[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
TRANSFORMING THE FEDERAL HOUSING
ADMINISTRATION FOR THE 21ST CENTURY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
APRIL 5, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-82
U.S. GOVERNMENT PRINTING OFFICE
30-534 WASHINGTON : 2006
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana JULIA CARSON, Indiana
WALTER B. JONES, Jr., North BARBARA LEE, California
Carolina MICHAEL E. CAPUANO, Massachusetts
CHRISTOPHER SHAYS, Connecticut BERNARD SANDERS, Vermont
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina
KATHERINE HARRIS, Florida DAVID SCOTT, Georgia
RICK RENZI, Arizona ARTUR DAVIS, Alabama
STEVAN, PEARCE, New Mexico EMANUEL CLEAVER, Missouri
RANDY NEUGEBAUER, Texas AL GREEN, Texas
MICHAEL G. FITZPATRICK, BARNEY FRANK, Massachusetts
Pennsylvania
GEOFF DAVIS, Kentucky
CAMPBELL, JOHN, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
April 5, 2006................................................ 1
Appendix:
April 5, 2006................................................ 39
WITNESSES
Wednesday, April 5, 2006
Adams, Stella, board member, National Community Reinvestment
Coalition...................................................... 21
Howard, Gerald M., Executive Vice President and CEO, National
Association of Home Builders................................... 22
Lowrie, Regina M., Chairwoman, Mortgage Bankers Association...... 24
Montgomery, Hon. Brian D., Assistant Secretary for Housing,
Federal Housing Commissioner, Department of Housing and Urban
Development.................................................... 6
Pickel, A.W. III, past President, National Association of
Mortgage Brokers............................................... 26
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 40
Ney, Hon. Robert............................................. 42
Miller, Hon. Gary............................................ 44
Adams, Stella................................................ 47
Howard, Gerald M............................................. 52
Lowrie, Regina M............................................. 61
Montgomery, Hon. Brian D..................................... 74
Pickel, A.W. III............................................. 80
Additional Material Submitted for the Record
Miller, Hon. Gary:
Statement of National Association of Realtors................ 88
Statement of National Reverse Mortgage Lenders Association... 93
Letter from National Multi Housing Council and National
Apartment Association...................................... 96
Letter from NAREB............................................ 99
Statement of Manufactured Housing Institute, with attachments 101
TRANSFORMING THE FEDERAL HOUSING
ADMINISTRATION FOR THE 21ST CENTURY
----------
Wednesday, April 5, 2006
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:05 a.m., in
the Rayburn House Office Building, Hon. Gary Miller presiding.
Present: Representatives Miller of California, Neugebauer,
Fitzpatrick, Waters, Velazquez, Lee, Miller of North Carolina,
Scott, and Cleaver.
Ex officio: Representative Frank.
Mr. Miller of California. [presiding] Good morning. The
meeting is called to order. The Subcommittee on Housing and
Community Opportunity is meeting to consider the
Administration's proposal on FHA, single-family mortgage
insurance activities. And Commissioner Montgomery, we are glad
to have you here today with us.
We welcome you today, and would like to commend you for
your work to ensure that the FHA program becomes, once again, a
viable option for low- and moderate income home buyers.
Leadership and vision has already resulted in many regulatory
improvements, and we encourage you to look at this program, and
to understand that we wholeheartedly agree with what you're
trying to do.
We think that it is underutilized. We think there is an
opportunity here to create brokers and lenders in a--where they
have the ability to participate in FHA, where we currently
think they're pretty much restricted, based on the amounts in
the past that we have been able to lend and to guarantee for.
Today, FHA is no longer a useful product for prospective
home buyers. Working families such as teachers, police
officers, firefighters, nurses, and others are faced with
situations where they are unable to own a home in communities
where they serve.
While FHA--created more than 70 years ago to meet the needs
of those underserved by the private sector--today is not living
up to its mission, and working families are left out without an
affordable alternative to finance their homes.
Statutory limitations preclude the FHA from adapting to a
rapidly changing marketplace. As a private sector mortgage
market has become more efficient, the FHA program's inflexible
rules and requirements have left it virtually irrelevant to the
financing options.
In high-cost areas, this is especially true, where
statutory loan limits eliminate the programs as an option for
the purchase of the entry-level home. Under the current limits,
FHA products are not available for home buyers in high-cost
areas of the country because the maximum mortgage limits aren't
much more than the housing prices.
Working families who need to qualify for FHA are
effectively kept out of the program because of where they live,
and where they work. In fact, I introduced H.R. 176 with Barney
Frank this past year, which would raise the limits, and, I
think, go a long way toward making the program a workable
program.
We are looking forward today to hearing your testimony on
what the Administration is planning to do. We hope you are open
to suggestions. We would like to see this program work. I
recognize Mr. Frank, who is not here. Mr. Miller you are
recognized for 5 minutes. No opening statement? Mr. Scott?
Mr. Scott. Thank you, Mr. Miller. And I certainly want to
thank you and Chairman Ney and Ranking Member Waters for
holding this hearing on the future of the Federal Housing
Administration. We should continue to evaluate the program, and
to ensure that it reaches more potential homeowners.
And lenders claim that FHA requirements to obtain FHA loans
have created a disadvantage for the loans, compared to
conventional markets. It is possible that the reduction of FHA
loans has created less competition for predatory lenders. There
have also been concerns that FHA has not adapted to the modern
condominium market.
In addition to considering policy changes to the FHA,
Congress should also be concerned with increases in the cost of
the program. The fiscal year 2007 budget proposed by the
Administration would increase the current annual loan fee of
FHA, multi-family rental housing loans, as well as loans for
healthcare facilities. Many housing associations oppose these
fees, due to their fears that these costs could inflate the
cost of housing.
The FHA programs are designed to help increase home
ownership among low-income Americans. And one way to help
increase home ownership is to lower the downpayment required
for FHA loans.
Congressman Tiberi and I have introduced the Zero
Downpayment Pilot Program Act, which would do just that. Last
Congress, a similar bill passed this committee, but was not
ultimately approved by Congress. I urge my colleagues to move
forward and support this important innovation.
While home ownership has increased in the United States,
more can be done to help bring the American dream to all
segments of our society. I look forward to the hearing from the
witnesses today to understand how the FHA can increase its
participation in the housing market. Thank you, Mr. Chairman.
Mr. Miller of California. Mr. Frank, you are recognized for
5 minutes.
Mr. Frank. Thank you, Mr. Chairman. I want to say that I
appreciate very much your role in this issue. I know the
chairman has taken the lead by introducing the bill, and I have
enjoyed working with him in the housing area, and I look
forward to our working together.
I hope that this is a bill that we will, with some
changes--not huge ones--be able to pass, and get enacted. I
think it is a good piece of legislation. I appreciate the
Administration's taking the initiative, listening to some of
the suggestions we have had, and I know, given the gentleman
from California's commitment here, we have a very good chance
on this.
And let me say that, as is often the case, you tend to take
for granted the places you agree and focus on the areas of
disagreement. So I just wanted to say at the outset, I am in
overwhelming agreement with this bill on most of the points.
There is just one area that I want to raise, and I am glad that
we're moving in this direction, but I would suggest that we
move in a little different way, and that is on the risk-based
premium for the lower-end people.
I very much applaud this. We have talked about increasing
home ownership. And, obviously, you're not going to do that
unless we reach out to people who find themselves in some
difficulty.
And you know, one of the things I want to stress, when we
got the data, people said, ``Well, it is true that if you're
black or Hispanic, the percentages show you're going to be
maybe paying more for a loan, or having more difficulty in
getting a loan. But that's not because of racism, it's because
of the economic fact.''
Well, having said that, we haven't solved the problem.
Explaining that racial disparity is, in part, because of
economic disparity doesn't mean we can all go home for dinner.
It means that we then look at ways of dealing with that
economic issue, because having this kind of racial disparity in
access to home ownership isn't fair, and it's not healthy for
our society and the kind of society we want to continue to
build. And FHA, obviously, gives us a chance to deal with that.
My only concern is--and I appreciate when you say, Mr.
Secretary, that the risk-based premium we will be charging
people in the lower-end would still be lower than they would
get in the private market. And as you say on page four, ``The
higher premiums that FHA will charge some types of borrowers
are still substantially lower than they would pay for sub-prime
financing,'' and I think that's a good thing.
But I think that they could be even lower. Here is the
deal. Obviously, in extending these loans to people who would
otherwise be into the sub-prime market, we are assuming that
the great majority of them will be able to pay their loans.
Otherwise, you wouldn't get into it. What we are saying is that
there will be a higher percentage of default there.
So, the question is, okay, we are going to extend this, and
a percentage of the people who get these, we know, will default
because of their economic circumstance. But most of them won't.
So then the question I would pose in public policy terms is
this. Who should subsidize the fact that we are going to be
lending money to people where there is a higher rate of
default?
And my answer is that we should not ask the people who are
not going to default in this stratum to subsidize the people
who do. Let's subsidize them from somewhere else.
In other words, let's say to the low-income people, ``Okay,
we're going to lend you the money, and yes, some of the people
who borrow are going to default in higher numbers, and we need
to find that somewhere.''
But why not cross subsidize? I don't think we need to look
at this and say, ``Each segment of the market has to be
economically self-sufficient,'' especially since, as I read the
budget for this bill, the project is that if we were to pass
the bill exactly as is, it would be $845 million per year, I
assume, in increased revenue. Although, in our budget terms,
revenue is called a negative subsidy. That is, we are--negative
subsidy means we are sucking money out of the borrowers, rather
than giving it to them.
And I think it's a good idea for us to be able to raise
some more money. But it's obviously more than we need. So the
one point of difference I have--and I have spoken to the
gentleman from California about this--is, look, I think it's a
very good idea to try and reach out to this low-end segment,
and it will help us in the predatory area.
Actually, we're working on sub-prime lending, and predatory
lending, but I'm a great believer in capitalism. One of the
best ways that we can get the private market to lower the rates
it charges sub-prime people is to compete with them, by having
an alternative place where they can go. I am all for that.
The only thing I think is--and I understand why the private
market would have to charge the low-income borrowers more than
high-income borrowers for interest, because of the risk of
default. And let's be clear what we're talking about. We are
saying given the way a rental--a loan market works, the poorer
you are, the more you're going to have to pay for your house.
Not a happy situation. We understand that's unavoidable in the
private market; but it's not unavoidable in the public sector.
We, the Federal Government, have the ability, I think, to
say, ``You know what? We are not going to charge low-income
people more for the loans, because some of them are going to
default. We are going to find a way to make''--we want to take
the risk of that default, and we will find the funds to take
care of that somewhere else.
So, with that one difference--and I think we need to work
it out, because I don't want to destroy flexibility and the
staff of the committee have pointed out there are some broader
considerations here. But if we can find a way to protect the
low-income borrowers from having to pay more for the loans,
then I think we have a bill that will be, I hope,
overwhelmingly supported, and I appreciate the Administration's
putting a very pro-housing responsible bill together. Thank
you, Mr. Chairman.
Mr. Miller of California. Thank you, Mr. Frank. The bottom
line is to make the FHA program a viable mortgage option. We
must ensure that the program allows for the purchase of entry-
level homes.
This includes not only the elimination of the geographic
barriers to utilize the program in high-cost areas, but also
facilitating the purchase of entry-level homes including condos
and manufactured housing. These forms of housing are an
affordable option in entry level home ownership, and they
should be included under this program, if we truly want to make
it help families climb the rung on the ladder of home
ownership.
In addition to reforming what can be purchased in the
program, we must also consider the competitiveness of FHA
products are currently structured among the mortgage options
available. In other words, we must explore the reasons that the
program is being utilized--its available mortgage products for
a potential home buyer. The answer is it's inflexible today,
and burdensome processes have left many in the industry
hesitant or actually unable to offer FHA products to their
clients.
Technological deficiencies must be addressed. While the
rest of the mortgage industry is electronically driven, the FHA
program remains a dinosaur, still trying to convert from a
peer-based process to an efficient electronic one. Lack of
flexibility and downpayment amounts to tremendous amounts of--
FHA used to be the best option for low- and moderate-income
home buyers, because it had the lowest downpayment requirement.
This is no longer the case.
Although the private market has developed flexible
downpayment arrangements to meet the need of borrowers, the FHA
programs' downpayment requirements are fixed to 3 percent.
While other mortgage products have recognized that the
ability to accumulate enough cash for the downpayment
assistance is universally considered to be the greatest single
barrier to home ownership, the FHA program does not offer
flexibility in the downpayment level. While the private
mortgage insurers have adopted a risk-based premium structure,
FHA does not set its insurance premiums according to the risk
of the loan. As a result, low-risk borrowers pay higher
premiums to subsidize the high-risk borrowers.
More Americans could qualify for a mortgage if their
monthly payment were lower. To make mortgages more affordable,
the FHA should have the flexibility to offer mortgages with
longer terms than the traditional 30 years. In this way,
borrowers would be able to purchase a home with a mortgage
product that is less risky than the interest-only product that
has become more popular in the housing market.
Cost-prohibitive and time consuming, financial audits and
net worth requirement limits mortgage brokers' participation in
the program. This means that FHA is not made available to some
borrowers who would get a better deal under the program, under
the sub-prime loan.
America is a home of people of different origins and
different make-ups, and we need to make sure that this program
fits their needs.
Mr. Cleaver from Missouri? You are recognized for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman. I would like to thank
the chairman and ranking member for successfully scheduling
this hearing today. And I would like to also thank our
witnesses for joining us this morning.
We face a tremendous challenge at this moment in our
Nation's history. And one of our great challenges is to provide
every American a safe and affordable place to call home.
We met last week to discuss the countless deficiencies in
the HUD budget proposed by the Administration, and we will see
tomorrow and Friday what happens to the House budget resolution
when it is considered on the Floor.
But I believe all of us agree that we have got to be
creative in finding additional ways to provide homes to every
American who needs one. Revitalizing FHA is a timely
undertaking, and I believe that we can provide more housing to
low- and moderate income Americans if FHA is in full operation.
FHA, created in 1934, at the very height of the Depression, was
a very valuable tool then, and I think it can be again.
I met last week with a Missouri brokers association, and
they mentioned some of the remarks that you recently made about
FHA. And they are concerned today that the FHA program, which
once had 40 percent of the market share, now only has 3
percent. I don't know if those numbers are accurate or not.
That's what they gave me.
And it seems to me that FHA could help us address some of
the pressing housing needs, particularly for low-income
Americans. And so, I look forward to your comments today, and
for an opportunity to exchange some views with you. Thank you,
Mr. Chairman.
Mr. Miller of California. Thank you. For the record, I
would like to enter the statements of the National Association
of Realtors; the Manufactured Housing Institute; the
Manufactured Home Ownership Association for Regulatory Reform;
the National Reverse Lenders Association; the National Multi-
Housing Council; and the National Association of Real Estate
Brokers Investment Division. Without objection, those are
entered into the record.
Brian Montgomery is the Assistant Secretary of Housing for
HUD. He is the Federal Housing Commissioner at the Department
of Housing and Urban Development. Prior to joining HUD, Mr.
Montgomery was the Deputy Assistant to the President at the
White House.
From 1995 to 1999, he served in the administration of
Governor George W. Bush as communications director at the Texas
Department of Housing and Community Affairs and the Texas
Department of Economic Development. Welcome, Mr. Montgomery.
STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, ASSISTANT
SECRETARY FOR HOUSING, FEDERAL HOUSING COMMISSIONER, DEPARTMENT
OF HOUSING AND URBAN DEVELOPMENT
Mr. Montgomery. Thank you very much. Thank you, Chairman
Miller and Ranking Member Waters. I would also like to thank
Ranking Member Frank for inviting me here today to testify in
the Administration's FHA Modernization Act. I ask that my
written testimony be entered for the record.
The bill itself is really very simple, the proposal
straightforward. It does just what the name suggests. It
modernizes the 72-year-old Federal Housing Administration, and
restores the agency to its intended place in the mortgage
market. Nothing more, nothing less. Yet the impact of this
bill, we believe, will be tremendous. And let me explain.
FHA was created in 1934 to serve as an innovator in the
mortgage market, to meet the needs of citizens otherwise
underserved by the private sector, to stabilize local and
regional housing markets, and to support the national economy.
This mission is still very relevant, perhaps now more so than
ever. And most of us would agree that FHA can and should
continue to play its important role.
Unfortunately, over the last several years, the housing
agency that helped bring the Nation out of the Depression, the
agency that helped our grandparents and helped our parents buy
their first homes, the agency that stood by the oil States and
the rust belt States in the 1980's was falling way behind.
For example, over the last 5 years, in Congressman Tiberi's
district, FHA volume dropped 44 percent. For Congresswoman
Harris, volume dropped 74 percent. And for Ranking Member
Waters, volume has all but disappeared, declining 98 percent.
Without a viable FHA, many home buyers, first-time home
buyers, minority home buyers, and home buyers with less than
perfect credit, were left with fewer safe and affordable
options. Many home buyers turned to high-cost financing, and
non-traditional loan products to afford their first homes.
All that said, the FHA Modernization Act is part of the
solution. FHA reform is designed to give home buyers who can't
qualify for prime financing a choice again--we believe, a
better alternative.
Now, let me explain the simple changes we're proposing. For
one, we are proposing to eliminate the complicated downpayment
calculation, and the traditional cash investment.
Last year, 43 percent of first-time home buyers purchased
their homes with no downpayment. Of those who did put money
down, the majority put down 2 percent or less. The downpayment
is the biggest barrier to home ownership in this country, and
this Act proposes to permit borrowers to choose how much to put
down, from no money down to 1- or 2-, or perhaps even 10
percent.
The bill also proposes to provide FHA the flexibility to
set the FHA insurance premiums commensurate with the risk. We
would charge lower credit risk borrowers a lower insurance
premium and higher credit risk borrowers a slightly higher
premium.
With this risk-based premium structure, we can reach hard-
working credit-worthy borrowers such as store clerks,
mechanics, librarians, bus drivers, and social workers, who,
for a variety of reasons, do not qualify for prime financing.
The higher premiums that FHA will charge some types of
borrowers are still substantially lower than they would pay for
sub-prime financing.
Another change proposed in the FHA Modernization Act is to
increase our loan limits. The loan limits in the high-cost
areas would rise from 87 to 100 percent of the GSE conforming
loan limit, and in lower cost areas, from 48 to 65 percent of
the conforming loan limit. This change is extremely important,
and crucial in today's housing market. Because of rising costs,
FHA insured only 5,000 loans in the entire State of California
last year, compared to 127,000 in 1999.
We are also proposing some changes to specific FHA
products, insuring mortgages on condominiums under its standard
single-family product, modernizing the Title I manufactured
housing program, and expanding the home equity conversion
mortgage program, also known as reverse mortgages.
Let me assure you that the changes we are proposing will
not increase the overall risk of the MMI fund, or impose a
potential cost on taxpayers. We are proposing to continue
managing the fund in a financially prudent manner, beginning
with a change in FHA pricing to match premiums with risk.
I know I have talked a lot here today, but I want to convey
to you just how passionate I am about the proposed changes.
When people ask me, ``Why are we proposing these changes,'' I
tell them these exact words: families need a safe deal at a
fair price. Families need a way to take part in the American
dream without putting themselves at risk. Families need FHA.
I want to thank you again for providing me the opportunity
to testify here today on this Act, and I look forward to
working with all of you to make these reforms a reality. Thank
you.
[The prepared statement of Mr. Montgomery can be found on
page 74 of the appendix.]
Mr. Miller of California. Thank you. Would HUD support
affordable housing goals for FHA programs similar to Fannie Mae
and Freddie Mac?
Mr. Montgomery. Well, certainly, Mr. Chairman, all of our
housing products serve families of lower to moderate incomes.
If you're asking would we put similar targets on FHA? I'm
sorry?
Mr. Miller of California. Yes.
Mr. Montgomery. Okay.
Mr. Miller of California. Yes, similar targets.
Mr. Montgomery. That's--
Mr. Miller of California. California and high cost areas--I
know in Barney Frank's area and in mine--FHA doesn't exist. In
Maxine Waters area, which is pretty much contiguous with mine,
it doesn't exist because the limits are so low, that we just--
nobody can buy a house that cheap in the marketplace. So FHA is
completely driven out of the marketplace.
We just reformed in last year's bill--if it ever gets out
of the Senate--on GSE's, where they can go into high-cost areas
like ours, and they can compete up to medium, 150 percent above
their normal loan limit, but not to exceed medium. I mean, we
need something like that for FHA and high-cost areas, because
it just isn't there.
Mr. Montgomery. And certainly, Mr. Chairman, that's what
the bill proposes. And probably a really striking example is
you look at Ranking Member Waters's district. In the year 2000,
we made 2,200 loans in her district. Last year we did 34. We
are not a product in the Nation's most populous State.
Alternatively, because of housing prices, we are an
extremely viable product in the Nation's second largest State,
in Texas. But right now, unless you live in the Midwest,
certain parts of the lower East Coast, and in the South, we
just can't serve lower to moderate income home buyers.
Mr. Miller of California. Yes.
Mr. Montgomery. And we just think it's time to reform the
conforming loan limits.
Mr. Miller of California. There are some who have tried to
make the argument that what we're trying to do will hinder the
ability of the conventional marketplace to work with minimal
competition from FHA. I disagree with that. What's your
opinion?
Mr. Montgomery. Well, again, we are a mortgage insurance
product. We don't loan money.
Mr. Miller of California. No, you don't, but you guarantee,
which enables people to be able to get into a low-cost loan.
Mr. Montgomery. Absolutely. We have a 100 percent iron-clad
guarantee. Some people have said that we're trying to compete
more with the conventional market. Our Congressional mandate
from the 1930's is not obsolete. We think it's more important
today than it was even back then. We just think the product is
a little obsolete and needs to be modernized.
Mr. Miller of California. Well, the jumbo marketplace, or
conventional marketplace, has grown tremendously, because
they're picking up a sector that you're not in, GSE's were not
in.
And what practical impact do you think that the loan limit
increase will have on home buyers in high-cost areas to be able
to purchase an entry-level home? Do you see a tremendous
benefit by your changing your way of doing business?
Mr. Montgomery. Yes, Mr. Chairman. I will give you a good
example. And I will use California and even Massachusetts
again. If you can't--by the way, if you can qualify for prime
financing, God bless you, that's a great thing. And we want
everyone to do that. But if you can't do that right now, if
you're in a high-cost State, and if you--if you're a lower
income home buyer with a few blemishes on your credit, your
only option is sub-prime lending.
Mr. Miller of California. Yes.
Mr. Montgomery. Which, inherently, is not a bad product.
Mr. Miller of California. More expensive--
Mr. Montgomery. The way that it was used is bad. So that
leaves what is a very safe product, which has one of the best
loss mitigation programs around, out of the playing field in
the Nation's most populous State.
Now, if you look at Marin County in the Bay Area last year,
we did a total of six loans. Five of those were reverse
mortgages. You go to Webb County, Texas, which most people have
never heard of, unless you're from Texas. We did over 1,500
loans.
That, to me, says we need to do something. And it doesn't
matter whether I'm visiting with a Democrat Member or a
Republican Member. If you're in a high-cost State, they all
tell me, ``Do something about the loan limits,'' and that's
what this bill proposes.
Mr. Miller of California. And there is a perception out
there that somehow the Federal Government is subsidizing
individuals with these loans. Would you please address that?
Because this turns revenue into the general fund.
Mr. Montgomery. Well, and there are no taxpayer funds used
in that. In fact, other than working capital fund monies and
salary and expenses money, FHA doesn't receive any
appropriation. We're a self-supporting entity. It's supported
by the people who pay the insurance premiums, and that's the
way it's been for 72 years.
Mr. Miller of California. What's the current health of the
FHA mutual mortgage insurance fund?
Mr. Montgomery. Well, Congress has a mandated 2 percent
capital reserve. Right now it's a little over 6 percent. So we
are financially sound. We have had clean audits the last 12
years, and the fund is financially sound.
Mr. Miller of California. How do you ensure proper
underwriting?
Mr. Montgomery. Well, we have some of the best underwriting
standards around. And bear in mind, since we are an insurance
premium, we guarantee the product. It allows families to have a
more affordable interest rate. And it's a very transparent
product, unlike what you see in some predatory lending. And we
think it's a darn good product. It's just time to modernize.
Mr. Miller of California. So you can justify what we're
attempting to do here?
Mr. Montgomery. Yes, sir, absolutely. We feel very
passionate about this, and believe it's good public policy, and
long overdue.
Mr. Miller of California. Thank you, sir. Mr. Frank, you
are recognized for 5 minutes.
Mr. Frank. Thank you. Mr. Secretary, I really appreciate
your elaboration on the high-cost situation, because we have
people, I think, quite ignorantly--maybe out of good faith, but
ignorantly--criticizing the increase in the loan limits, and
saying, ``Well, you're moving away from the segment you're
supposed to serve.''
And I think you made it very clear that if we don't
increase the loan limits in much of the country, you cannot
serve that segment, that we are talking not about getting to a
higher-end in the income spectrum, but reaching precisely the
part of the spectrum that FHA is supposed to reach in places
where it is now priced out of the market.
I was particularly struck by your comments about our
colleague from California, Ms. Water's, district, the fact that
FHA has virtually disappeared. So that when we talk about
raising the limits, we're still not going to hit Santa Monica.
You're still not going to hit, you know, much of the Bay Area.
We are not talking about reaching the high-end areas in
California or in Massachusetts. There are parts of my district,
the City of Newton, where I live myself, where I don't think
the limit is going to come close, even at the higher level, to
them. But there are other parts of my State, and of California,
where it will. So I really appreciate that, and I hope we will
hold firm on this.
And there are some competitors who don't like the idea. But
again, we want to be clear that we are not changing the mission
of FHA.
And is it also the case, by every projection we have, that
if you are able to do that, if you are able to go with a higher
loan limit based on the house price, that this will increase
the negative subsidy, i.e., make money for us?
Mr. Montgomery. Well, as you know, Ranking Member Frank,
we're required to operate in a negative subsidy environment.
And we think by, again, spreading the risk out, we can continue
to operate in this environment. And we just think that it's
time to price the product, which we think is a good product,
commensurate with the risk, and that's what this bill does.
Mr. Frank. I appreciate that. The other thing I would say
is this. You know, some of what we favor is, I think, going to
increase the return to the Treasury, just by increasing the
amount of volume.
But we have a fund that is now in an actuarially sound
position. Is that correct?
Mr. Montgomery. Yes. Yes, sir, it is.
Mr. Frank. All right. And it is returning over and above
what's needed to be actuarially sound, some surplus to the
Treasury?
Mr. Montgomery. That is correct.
Mr. Frank. Okay. Well, in that case, that's why I think the
gentleman from California and I are somewhat skeptical that you
need all of the increases that are in this bill.
I mean, when we have got an actuarially sound fund, and
it's already making money, an additional $845 million seems to
me to be more than we need on this program. And that's why, in
particular, I will be working to try and--I don't want to take
away the flexibility for pricing.
We don't want to have a situation where things could go bad
and we would be in some trouble. But particularly at the low
end, I want to stress again that I think this is a very good
forum now in which we, the Federal Government, can help low-
income people.
And again, we are agreeing that when you extend the loans
downward, you are going to hit people who are higher risk, not
because of any moral deficiency on their part, just because
they have less money, they have less margin, etc. And then the
question becomes, for public policy, who should subsidize them?
And again, I think that's the way to focus it. And I think
the answer should be we that do not expect the majority of
lower income people who would be reached here to have to bear a
lot of the burden of the subsidy for the minority who aren't
going to pay up. Let's find another way to do that. We have
budgetary flexibility here, because we're in the FHA structure.
And I am pretty sure there is no requirement that any
particular class of loans has to bottom out, has to be in
overall balance. So I would look very closely at that.
And yes, it would be nice if you made a little bit more
money. Frankly, some of us believe that the surplus that is
generated, while in budget terms it's not a free gift to use it
for housing, it justifies housing.
That is, when you look at the housing budget of America, as
you look at the amount we expend from the Treasury and HUD, we
ought to keep in mind that we are making some money as an
offset to that in the housing area from FHA. And while it
doesn't make it a free gift of money in the pay-go sense, it
does, I think--it should have some public policy goals.
So, I again want to thank the Administration. This is a
very good bill, and I hope we can move forward on it with the
one change that I discussed. And as I said, I particularly
appreciate--and we will be talking more about--your helping us
justify the high-end.
I guess the best way to put it--to go back to the high-end
thing--if you believe that there ought to be economic
guidelines for where the FHA can lend, then you ought to
believe that we adjust those for region. The notion that you
would set a limit based on the cost of housing, and ignore the
very wide variations in the cost of housing, just doesn't make
any sense economically. Thank you, Mr. Chairman.
Mr. Miller of California. Thank you. Mr. Frank, when this
program changes, there are areas of San Francisco, like the
Bayview Area Redevelopment Sector, that are going to
tremendously benefit from this program. Ms. Lee, you are
recognized for 5 minutes.
Ms. Lee. Thank you very much. Good to see you. And let me
just ask you, going to the Bay Area, of course my area is
Oakland, the East Bay, across from San Francisco. And right
now, the median price of an existing single-family detached
home, just in California in general, is about $551,000. That's
a 13 percent increase.
And of course, the median price of homes in my county, in
Alameda County, during January of 2006 was $570,000. Now,
that's $570,000 for a small house. The FHA loan limit, I
believe, in my district for a one unit house is about $362,000.
So, I think we all agree that these loan limits need to be
raised.
But I'm not sure, with that big of a gap between the median
price and even the loan limit being raised, what in the world
are we going to do to ensure that people who deserve to
purchase and participate with FHA will be eligible?
I also wanted to know just--I believe in this legislation
you presented--and this is the second question--that there is
no provision for fair housing and non-discrimination reforms in
the FHA program. And I'm wondering what you're doing to ensure
that all lenders are in compliance with fair housing laws, and
if you have a breakdown of the demographics of FHA homeowners,
specifically African American, Latino, and Asian Pacific
American homeowners, under the FHA program.
Mr. Montgomery. Thank you very much for your question. And
I will answer the last part first.
We work very closely with Assistant Secretary Kim Kendrick
in fair housing issues, and I think FHA is a leader in that
area, and especially as we're celebrating Fair Housing Month in
the month of April.
Relative to the conforming loan limit cost, we--
Ms. Lee. Let me just ask you though, Mr. Secretary, in this
legislation, in the legislation that's being proposed,
shouldn't there be some provision reaffirming that?
Mr. Montgomery. We will make sure it is. The intent--and I
will go back and look a the legislation--is not to supplant
what is in there now, but we will certainly--and I give you my
word--to make sure that is in there.
Ms. Lee. Great. And we will work with you on that also.
Mr. Montgomery. Thank you.
Ms. Lee. Thank you. Okay, continue.
Mr. Montgomery. But relative to the conforming loan limits,
I am often struck by the fact that in the Nation's most
populous State, the median home price is north of $550,000. In
the second most populous State, Texas, it's only about
$175,000.
Now, there are plenty of homes--right now we can't exceed
$362,000--but by going to 100 percent, we can go to $417,000.
And while we may not be able to get parts of the Bay Area,
there are certainly other parts of California and other high-
cost States. There are a lot of homes being built between
$362,000 and $417,000, which is a 100 percent limit.
It's difficult for us, speaking for FHA, to address beyond
that. But we certainly recognize that it's a concern in many
parts of the country.
Ms. Lee. But let me ask you. It is a concern. And you just
laid out what the issue is, and what the problem is, and what
we're going to see, of course, is de facto segregation.
You're going to see areas such as the Bay Area become upper
middle income white areas. You're going to see people moving,
which we're seeing now, out of places such as Oakland and San
Francisco, primarily minority potential homeowners, minority
constituencies and populations leaving. And we're going to have
a major crisis on our hands, in terms of the further
segregation of America, based on, now, the fact that people
cannot qualify because we know, historically, income levels are
lower in communities of color, and they can't afford these
houses.
And so, it's a vicious cycle. And how do we break that
cycle, is what I'm asking you.
Mr. Montgomery. Well, speaking for FHA, it's difficult for
us to address people who--where home prices exceed what we are
required by law to stick to.
And I certainly agree with your premise, that there is a
concern about construction of affordable housing in many parts
of the country. And I would say that's most pronounced,
unfortunately, and probably, in your district, that what sort
of incentive is there for people to build homes of more
moderate cost, versus higher-cost homes.
There are certainly regulatory barriers, local codes that
certainly drive up the cost. Real estate values just continue
to increase in many cases out of sight, to be very blunt.
But we think, relative to low- to moderate-income home
buyers, by making this step at least to 100 percent, that we
can at least serve more families who are not being served right
now, or at least serve them with a much safer product.
Mr. Miller of California. The gentlelady's time is up. One
of the largest originators of loans we have out there is the
mortgage brokers. Yet, in many cases, they are not allowed to
offer FHA type of loans. Are you addressing that in any way?
Mr. Montgomery. We have been working very closely with the
mortgage brokers and other groups.
In fact, my first day on the job, when we realized we
needed to fix FHA, we sat down and met with every group, from
low-income housing advocates to realtors, home builders,
brokers, and bankers.
And I know some of them have concerns about the audit
requirements, and we are in communication with them to see if
we can resolve that, because they are originating between 60
and 67 percent of all loans right now, and I don't like using
this term, but they are, in effect, our sales force.
Mr. Miller of California. Yes, they are.
Mr. Montgomery. And--
Mr. Miller of California. We had a hearing last year when
the bankers came forth and testified that they are one of their
major resources in processing loans, and yet they are not
really able to work in the FHA arena.
Mr. Montgomery. Well, there were some rather onerous
process requirements, Mr. Chairman, that from day one we
immediately began to modernize. And those were roundly
applauded by the mortgage brokers and by the mortgage bankers,
just streamlining our procedures.
Also, we had some fairly onerous appraisal requirements.
And we were even, as you know, one of the last entities
requiring thick case binders full of home documents to be
mailed back and forth between our home ownership centers and
brokers and lenders.
Mr. Miller of California. Yes.
Mr. Montgomery. And if there was one little error, we had
to FedEx it back, and it got very expensive. We are now
requiring them to do that--or saying that they can do it
electronically.
So, a lot of those have been applauded by the industry,
including the mortgage brokers.
Mr. Miller of California. Well, in the vein of what Ms. Lee
was talking about, about low-income families having an
opportunity to go and buy a home in the marketplace, many--in
many cases, mortgage brokers have more time and the ability to
represent a low-income family, representing them in a lending
environment. And I think that that would go a long way toward
addressing these concerns.
Mr. Montgomery. Yes, sir.
Mr. Miller of California. Ms. Velazquez, you are recognized
for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Commissioner
Montgomery, this committee approved zero downpayment
legislation last year that included mandatory counseling.
Although this legislation has not passed Congress, does HUD
plan to take the advice of this committee and require housing
counseling for loans that require no downpayment?
Mr. Montgomery. Well, we certainly think home buying
counseling is a very good concept, and a very good program. As
you know, this Administration has increased home buying
counseling funds exponentially over the last 5 years.
Now, as you know, this legislation--I haven't used the term
zero down, because zero down would now become one of several
options that we could offer low- to moderate-income home
buyers. And again, if we could price it commensurate with the
risk, look at the borrower's portfolio, they may qualify for
zero down, and maybe a half percent down, and maybe 1-, 2-, or
3 percent.
So, we're not zeroing in on just zero down, because there
may be, again, a whole range of products that family--and some
families may not want to put down more money. They may want to
save it to furnish the home, or something of that manner. The
key thing here is flexibility.
Ms. Velazquez. But even if you don't want to call it zero
down, my question to you is whether you're going to take the
advice of this committee and include or require housing
counseling for those borrowers, especially if we want to tackle
the issue of foreclosure, predatory lending in our communities,
low-income communities, we need to educate those consumers.
Under this proposal, would you intend in any way to make
sure that borrowers will be connected to that type of housing
counseling?
Mr. Montgomery. Well, that is certainly something that we
can consider, now that we have moved away just from a zero
down. It wasn't our intent to not offer families advice on the
home buying process. But certainly it's something we can look
at.
And I want to add to that, we also did not have a separate
FHA website or a call center, which we now have. And we think,
to the degree that we can't sit down and do one-on-one
counseling, it is about time that FHA had the ability for
people to access information on the Internet, or pick up the
phone and--
Ms. Velazquez. But in low-income communities, people might
not have access to technology.
Mr. Montgomery. And that's a very good point. We have, I
should add, begun a marketing campaign designed specifically at
Latino and African American communities in 60 communities
across the country, and we are starting the effort,
Representative. And we hope with this legislation, to do even
more.
Ms. Velazquez. Okay. The FHA is generally targeted for
minority, low-income, and first-time home buyers. These
borrowers will likely be charged higher premiums under a
differential mortgage premium system.
Can you explain how changing to this system, and imposing
higher rates, will not push some borrowers out of the program,
and you will be then defeating the purpose?
Mr. Montgomery. I think it's important to put into context
the amount between the varying percentages of the mortgage
insurance premiums.
I will use an example, a $100,000 home, which while not
readily available up here, it is in other parts of the country.
The payments on that home would be about $674 a month for a
family that pays a 1.5 percent FHA mortgage insurance premium
and a .5 percent monthly premium. If we charge that family the
maximum of 3 percent, again with the .5 percent annual premium,
the payment only goes up $19 a month.
Now, compare that to what that family would pay with a
standard 9.5% sub-prime loan. The payment is $160 more a month.
So, even by going up--again, we have to keep a capital reserve
that Congress mandates--even going to the extreme example of 3
percent, which is the cap we have been working with--it's still
a far, far better product, a safer product with no pre-payment
penalties, than that family would get versus the sub-prime
product.
Ms. Velazquez. I understand that. But for some, and too
many families in this country, $20 is a lot. It will make the
difference between purchasing a prescription drug or putting
food on their table. So that's my point. Thank you.
Mr. Miller of California. Thank you. FHA proposals contain
many options, but condominiums seem to be one that is, often
times, overlooked. And one of the types of housing especially
attractive to first-time home buyers, is the condominium. Can
you please explain how the proposal would make it easier for
buyers to use FHA to buy a condo?
Mr. Montgomery. Well, condominiums have been in the FHA on
the multi-family program side for a number of years. And we
think it's time to move them into the single-family side, and
to put all the single-family programs, including condominiums,
under the MMI fund.
Mr. Miller of California. So they will all be single-
family, attached and detached, under one category, then?
Mr. Montgomery. That's correct. It will all go under single
family, including condominiums, and be operated under the MMI
fund, instead of the--
Mr. Miller of California. So the loan, then, would be
pretty much pushed by FHA as you would single-family detached?
Mr. Montgomery. That's correct. And as many condominiums
now are springing up in areas closer to city centers, they
become more viable options for a lot of families. And again, we
just think it's time to modernize it, and make condominiums a
part of the single family product side.
Mr. Miller of California. Great, thank you. Mr. Scott, you
are recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. Mr. Montgomery, the FHA
is a product of the Franklin Delano Roosevelt Administration.
It was birthed during the Depression to serve those needs that
were not met by the private sector, correct? And recently, the
FHA loans have started to decline. Is that--when did that
decline start?
Mr. Montgomery. Well, FHA volume has always ebbed and
flowed, depending on factors, certainly to include economic
factors. But the percentage of our market share has been
steadily declining for about the last 6 years.
Mr. Scott. Was there any given--up to the last 6 years,
it's been going on since 1934. So from 1934 to about 2000,
we're moving along pretty good, up and down, ebbing and
flowing, but pretty good. What happened 6 years ago? Was there
some economic activity, some event that happened that started
this downward slip?
Mr. Montgomery. Sir, I would say a lot of our traditional
borrowers that would have gone with FHA, if you look at the
data and statistics, they moved toward sub-prime loans.
And I can't speak for the past, but I can say you've got a
perfect storm, sadly, of an outdated FHA product, and not a lot
of consumer awareness of the product. You had onerous
requirements. You had outdated technology that we were using.
And a lot of realtors and lenders didn't want to use FHA. We
were cumbersome and unwieldy, and we're working to change that.
I didn't blame them for not wanting to use the product. We
didn't make it easy on them.
And between other products marketing themselves well, that
we weren't able to do, a lot of families made decisions, they
wanted to buy a home--God bless them for doing that--but our
concern is that some of those families made poor decisions.
Mr. Scott. And you believe passage of this legislation
you're proposing and supporting would help put us back on the
right track, moving upward?
Mr. Montgomery. Absolutely, sir.
Mr. Scott. Would moving FHA to a risk-based pricing formula
make it closer in nature to the sub-prime market?
Mr. Montgomery. Sir, just about the entire mortgage
industry, and other forms of insurance--which is what we are--
price based on risk.
One thing I think it's important to note is that, yes, for
some, the premiums will go up. But for a lot, they will go
down. And we will look at the totality of a borrower's profile:
their income; their debt; their FICO score. You have a lot of
immigrant families who don't have a lot of credit, but perhaps
have a lot for a downpayment. Now we can price a product to
their risk, and it may be, based on their downpayment, they pay
very little insurance premium.
Right now, it's a one-size-fits-all that drives away many
borrowers. And we think it's just time to modernize it, and
bring it into this century.
Mr. Scott. Do you and your Administration support the
Tiberi-Scott bill for zero downpayment? It is that downpayment
that is the most cumbersome, difficult stumbling block to home
ownership. And Congressman Tiberi and I have been working on
this bill, and it has got some good movement. Do you all
support this bill?
Mr. Montgomery. We absolutely support the concept of zero
down. And this legislation, though, goes a little step further,
in that, again, pricing it to a family's risk or profile, it
may be that they can qualify for a half percent. And as I
mentioned previously, maybe a family who could go zero down
decides, ``Well, we would rather keep some of the money to
furnish the home, or buy a refrigerator,'' or whatever. And
again, we can have that flexibility that we don't have today.
So, we certainly support that concept, Congressman. But I
also think that by implementing this bill, we can have a whole
range of downpayment scenarios, again, to match a family's
profile
Mr. Scott. Okay. Let me just, for--go back for a minute on
the condominiums, because that is a big issue. Can you give us
a little bit more information on the demographics served by the
condominium market?
Mr. Montgomery. Well, sir, I can get you more specific
information after this as to the demographics. But we think
it's time to modernize, since condominiums are increasing
dramatically as an option for families, especially those who
want to continue to live near city centers. We just think it's
time to modernize, to be able to offer a more affordable
product to many families who choose to live in condominiums.
But we can get you the demographic--
Mr. Miller of California. The gentleman's time is expired.
Thank you.
H.R. 4804, sir, a bill introduced to modernize FHA Title I
manufactured housing program, was recently referred to this
committee. The Administration's proposal also contained a
number of Title I reforms, with the goal of making the purchase
of a manufactured home more affordable and increasing Ginnie
Mae's participation in Title I programs. What Title I reform
does the proposal address?
Mr. Montgomery. Well, for one, we think moving away from
the 10 percent portfolio--right now, a lot of--we can't pay
claims that exceed the 10 percent of a lender's portfolio. We
think it's time to move away from that, to make it more mirror
Title II.
We think by raising the prices--right now, for a
manufactured home, you are limited to $48,000. The median price
for a manufactured home today is a little more than $58,000. So
we would propose to raise the conforming loan limits for
manufactured homes on a lot, or separate, or even for property
improvements. And we just think it's time to modernize Title I,
as well.
Mr. Miller of California. And you don't think this creates
a greater risk for FHA?
Mr. Montgomery. No, sir. We don't. As a matter of fact, we
think that the more it could mirror Title II, the less risky it
would be.
Mr. Miller of California. Okay.
Mr. Montgomery. I mean, volume right now we're doing on
Title I, because interest rates are so high, that there is no
definite guarantee that we're going to pay the claim, and--
Mr. Miller of California. I agree. I just wanted to hear
you say it, that's all.
Mr. Montgomery. We're doing less than 2,000 loans now. The
volume has all but disappeared.
Mr. Miller of California. Yes.
Mr. Montgomery. And 22 million Americans live in
manufactured homes. That's 8 percent of our population. We
think we need to make it a more affordable product, especially
for families who live in rural communities.
Mr. Miller of California. I agree. Mr. Cleaver, you're
recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Mr. Montgomery,
first, if you could, tell me, please, what the FHA share of the
market is, presently.
Mr. Montgomery. It's somewhere between 3.25 and 3.75
percent.
Mr. Cleaver. Well, are the mortgage folks accurate that FHA
once held 40 percent of the market?
Mr. Montgomery. That would probably seem a little high to
me. Historically, over the last 20 years, it has fluctuated.
But I don't recall, in the last 20 years at least, it's been
higher than about 19 percent.
Mr. Cleaver. So, if this legislation is approved, do you
think that FHA would get a larger share of the market?
Mr. Montgomery. I--as a public servant, I hate using the
term market share, because it seems like we're a corporation,
but it is a good descriptive term.
If we help one more family, sir, with a safer product at a
fair price, then we will be satisfied. If that increases the
so-called market share, great. But we are doing this to
position it as a product, to modernize it, and to make it a
more viable option for lower-income families. And we think by
doing that, sir, our percentage of the market will more than
likely increase.
Mr. Cleaver. Well, the purpose of the question actually is
designed to find out--there are some on this committee and in
this Congress who believe that Fannie Mae and Freddie Mac's
portfolio has grown too large, that it's too large. I'm not one
of them, but there are those who believe that.
And so, I'm wondering whether or not the FHA revitalization
would relieve Fannie Mae and Freddie Mac of this--or reduce the
size of their portfolio. I mean, if you're going to revitalize
and capture a larger share of the market--and I can see that
you're trying to stay away from a percentage that you think you
might capture of the market--but I'm also interested in whether
or not a not-intended consequence of this legislation might be
to reduce the portfolios.
Mr. Montgomery. Well, we will certainly not change the
housing goals for the GSE's, affordable housing goals, sir. We
have a legislative mandate to do those, and those wouldn't
change. FHA traditionally serves a lower-income/higher-risk
borrower than the GSE's do. And I don't--while there could be
some minimal overlaps there, I don't see that being an
unintended consequence.
Mr. Cleaver. Well, yes. I'm not making a judgement on
whether it's good or bad, I'm simply wondering if we can reduce
the portfolios of the GSE's. I mean, if you're going to--you
expect the market to--your market share to rise, right?
Mr. Montgomery. Yes, sir. That's our goal, to serve more
borrowers.
Mr. Cleaver. Okay. So if it rises, do you think that that
would reduce the GSE's portfolio?
Mr. Montgomery. More than likely not, sir. But I would say
that more families, if you look at the data over the last
several years, most of the traditional FHA borrowers--by the
way, if some of them went conventional, great; that's what we
all want--but looking at the data, most of them were steered
toward sub-prime products. And that market, as you know, has
exploded, exponentially.
Mr. Cleaver. Well, what do you--is there--what do you
consider to be--I mean, somewhere in your comments you made a
statement about some home--oh, okay, I'm sorry. The primary
concern with the risk-based pricing approach, or that ``FHA
will target people who shouldn't be homeowners.''
When you say, ``shouldn't be homeowners,'' are you speaking
to their income level? To their credit? What are you--who are
the people who should not be home buyers?
Mr. Montgomery. Sir, one of the biggest concerns we have
are the amount of mortgages that are going to reset later this
year and into next year. It's just shy of $2 trillion. And as
many arms reset, or other variables occur, we are concerned
that some families who got into a loan on day one at ``X''
number of dollars per month, can now no longer afford the home,
once that interest rate resets. And that is something of great
concern to us.
And perhaps, if this legislation goes through, we may be
able to be an option for many of those families to refinance
into an FHA product.
Mr. Miller of California. The gentleman's time has expired.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Miller of California. A good question, Mr. Cleaver. I
think part of the problem we have is that the conventional
market has grown dramatically, and GSE's have not participated
in that growth, because they have been limited on the
percentage of loans they can make, especially like in high-cost
areas. They're just not there today.
So, as the market grows, I think GSE participation will
also grow at the same percentage it should have in the past. So
I don't have that concern.
But on your first page of written testimony, you stated
that FHA made significant changes, streamlining and realigning
it for procedures. Could you describe those significant changes
that have been streamlined in the process, and how it is
affecting consumers?
Mr. Montgomery. We are not a retail operation. We rely on
realtors and lenders, if you will, to sell and promote FHA. And
if we are difficult to deal with, with unique and onerous
requirements--for example, if you had a cosmetic problem with a
home, might have been a wobbly handrail or a cracked
windowpane, we required appraisers to go back and forth, to
make sure cosmetic items were taken care of.
Now, certainly, we're not, you know, cutting any corners on
something structural in nature, or impacting the safety and
health of the occupants. That was one concern: onerous
appraisal requirements. We did away with those. We adopted what
the conventional market does, and that's accept the Fannie Mae
appraisal form.
We also had the unique requirements as sending the case
binders back and forth. We came into the late 1990's, so to
speak, from a technological standpoint, and said, ``Can we be
doing this electronically?'' mirroring what the Veterans
Administration home buying program has been doing since 1999.
Very, very successful. We also just are generally trying to
make FHA much easier to deal with.
But we all agree to meeting with our industry partners,
while they roundly applauded--and all of them did, I might
add--our process improvements, they also seconded what we had
realized, that it was time to make long-overdue product
improvements, as well.
Mr. Miller of California. Thank you for your testimony.
Would you like to say anything in conclusion?
Mr. Montgomery. Just thank you very much for the
opportunity to testify today.
Mr. Miller of California. Thank you, sir. I would like to
welcome our second panel now. We have Stella Adams, who is a
board member of the National Community Reinvestment Coalition.
Members of the coalition seek to increase the flow of private
capital into traditionally underserved communities.
Jerry Howard is executive vice president and chief
executive officer of the National Association of Home Builders.
Welcome, Jerry. The Association is a Washington, D.C.-based
trade association, where the mission is to enhance the climate
for housing in the building industry.
Regina Lowrie is the president of Gateway Funding
Diversified Mortgage Service, located in Horsham, Pennsylvania.
She is testifying today as a board member of the Mortgage
Bankers Association.
And A.W. Pickel is president and CEO of Lender One
Financial Corporation, located in Lenexa, Kansas. Lender One is
a full service mortgage banking operation approved to
underwrite conventional and government loans. Mr. Pickel is
testifying today on behalf of the National Association of
Mortgage Brokers. Welcome. Ms. Adams, we would recognize you
first, for 5 minutes.
STATEMENT OF STELLA ADAMS, BOARD MEMBER, NATIONAL COMMUNITY
REINVESTMENT COALITION
Ms. Adams. Thank you, Mr. Chairman, and Ranking Member
Waters. It is an honor to be here today, as the voice for over
600 community organizations from across the country that
comprise the National Community Reinvestment Coalition.
Mr. Chairman and other distinguished members of the
committee, we applaud your efforts to modernize FHA and update
programs that have become antiquated. It is important that
these programs remain relevant in today's lending market.
Nonetheless, we are concerned with some of the proposed
reforms that will move FHA more towards private sector pricing
patterns. The mission of FHA is to serve low- and moderate-
income families with affordable home loans. In general, we
believe that FHA should be modernized, but these proposals
would move FHA away from its original purpose.
NCRC believes that FHA must provide an alternative to sub-
prime lending, in order to provide a competitive impetus for
pricing to be reduced for borrowers with impaired credit. The
proposal to adopt a risk-based pricing mechanism for mortgage
insurance would move FHA closer to the risk-based pricing in
the sub-prime market.
In other words, FHA pricing would more closely resemble
sub-prime pricing. This move would be the opposite of what is
needed. We need to retain and expand upon alternatives to sub-
prime pricing, in order to maintain competitive pressure on the
sub-prime market to lower its pricing.
An example illustrates how the proposed risk-based pricing
mechanism would move FHA pricing toward sub-prime pricing.
Imagine two borrowers, Josh and Monica. Josh has seriously
impaired credit, and is a B-minus sub-prime borrower. Monica
has a few nicks on her credit, and is an A-minus sub-prime
borrower. Right now, both Josh and Monica get charged roughly
the same FHA mortgage insurance premium. Monica cross-
subsidizes Josh's premium.
On the other hand, if Josh and Monica were to go to the
private sector market, Monica could probably get a near-prime
loan, perhaps around 7 percent. Josh's APR would be much
higher, possibly 9 to 10 percent. In contrast, the FHA program
reduces the pricing disparity between Monica and Josh's prices
for loans. While this may not be the greatest deal for
consumers like Monica, it protects consumers like Josh from
onerous and high-cost loans in the private market.
FHA's program has lost market share to sub-prime lenders in
recent years. While a number of sub-prime lenders are
responsible, predatory lending is a subset of sub-prime
lending.
Moreover, abusive lending is particularly prevalent at the
lower ends of the credit scoring spectrum, since the more
credit-impaired borrowers are precisely the ones with the
fewest alternatives.
Currently, FHA loans are an important source of an
affordable loan for traditionally underserved borrowers. NCRC's
data analysis shows that a greater percentage of lower income
and minority borrowers receive FHA loans than conventional
loans. Moreover, the level of sub-prime lending, as a percent
of loans, sub-prime loans were 1.4 percent of government-
insured loans. In contrast, sub-prime loans were 11.5 percent
of conventional home loan purchases.
As illustrated by the data, a move to risk-based premium
pricing could seriously undercut the current affordability of
FHA loans for traditionally underserved borrowers. We cannot
move dramatically away from FHA's vital place in the market, as
an affordable alternative.
Significant policy questions are whether a move to risk-
based premium pricing is necessary to shore up the
competitiveness of FHA lending, or the safety and soundness of
FHA lending.
NCRC is not convinced that a move to risk-based pricing is
necessary to offer flexible and affordable mortgages. We have
had discussions with a number of large lenders offering
conventional mortgage loans with very minimal downpayments,
without private mortgage insurance, and to borrowers with low
credit scores--below 600 FICO.
We ask HUD to more fully explore these types of products,
and additional credit counseling that may be needed as a
component to some of these products. Enhanced home buyer
counseling and careful underwriting appear to be a more
promising path than moving toward a sub-prime pricing
structure.
By making FHA loans more costly for credit-impaired
borrowers, the chances increase that these borrowers will
default, making the FHA program less safe and sound.
Mr. Miller of California. The gentlelady's time has
expired. Would you like to wrap up?
Ms. Adams. We thank Mr. Chairman for holding this hearing
of great importance for the ability of minority and low-income
borrowers to buy affordable homes. We urge the committee not to
move FHA towards a risk-based pricing system, and not to raise
maximum loan amounts.
As demonstrated above, NCRC believes it is critically
important to preserve FHA as an affordable alternative to the
sub-prime market. On the other hand, if FHA remains an
affordable alternative, it serves as an important check and
balance on the private market, keeping pressure on sub-prime
lenders to lower their prices. Thank you, on behalf of NCRC and
our members.
[The prepared statement of Ms. Adams can be found on page
47 of the appendix.]
Mr. Miller of California. Thank you. Mr. Howard, you are
recognized for 5 minutes.
STATEMENT OF GERALD M. HOWARD, EXECUTIVE VICE PRESIDENT AND
CEO, NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Howard. Good morning, Chairman Miller. Good morning,
Mr. Cleaver. It's great to be before this subcommittee again. I
am Jerry Howard, the CEO of the National Association of Home
Builders.
Over the past 2 decades, the popularity and relevance of
the FHA's single family programs has waned, as they have failed
to keep pace with the market. This is due partially to
statutory and regulatory constraints that have limited the
FHA's ability to respond to the needs of the borrowers. The
differences between FHA's requirements and those for
conventional mortgages are a disincentive to the use of the FHA
programs.
Further, the FHA's lack of responsiveness to market needs
has created opportunities for predatory lenders. Nevertheless,
important strides have been made to revitalize FHA under the
leadership of Commissioner Montgomery, and with the support of
Secretary Jackson.
The benefits of these efforts are already being seen. The
FHA has aligned its appraisal requirements with market
practices. Additionally, FHA's new policies increase the
allowable loan to value ration for cash-out refinancing
transactions. And revisions to the 203(k) rehabilitation
program have made this program more user friendly.
Despite these steps, several requirements still seriously
constrain FHA's ability to deliver a range of mortgage products
needed for FHA to fulfill its mission.
Accordingly, NAHB believes that Congress should grant the
FHA the broader authority outlined in the Administration's
budget request, and detailed in the draft authorizing
legislation. NAHB is pleased that several reform proposals are
included in the Administration's position. I will outline them
here.
First, the current limit for FHA mortgages is too low to
enable deserving potential home buyers to buy homes in many
high-cost areas. The artificially low limit restricts choices
for home buyers who use FHA-insured mortgage loans. They are
pushed to the lowest echelon of available homes throughout much
of the country. And in many areas, there are no homes
available.
NAHB supports the Administration's proposal to recalibrate
local loan limits to 100 percent of the area median, up to the
conforming loan limit, and to increase the minimum FHA mortgage
amount to a more meaningful level.
Second, one of the most common factors keeping potential
home buyers from achieving their dream of home ownership is the
lack of financial resources to pay downpayment and closing
costs. FHA's current statutory requirement of a cash
contribution of 3 percent by a home buyer was considered
innovative years ago, when downpayments of 10 percent or more
were the norm for conventional loans.
However, recent strides in underwriting make it possible to
predict with reasonable certainty, the likelihood that a
borrower will or will not default on a loan, rendering the
downpayment a far less critical variable in the underwriting
process.
NAHB has long supported efforts by this committee to
implement the new zero downpayment program, and we support the
Administration's request to provide FHA the flexibility to
establish a range of downpayment program requirements for its
single family programs, as long as the programs operate on an
actuarially sound basis.
Third, NAHB is pleased that the budget request includes an
initiative for a risk-based mortgage insurance premium. Such a
premium would temper the current structure for better
performing loans, or cross-subsidizing weaker loans in the FHA
insurance fund, allowing the FHA to support a broader menu of
mortgage markets.
Fourth, by extending the maximum loan maturity to 40 years,
FHA will enable borrowers' monthly loan payments to be reduced.
Unlike current popular interest-only loans, an FHA-insured
mortgage loan with a 40-year maturity will ensure that some
part of the borrower's monthly payment is used to reduce the
outstanding loan balance, and to build up equity in the home.
Finally, in many communities, condominiums represent the
most affordable path to home ownership. Unfortunately, FHA's
requirements for condominium loans are burdensome, differing
significantly from the requirements for mortgage loans that are
secured by detached single family housing. The net result is a
severe limitation on the availability of FHA-insured mortgages
for those attempting to purchase a condo unit.
NAHB is pleased that the Administration has requested to
consolidate all of the single-family mortgage insurance
programs under one section of the National Housing Act. This
would be a major step in reopening FHA-insured financing in
this critically important market segment.
Mr. Chairman, we thank you for the opportunity, and we look
forward to working with you, and with the ranking member and
the other members of the committee in this important issue.
[The prepared statement of Mr. Howard can be found on page
52 of the appendix.]
Mr. Miller of California. Thank you, Mr. Howard. Mr.
Fitzpatrick, you are recognized for the purpose of an
introduction.
Mr. Fitzpatrick. Mr. Chairman, I am very proud indeed to
welcome to the House of Representatives, and this committee, an
outstanding Pennsylvanian, Regina Lowrie, who is the chairman
of the Mortgage Bankers Association.
Ms. Lowrie is a woman entrepreneur who, in 1994, founded
Gateway Financial Diversified Mortgage Services in Horsham,
Pennsylvania, which is part of the greater Philadelphia area,
with just 8 employees, which she has helped to grow today to a
company of over 800 employees with 58 offices, and is greater
Philadelphia's largest independent mortgage company. I am very
proud to have her testify to the committee today. Thank you,
Regina.
Mr. Miller of California. Ms. Lowrie, you are recognized
for 5 minutes.
STATEMENT OF REGINA M. LOWRIE, CHAIRWOMAN, MORTGAGE BANKERS
ASSOCIATION
Ms. Lowrie. Thank you, Congressman Fitzpatrick. And good
morning, and thank you for holding this hearing, and inviting
me to share MBA's views on reforming the FHA.
As Congressman Fitzpatrick said, in 1994, I founded Gateway
Funding Mortgage with 7 employees and $1.5 million in capital.
We now have over 800 employees working in more than 58 offices,
and originating over $3 billion in loans. I am proud of our
work at Gateway, and of my entire industry, in providing home
ownership opportunities for American families.
When I started Gateway, FHA programs helped to serve many
borrowers who would otherwise not get a loan. Ten years ago,
FHA comprised 40 percent of our volume. We worked hard to be a
good partner with FHA. And together, FHA and Gateway served
tens of thousands of people.
Today, however, this story is very different. While Gateway
has grown significantly, our use of the FHA program has dropped
precipitously. While Gateway has been able to adapt to changes
in the market, FHA has not. While the needs of low- and
moderate-income home buyers, of first-time home buyers, and of
senior home owners have changed, FHA has not followed its
historic path of adapting to meet borrowers' changing needs.
We support FHA, and we believe that it plays a critical
role in today's marketplace. Most of FHA's business is directed
towards low- and moderate-income and minority borrowers, the
very strata that is most challenged to be part of our ownership
society.
At the same time, we have watched, with growing concern, as
FHA has steadily lost market share over the last decade,
potentially threatening its long-term ability to help
underserved borrowers. FHA was founded in 1934, and many of the
laws, regulations, and traditions that govern its operations
have not kept pace with the rapidly changing and dynamic
marketplace. As the market continues to innovate around FHA,
the great fear is that many aspiring home buyers will either be
left behind, or forced into higher cost alternatives.
We believe that Congress should empower FHA to incorporate
private sector efficiencies that will allow it to meet today's
needs and anticipate tomorrow's. MBA believes that changes
should be made in three areas: FHA needs more flexibility to
innovate new products, and introduce them; invest in new
technology; and manage their human resources.
MBA supports the Administration's proposals to help FHA
achieve these goals. MBA supports changes to the FHA
downpayment requirements, including the elimination of the
complicated downpayment formula, and the rigid cash investment
requirements.
The downpayment is one of the primary obstacles for first-
time, minority, and low-income home buyers. FHA may be able to
serve more borrowers, and do so with lower risk to their funds,
if they are able to adjust their premiums, based on the risk of
each mortgage insured.
MBA would caution, however, that creating a risk-based
premium structure will only be beneficial to borrowers if there
is a lowering of current premiums.
Finally, MBA supports all of the proposed changes to the
current home equity conversion mortgage program. MBA's surveys
show that FHA's HECM product comprises 95 percent of all
reverse mortgages, and is thus tremendously important to our
senior homeowners.
In conclusion, FHA has an important role to play in the
market in expanding affordable home ownership opportunities for
the underserved, and addressing the home ownership gap. But the
loss of market presence means we are losing FHA's impact. The
result is that some families are either turning to more
expensive financing, or giving up.
MBA applauds the leadership and commitment of HUD Secretary
Jackson and FHA Commissioner Montgomery in calling for FHA
reform. And I urge Congress to enact legislation to reform FHA
to increase its availability to home buyers, promote consumer
choice, and ensure its ability to continue serving American
families. Thank you.
[The prepared statement of Ms. Lowrie can be found on page
61 of the appendix.]
Mr. Miller of California. Thank you, Ms. Lowrie. Mr.
Pickel, you are recognized for 5 minutes.
STATEMENT OF A.W. PICKEL, III, PAST PRESIDENT, NATIONAL
ASSOCIATION OF MORTGAGE BROKERS
Mr. Pickel. Good morning, Chairman Miller, Ranking Member
Waters, members of the subcommittee, and Mr. Cleaver. It's
always good to see a fellow Kansas Citian.
My name is A.W. Pickel, III, and I am the past president of
the National Association of Mortgage Brokers. Thank you for
inviting NAMB to testify today on transforming the Federal
Housing Administration for the 21st Century. As the voice of
the mortgage brokers, NAMB speaks on behalf of more than 25,000
members in all 50 States and the District of Columbia.
I want to commend this subcommittee for its leadership when
addressing the much-needed reforms to the FHA program. America
enjoys an all-time record rate of home ownership today, an
achievement to which mortgage brokers have directly
contributed.
NAMB appreciates the opportunity to address the need to:
one, increase FHA loan amounts for high-cost areas; two,
develop risk-based pricing for mortgage insurance on FHA loans;
and three, reform the FHA program to reduce the barriers to
mortgage broker participation.
NAMB supports many of the proposed reforms to the FHA
program, but believes the Administration should also first make
certain that the FHA loan program is a real choice for
prospective borrowers. Regardless of how beneficial a loan
product may be, it requires an effective distribution channel
to deliver it to the marketplace.
Unfortunately, many prospective borrowers are denied the
benefits offered by FHA loans, because mortgage brokers, the
most widely used distribution channel in the mortgage industry
today, are limited in their ability to offer such products.
Current FHA requirements impose cost-prohibitive, time
consuming, and unnecessary annual audit and net worth
requirements on mortgage brokers that want to originate FHA
loans. These requirements seriously impeded mortgage brokers'
ability to bring FHA loans to the marketplace. A stated
objective of HUD and FHA is to increase origination of FHA loan
products, and expand home ownership opportunities for first-
time, minority, and low- to moderate-income families.
NAMB supports increased access to FHA loans, so the
prospective borrowers who have blemished or almost non-existent
credit histories, or who can only afford minimal downpayments,
have increased choice of affordable loan products, and are not
forced by default into a sub-prime loan.
The solution to increasing FHA loan production is simple.
Allow more mortgage brokers to offer FHA loan products directly
to consumers. This can be accomplished by eliminating the audit
and net worth requirements for mortgage brokers. At a minimum,
bonding requirements offer a better way to ensure the safety
and soundness of the FHA program, rather than requiring
originators to submit audited financial statements.
Congress and this Administration have made home ownership a
priority in this country. Unfortunately, today, the demand for
homes continues to outpace new housing development and sales of
existing homes, causing escalation of home prices. In an
environment of rising interest rates, many first-time,
minority, and low- to moderate-income home buyers need the
safer and less expensive financing option that the FHA program
can provide.
For this reason, NAMB uniformly and unequivocally supports
increasing FHA loan limits in high-cost areas. Congress should
also create the ability for FHA loan limits to be adjusted up
to 100 percent of the local area median home price in all
communities, thereby providing a logical loan limit that will
benefit both the housing industry and the consumer. This
approach allows the FHA loan limits to respond to changes in
home prices, and reflect a true home market economy.
The benefits of the FHA program should belong equally to
all taxpayers, especially those residing in high-cost areas
that often are most in need of affordable mortgage financing
options. NAMB also believes that FHA risk-based premiums are
needed in the current mortgage finance system to drive
competition and lower cost for borrowers.
Private mortgage insurers have already demonstrated the
ability to balance risk with the premiums charged. FHA should
be afforded the same opportunity. The proposed reforms simply
bring FHA into parity with what has already proven to be a
reasonable assumption of risk for the marketplace. With risk-
based premiums, FHA will have the ability to enter the sub-
prime market safely, and still offer significant savings to
prospective borrowers.
Because FHA's share of the market is approaching marginal
levels, any risks to the program are likely to be greater under
the status quo than with the proposal. Making FHA more
competitive will improve the services and products provided by
other lenders and insurers in the industry, and help to restore
FHA loan product origination to levels of previous years.
NAMB also supports eliminating the downpayment requirement,
and granting FHA the flexibility to offer 100 percent financing
to aid in the effort to increase home ownership for first-time,
minority, and low- to moderate-income families.
Therefore, under the leadership of Mr. Montgomery, I would
like to say that FHA has made great strides, most recently with
the adoption of the 95 percent cash-out refinances, and the
appraisal changes. We would encourage Congress to seize this
opportunity to revitalize the FHA program with this proposal,
so that we can increase minority home ownership by 5.5 million
by 2010.
Borrowers underneath this will see better loan programs at
lower interest rates. We strongly urge the subcommittee to
accept this proposal. NAMB appreciates the opportunity to offer
our views on transforming the FHA program for the 21st century.
We want to thank you for your consideration. We look forward to
working with you, and I am happy to answer any questions.
[The prepared statement of Mr. Pickel can be found on page
80 of the appendix.]
Mr. Miller of California. Thanks, Mr. Pickel. Ms. Waters,
you are recognized to make an opening statement.
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to thank Mr. Ney, who is not here this morning, for his
interest in this subject matter, and for agreeing to hold this
hearing on this issue. And I would like to thank you for
sitting in for him.
Historically, the Federal Housing Administration and its
mortgage insurance programs were available to insure lenders
against loss from loan defaults by borrowers. However, this
hearing is really long overdue, because of the decline of the
use of FHA-insured mortgages making an otherwise valuable
source of mortgage insurance unavailable for an important
segment of the mortgage market.
Some might even say that the FHA had lost touch with
reality, because its programs were no longer reaching their
intended targets: low- and moderate-income persons and first-
time home buyers. Today we have an opportunity to explore FHA
mortgage insurance programs to determine what is best for
first-time home buyers and low- and moderate-income persons, as
well as the many borrowers who feel that the sub-prime lending
market is their only option.
The relationship between affordable housing and the
availability of mortgage insurance is an important issue for
me. Without the availability of mortgage insurance choices,
those pursuing the American dream of wanting a home find it
next to impossible to overcome the many obstacles to home
ownership. Government-backed mortgage insurance should not be
seen as one of those obstacles.
The growth in risk-based mortgage activities has been
accompanied by a rise in predatory lending activities,
predatory lending activities that inflate the cost of owning a
home, and increasingly, erode the equity in the very home that
the individual purchases. Predatory mortgages are estimated to
cost $9.1 billion each year. The FHA proposal is, in part, an
alternative to help buck this trend. It is welcomed.
According to the FHA, between 2003 and 2005, non-prime
loans grew from 118 billion to 650 billion in mortgages, while
FHA went from insuring 9.2 percent to 4.1 percent of the
Nation's mortgages. According to a Mortgage Banker's
Association survey, non-prime loans are far riskier, with
foreclosure rates twice that of prime loans. And non-prime
foreclosures will only grow with pre-payment penalties, balloon
mortgages, and rising interest rates.
For minorities, the situation is even more frightening.
Non-prime targets minorities with 40 percent of African
Americans and 23 percent of Hispanic home buyers paying
interest rates that are 3 percent over market rates. Between
2001 and 2003, the shared non-prime mortgages for African
Americans almost doubles. And with Hispanic, the rate went up
two-and-a-half times.
I am just happy that the FHA has decided to finally address
the shortcomings of the current FHA mortgage insurance
programs. Some of the problems are being driven by changes in
technology, while other problems represent the reluctance of
some to take on this issue, because of criticism about FHA
entering the predatory lending market.
It would be premature and unfair for any of us to conclude
anything about the FHA mortgage insurance proposal until we
have heard from the Commissioner and the other witnesses. I
understand that they have been here this morning; they have had
their say.
Many of you know that I have worked with Mr. Ney and some
others, not only to make sure that those of us who live in
States like California could raise the loan limits to include
more people, but increasingly we have been watching as the
mortgage brokers and others come up with more and more products
to be able to accommodate the low-income home buyers, and the
minority home buyers. Unfortunately, FHA has just sat there,
watching this market without being able to impact it in any
appreciable way.
Now, I think with this hearing, all of our members can
learn a lot more about what is possible with FHA. I am excited
about no downpayments; I am excited about a product that can
finally reach the market that so desperately needs some
attention.
So, with that, Mr. Chairman, I thank you and I yield back
the balance of my time.
Mr. Miller of California. Thank you, Ms. Waters. I
appreciate the testimony today, Mr. Pickel, Ms. Lowrie, Mr.
Howard. You have all expressed support for raising these
limits.
But Ms. Adams, I noticed your opposition to that. And how
is this increase harmful to low-income and minority families
who live in places such as New York, California--where Maxine
and I are from--and Washington, D.C.? How does that impact them
in a negative fashion?
Ms. Adams. Thank you, Mr. Chairman. The concern that we
have at NCRC is that while, in those high-priced markets, it
certainly would make it affordable, unlike the GSE's affordable
housing goals, the FHA does not have an affirmative public
obligation, outside of its intended mission, to serve low- and
moderate-income persons.
And so, if we expand it to high--to the high-cost markets
where it would meet the needs of low- and moderate-income
persons, it would also expand their ability to reach out in
other markets, in markets like mine, where it's very affordable
to go into upper middle-income--
Mr. Miller of California. No, it doesn't do that. It only
impacts high-cost areas. And what are the alternatives if these
loan limits are not increased in high-cost areas? It deals with
it up to a percentage to median. If your median is down to
$150,000, it doesn't increase it there. But you can't buy a
$300,000 home in Maxine's district, nor in my district. And
we're trying to create more opportunity in the marketplace.
But what you're expressing does the opposite. It eliminates
people from having the opportunity to have an FHA loan. So what
are the alternatives to these loan increases, in your opinion?
Ms. Adams. We believe that there are a number of factors
that are playing into those markets that may need to be
addressed outside of the FHA. Forty percent of those markets
are really investors, and not really first-time home buyers,
and their second home markets that are driving up the costs in
those areas.
Mr. Miller of California. What do you consider underserved
populations, then?
Ms. Adams. I clearly consider minority and low-wealth
populations to be underserved.
Mr. Miller of California. That would be predominantly San
Francisco, Oakland, Los Angeles--
Ms. Adams. But I will tell you that housing prices at
$300,000 and $400,000, the populations that I consider low-
wealth and underserved, won't even be able to afford an FHA
loan at $300,000.
Ms. Waters. Would the gentleman yield?
Mr. Miller of California. Yes, I am just about through, and
then I would be happy to yield.
Ms. Waters. Yes.
Mr. Miller of California. We have to look at areas other
than just less expensive areas. FHA needs to be relevant in
low- and moderate-income families throughout this country.
Ms. Waters. I think that's correct, sir.
Mr. Miller of California. And low- and moderate-income
families in many areas are having to pay $400,000, $450,000 for
a home. And FHA is not there to serve them. And then that puts
them in a situation where, like Maxine Waters was concerned
about, where are we forcing these people to go to? And in many
cases, they are forced to go to lenders that we consider
predatory, in some cases.
Sub-prime, I'm not talking about, because I think there is
an absolute market for that. But to take FHA and take it out of
these marketplaces, puts people in a very difficult situation
when we're trying to provide an opportunity for low- and
moderate-income home buyers in high-cost areas. Would you like
to respond to that?
Ms. Adams. I agree with you, sir. I think it's a complex
issue. I don't know how people who make $40,000, $50,000, or
$60,000 are going to be able to afford a $300,000 loan, even
with FHA--
Mr. Miller of California. Different issue. Different issue.
Maxine, I yield to you.
Ms. Waters. Yes. I'm sorry, Mr. Chairman, I have to run
over to the Judiciary Committee for an amendment that I have.
But I wanted to say to our witness here that I appreciate her
concern, and certainly that is a legitimate question to raise.
When you look at our market in California, and you look
into what is supposed to be the poorest areas where these homes
have just shot up to unimaginable prices, what you find in many
cases are two and three families going in together to buy
homes. And it works very well.
What happens is if you get, you know, two or three families
who are working that can share the space, and then what they do
is they build up equity. And when they build up the equity in
the home, and then they are able to refinance, often times they
can bring down the price of the interest rates, etc.
And in addition to that, with the appreciation and the
equity that they have in the home, it gives them even more
money, and they buy up even more. So I know it's kind of
tricky, but believe me, they need the opportunity to have
access, even with these spiraling costs that we have in places
like California.
Ms. Adams. Ms. Waters?
Ms. Waters. Yes?
Ms. Adams. It is the desire of the National Community
Reinvestment Coalition that every American have the opportunity
and access to affordable housing, and to home ownership, and to
safe and sound products, such as the FHA mortgage, as opposed
to the--some of the products that are in the sub-prime market.
Ms. Waters. Well, I know your mission, and what your goals
are. But I also have to tell you that I find that you are
getting some of your support from predatory lenders. And if you
can work with them, you can work with FHA.
Ms. Adams. We strongly--I only had 5 minutes, and I only
wanted to highlight the risk-based--
Ms. Waters. No, but I want to let you know I know a lot.
Ms. Adams. Yes, ma'am. But--
Ms. Waters. And so when you start to tell me about what
your mission is, I probably know it as well as anybody.
Ms. Adams. Yes, ma'am. We support FHA--
Ms. Waters. I know where much of your money comes from. So
they need the same opportunity that the predatory lenders that
you work with have, okay?
Ms. Adams. We're trying to reform those predatory lenders--
Ms. Waters. I know what you're trying to do, but I also
know who is at your banquets, and what they do, all right?
You're talking to me, now.
Ms. Adams. We support FHA. We believe that FHA should be
available to as many--and as a real safe alternative to all
sub-prime lenders. And if that puts some of our partners in a
bad situation, that won't hurt us at all. We absolutely believe
that FHA is the right product to meet the needs of low- and
moderate-income borrowers, minority borrowers, and is a real
alternative.
Mr. Miller of California. I want to reclaim my 2 minutes.
Ms. Lowrie, in your testimony you noted that 15 years ago, a
number of FHA-insured mortgages had dropped from 13 percent
to--of total originations to 3.5 percent. Could you discuss the
decrease in FHA originations in high-cost areas?
Ms. Lowrie. Thank you for the question. And you're right. I
mean, back almost a decade ago, FHA's market share was over 13
percent, and today, less than 3.5 percent. But I think a lot of
that has to do with the fact that it has not been able to keep
pace with the private sector market.
And when we talk about risk-based pricing, that's a
component in mortgage lending that the investment community,
that Wall Street--not just sub-prime, but even the prime
market--has moved toward risk-based pricing.
There are limitations in technology. As the Commissioner
mentioned, the inability to be able to transmit loans
electronically--I mean, we are moving towards, probably within
the next several years, being able to do an electronic e-note
mortgage, electronic signatures. And yet, we couldn't even
electronically transmit a file to FHA. So, FHA could use
improvements in the area of technology, innovation, and new
products.
And just one other point, Congressman. It took almost 7
years to put in place a hybrid ARM, a 5/1 and a 3/1 ARM, that
the private market had already introduced in years prior,
because it has to go through Congress for approval.
Mr. Miller of California. So they lost market shares
because of that.
Ms. Lowrie. Yes.
Mr. Miller of California. Okay. Mr. Fitzpatrick, 5 minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman. Ms. Lowrie, in
your testimony you talked about the need for improvements in
the reverse mortgage program. There is a bill pending in
Congress, H.R. 2892, that I introduced, that would remove these
statutory limit--the cap of 250,000--mortgages. It has passed
the House already, and there is a very similar bill pending in
the Senate.
The idea being that when there is a cap on the number of
mortgages that can be issued in this country, that it actually
has a limitation on the number of mortgage bankers that can
actually invest and get into the market. Perhaps that lack of
competition then increases the ultimate cost of the mortgage
program to senior citizens who really need it, might increase
the cost of the fees associated with the mortgage.
I was wondering if you believe whether removing what you
refer to as the HECM cap, the home equity conversion mortgage
program cap, won't in fact lower the cost of getting one of
these mortgages for senior citizens in this country.
Ms. Lowrie. Well, it's hard to answer how the market would
react to that, how it would affect liquidity in that product.
But I do think that it has a--it offers a great opportunity to
reduce the cost for seniors. And I also think that, in addition
to eliminating the cap, opening it up to purchases for seniors
under the HECM program is also a great opportunity to offer
that product to more seniors. So, yes, I do, Congressman.
Mr. Fitzpatrick. And that actually came up during the
course of discussion in this committee about what we could do
to help homeowners impacted by Hurricanes Rita and Katrina, who
actually don't even have a home at that point in time, might
have to build a home, which is almost akin to a purchase.
In the event that the cap was not eliminated, what do you
think the threat to seniors would be?
Ms. Lowrie. Well, I think when you look at the issue
between high-cost and low-cost areas, it almost seems unfair
that a senior in a low-cost area, who has the same amount of
equity in their home, could maximize taking that equity out,
whether it's to pay bills or to sustain living for the rest of
their life, and someone living in a high-cost area couldn't do
that because they--their property is over the cap.
So, I think there is an inequity there, and I think we see
more and more--we just have to look at the demographics in our
country, and look at the increasing aging population, that this
program not only is becoming more popular, but I think it's a
critical component for a lot of seniors in this country, to be
able to sustain their lifestyle.
And as Congresswoman Waters said, you know, there are
people who can't get a prescription, or you know, purchase
groceries. I mean, I think this is--it's an important issue,
and I think we have a fiduciary responsibility to address that
and keep equity within the program.
Mr. Fitzpatrick. And so, as the program becomes more widely
used, is it your experience that seniors are satisfied? Are
they happy with the program?
Ms. Lowrie. Congressman, not only are they more satisfied,
I think the industry has done an excellent job in trying to
educate. You know, we talk about financial literacy and
consumer education being so critical to low-income minority
borrowers, but it's also important for the seniors. And I think
it took a number of years for seniors to understand the HECM
product, and the industry has done a fabulous job in really
getting the message out, and educating them, and having them
feel more comfortable with the product.
So, I think that's why we're seeing continued growing
interest, and a need for these changes and revitalization of
the program.
Mr. Fitzpatrick. Thank you for your testimony here today.
Ms. Lowrie. Thank you.
Mr. Miller of California. Thank you. Mr. Scott, you're
recognized for 5 minutes. Mr. Scott? Mr. Cleaver?
Mr. Cleaver. Thank you, Mr. Chairman. I almost had a chance
to be the acting ranking member, but I guess I have forfeited
now. This was going to be the highlight of my career, but--
Mr. Miller of California. So much for your career.
Mr. Cleaver. Mr. Scott has just ruined it.
[Laughter]
Mr. Cleaver. Thank you, Mr. Chairman. Mr. Pickel, the FHA
Modernization Act, which I think is something that this
committee ought to approve, and hopefully the House will
approve it, but is--how active are your members in the Gulf
region, in the aftermath of the three hurricanes: Katrina,
Rita, and Wilma?
Mr. Pickel. Actually, our members are very active in the
aftermath of all that. One of the things our association did
was set aside $350,000 to help out people who had been actually
hurt by the hurricanes.
The other thing that I guess we're doing at this point--and
if we had the opportunity, we could do more--would be getting
actively involved in helping people do reconstruction, or put
their homes back together. A number of mortgage brokers can't
do that, simply because they're not allowed to do FHA products,
due to the annual audit.
The audit simply says that they have to have $75,000 in net
worth. Most audits cost about $10,000 by a CPA. So, for a one-
person, or a two-person, or a three-person mortgage broker
shop, it's fairly cost prohibitive, and they just choose not to
do it.
So, if mortgage brokers were allowed to do FHA products
without the audit, it would greatly increase our ability to
help more homeowners, especially in those areas. But we are
doing quite a bit. Several people have gone down there,
actually, from around the country to help out.
Mr. Cleaver. Thank you. I wanted to ask Mr. Montgomery this
question earlier, and maybe any of you can address it.
But wouldn't this, wouldn't the Gulf Coast region be the
perfect laboratory for the revitalization, or the expansion, of
FHA? I mean, don't you think that this has created perhaps the
best opportunity for FHA since the beginning of its--not
decline--but its reduction in providing housing for low-income
Americans?
I mean, you look at New Orleans, for example. You know, it
seems to me that the door is wide open, and if it isn't, then
we perhaps ought to make some adjustments in the bill to open
the door for FHA. So if any of you would address that, I would
appreciate it.
Ms. Lowrie. Congressman, yes. First of all, the Mortgage
Bankers Association totally agrees with you that, you know, FHA
can play a vital role. They have already played a vital role in
helping to stabilize that market.
I think the issue--and I had the opportunity to visit down
in New Orleans, and visit the various parishes and see the
devastation. And this would be one piece of it, revitalizing
FHA and having FHA be in the forefront of the market, creating
opportunities down there. But there are a lot of other issues.
I mean, all of our members, and private capital, need to be
supportive, not because--as we mentioned, and the commissioner
mentioned, it is private lenders that fund FHA loans that are
insured by the Federal Government. So it's a partnership that,
you know--we will continue to work very closely with FHA and
the other housing authorities, Habitat for Humanity, to try and
bring capital and funding into that area, to revitalize the
market.
Mr. Cleaver. Thank you. But if the--I mean, we are--the
Federal Government is guaranteeing the loans, and I mean, you
are not suggesting at all--and this is an honest question--that
lenders are going to be hesitant?
Ms. Lowrie. No. And when I said it's a complicated issue,
without taking up a lot of time or too much time, remapping the
flood maps for that area, and having the ability to insure
those loans with flood insurance is one of the issues.
Mr. Cleaver. Okay.
Ms. Lowrie. So lenders and servicers are grappling with a
lot of issues relating to Hurricane Katrina. And I think that
FHA and what HUD has done in that market has been phenomenal.
And we will continue to work with them over the coming years.
Mr. Cleaver. Thank you.
Mr. Miller of California. The gentleman's time is up.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Miller of California. Mr. Howard, your testimony
alludes to FHA's sliding market share. And should Congress be
concerned about FHA's market share, and could the fact that
there is a declining market share point to the private sector
meeting those needs?
Mr. Howard. Yes, sir. I think that Congress should be
concerned about FHA's relevance in the marketplace. FHA is
designed to help low- and moderate-income people reach home
ownership. When FHA's relevance diminishes, it opens the door
for more predatory lending, sub-prime lending that is not of
the stature of FHA.
So, I think it's a really important component to get the
people who are trying to make the first step on the ladder to
home ownership. And so FHA's efforts to revitalize, I think,
are crucial in that regard.
Mr. Miller of California. And what's your opinion on the
40-year mortgage product, and whether it provides affordability
and increases costs and risks to low- and moderate borrowers?
Mr. Howard. I think it's a really innovative idea. I mean,
our country was the first country to come up with the 30-year
conventional mortgage, and increasing it to 40 years just--at
the same time as possibly the risk-based cost factor would
potentially increase the payments by a moderate-income home
buyer, putting the 40-year mortgage in place will bring them
back down, and at the same time, ensure that they are building
equity.
We think it's a novel idea, a good idea, and given the
changing dynamics in our society, one that would fit right in
right now.
Mr. Miller of California. Good. Mr. Neugebauer, you are
recognized for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Howard, as you
know, I have been in the housing business for a number of
years. And one of the things that--when Secretary Jackson was
here last week, we talked about the fact that when I first got
in the housing business, that FHA had a bigger presence in the
housing industry.
And now, at this particular time in the history of our
country, we have one of the highest homeowner rates in the
history of our country. More people own a home today than at
any other time. And particularly minority home ownership is
increasing.
And yet, we have been able to accomplish that with a
diminished role of FHA in that market. And so I guess the
question I have--and maybe to the other panel members--is how
relevant is the continuation of FHA, and has the private sector
moved in and taken over an area where, in the past, when I
first got in this business, that was an area they would not
tread?
Mr. Howard. I think the market conditions in the past
several years have been very conducive to private sector
involvement, and I think that's great.
But in your State, in Texas, during the credit crunch, the
private sector totally disappeared from the market in many
cases. Also, out in California at various times, members of the
private sector have closed down their housing offices and
walked away. And FHA, along with the GSE's, were the only
elements of the housing finance system that remained and kept
things going.
So, as a back-stop, FHA is vitally important. Moreover, as
a conduit to low- and moderate-income home ownership, FHA
remains vitally important, particularly if these proposals are
enacted, and the FHA is streamlined, and is able to get its
message out to the consumers.
Mr. Neugebauer. Yes, Ms. Lowrie?
Ms. Lowrie. Congressman, I would like to just add to what
Mr. Howard said, and speak to your point about addressing home
ownership to minorities. And you're absolutely correct, our
home ownership rate is close to 69 percent in this country, the
highest it's been in the history of the United States.
However, for minorities, and for immigrants, and for low-
income borrowers, there is a gap. And it's a substantial gap.
And the statistics have shown that FHA has consistently been
able to serve that underserved borrower.
The statistics today show it. If you look, African-American
and Hispanic borrowers constitute over 29 percent of the book
of FHA business, whereas in the conventional market, it's only
a little over 14 percent. So, there is still a definite need
for FHA in the marketplace.
Mr. Neugebauer. Mr. Pickel?
Mr. Pickel. In regards to your question as to its
viability, I guess my comment would be that, yes, there are
other products that have developed to meet the need. And one of
the things that--and by the way, I am a small mortgage guy, I
just run a small shop--we consistently hear is the zero down,
or you know, no money to get into the house.
And to keep FHA out of that market only disadvantages the
very people who really need it. So, quite frankly, even though
there are other products out there, if we can get FHA back in
there, I mean, we have an opportunity to do something really
good. And this would be great, because they could get a fixed
rate with--and the MMI premiums, I looked at what they're
proposing, I mean, it's really a good thing, and it would
really help FHA. And it would help people.
Mr. Neugebauer. Well, I was sorry I was not able to be here
when Mr. Montgomery was speaking earlier, but I did talk to
Secretary Jackson last week. And one of the things I think we
had talked a little bit about, the fact that some of the people
that are originating a good number of loans are kind of shut
out of that process because of the audit procedure.
And one of the things that certainly we want to pursue is
being able to allow the folks that are really originating a
good portion of the loans to be actively, you know, originating
the FHA loans.
What--as we look at the minority home ownership and the
gap, and trying to close that gap, we have had the no
downpayments, and HUD has had some different programs, and some
of the States have had different programs through housing
finance organizations. Where do you see the most critical piece
of--if we reshape FHA, what's the critical piece that we need
to be thinking about?
I will start with Ms. Adams, and then we will just kind of
go down the panel, and I suspect my time will be just about
gone.
Ms. Adams. Thank you. I think one of the critical pieces of
this is the flexibility to offer the no downpayment option. It
is critical that we keep FHA as a flexible but affordable
product suitable to low-income and minority borrowers.
FHA has really effectively served minority communities by
providing conventional products, providing a safe product for
borrowers that--many of whom have been trapped in this--or
steered, or somehow end up in the sub-prime market because they
are not aware of FHA and its options. And we need to keep it in
the--make sure it has the flexibility to serve the communities
it was intended to serve, and to reach into there.
Mr. Howard. Mr. Neugebauer, I think that the flexibility
issue is an overarching issue, but I think it also needs to
apply to the price limits on FHA borrowing. In some of
America's urban and suburban areas, no matter how flexible FHA
is, with the current price limits they're not going to be able
to reach down to the moderate and low-income people, be they
minority or majority in this country.
And so, in addition to the programmatic flexibility, I
think they have to also be able to respond to the markets and
the increasing prices in housing.
Ms. Lowrie. Congressman, I would agree with my fellow
panelists here that the flexibility and downpayment is
critical. And one of the biggest barriers to home ownership is
the downpayment. So, the private market--the private sector--
has seen the zero down work very well, and when it's
underwritten based on certain credit risk parameters.
But I would go even further to say that when we are looking
at revitalizing and FHA reform, we need to be looking at not
just this one component, but giving FHA the ability to innovate
new products without having to go--I mean, the market is so
dynamic, you know, my sales people will say to me, you know,
``So and So down the street is offering the My-Community 100
percent mortgage.'' They want it yesterday. It takes years to
get something approved for FHA to be able to offer it within
the marketplace. So that's one.
And being able to invest in technology, and manage their
human resources, giving FHA the flexibility to operate more in
line with the private sector, you know. It does put money in
the Treasury, it's never cost the taxpayer one cent. And that
money going into the Treasury helps reduce the deficit. I think
we need to look at what can be done to put some of it back into
FHA.
Mr. Miller of California. The gentleman's time has expired.
Mr. Pickel, maybe you can answer the question why the financial
audit was put in place that keeps you out of the marketplace
with FHA.
Mr. Pickel. Why it was put in place? I think--I wasn't
there when it was put in place, but I think--
Mr. Miller of California. You're a great one to answer it,
then.
[Laughter]
Mr. Pickel. I think it was most likely put in place so that
they had some type of idea that this broker, or this
individual, had some financial soundness to them, or stability.
But quite frankly, $75,000 is not much, in terms of financial
stability.
Mr. Miller of California. No, not with the cost of the
audit.
Mr. Pickel. No. And then, you know, really, FHA holds the
direct endorsement lender accountable for those loans. What
we're looking to prevent with the broker, quite simply, is just
the issue of fraud. The broker doesn't underwrite, the broker
originates.
I think, you know, in answer to your question with that
audit, you know, eliminate the audit so that FHA can have a
brand new sales force on fixed rate mortgages, and we will
increase home ownership another--
Mr. Miller of California. I agree with you on that. Well, I
look forward to this bill moving forward. I would like to thank
Mr. Montgomery, Ms. Adams, Mr. Howard, Ms. Lowrie, and Mr.
Pickel, for their testimony. It was very well received.
The Chair notes that some members may have additional
questions for the 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 response in the record.
The hearing is adjourned. Thank you.
[Whereupon, at 11:07 a.m. the subcommittee was adjourned.]
A P P E N D I X
April 5, 2006
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