[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



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                           WASHINGTON : 2006 
29-459 PDF

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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

                              ----------                              
                                                                   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

                              ----------                              


                        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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