves at a
significant disadvantage.
So the reality is, we know that there are issues and we
know that there are problems. We have reached out on a number
of occasions to try to work with the industry, to try to work
with HUD and FHA to address some of those concerns. I would
hope that they can be addressed within HUD and FHA without
having to come to the subcommittee. That was our appeal and
that is our goal. It would be the MBA, HUD, and the nonprofit
organizations sitting down together to come to a viable
solution that helps low-income homebuyers get in their home and
stay in their home.
Mr. Tiberi. Yes?
Ms. Bowdler. I just wanted to take an opportunity to stick
up for the counseling process just a little bit.
Mr. Tiberi. You do not have to with me. It is in the bill,
required in the bill.
[Laughter.]
That is why I argue that this program is actually going to
be stronger than the 3 percent down program.
Ms. Bowdler. Housing counseling really is not a hurdle to
the process. I just want to give you an example of how this
regularly plays out. One of our groups that works in Falls
Church has been on a committee in Virginia. What happens is, a
client comes in to see them; they sit down and see them face to
face, and assess their situation. If they are mortgage-ready,
then that initial interview may be anywhere between 1 and 2
hours. They walk them through the process; they explain
everything they need to know; and then they are done.
When it takes more time is if a client is in fact not
mortgage-ready. Then a family is faced with a decision: Do I
want to work through a counseling process or do I want to go
get a less-than-quality product that will put me in a home
right now? So that is the only time that it could potentially
slow down a process, is if a client has a lot of issues.
I just wanted to point out also that that is why your
legislation is very smart and intuitive to put individual
counseling into the bill because it is much quicker. It is
going to help a client correctly identify their situation, if
this product is for them, and it is going to do it a lot
quicker, as opposed to group classes which may be offered once
a quarter. They may take place over several weeks and are not
as effective.
Mr. Tiberi. I appreciate that. Just a comment in terms of
downpayment being important. I know we all come from different
communities. In Columbus, Ohio, which is the largest city in
Ohio, the Columbus Urban League puts on a yearly home expo for
first-time homebuyers, trying to promote homeownership. Year
after year, their number one issue, barrier to homeownership,
is lack of a downpayment.
So while there are other issues, clearly in my community
the downpayment is a significant problem, which has led to
quite a bit of competition within the nonprofit community, not
just AmeriDream and Nehemiah, but a number of others who are
pretty active in Central Ohio.
I appreciate everyone being here today.
You look like, Mr. Shear, that you have a comment? Okay.
You looked like you were poised to say something.
Thank you all for coming today. This is an important issue.
As I said earlier, I hope that we all can work together to
promote something that we are all concerned about, and that is
higher homeownership and protection for taxpayers at the same
time.
The Chair notes that some members may have 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 the responses in the record.
With that, this hearing is adjourned.
[Whereupon, at 11:47 a.m., the subcommittee was adjourned.]
A P P E N D I X
June 30, 2005
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