[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                  THE EXPANDING AMERICAN HOMEOWNERSHIP


                  ACT OF 2007: H.R. 1852 AND RELATED


                        FHA MODERNIZATION ISSUES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-23



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
RON KLEIN, Florida                   TOM PRICE, Georgia
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut   ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                MARSHA BLACKBURN, Tennessee
ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma                  KENNY MARCHANT, Texas
                                     THADDEUS G. McCOTTER, Michigan

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
           Subcommittee on Housing and Community Opportunity

                 MAXINE WATERS, California, Chairwoman

NYDIA M. VELAZQUEZ, New York         JUDY BIGGERT, Illinois
JULIA CARSON, Indiana                STEVAN PEARCE, New Mexico
STEPHEN F. LYNCH, Massachusetts      PETER T. KING, New York
EMANUEL CLEAVER, Missouri            PAUL E. GILLMOR, Ohio
AL GREEN, Texas                      CHRISTOPHER SHAYS, Connecticut
WM. LACY CLAY, Missouri              GARY G. MILLER, California
CAROLYN B. MALONEY, New York         SHELLEY MOORE CAPITO, West 
GWEN MOORE, Wisconsin,                   Virginia
ALBIO SIRES, New Jersey              SCOTT GARRETT, New Jersey
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
CHARLES A. WILSON, Ohio              GEOFF DAVIS, Kentucky
CHRISTOPHER S. MURPHY, Connecticut   JOHN CAMPBELL, California
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
BARNEY FRANK, Massachusetts

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 19, 2007...............................................     1
Appendix:
    April 19, 2007...............................................    37

                               WITNESSES
                        Thursday, April 19, 2007

Diaz, Lautaro ``Lot'', Vice President, Community Development, 
  National Council of La Raza....................................    25
Harrison, Iona C., GRI, National Association of Realtors.........    23
Killmer, William P., Group Executive Vice President for Advocacy, 
  National Association of Home Builders..........................    30
Montgomery, Hon. Brian D., Assistant Secretary for Housing, 
  Federal Housing Commissioner, U.S. Department of Housing and 
  Urban Development..............................................     8
Robbins, John M., CMB, Chairman, Mortgage Bankers Association....    27
Smith, Ed, Jr., Chairman, CAMB Government Affairs Committee, 
  Chief Executive Officer, Plaza Financial Group, California 
  Association of Mortgage Brokers................................    28

                                APPENDIX

Prepared statements:
    Miller, Hon. Gary............................................    38
    Sires, Hon. Albio............................................    41
    Diaz, Lautaro ``Lot''........................................    43
    Harrison, Iona C.............................................    48
    Killmer, William P...........................................    56
    Montgomery, Hon. Brian D.....................................    65
    Robbins, John M..............................................    71
    Smith, Ed, Jr................................................    88

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Statement of AARP............................................    96
    Joint letter to Chairman Frank and Chairwoman Waters from 
      ACORN, HomeFree-USA, Housing Partnership Network, and 
      Mission of Peace...........................................   135
    Statement of Peter H. Bell, President, National Reverse 
      Mortgage Lenders Association...............................   138
    Statement of the Consumer Mortgage Coalition.................   143
    Letter from the National Association of Realtors to Hon. 
      Alphonso Jackson, Secretary of HUD, dated April 9, 2007....   150
    Letter to Chairwoman Waters from the National Council of 
      State Housing Agencies, dated April 18, 2007...............   152


                         THE EXPANDING AMERICAN



                       HOMEOWNERSHIP ACT OF 2007:



                         H.R. 1852 AND RELATED



                        FHA MODERNIZATION ISSUES

                              ----------                              


                        Thursday, April 19, 2007

             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 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Waters, Cleaver, Green, Clay, 
Maloney, Sires, Ellison, Wilson; Biggert, Miller of California, 
Capito, Garrett, and Neugebauer.
    Also present: Representative Frank, Ex Officio.
    Chairwoman Waters. This hearing of the Subcommittee on 
Housing and Community Opportunity will come to order. Today's 
hearing is entitled, ``The Expanding American Homeownership Act 
of 2007: H.R. 1852 and Related FHA Modernization Issues.'' 
Without objection, all members' opening statements will be made 
a part of the record.
    We will be recognizing subcommittee chairs and ranking 
members for, I think, 5 minutes each, and there will be an 
additional 5 minutes that will be given for recognition on both 
sides of the aisle. With that, I will recognize myself for the 
first 5 minutes.
    Good morning, ladies and gentlemen. I want to thank Ranking 
Member Biggert for joining with me to hold today's hearing. 
Many members are anxious to see this bill move through the 
House, and I certainly am one of them.
    The bill introduced by me, and cosponsored by Chairman 
Frank, will revitalize the Federal Housing Administration 
(FHA), once the preeminent provider of mortgage insurance to 
low- and moderate-income families in the country. I believe 
that this FHA legislation is critically important to bringing 
stability to the mortgage lending market, particularly at the 
lower spectrum of the market.
    Everyone now knows about the perils of the subprime lending 
market with the dramatic rise in foreclosures and estimates 
that as many as 2 million mortgage loan defaults are predicted 
by year's end. So the sooner we can reinvent FHA to become a 
viable FHA, the sooner we will be able to assist many low- and 
moderate-income borrowers who are left with few safe and viable 
mortgage options. Refinancing, reverse mortgages, and other FHA 
products are all important.
    Specifically, H.R. 1852 will facilitate the modernization 
of FHA and bring it into the realities of the housing market in 
the 21st century by: increasing loan limits in high-cost areas 
of the country like California, where the median price of a 
home in Los Angeles is $513,000, and New York and 
Massachusetts, where FHA has been driven from the market 
forcing many borrowers to turn to high-cost financing and other 
non-traditional loan products; authorizing zero down and lower 
down payment FHA loans for home buyers who could not otherwise 
make the down payment required under current FHA rules to make 
FHA more consistent with other private sector loan products, 
especially where the borrower has a strong record and credit 
history; directing FHA to underwrite to borrowers with higher 
credit risks than FHA currently serves that are still credit 
worthy to take out a mortgage loan but who have been otherwise 
driven into the subprime loan market with pre-payment 
penalties, ARMs, and ultimately unbearable mortgage interest 
rates that are leading to foreclosures; and permanently 
eliminating the current statutory volume cap on FHA reverse 
mortgage loans to permit FHA to meet the growing needs of home 
equity rich and cash poor seniors and Baby Boomers who will 
need help paying bills or home costs.
    In addition, H.R. 1852 includes a number of important 
changes to the FHA bill that passed the House last year. First, 
it eliminates the fee increases from last year's bill for 
borrower who continue to make a down payment, scaling back the 
maximum up-front fee from 3 percent to 2.25 percent and the 
maximum annual fee from 2.2 percent to .55 percent. These 
reductions will reduce FHA closing cost premiums for a 
hypothetical family buying a $300,000 home by $2,250 in annual 
fees over a 5-year period of $20,000 compared to last year's 
bill.
    The bill also adds a number of home buyer protections not 
included in last year's bill for families taking out riskier 
zero-down payment loans and for borrowers who represent a 
higher credit risk. The bill gives HUD the authority to require 
pre-purchase counseling for riskier borrowers, requires a 
number of disclosures spelling out the costs and risk of zero 
down and lower down payment loans, and provides the borrower 
opt-in to receive notice of availability of counseling in the 
event a borrower falls behind in their loan payments. FHA has 
very strong loss mitigation measures in place so the borrower 
protections in the bill are a plus that are widely supported.
    Finally, the bill includes a provision authorizing loan 
limit increases for FHA rental housing loans in high cost areas 
where current FHA loan limits do not keep pace with local 
construction costs. I have said over and over again that there 
is an affordable housing crisis in America. I believe that the 
FHA modernization bill points us in the direction of a solution 
to help meet the housing needs of many Americans who still want 
to achieve the status of homeowner.
    Thank you. I will now recognize the ranking member, Mrs. 
Biggert, for 5 minutes.
    Mrs. Biggert. Thank you, Chairwoman Waters, and thank you 
for holding this hearing today. I would like to welcome today's 
witnesses, many of whom are not new to the subject matter, and 
I look forward to hearing their views. I am especially eager to 
hear from Assistant Secretary Brian Montgomery about how the 
FHA program may be of assistance in this current mortgage 
foreclosure crisis. We heard from him on this subject on 
Tuesday as well.
    Clearly, the FHA has a role to play in the solution to this 
country's rising foreclosure rate. As Assistant Secretary 
Montgomery indicated in testimony before this committee and 
others, FHA is already assisting credit-worthy borrowers in 
need of loss mitigation and restructuring assistance. According 
to the testimony that he delivered at Tuesday's hearing in 
2006, FHA assisted 75,000 families by preventing foreclosure 
through its loss mitigation program.
    Moving forward, I am sure that Ms. Waters will agree with 
me that one of the most important things that this Congress can 
do as we search for ways to help those who have been harmed by 
the subprime market is to give FHA the tools it needs to be a 
viable alternative for first time and lower income borrowers. 
That is why this hearing on FHA modernization is both timely 
and critical. By modernizing FHA we can provide another 
alternative for low-income borrowers who may otherwise be 
forced into higher cost subprime loans or even predatory 
products. By moving quickly to modernize FHA, we can provide a 
safe alternative for hundreds of thousands of lower income 
credit-worthy borrowers looking to either purchase a new home 
or avoid foreclosure.
    It is true that FHA cannot help all homeowners who are in 
the red, but it can help a good portion of them. Last month, 
both Chairwoman Waters and I introduced legislation aimed at 
reforming the FHA program. The bill that I introduced, H.R. 
1752, is virtually identical to H.R. 1521, which passed the 
House by an overwhelming vote of 415 to 7 on July 25, 2006. 
H.R. 1752 is the same as the bipartisan compromise that was 
agreed to by Chairwoman Waters, Chairman Frank, and then-
Chairman Mike Oxley in the last Congress. Given the 
overwhelming vote of 450 to 7, I had hoped that we could 
introduce the same bipartisan FHA modernization bill and move 
it expeditiously to the House Floor. The bill that I introduced 
incorporates all of the bipartisan agreements that were reached 
last year regarding how risk-based pricing and lower down 
payment requirements should be implemented. While the Frank-
Waters bill implements some risk-based pricing and lowered down 
payment requirements, I am concerned that it will limit the 
flexibility that the FHA needs to serve additional low-income 
borrowers or to respond to ever-changing market conditions. 
That lack of flexibility translates into fewer borrowers being 
eligible for FHA assistance under the Frank-Waters bill.
    Let me outline several of the differences between last 
year's bill, which I again introduced this year, and the Frank-
Waters bill. First, the Frank-Waters bill permits only first-
time home buyers to participate in a new low and no down 
payment loan program. My bill allows any FHA-qualified borrower 
to participate in the new FHA low loan program. Second, the 
Frank-Waters bill authorizes the FHA to implement risk-based 
pricing but it leaves in place the current outdated premium 
caps of 2.25 percent up-front and 0.55 percent annually. And 
the zero and lower down payment loans would have the higher 
caps. My concern is that these limits on premium caps will 
prevent FHA from serving riskier borrowers who could be 
prudently served by charging a slightly higher premium. With 
the flexibility to charge slightly higher premiums, FHA would 
be able to serve borrowers with the lower FICO scores who are 
currently being served only by the subprime market at very high 
interest rates. With FHA mortgage insurance, lenders will 
charge borrowers the market mortgage interest rate. Without FHA 
insurance, they have no choice but to turn the borrower away or 
to charge for a risk in an increased mortgage interest rate.
    Just like last year's House-passed bill, my bill implements 
premium caps, and enables the FHA to reach down and serve 
riskier borrowers, but in a prudent manner. The up-front 
premium is limited to a maximum of 3.0 percent, and the annual 
premium to a maximum of 2.0 percent.
    Third, my legislation includes another bipartisan agreement 
reached last year, the automatic reduction of annual premiums 
to no more than 55 basis points for loans that remain active 
after 5 years. Automatic premium reductions can be a good 
thing. They can reduce refinancing and perhaps some defaults 
and foreclosures as well. In contrast, the Franks-Waters bill 
requires the refund of excess up-front premiums charged to 
higher risk borrowers, those with FICO scores below 560. I am 
concerned that this provision could have unintended 
consequences of limiting the number of borrowers that could be 
served by the FHA program because it may require initial 
premiums to be even higher. The refund provision would also be 
very difficult to implement. It is inevitable in an insurance 
fund that lower risk borrowers will subsidize higher risk 
borrowers. Refunds of this nature undercut the concept of 
insurance and is the logical equivalent of a healthy person 
requiring a 100 percent refund of his or her health insurance 
premiums or a driver who does not get into an accident 
demanding his car insurance back.
    If I could be yielded the 5 minutes, and then I will yield?
    Chairwoman Waters. Without objection.
    Mrs. Biggert. Thank you. Finally, the most significant 
difference between the bill I introduced and the Frank-Waters 
FHA reform proposal is of greater concern to me and many of my 
colleagues and that is the inclusion of a provision that 
creates a funding place holder that envisions using FHA funds 
to support the creation of a national housing trust fund. While 
the other provisions that I have mentioned are the ones that 
represent significant differences between our introduced bills, 
using FHA program funds to create a housing trust fund is the 
most objectionable, and I believe that it is not an appropriate 
use of FHA funds. Taking funds out of FHA and using them for a 
purpose unrelated to its core mission would threaten the 
solvency of the FHA fund and its ability to pay out on 
insurance claims.
    There is general agreement on the need for FHA 
modernization legislation. Furthermore, there is no doubt that 
the FHA program can be an important tool for the lower income 
borrower. The legislation that passed the House last year and 
was supported, again by both Chairwoman Waters and Chairman 
Frank, would make FHA more efficient and competitive with 
subprime industry by decreasing premiums for borrowers, 
permitting no down payment loans, and increasing access to 
ownership. Removing the housing trust fund provision will allow 
us to work together on a bipartisan bill that can be moved 
expeditiously to the House Floor and that will receive 
overwhelming bipartisan support. We can even put it on the 
suspension calendar. The quicker we pass FHA reform in the 
House, the quicker we can send it to the Senate, and get it 
onto the President's desk, and I think relief is needed now.
    I want to commend Chairwoman Waters for her timeless 
efforts last Congress to pass FHA reform legislation by such an 
overwhelming bipartisan vote, and I look forward to working 
together to again achieve this goal. Again, thank you for 
holding this important hearing, and I look forward to hearing 
the testimony today from our distinguished witnesses.
    And I will yield. How many minutes do I have left?
    Chairwoman Waters. You have about 2 minutes.
    Mrs. Biggert. Okay, I will yield 1 minute to Mr. Miller and 
1 minute to Mr. Neugebauer. The gentleman from California.
    Mr. Miller of California. Thank you. It is good to have you 
here today. We are looking at a situation in the marketplace 
where we need to utilize every tool we have available to 
provide options for people to acquire a home. In areas such as 
California, we have an FHA program that has been available for 
70 years. And if you look at the drop in utilization in 
California because we are a high cost area, it is really 
stunning. In 2000, FHA insured 109,074 mortgages in California. 
In 2005, it was 51,037. In my district alone in 2000, we had 
7,000 mortgages. It dropped to 80. You are looking at a 99 
percent drop in an area that arguably needs the benefit of an 
FHA program or a conforming program as much as any other State 
in the Nation does. In fact, in high cost areas it is much 
harder for people to get into--is my minute up? Thank you very 
much.
    Chairwoman Waters. I think you have 1 additional minute, 
Mrs. Biggert. Who did you yield that to?
    Mrs. Biggert. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Well, thank you, Madam Chairwoman and 
Ranking Member Biggert. I think this is an important discussion 
we are having. We have been having a lot of discussions about 
subprime lending and making sure that we do not impact the 
marketplace with actions that we take here in Congress, 
certainly making FHA more relevant is a very important piece of 
policy that we are considering. Homeownership is at an all-time 
high. We need to continue to provide the ability for folks to 
do that, to experience the American dream.
    I am concerned about a couple of things, one in the new 
bill is I want to make sure that we make available, being able 
to participate in FHA programs a broader spectrum and making it 
less onerous for some of our mortgage brokers to participate in 
some of the requirements that we are putting on them. In our 
previous bill, we had some provisions in there to make it 
easier. And then the second piece of it is we need to make sure 
that this new program is actuarially sound. We do not need to 
be going down a road where we jeopardize the integrity of the 
FHA program. And one of the things that was mentioned is it 
looks like we are going down the road now of another extortion 
from an organization for money for purposes other than what 
that organization is proposed and chartered to do. And creating 
other funds and taking money out of FHA when we are embarking 
down a road of a new program, I think, is a very dangerous 
precedent.
    Thank you.
    Chairwoman Waters. I recognize the gentleman from 
Massachusetts, Chairman Frank, for 5 minutes.
    The Chairman. Thank you, Madam Chairwoman. I work with my 
friend from Texas on a lot of issues, and there are a lot of 
areas where this committee can cooperate across party lines, 
but nowhere have the differences that do exist between the 
parties been made more clear than in his last statement when he 
described the effort by the gentlewoman from California and 
myself to provide more funding for affordable housing as 
``extortion.'' The FHA is a Federal agency created by Federal 
law. And the notion that it is ``extortion'' to try to use some 
of the surplus funds it has been generating to help provide 
affordable housing greatly defines the difference between the 
parties.
    I noticed that the gentlewoman from Illinois--who 
temporarily had to leave and who has been a very constructive 
member also-- said, ``Well, we should not be using FHA funds 
for other purposes.'' Maybe she missed this, but during the 
entire period of Republican majority rule, that is exactly what 
was happening. The FHA was producing surpluses which went into 
the general treasury, and they have been used to support such 
non-housing related issues as the war in Iraq, nuclear testing, 
or anything else the Federal Government does. This notion that 
money should not come from the FHA for other purposes is a very 
new one because the FHA has been a money maker for the rest of 
the Federal Government in the past. Now it is true that many of 
us--including the gentlewoman from California and I--believe 
that if the FHA continues to generate surpluses, and we 
certainly will guarantee that first claim on any monies goes to 
keep the FHA functioning, but the question is should the 
surpluses go into the general treasury and help offset 
everything else the Federal Government does, such as farm 
subsidies, the war in Iraq, bridges to nowhere, and all of 
those other purposes for which it was put, or should we target 
it towards affordable housing?
    The gentlewoman from Illinois also expressed surprise, and 
to some extent disappointment, that the gentlewoman from 
California and I have a different version of the bill than the 
one that passed last year. And the gentlewoman from Illinois 
correctly noted that last year the gentlewoman from California 
and I supported a different version of the bill but, again, 
maybe she forgot something happened in the interim: the 
election. The gentlewoman from California and I are strongly 
committed to trying to help homeownership, to bring down costs 
for housing in general, and to help the middle class, but also 
to do something about that very significant fraction of our 
population who are not adequately housed, and who that pay too 
much for housing. Last year we did the best we could, we were 
not in the majority. We were being constructive. In fact, I 
think you could say we were setting a good example for our 
friends. When you are in the minority, you recognize that you 
are not going to write the major pieces of the bill and you 
cooperate to get the best deal you can. That is what the 
gentlewoman from California and I did. I know there have been 
people who have been surprised that we have not lived up to 
their stereotypes and that we have, in fact, been cooperative 
and conciliatory given the circumstances. Things are different 
now. And there are a lot of things that the parties have in 
common, but we have always had the view that we should be 
reaching out to help people who are in economic distress and 
now that we represent the majority, we plan to do that.
    And let me talk specifically about the terms under which 
the FHA would be lending to people with more credit risk. Yes, 
the bill that we are supporting says that if you or someone 
with higher credit risk and a lower credit score borrows the 
money and diligently pays it back, you should not, in the end, 
be charged more by your own Federal Government than someone 
making 3 times as much money as you. That is the radical 
proposition which we are advocating. We recognize there is a 
risk, and we said, okay, there will be some higher up-front 
premiums. But we say that if you meet your obligations, if you 
work very hard and pay back what you owe, why should you pay 
more than somebody who makes far more money than you because 
other people in your situation previously defaulted?
    Now the gentlewoman said, ``Well, that rule was strict, 
what is available?'' No, only if you consider the higher credit 
risk people to be a closed pot. I, along with the gentlewoman 
from California, have been preaching, and I think finally we 
are going to win and we are going to admit California, 
Massachusetts, and New York to the Union. We are going to allow 
them to fully participate in Federal housing programs: FHA, 
Fannie Mae, and Freddie Mac. They have been somewhat excluded 
for some time. That will generate some revenues, and we intend 
to take some of the additional revenues generated within this 
set of programs and use them to make the radical proposition--
that if you are of a higher credit risk and you borrow money 
and you get your mortgage insurance from the FHA and you pay 
back every penny you were supposed to, that you will not be 
charged more by your own Federal Government--true. That is the 
best thing we can do about the subprime market.
    And there was also a comparison to insurance. Well, this is 
the Federal Government. I do not think that the Federal 
Government ought to--I know there is a dispute about whether or 
not we should help the poor at the expense of the wealthy but 
is there really an argument that we should penalize lower 
income people by charging them more for exactly the same 
mortgage insurance as someone who makes 3 times as much because 
somebody else who makes the same amount they do did not pay it 
back? So, yes, that is what we are saying. We are saying that 
if the FHA is to generate surpluses, as it has for 12 years, 
rather than that money going for earmarks in the agricultural 
surpluses and wars and trips and other things, it should be 
recycled to some extent for affordable housing, which does help 
everybody as you add to housing. One of the problems we have 
had is a housing program whereby we have only done vouchers so 
we have added to the demand for housing without increasing the 
supply. And we also believe that in dealing with people in the 
subprime category, we should extend to them the ability to go 
to the FHA and be helped. And if they make their payments like 
anybody else, they should not be charged more than anybody 
else.
    I thank the gentlewoman for her leadership, which has been 
so strong in this area.
    Chairwoman Waters. Thank you very much, Mr. Chairman. All 
time has been exhausted on both sides. We are going to move to 
our panel. On our first panel we have the Honorable Brian D. 
Montgomery, Assistant Secretary for Housing, Federal Housing 
Commissioner, U.S. Department of Housing and Urban Development. 
Welcome, Mr. Montgomery.

   STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, ASSISTANT 
   SECRETARY FOR HOUSING, FEDERAL HOUSING COMMISSIONER, U.S. 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Montgomery. Thank you very much, Chairwoman Waters, 
Chairman Frank, and Ranking Member Biggert, for inviting me 
here today to testify about the modernization of FHA. I want to 
begin this morning also by thanking not only just both of you, 
but again Chairman Frank and Ranking Member Bachus, for your 
strong leadership on this issue, and that goes for the entire 
committee as well for allowing me to testify on how best to fix 
FHA.
    Yes, last year, our hard work, our collective hard work 
paid off to the tune of 107 cosponsors. They were evenly split 
between both sides of the aisle. Yes, and a resounding 415 to 7 
vote on the Floor of the House. Well, this year, as we all 
know, we have two bills pending before this committee. Both 
bills would raise loan limits in high-cost areas. They would 
eliminate FHA's antiquated down payment requirements. And they 
would allow, to varying degrees, risk-based pricing to occur 
and eliminate the burdensome cap on reverse mortgages. Yes, we 
look forward to working with this committee on a bipartisan 
basis like we did last year in helping craft a comprehensive 
bill that would provide underserved Americans with a safe 
mortgage at a fair price. And speaking of fair price, when 
borrowers pay FHA insurance premiums, they are essentially 
buying a prime interest rate. An FHA-insured loan is generally 
3 to 4 percentages lower than a subprime loan. When comparing 
these two loan types on a $225,000 mortgage, this rate 
differences translates into an average savings of $300 a month. 
That is $137 over the life of the loan.
    In recent years, the primary users of many subprime loans 
have been minority and lower income first-time home buyers, 
many of whom struggle to qualify for prime loans due to 
underwriting or down payment requirements. It is our belief 
that had FHA had a minimum, and I say a minimum, amount of 
flexibility like that proposed in the FHA modernization, we 
could have better served many of these borrowers. The impact on 
African-American and Latino borrowers has been particularly 
profound. For instance, according to our 2004 numbers, 40 
percent of African Americans and 23 percent of Latinos pay an 
interest rate 3 percentage points higher than market rate.
    As you all know, the volume of subprime lending is 
declining rapidly. While this may appear to be good news, the 
departure of a strong subprime presence means many lending 
institutions may turn their backs on lower income borrowers. In 
order to offset this thinning of credit, there needs to be a 
mortgage alternative we like to call, ``Back to Basics,'' which 
would provide a wide swathe of lower-income borrowers with the 
credit and loan options they require, and that is a modernized 
and reinvigorated FHA.
    As I mentioned before, we are seeking the following 
changes. First, we are proposing to eliminate our complicated 
down payment calculation and 3 percent minimum cash investment 
requirement. Second, our proposal seeks to provide FHA the 
flexibility to set insurance premiums commensurate with the 
risk of the loans. In so doing, we could reach deeper into the 
pool of prospective borrowers while protecting the financial 
soundness of the FHA mortgage insurance fund.
    Lastly, I would like to mention the proposed increase in 
FHA loan limits. By increasing the loan limits to 65 percent 
and 100 percent of the conforming loan limit, which we support, 
FHA would once again be a player in high cost areas, regions 
that have previously been out of play, such as the entire State 
of California and most of the Northeast. What is more, raising 
the floor to 65 percent of the conforming loan limit has the 
added benefit of giving families better access to newly 
constructed housing, which is on average more costly.
    Finally, before closing, I would like to take a moment to 
assure you of FHA's readiness to proceed. Regarding our 
capacity to manage our book of business, the inspector general 
recently completed its annual audit of FHA's financial 
statements. In short, we received a clean opinion. In fact, 
this marks the 14th consecutive year of clean audits. However, 
it is the first in which absolutely no material weakness were 
identified, that it never happened. What this means is that 
when FHA reports on its financial position at the end of each 
year, the reports are accurate and fairly portray the financial 
status of the FHA mortgage insurance fund. With such a long 
history of success, and the continual improvements to our 
processes, I am not sure why some people question our ability 
to manage the FHA funds. And in light of the recent GAO report 
taking us off the high-risk list for the first time since 1994, 
there should be no doubt--no doubt--that we can manage our 
programs. If we were not fiscally sound, trying to implement 
change would spell disaster but this GAO report, as well as our 
most recent audit, reveals that FHA is both financially stable 
and consistent.
    In conclusion, I believe that FHA should continue to play a 
key role in the national mortgage market, and I am here today 
to make the case for changes to the National Housing Act that 
will permit us to continue to fulfill this critical mission.
    I want to thank you again for providing the opportunity for 
me to testify today.
    [The prepared statement of Mr. Montgomery can be found on 
page 65 of the appendix.]
    Chairwoman Waters. Thank you very much, Mr. Montgomery. I 
recognize myself for questions for 5 minutes. As has been said 
over and over again, and as was said by Mrs. Biggert this 
morning, we did a fantastic job of getting bipartisan support 
for FHA modernization in the last session of Congress, and I am 
looking forward to cooperation from both sides of the aisle so 
that we can move this legislation and open up opportunities for 
people who have been thrown into the subprime market and who 
find themselves certainly in great difficulty now.
    I have heard some of the concerns that were registered by 
Mrs. Biggert, which I suppose caused her to want to carry a 
bill to make sure those concerns were addressed. Do you agree 
that we need to do anything differently than we did in the last 
bill? If so, what? And I would like for you to specifically 
comment about our housing trust fund and this legislation.
    Mr. Montgomery. Thank you. Let me discuss the trust fund 
first. To be honest, we do not know enough yet about how this 
trust fund would be structured, where the funds would go. I, 
speaking for FHA, have IT system requirements as the world's 
largest mortgage insurance company, government mortgage 
insurance company, and the world's largest mortgage company for 
minorities. I would like to be able to have the ability to get 
professional staff that would enable us to carry out our 
mission, especially in a reformed FHA, and to be able to pay 
them similar to other government agencies do. So speaking 
selfishly for FHA, I could use those funds to help do some of 
what I just articulated. So I will say until we know more about 
how the fund would be structured, I certainly appreciate the 
concept, and am very sympathetic to the concept, but until we 
know more about it, it would be difficult for us to say that we 
would wholeheartedly support it.
    Chairwoman Waters. Do you agree that there is a housing 
crisis?
    Mr. Montgomery. I have said publicly many times that there 
is a housing crisis in this country, and I have said publicly 
in other settings, in particular for persons with disabilities 
and for the elderly.
    Chairwoman Waters. Do you agree that FHA modernization 
could open up opportunities for many folks who could not be 
serviced or who get thrown into a subprime market that places 
them at great risk?
    Mr. Montgomery. Absolutely.
    Chairwoman Waters. Do you agree that it is important that 
this bill moves without any obstruction so that we can have a 
reformed FHA?
    Mr. Montgomery. If I could respond to that, and also to 
your first question as to the differences. Under the premium 
structure, Madam Chairwoman, that you have versus the Biggert 
bill, by having a cap of 2.25 percent versus a cap of 3 
percent, that precludes us from being able to help lower 
income, higher risk borrowers because of the actuarial 
requirements of the mutual mortgage insurance fund. While I can 
understand why you would have your cap, and Mrs. Biggert has 
hers, we would propose, and so support as we did last year, to 
have the maximum flexibility. And that is one of the reasons 
for some of the predicament that we are in on the subprime--to 
be able to go to 3 percent because as you heard me say 
previously, looking at the difference between FHA even at 3 
percent, by the way, the difference between 3 percent--1 
percent and 3 percent on a $225,000 loan is about $26. And you 
heard me say with the subprime borrowers at 3 points above par, 
the difference on that $225,000 home is about $300 a month. So, 
again, we think by having the 3 percent, would some borrowers 
like that? It gives them flexibility. We can reach lower 
income, lower FICO score borrowers, including many subprime 
borrowers whom we cannot reach today.
    Chairwoman Waters. But we are going to agree that we are 
not going to let that difference stop this bill, is that right?
    Mr. Montgomery. I am sorry, ma'am?
    Chairwoman Waters. We are not going to let that difference 
get in the way of getting a bill passed and onto the 
President's desk?
    Mr. Montgomery. Well, since I do not have a vote in this 
process, I will let you all decide that. In all candor, Madam 
Chairwoman, everybody has worked so hard on this bill and that 
is the good news here. We all know we need to modernize and 
reinvigorate FHA, but we feel strongly that we need the ability 
to reach higher risk, lower FICO score borrowers and we can do 
that at 3 percent--more of them I should say, more of them than 
we can at 2.25 percent.
    Chairwoman Waters. Thank you, Mr. Montgomery. And I will 
recognize our ranking member, Mrs. Biggert, for 5 minutes for 
questions.
    Mrs. Biggert. Thank you, Madam Chairwoman. Commissioner 
Montgomery, could you explain the importance of allowing FHA to 
assess the risk of each individual borrowers when setting 
mortgage insurance premium prices?
    Mr. Montgomery. Well, that is critical. We are an insurance 
company; we are in the risk business. We are in the business of 
helping lower income borrowers with little savings for a down 
payment and perhaps some blemishes on their credit. That is 
what we have done for decades now. But we take very seriously 
protecting the solvency in the FHA fund so we put each risk 
category through a rigorous test, through an actuarial review. 
Our Office of Evaluation conducts that. And it is critically 
important for us to be able to identify any number of different 
variables for all borrowers. By the way, that pool of borrowers 
that we have profiles that we can look at is some 4.5 million 
or so different risk profiles.
    Mrs. Biggert. How does this type of price structure allow 
FHA to help more low-income borrowers?
    Mr. Montgomery. Well, as you heard me mention previously, 
well, let me add a little bit to that. Let's say the up-front 
premium is 1 percent on a $225,000 house. Your payment for the 
up-front mortgage insurance is about $14--$13.90 and change. At 
2 percent, you are at about $26. And at 3 percent, you are at 
roughly $39.95 or so. So the difference is not much. Now the 
$225,000 figure in this room sounds like a low amount. But as 
Congressman Neugebauer from Texas knows, that is a big home in 
the South and in the Midwest and in other parts of the country. 
As a matter of fact, 75 percent of our mortgages currently are 
below $150,000. And the average cost on average, the median for 
FHA, is somewhere around a $130,000 mortgage. So the $225,000 
example is half that for the lower income--or the lower priced 
home.
    Mrs. Biggert. If the bill that we had last year was enacted 
tomorrow, how quickly could you implement the reforms?
    Mr. Montgomery. Well, like we did last year, and we are 
doing this year, in some cases we are preparing for a victory 
party let's say that we may not have. I say that in that we 
cannot wait. Hopefully, we will get a reformed FHA bill 
through. We cannot wait until that moment in time to say, 
``What do we do now?'' So we were meeting last year, and we 
have been meeting this year with our IT staff. We are prepared 
to make the changes to our underwriting system to what is 
called our total scorecard. And to begin, we also have been 
putting together what the training for lenders would look like. 
We would be ready on day one. We would be more ready on day 
two, but we will be ready on day one.
    Mrs. Biggert. Okay. I understand that FHA has nearly the 
same delinquency rate as the subprime market but the 
foreclosure rate is much lower. Could you explain what tools 
you use between the delinquency or default and foreclosure and 
whether this accounts for the lower foreclosure rate?
    Mr. Montgomery. Well, the subprime market has a foreclosure 
rate twice that of FHA. And, yes, our 90-day delinquent rates 
are within points of each other. I think that the fact that our 
foreclosure rate is half points to your point and that is, yes, 
we have a very vigorous loss mitigation program, we require 
lenders to reach out and to work with borrowers who are in 
trouble and, yes, we saved 75,000 families last year--FHA-
insured families from foreclosure. I think that point is more 
important today than probably at any point in the last several 
years, especially as we see many other families who have 
subprime products facing some financial crisis in their life.
    Mrs. Biggert. How many additional borrowers could you serve 
if last year's House bill was enacted?
    Mr. Montgomery. Well, based on last year's bill, we 
expected our volume to essentially to double between now and 
2012, not including the reverse mortgages, by 2012 we would be 
serving 1.2 million borrowers under FHA, about double what we 
are today.
    Mrs. Biggert. How many people could you serve if nothing is 
done, if there is no change, and we do not have any 
modernization bill?
    Mr. Montgomery. Well, right now we are serving roughly 
500,000 borrowers. As you know, our volume of business has been 
in a free fall for about 3 or 4 years. The good news is that, 
through some process improvements, we have sort of stopped the 
hemorrhaging, but we think again in Mr. Miller's State and 
others, the fact that they cannot use this product did not make 
any sense to us. That is why we want to improve it.
    Mrs. Biggert. Is there a difference in how many people you 
could serve if the Waters-Frank bill was enacted versus last 
year's bill or the current situation?
    Mr. Montgomery. It would be more difficult at the 2.25 
percent increase for us to serve borrowers with incomes less 
than $45,000 a year and with FICO scores below about 600. 
Because of the actuarial review that we conduct and, yes, we 
are an insurance company, risk is our business, we would have 
to probably raise the cash investment on those types of 
borrowers above 3 percent.
    Mrs. Biggert. Thank you. I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. Are there any other 
members who wish to be recognized for questions for Mr. 
Montgomery? Mr. Cleaver, in order of seniority unless you are 
not ready, then we will go to Ms. Maloney.
    Mrs. Maloney. I defer to him because he was here first.
    Chairwoman Waters. But he said it is okay.
    Mrs. Maloney. Okay. Well, first of all, I just want to 
really congratulate Chairwoman Waters and Chairman Frank for 
moving so swiftly on this, first going to the Katrina area and 
moving a GSC bill that is going to put some housing money out 
of the government into the ground to help the people. And 
really revitalizing the FHA program, the Expanding Home 
Ownership Act is part of the puzzle we need to help the 
predatory lending tsunami and making it available to people and 
really making it more flexible. There are ways that we could 
change it so that it is available and more flexible to people 
in need. And this bill goes a long way towards doing that. And 
I really cannot thank the chairwoman, the timing of it could 
not be more important to get this going forward, and to have 
had a bill with a fair and balanced approach.
    One area in the GSA/GSE bill that Chairwoman Waters moved 
forward, Mr. Baker and I added daycare, which is in a crisis in 
this country. It is not there. People are opening up their 
homes for daycare, licensed daycare. In New York City, there is 
a waiting list of hundreds of thousands of people. It is not 
there and it takes a man and a woman to put the food on the 
table and pay the rent now and too often in American society. 
So both are working and we need more daycare. And I am going to 
be working on an amendment that would be part of FHA, expanding 
it in a certain framework, so that daycare loans and financing 
could be there in a flexible way not only for new construction 
but for homes that are going to have licensed daycare in it. 
That is the only daycare that is growing in New York is 
licensed daycare in their homes. And I would like the 
gentleman, if he could, to respond to this concept? We added it 
to the GSE bill as one of the areas that you can get secondary 
market financing. It is a creative way to get money into the 
system to help with this critical issue that is confronting 
families of America.
    Mr. Montgomery. Thank you very much for your question. 
Whenever I hear the word ``daycare,'' my ears perk up because I 
have a 5\1/2\ month old at home. Conceptually, Congresswoman, 
certainly we would love to hear more about how your bill would 
work and certainly understand the plight of many lower income 
families and how they juggle both work and taking care of their 
children. We certainly look forward to having those discussions 
with you in that area.
    Mrs. Maloney. Secondly, on the subprime crisis that we are 
confronting, I think we all agree that preserving homeownership 
is just as important as expanding it. And what in your opinion, 
whether it is in this bill or through another vehicle, should 
Congress do to make sure that we help those people who are 
being affected by the current subprime crunch, many of whom 
were exploited, they were targeted? First of all, how do you 
think it could be incorporated in your bill or rather in 
Congresswoman Water's bill to expand the way the FHA could help 
people restructure loans in crisis or any other ideas that we 
can have as we move forward to help people stay in their homes?
    Mr. Montgomery. The good news is that we are helping 
subprime borrowers today. As a matter of fact, we are on track 
this year to help people getting out of a subprime loan or 
refinancing into an FHA loan, we are on track to do 
conservatively about 60,000 this year with the existing FHA 
structure. Many families on their own obviously have figured 
out they are in a predicament and reached out to us for help. 
But we think the best way relative to refinancing is to have 
that latitude for people getting out of a subprime loan into an 
FHA loan, to have the latitude to go to a 3 percent up-front 
premium because these would be some higher risk borrowers.
    Mrs. Maloney. Well, specifically, one idea that I have, or 
one hurdle that is out there I have read about, is that some 
homeowners who would otherwise make good candidates with an FHA 
loan with a decent track record on time payments may be barred 
from refinancing with FHA if they are not current on their 
existing loan. Oftentimes, because they are suffering from the 
payment shock of the interest rate reset, jumping from the 
teaser rates to a higher level, do you think looking into 
changing this requirement might benefit homeowners and FHA if 
it could be done in a way that is responsible?
    Mr. Montgomery. Absolutely and that is something we are 
looking into today. I discussed at Tuesday's hearing, since it 
would present a new risk category for us, that the Credit 
Reform Act of 1990 requires us to put that new risk category, 
that would be delinquent borrowers but for the reset they had 
good credit let's say for the previous 12 months, we are 
looking at that right now.
    Mrs. Maloney. And, lastly, because my time is running out, 
could this change be done administratively by HUD or should 
there be a legislative fix for it?
    Mr. Montgomery. The Credit Reform Act requires that we put 
it through a stress test. We are doing that right now. And I 
would have that authority based on the outcome of the review.
    Mrs. Maloney. Okay, thank you very much.
    Chairwoman Waters. Thank you. Mr. Neugebauer?
    Mr. Neugebauer. Thank you, Madam Chairwoman. Commissioner, 
I appreciate your being here, and I think the intent of this 
committee is to make FHA a more relevant factor in the 
marketplace. One of the concerns I have is when you were 
talking about flexibility a while ago, our financial markets 
are very sophisticated today. And one of the reasons I believe 
that your business is down is due to your inability to really 
respond to market conditions. I want to go back to the rate 
thing just a little bit. Now, it is my understanding if you 
initiate some of these new programs, those programs will be 
bracketed as a category and you will have to actuarially 
measure what your loss ratios are on these new types of 
products that you are putting out. And doesn't it make sense 
for you to have the flexibility to be competitive to be able to 
price those based on what your actuarial findings actually are?
    Mr. Montgomery. Absolutely, Congressman, I think the FHA 
Commissioner should have that flexibility.
    Mr. Neugebauer. And doesn't it also make sense that if in 
some cases, if those certain types of products that you are 
doing are actually performing better, you have the flexibility 
to actually lower those premiums, that if in some cases, those 
certain types of products that you are doing are actually 
performing better, you have the flexibility to actually lower 
those premiums, and obviously make them more affordable for 
some of our borrowers?
    Mr. Montgomery. Again, yes sir, we certainly agree, and in 
fact had the Commissioner, me, or whomever at the previous 
flexibility to adjust premiums, look at today, we are still 
discussing having that flexibility now almost a year to the day 
from last year's hearing. I suspect we could have helped a lot 
more lower income borrowers during that year period had we had 
that flexibility.
    Mr. Neugebauer. And I want to go back to a little bit of 
some things about, whether it is a housing fund, what we are 
talking about is retained earnings, we are talking about 
profits. What do you do--if FHA begins to make more money and 
stay on the same financial course, what do you do with the 
earnings? And if we are talking about distributing, I guess we 
feel like in some cases those are excess earnings. I have never 
made earnings in excess before but I would like to get to that 
point. But one of the things that I think is important is if 
you are managing an entity that is trying to move towards an 
affordable housing goal, doesn't it make sense then to be able 
to maybe make some investments internally within FHA and 
possibly give you the ability to create some new kinds of 
products and programs rather than having to worry about those 
monies being taken out arbitrarily from FHA?
    Mr. Montgomery. As I referenced earlier, if we had the 
ability to make some of the IT improvements, one of the 
programs that they use is computer languages that you and I 
probably had when we were in college that most people under 30 
have never heard of--Fortran and COBOL. We have a fantastic CIO 
but we cannot be the priority in every category. And so, yes, 
there are some improvements that we need to make and it would 
be good to have the flexibility to do so.
    Mr. Neugebauer. You and I had this conversation, I think, 
when we were talking about the last bill, and that is that you 
depend upon the originators to go out there and to sell your 
product. While you can put the product together and you have 
something, the ability for FHA to expand their business is 
going to depend on, number one, the acceptability of the 
product, and number two, the availability of people to go out 
and originate those, is that correct?
    Mr. Montgomery. That is correct. We do allow and have 
brokers and lenders and other certainly sell our products so to 
speak, we require that.
    Mr. Neugebauer. And one of the things that is not in the 
new bill that concerns me is the fact that we had put a 
requirement, we had talked about allowing for some of the 
smaller originators to, rather than having to have an expensive 
audit, and we all know with today's environment, we have had a 
little dose of Sarbanes-Oxley, we know what the cost of these 
audits, they have skyrocketed. And for our small business 
people who want to have a little small mortgage business, that 
makes it a very difficult process for them. Would you support 
being able to look at an alternative, a bond or something like 
that, for some of our smaller originators to be able to 
participate in your programs?
    Mr. Montgomery. We have had previous discussions on the 
bond and relative to the responsibility to protect the solvency 
of the mutual mortgage insurance fund, a surety bond, while 
good at the State level, doesn't give us a lot in that respect. 
But let me say though that I am very sympathetic, Congressman, 
for the mortgage brokers here, aware of that, to those small 
businesses. I go out and I attend their conferences, I travel a 
lot, I meet with mortgage brokers and when a small business, a 
father and son, a mother and daughter, or two sisters, 
whatever, who are mortgage brokers and love it, taxes say we do 
not make a lot but we cannot use the FHA product. It doesn't 
make any sense to me for a government program to be so onerous 
so that small businesses cannot use it. So we are where we need 
to be in that respect yet although we have discussions with the 
mortgage brokers and there are a couple of things that we have 
been discussing and ultimately we allow more mortgage brokers 
to use the program.
    Mr. Neugebauer. I think it is going to be imperative that 
we do that.
    Chairwoman Waters. Thank you, your time has expired. Mr. 
Cleaver for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman, and thank you for 
scheduling this meeting and for having the initiative to push 
us toward transforming the FHA. Mr. Montgomery, like a lot of 
people, Baby Boomers at least, I came out of college and bought 
my first home with FHA, an $18,000 home. And at that time, 
everyone I knew buying homes were going through FHA. I think it 
served its purpose well. And, of course, today in your 
testimony when you talked about the drop in the FHA share of 
the market in Chairwoman Waters' district, that just is mind-
boggling. What I would like to ask or find out from you is 
Freddie Mac has said that they are going to buy up to $20 
billion in subprime mortgages. You cannot compete with the 
giants but is there a way, a possibility, for you to beef up 
your portfolio, is it possible for FHA to buy any of the 
subprime mortgages?
    Mr. Montgomery. Thank you, sir. As I mentioned here in this 
very room on Tuesday during the hearing, we are helping 
subprime borrowers today. You may have heard me reference 
earlier that we are on track to assist, we think, about 60,000 
conservatively this year who are getting out of a subprime loan 
in FHA. With the reformed and modernized FHA, especially to 
have flexibility on the premiums, there is no doubt in my mind 
we can assist many more. Now that is not to say we are going to 
throw open the barn door so to speak. We have to protect the 
solvency of the Mutual Mortgage Insurance Fund so many 
families, all of whom, would still have to go through our 
eligibility and underwriting criteria.
    Mr. Cleaver. There is a lot of discussion going on about 
Freddie Mac, Fannie Mae, and the size of their portfolio, and 
it seems to me that the best way to reduce that portfolio to 
bring it into some kind of normality would be for FHA to 
increase its share of the market. If you had an opportunity to 
write on that sheet of paper with your left hand, what would be 
the best thing that could happen for FHA to begin to rise again 
what would it be?
    Mr. Montgomery. Well, certainly upgrading our IT systems 
and being able to pay some of our professional staff more. But 
as far as the retail thing, being able to help borrowers having 
the maximum flexibility on the up-front premiums and on the 
annual premiums would allow us to help higher risk, lower FICO 
score borrowers in an actuarial sound manner. And, again, we 
are helping many today and it is our strong belief we can help 
many more with a reformed, modernized FHA.
    Mr. Cleaver. But what could this committee do?
    Mr. Montgomery. Pass an FHA bill.
    [Laughter]
    Mr. Montgomery. I normally don't get that question so I 
appreciate the efforts to try and pass the FHA bill.
    Mr. Cleaver. That is good. That is the best response. Is 
there a plan to increase multi-family loan fees?
    Mr. Montgomery. Relative to the OA budget, there is a 
proposal in there different from the proposal last year that 
was rescinded to increase in some instances the fees for, we 
are talking about multi-family here, to increase their 
insurance premiums. That will go out for public comment here in 
the next several weeks. It has not happened. I want to stress 
that. And please understand that we will put it out for public 
comment and be mindful of any comments that we receive.
    Mr. Cleaver. Thank you, Madam Chairwoman. I yield back the 
balance of my time.
    Chairwoman Waters. Thank you. The gentleman from 
California, Mr. Miller, for 5 minutes.
    Mr. Miller of California. Thank you, I will take blame for 
the security bond language in last year's bill because I had it 
put in there. And I did it for a reason--mortgage brokers 
originate more loans than any other group in the marketplace 
out there. And yet if you look at the cost prohibitive, time 
consuming financial audits and net worth requirement, it limits 
brokers' participation in the FHA program. And you wanted a 
minimum amount of flexibility, which I think is an 
understatement, I want to give you a maximum amount, but in 
some of these areas where we are talking about instead of as 
some might transfer assets, we all know how this is done, you 
can transfer assets and make your audit look really good, 
assets disappear, in the construction industry, we have been 
required for years to put up surety bonds and it has worked 
very, very well. And if it is a cash audit or it is a surety 
bond for the given amount of money, which equates to the same, 
one is accessible if there is a problem, I do not understand 
why we would limit participation in a program that I will state 
from my area when it has dropped 99 percent in 5 years, you and 
I both look and say there is a severe, severe problem here. And 
when you look at the largest group of loan originators in this 
country and we say how do we also provide flexibility for them 
as we are trying to provide for you and with that flexibility 
safeguard the requirements so we are not saying, okay, just do 
it without any safeguard. But somebody is going to write a 
surety bond, I know people who write surety bonds and they do 
not go out there and arbitrarily write a surety bond without 
knowing they have something to go after if that occurs. So why 
do you think that we cannot structure a reasonable approach to 
including more individuals to be able to work with FHA and 
provide an alternate such as surety bond?
    Mr. Montgomery. We are trying to find a reasonable 
approach.
    Mr. Miller of California. But you are willing to work? 
Okay, Maxine, you heard that, he is willing to work, so we need 
to look at this, okay. That is a good approach.
    Mr. Montgomery. Just on the surety bond there is no 
national standard for surety bonds, they vary from State to 
State. But I do want to stress again that we are very 
sympathetic--
    Mr. Miller of California. Well, that is why I have been 
fighting for optional Federal charters for the insurance 
industry because every State requires a different base, some 
allow third party insurers, some do not, so I do not disagree 
there, but if the bond is written in a fashion acceptable, I do 
not know why that would be precluded from the conversation?
    Mr. Montgomery. Well, in reference to your previous comment 
about being sympathetic and discussing with them other options, 
we are having those discussions as recently as several weeks 
ago with the mortgage brokers.
    Mr. Miller of California. Okay, so let's say that is still 
on the table and we can still do that. If you look at the 
situation we are facing in the mortgage market today, I think 
it is profound how we need to reform FHA. What are the benefits 
FHA--do you think an FHA program has over other options that 
might be available in the marketplace today?
    Mr. Montgomery. It is a back-to-basics approach. We have 
never had anybody call our toll-free number and say, ``I do not 
understand my FHA loan.'' Your first payment is equal to your 
last payment, no pre-payment penalties, no teaser rates, no 
hidden costs. The benefits are far more than what some of these 
other loans--
    Mr. Miller of California. So you think the FHA can really 
complement the private sector in providing a broader base for 
your project to be applied?
    Mr. Montgomery. Well, we are a government mortgage 
insurance program that works in partnership with lenders, 
originators, and brokers. To me it is the best of both worlds. 
You have a private delivery system and the beauty of a 
government program with a 73 year track record.
    Mr. Miller of California. And so if we are going to do 
something that could likely double the business you currently 
generate let's say, which we think you are being held back 
tremendously, a very safe program, it works, it's beneficial, 
there is really no reason why we shouldn't include the largest 
originator of loans, and that is the mortgage brokers, in your 
program and be somewhat flexible, yet provide safeguards on how 
they apply your program and are involved in it, would you not 
say there are options for us there?
    Mr. Montgomery. We are again having those discussions with 
them and will continue to have them and try to find a 
reasonable compromise. Again, recognizing I have to be mindful 
of the FHA insurance fund.
    Mr. Miller of California. Okay, I agree with that. And I 
think, Madam Chairwoman, that we worked very well last year in 
constructing a bill that we all thought would do the best and 
provide the most for our basic communities, and I really trust 
that we can do that again this year, that we can come together 
and look at good and bad and both and say, ``How do we come to 
some reasonable compromise?'' ``How do we expand a program that 
we absolutely understand and acknowledge is beneficial to the 
market today, that in many cases has been impacted because of 
lack of participation of FHA and GSEs.'' And I know for the 
last 3 years, you and I have looked at this issue, how do we 
expand it, and I think we are all going in a good direction, it 
is just how we get there and do we get there in a way that we 
think is acceptable, and can be applied in a broad base 
fashion. So I look forward to working with you on this bill as 
it proceeds.
    Chairwoman Waters. Thank you very much, Mr. Miller. I will 
recognize Mr. Green of Texas for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and thank you very 
much for hosting this hearing and presenting this piece of 
legislation. My understanding of the history of the legislation 
is that the essence of this legislation was captured in 
previous legislation that was supported by this House and my 
prayer is that we will receive the same support in this session 
of Congress.
    Mr. Montgomery, thank you very much for being here today. I 
am so honored to share with my colleagues that you have been 
very helpful in the current position that you are in, you have 
been very responsive, and you have gone out of your way to be 
helpful. You came to Houston, Texas, I believe, to help us with 
one of our concerns and for this we greatly appreciate you. 
Just a couple of really quick questions. The first is you give 
an example in your testimony of a $225,000 loan and you explain 
how this will--if FHA were the financier, the borrower would 
save $137,000 over the life of the loan. Would you kindly go 
through this as expeditiously as possible because I do have a 
second question? I want people to hear from you how you believe 
you can best serve people with reference to this example.
    Mr. Montgomery. I will give you the very quick answer, we 
price for the risk and the mortgage insurance. Subprime lenders 
price for the risk and the interest rate. And, thus, you can 
see the stark, very stark contrast between at a cap of 3 
percent, $39 more a month versus upwards of $300 more a month, 
and, yes, $137,000 over the life of the loan.
    Mr. Green. And do you consider yourself in terms of 
positioning, your position somewhere between prime and 
subprime, is that a fair statement?
    Mr. Montgomery. We are far closer to prime for this reason, 
when a borrower gets an FHA loan through the mortgage 
insurance, they are essentially buying a prime interest rate.
    Mr. Green. And the final question has to do with today's 
news, we find that we have many persons who are being 
foreclosed on, how would your FHA alternative be a safer 
alternative than a subprime alternative?
    Mr. Montgomery. By far the fact that we are the most 
transparent loan process out there with the full faith and 
credit of the U.S. Government backing these loans. There are no 
surprises with an FHA loan between the no prepayment penalties, 
which are crippling families today, no teaser rates, no sticker 
shock. And, as I referenced earlier, no one has ever said, ``I 
didn't understand my FHA loan'', because it is a back to basics 
approach.
    Mr. Green. I thank you very much, and I thank you again for 
coming to Houston. Madam Chairwoman, I yield back the balance 
of my time.
    Chairwoman Waters. Thank you very much. Ms. Capito?
    Mrs. Capito. Thank you, Madam Chairwoman. Thank you, Mr. 
Commissioner, for coming. I noticed in your testimony that one 
of the proposed changes is to increase the loan limits, FHA 
loan limits, and then you get into some fairly technical kinds 
of comparisons as to why that is important. Could you just 
briefly tell me, what are the loan limits and what are you 
looking to increase them to?
    Mr. Montgomery. Right now for the high-cost States, such as 
California and most of the Northeast, we are at about 87 
percent of the conformity rate, which is about $360,000 a year.
    Mrs. Capito. That is your max-out rate?
    Mr. Montgomery. That is just for those high-cost States. 
Essentially for everyone else with a few exceptions, give or 
take, the maximum is around $200,000 a year.
    Mrs. Capito. Okay, I know one of the hurdles of home 
buying, particularly first-time home buyers, is that down 
payment, and we passed a piece of legislation, the American 
Dream Down Payment Act, to try to help first-time home buyers 
jumping over that hurdle. Does your product meld with that? Do 
your brokers, are they able to couple those together? Do you 
see that as helping with the potential growth of FHA loans? How 
do you perceive that?
    Mr. Montgomery. Well, the realities have estimated last 
year about 45 percent of loans were made with no down payment. 
Our proposal does away with the requirement for a 3 percent 
cash investment but essentially runs the gamut in between from 
a 97 percent LTV up to 99.95 LTV, if you will. Because of the 
risk-based approach and families having some choice, how much 
they want in an up-front premium or in an annual premium, they 
can in many cases have that choice. It is just like families 
have today, some families elect to pay a little higher interest 
rate to keep more money in their pocket so they can pay for a 
new refrigerator or upgrades to their home and the like.
    Mrs. Capito. And how does the FHA from say, the West 
Virginia Housing Development Fund, is there a good 
communication between State availability of loans and the FHA? 
And do you feel like you are working together to maximize the 
resources?
    Mr. Montgomery. We are working together. We can always work 
together better but again in the high-cost States, the State 
housing finance agency has difficulty offering an FHA product 
because of our constraints on the premium structure and 
certainly on the loan limits.
    Mrs. Capito. Okay, thank you. Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. Mr. Clay for 5 
minutes.
    Mr. Clay. Thank you so much, Madam Chairwoman. And thank 
you for holding this hearing today. Mr. Montgomery, my question 
is not strictly about FHA. We have a national crisis with home 
foreclosures and it will affect the national economy in an 
adverse way and the effect on some local economies will be 
devastating. Millions of families will lose equity and their 
standard of living. I noticed today that even Freddie Mac has 
decided to purchase $20 billion in these troubled loans. The 
executive director of the Equal Housing Opportunity Council 
report on CBS News that home mortgage foreclosures are up in 
both the City of St. Louis and St. Louis County, which I 
represent, when compared to 2005. In 2006, foreclosures were up 
44 percent in the City and 34 percent in St. Louis County. What 
is HUD's position on this crisis? And is HUD designing any 
special initiatives to combat the rapidly rising foreclosures?
    Mr. Montgomery. I think the best way to help many subprime 
borrowers get out of their loans today is through a modernized 
FHA, the same song I was singing here last year, and have for 
the last 20 months. Now relative to the bill that got through 
this committee last year and through the House, this year 
though since October of last year we have been doing home 
buying counseling, working with many nonprofit groups trying to 
get the word out, working with Realtors to help many families. 
But while we are helping, as I mentioned before, subprime 
borrowers today, the best way to do it is to pass this bill to 
help more.
    Mr. Clay. What is HUD's opinion on the proper amount of 
government intervention into the market? I think that Freddie 
Mac has really stepped up to the plate to actually say we will 
help salvage some of these people's American dream of 
maintaining their home and holding onto that property. What is 
the government's proper intervention in a crisis like this?
    Mr. Montgomery. With all due respect to my colleagues at 
Fannie Mae and Freddie Mac, they are private corporations. They 
have the ability to make decisions overnight. I am not saying I 
need that ability. But beyond the obvious remedy, modernizing 
FHA, there are some things we can do in the here and now that 
we are working on and are on track to help at least 60,000 
subprime borrowers this year. Some of these fixes I discussed 
here in the hearing in this room on Tuesday, and we are putting 
those through a risk analysis, as the Credit Reform Act 
requires, and we should know how those will come out in the 
next month.
    Mr. Clay. So some of those 60,000, you will be able to save 
their homes, or get them into another form of financing?
    Mr. Montgomery. We are on track to help 60,000 this year. 
It is our conservative estimate, through FHA reform, that we 
could help easily 200,000 more--200,000 or more in addition to 
the 60,000.
    Mr. Clay. Thank you. Thank you so much for those answers. 
And, Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much, Mr. Clay. Mr. 
Ellison for 5 minutes.
    Mr. Ellison. Thank you, Madam Chairwoman. Sir, thank you 
for coming to visit with us today. I just have a few questions 
and they are of a more general nature. Could you share with us 
your assessment of what the unmet housing needs are for 
Americans today?
    Mr. Montgomery. Are you talking about relative to rental 
housing or homeownership?
    Mr. Ellison. I mean in general.
    Mr. Montgomery. Let me take two groups in particular, the 
elderly and persons with disabilities, an industry group, AUSA, 
estimates that there are probably 10 seniors waiting for every 
Section 202 property. That is the elderly housing program HUD 
has. We have 10 on a waiting list for every one that gets into 
the property. Some of the disability groups have also talked to 
us about the urgent need for housing and as part of our early 
budget we have some demonstration projects that we think will 
help mitigate that need.
    Mr. Ellison. Thank you. That is similar to the information 
I received, particularly with seniors, but also just general 
low-income housing. In Minneapolis, there is a significant 
waiting list there. Could you speak to what in your view 
happens to a community when there is such a shortage of housing 
for certain sectors like seniors, low-income people, or people 
with disabilities. What do they do? Are they the homeless?
    Mr. Montgomery. I cannot speak for the homeless group, that 
is a little out of my lane, but for many decades, certainly 
pre-dating my arrival at FHA, there has been a shortage of 
housing for low-income families throughout America. And we are 
trying to do what we can in this tight budget environment to 
help even more through the use of Low-Income Tax Credits, 
through home funds and others. But certainly I have said 
publicly, yes, there is a production problem relative to 
helping some of those groups, and we are trying to fix that.
    Mr. Ellison. I have had a lot of conversations about 
housing recently and one individual indicated to me that the 
reason that we are in this housing--in the subprime lending 
foreclosure situation we are in today is because there has 
been, over the last 30 years, a liberalization in the rules 
with regard to making mortgages available to people because we 
place value on getting people into homeownership. Do you have 
any views on that?
    Mr. Montgomery. Well, I can speak for FHA. Some of what you 
read and hear, some of the no-income and no-asset stated income 
products, while inherently that is not a bad product for many 
families, in the many ways it was used we have some of the 
problems we are looking at today and that is something FHA does 
not do. We have rather rigorous and strict requirements 
relative to things such as income verification, and social 
security numbers, so that is certainly one of the concerns that 
we will not do under FHA, at least certainly while I am there.
    Mr. Ellison. I would like to ask you now about housing with 
regard to people who are ex-offenders coming out, have you had 
occasion to examine housing for these individuals who have 
prior contacts with the criminal justice system, perhaps even 
felony records, is that something you have had any occasion to 
think about or work on?
    Mr. Montgomery. I have not, Congressman, but I would 
certainly be interested in discussing that with you at a later 
date.
    Mr. Ellison. In the course of your work, and in your 
reading, have you recognized or found out whether or not this 
particular population is having some unique difficulties with 
regard to obtaining housing?
    Mr. Montgomery. Well, there are certainly many groups who 
have unique difficulties obtaining housing and relative to this 
group, I would certainly love to hear your views on that at a 
later time.
    Mr. Ellison. Okay, thank you very much.
    Chairwoman Waters. Thank you very much, Mr. Montgomery. We 
appreciate the time that you have put in here this morning. I 
hope that you will pay attention to our housing trust fund and 
understand that it is very key to getting a bill out of here 
and some of those other issues, I think, working with Mrs. 
Biggert, we can resolve. Thank you very much.
    Mr. Montgomery. Thank you.
    Chairwoman Waters. I will now call the second panel. Our 
second panel consists of: Ms. Iona Harrison, GRI, National 
Association of Realtors; Mr. Lautaro ``Lot'' Diaz, vice 
president, community development, National Council of La Raza; 
Mr. John M. Robbins, CMB, chairman, Mortgage Bankers 
Association; Mr. Ed Smith, Jr., chairman, CAMB Government 
Affairs Committee, chief executive officer, Plaza Financial 
Group, California Association of Mortgage Brokers; and Mr. 
William P. Killmer, group executive vice president for 
advocacy, National Association of Home Builders.
    While our panel is getting seated, I ask unanimous consent 
to have the written statements of the AARP and Consumer 
Mortgage Coalition, as well as letters of support from the 
National Council of State Housing Agencies and HUD counseling 
intermediaries entered into the record. Without objection, such 
will be the order.
    Thank you very much. We will start our panel with Ms. Iona 
Harrison.

  STATEMENT OF IONA C. HARRISON, GRI, NATIONAL ASSOCIATION OF 
                            REALTORS

    Ms. Harrison. Good morning.
    Chairwoman Waters. Welcome.
    Ms. Harrison. Chairwoman Waters, and Ranking Member 
Biggert, thank you for the opportunity to speak before you 
today. My name is Iona Harrison and I am a broker-owner with 
Realty Executives/Main Street USA in Upper Marlboro, Maryland. 
I am here to testify on behalf of 1.3 million members of the 
National Association of Realtors. We thank you for the 
opportunity to present our views on the importance of the FHA 
Mortgage Insurance Program and the urgent need for reform. In 
fact, when Realtors come to Capitol Hill next month, FHA reform 
will be one of their primary talking points.
    Consumers need a safe, affordable mortgage alternative. In 
2006, 1.2 million families entered into foreclosure, 42 percent 
more than in 2005.
    Chairwoman Waters. Excuse me, Ms. Harrison, will you pull 
your mike a little bit closer so that we can hear you. It will 
not move.
    Ms. Harrison. Thanks.
    Chairwoman Waters. Oh, all right.
    Ms. Harrison. I think he was leaning on it.
    Chairwoman Waters. Okay.
    Ms. Harrison. In 2006--is that better--1.2 million families 
entered into foreclosure, 42 percent more than in 2005. 
Predatory lending, exotic mortgages, and a dramatic rise in 
subprime lending,coupled with slowing home price appreciation 
have all contributed to this crisis. When the Federal Housing 
Administration was established back in 1934, consumers faced a 
similar lending crisis. At that time, FHA was an innovator and 
led the private market in offering safe, affordable home loans 
to American families. Since its inception, FHA has insured more 
than 34 million properties. However, the FHA has failed to keep 
pace with borrower needs and changes in the private market and 
is no longer a viable alternative for many borrowers. At the 
same time, the subprime and non-traditional mortgage markets 
have boomed. Many of these loans offer low teaser rates which 
reset to much higher rates after a few years. In many cases, 
these borrowers qualified only on their ability to make the 
initial payment and face large prepayment penalties if they 
attempt to refinance. Mortgage experts estimate that 
approximately $1.5 trillion worth of adjustable mortgages will 
reset by the end of 2007. Faced with significantly higher 
monthly payments, many borrowers will face the possibility of 
losing their homes.
    Realtors support efforts to give consumers affordable 
alternatives to the more risky loans that are currently being 
heavily marketed. We believe the FHA could again be a viable, 
affordable alternative for borrowers with less than ideal 
credit.
    Today, we ask you to advance legislation that would reform 
the FHA Mortgage Insurance Program in several important ways. 
Increases in FHA loan limits are needed not just in high-cost 
areas, but nationwide. Such increases are critical for FHA to 
assist home buyers in places like California but also areas 
where home prices exceed the current maximum limit but are not 
defined as high cost, such as Illinois, Ohio, and Arizona.
    Second, we ask you to eliminate the statutory 3 percent 
minimum down payment on FHA-insured mortgages. In 2005, 43 
percent of first-time home buyers financed 100 percent of their 
home. NAR research indicates that if FHA were allowed to offer 
this option, 1.6 million families could benefit, including many 
low-income and minority home buyers. Eliminating the statutory 
3 percent minimum cash investment will provide consumers a safe 
option away from non-traditional products.
    Third, NAR supports legislation that would provide FHA with 
the ability to charge borrowers different premiums based on 
risks of the borrowers and type of loan product. Currently, all 
FHA borrowers, regardless of risk, pay virtually the same 
premiums and receive the same interest rate. Giving FHA the 
flexibility to charge different borrowers different premiums 
based on risk will allow FHA to increase their pool of 
borrowers. Risk-based pricing makes sense in the private market 
and does for FHA as well.
    Fourth, NAR supports moving the Condo Program into the 
203(b) Program and combining all single family programs into 
the Mutual Mortgage Insurance Fund. From a conceptual and 
accounting standpoint, it makes sound business sense to place 
all single family programs under the MMIF. We also recommend 
that HUD lift many of the barriers that make condominium 
purchase difficult under FHA. We believe the current policies 
limit sales and homeownership opportunities, particularly in 
market areas where condos are one of the few remaining 
affordable housing alternatives.
    In addition to the reform measures I just outlined, the 
National Association of Realtors has provided HUD Secretary 
Jackson with a proposal that would allow FHA to help many 
families with recent or impending interest rate adjustments 
refinance into a loan they can afford. Our proposal is to allow 
credit-worthy borrowers, who may not be current on their 
existing loan, to refinance into an FHA loan. Many of these 
homeowners who might otherwise qualify for FHA-insured mortgage 
are preempted by guidelines that prohibit refinancing the loans 
that are not current. We believe FHA can design a set of 
prudent guidelines where credit-worthy borrowers could 
refinance and avoid losing their homes. NRA has also encouraged 
HUD to conduct a large public-awareness campaign to fully 
inform homeowners of their options once FHA reforms are in 
place. Realtors would support these efforts as a natural 
extension of our FHA education brochure which we produced with 
HUD last year.
    FHA is the only national mortgage insurance program that 
provides financing to all markets at all times. Now more than 
ever, FHA needs to be strengthened so that it will continue to 
be available to borrowers when they need it most. Realtors 
stand ready to work with Congress and HUD to breathe new life 
into the FHA and ensure all Americans can afford to buy and 
keep their homes for as long as they choose.
    Thank you again for the opportunity to testify on this 
important issue. I stand ready to answer any questions that you 
may have.
    [The prepared statement of Ms. Harrison can be found on 
page 48 of the appendix.]
    Chairwoman Waters. Thank you very much. Mr. Lautaro ``Lot'' 
Diaz?

 STATEMENT OF LAUTARO ``LOT'' DIAZ, VICE PRESIDENT, COMMUNITY 
            DEVELOPMENT, NATIONAL COUNCIL OF LA RAZA

    Mr. Diaz. Good morning.
    Chairwoman Waters. Good morning.
    Mr. Diaz. My name is Lot Diaz, and I am vice president of 
Community Development at National Council of La Raza (NCLR). 
For the past 20 years, I have been working to promote safe and 
affordable communities for working families. At NCLR, I oversee 
the NCLR Homeownership Network, a group of 43 counseling 
agencies working nationwide.
    I would like to start by thanking Chairwoman Waters and 
Ranking Member Biggert for inviting NCLR to participate in the 
dialogue. I would like to congratulate the members of this 
committee, and Ms. Waters in particular, for the hard work on 
FHA reform.
    The Expanding American Homeownership Act of 2007 improves 
on the previous versions of the bill. In the past 8 years, I 
have seen FHA go from a product of choice in our communities to 
one used by far fewer families. Since FHA has an important role 
to play, now is the time for a modernized FHA program.
    In my time here today, I would like to discuss three main 
points: Why a stronger FHA is good for Latinos; the importance 
of greater access to homeownership counseling; and other ways 
FHA can promote Latino wealth building.
    Let me start with why we need a stronger FHA. FHA has been 
a traditional way for Latino families to achieve homeownership, 
however aggressive subprime marketing in our communities have 
pushed FHA to the sidelines. The number of Latinos using FHA 
have been decreasing every year. At the same time, many of our 
families do not have good loan options to choose from. As a 
result, they are vulnerable to predatory lenders. A competitive 
FHA would be a safe alternative for Latinos with fewer loan 
options.
    In addition to affordable loans, Latino families benefit 
from homeownership counseling. NCLR created a network of 
housing counselors 10 years ago. Now we are serving more than 
33 Latino communities across the country. Last year, we helped 
nearly 3,000 families purchase their first home. Participants 
cite counseling as one of the most important factors in their 
ability to successfully purchase. Research also shows that 
these families are far less likely to default. H.R. 1852 
increases the availability of counseling for FHA borrowers. 
This is especially important for borrowers who would access the 
newer products such as zero down payment and interest-only 
loans.
    Last year, we also helped over 1,000 families who were 
already homeowners. Some were falling behind on their loan 
payments; others needed help to be refinanced in a more 
affordable mortgage. For many families in danger of default, 
time is the enemy. The earlier we can talk with the borrowers 
regarding their late payments, the better. Counselors are 
working hard to get the word out for their services but this is 
not enough. Counselors need more resources and they need to get 
to the borrower before it is too late. Congresswoman Waters and 
Congresswoman Velazquez worked on this issue. The opt-in 
provision of H.R. 1852 will allow families access to 
foreclosure prevention assistance. FHA borrowers will be able 
to sign a form saying they want a counseling agency to contact 
them in the case of default. We believe this is a powerful tool 
that will connect families with intervention services when they 
need it.
    One successful example of foreclosure assistance is Ms. 
Vega. She came to visit the Spanish Coalition for Housing in 
Chicago a couple of months ago. Her mortgage payments jumped 
unexpectedly and she could not make them. The initial repayment 
plan offered by her servicer was too expensive. Our counselors 
were able to negotiate on her behalf and because of their work, 
the terms of Ms. Vega's loan have been modified. If it weren't 
for the Coalition's work, she would have lost their family's 
home.
    There are other noteworthy additions to this FHA 
modernization bill as well. The bill includes rewards for 
families to pay on time. Clearly, on-time payers have proven 
that they are a lower risk. Legislation would reduce the 
insurance premium over time. We also support raising the FHA 
loan limits in high-cost areas. Clients in our groups in 
California; Seattle, Washington; Boston, Massachusetts; and 
Alexandria, Virginia, for instance, face high housing prices. 
FHA would be available to more families if the loan limits were 
higher. Finally, the cap placed on fees will keep FHA 
affordable to all of our borrowers, which is really important.
    Let me close by offering a couple of suggestions to further 
strengthen the bill: increase funds for housing counseling to 
$100,000 million and make sure counseling agencies can earn 
fees for the services they provide to industry; reinstate the 
FHA discount for families that got counseling through HUD-
certified programs; and finally FHA should set the bar for 
industry ethical standards. We need a code of ethics to hold 
originators accountable given the potential changes to the FHA 
program.
    Thank you. I would be happy to answer any questions at your 
convenience.
    [The prepared statement of Mr. Diaz can be found on page 43 
of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Robbins?

 STATEMENT OF JOHN M. ROBBINS, CMB, CHAIRMAN, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Robbins. Good morning, Chairwoman Waters, and Ranking 
Member Biggert. Thank you for holding this hearing and inviting 
me to share MBA's views on reforming the FHA. I have spent over 
36 years working with FHA and have made billions of dollars in 
loan originations to families who have achieved the dream of 
homeownership through FHA's programs. When I started in the 
mortgage business, FHA programs helped us to serve many 
borrowers who otherwise could not get a loan. Today, the story 
is very different. In 2003, FHA made up approximately 16 
percent of our overall production. Last year, however, only a 
little more than 1 percent of our business went to FHA. While 
the mortgage market has grown significantly, our use of the FHA 
program has dropped precipitously. Lenders have progressed, 
reacting to quickly changing and efficient technology. 
Unfortunately, FHA has not. While the needs of low- and 
moderate-income home buyers, of first-time home buyers, and of 
senior homeowners have changed, FHA has not followed its 
historic path of adopting to meet borrowers' changing needs.
    MBA strongly supports FHA and believes that it still plays 
a critical role in today's marketplace. Most of FHA's business 
is directed toward low- and moderate-income and minority 
borrowers, the very strata that is most challenged to be part 
of the American Dream. At the same time, we have watched with 
growing concern as FHA has steadily lost market share over the 
past decade, potentially threatening its long-term ability to 
help underserved borrowers. As the market continues to evolve 
around FHA, the great fear is that many aspiring homeowners 
will either be left behind or forced into higher cost 
alternatives.
    MBA notes with great concern that the Administration's 
fiscal year 2008 budget proposal estimates that the FHA 
Mortgage Insurance Fund will go into the red next year unless 
changes to the existing program are made or additional 
appropriations are provided. MBA agrees with the Administration 
that the FHA's Mutual Mortgage Insurance Fund would run in the 
black with little or no premium increases necessary if FHA 
reform proposals were passed this year.
    MBA applauds the introduction of FHA reform bills, H.R. 
1852 and H.R. 1752, and that they started the reform effort 
early in the 110th Congress. MBA strongly supports changes to 
FHA's single family and multi-family loan limits and down 
payment flexibility and requirements including the elimination 
of the complicated down payment formula. The down payment is 
one of the primary obstacles for first-time minority and low-
income borrowers. We believe Congress should empower FHA to 
allow it to meet today's needs and anticipate tomorrow's. The 
MBA believes changes should also be made in three areas: FHA 
needs more flexibility to introduce innovative new products; 
invest in new technology; and manage their human resources. 
Finally, MBA also supports changes to the Home Equity 
Conversion Mortgage Program. MBA's surveys show that FHA's 
HOEPA product comprises 95 percent of all reverse mortgage and 
is thus tremendously important for senior homeowners.
    In conclusion, FHA has an important role to play in the 
market in expanding affordable homeownership opportunity for 
the underserved and addressing the homeownership gap. For low- 
and moderate-income families, FHA should be the financing 
considered first because it has the lowest rate and provides 
the borrower the best opportunity to become a successful 
homeowner. However, the current 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 just giving 
up. 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. MBA stands ready to work with you on this important 
issue. Thank you.
    [The prepared statement of Mr. Robbins can be found on page 
71 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Smith?

 STATEMENT OF ED SMITH, JR., CHAIRMAN, CAMB GOVERNMENT AFFAIRS 
  COMMITTEE, CHIEF EXECUTIVE OFFICER, PLAZA FINANCIAL GROUP, 
           CALIFORNIA ASSOCIATION OF MORTGAGE BROKERS

    Mr. Smith. Good morning. Thank you very much for having me 
here, Congresswoman Waters, and Mrs. Biggert. On behalf of the 
California Association of Mortgage Brokers, of which I am the 
vice president of government affairs and industry relations, I 
want to bring a different perspective to the table, I am 
actually a practicing mortgage broker who deals with customers 
on a daily basis. For the past 24 years in my marketplace, I 
have seen many, many families come to my office, sit down with 
me, and we have structured an opportunity for them to have the 
American Dream. Part of that conversation normally when we get 
started is the expectations of homeownership, their dreams of 
homeownership. We talk about the future of building 
generational wealth. Those conversations occur in every time 
and in every opportunity that I have to serve someone with 
doing a mortgage for them.
    Over the past few years, I have seen the FHA loan product 
in our marketplace in California completely disappear. The 
colleagues who are here obviously have articulated that fact 
over and over again. My perspective that I want to bring to you 
is the ground level eyeball conversations that we have. When 
someone walks into our office and looks into buying a home--a 
median priced home in southern California is over $500,000--
this has a devastating effect on them. We are now, because of 
the loan limits in California being low, California not being 
designated as a high-cost State, we have very limited 
opportunities and products available to deliver a sustainable 
loan. Over the past few years, we have gone to the subprime 
market. The subprime market has now been the conventional 
solution to the lack of sustainable loan products through FHA. 
I used to do FHA loans all the time. We do not do those anymore 
because it is not applicable in our marketplace, the loan 
limits are too low. So, consequently, we have gone to 100 
percent financing with subprime loans. We have gone to 
interest-only products which keep people in a low payment 
opportunity to be able to maintain those homes, but we try to 
develop a sustainable plan for them to keep their homes, to 
refinance into their homes. Many of those plans and dreams have 
not occurred. After 2 years or 3 years, those interest-only 
products have reset, payment shock has set in, and their 
financial dynamics have completely changed, which puts them in 
a position of financial peril.
    We all know where we are with foreclosures. We are dealing 
with foreclosure rates that are escalating throughout the 
country, especially in your district and in my marketplace in 
San Diego. What alternatives do we have now other than to go 
out to the marketplace and try to find another sustainable 
product for them that is not available? The liquidity, the 
availability of loans and products has diminished dramatically. 
Those customers sit there and look me in the eye and ask me, 
``Smitty, what am I going to do? How can I keep my home for my 
family?'' I have to research, dig and try to find products to 
keep people in their homes that are not there anymore. FHA is a 
very viable solution to the subprime crisis that we are in 
right now. It delivers a sustainable product that has no 
prepayment penalties, fixed rate loans, and impounds for taxes 
and insurance. These are the type of financial instruments 
that, if we have available to us, we will be able to put people 
in their homes, keep them in their homes, and preserve the 
homeownership opportunities that they have started with.
    One of the things that is a big drawback throughout 
America, and specifically in California, is that the mortgage 
broker, the small business, does not have the availability of 
the FHA product. We are the number one delivery channel for 
home loans in America. We produce approximately 70 percent of 
every home loan in America. If we do not have the opportunity 
to deliver that sustainable product to low- and moderate-income 
individuals, we are cutting 70 percent of the opportunities out 
for people who want to keep their homes.
    What I would encourage us to do is to have a solution that 
keeps us, the mortgage broker, the person who is in the 
community, who lives in the communities, who works in the 
communities, we go to church with our customers, we build our 
businesses on referrals. It is incumbent upon us to work hard 
for each and every customer we have because we live and work 
with them. We operate on repeat business. If giving us the 
opportunity--if giving mortgage brokers the opportunity to 
deliver the FHA product, I believe that would be the first step 
in the solution to the foreclosure ratios that we are having 
now and to build a long-term base for sustainable--for 
maintaining sustainable homes and build net worth for customers 
in the future.
    [The prepared statement of Mr. Smith can be found on page 
88 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Killmer?

STATEMENT OF WILLIAM P. KILLMER, GROUP EXECUTIVE VICE PRESIDENT 
      FOR ADVOCACY, NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Killmer. Thank you, Chairwoman Waters, Ranking Member 
Biggert, and members of the subcommittee. My name is Bill 
Killmer and I am the National Association of Home Builders 
Group vice president for advocacy. We thank you for the 
opportunity to testify on behalf of NAHB on the subject of FHA 
revitalization. First, I want to thank the members of this 
subcommittee for your strong bipartisan support of FHA reform 
during the 109th Congress and for taking action so quickly here 
in the 110th.
    The ongoing turmoil in the subprime mortgage markets 
greatly increases the urgency for enactment of FHA legislation. 
While subprime mortgage programs have played a valuable role in 
expanding homeownership opportunities, some lenders have 
resorted to less rigorous lending practices that have harmed 
borrowers in the housing finance system. The unfortunate 
experience of such borrowers provides the compelling reason why 
FHA needs the tools to meet its mission objectives more 
effectively. Indeed, I believe that much of the trouble in the 
subprime mortgage market and the hardships it has produced for 
many borrowers could have been avoided if the FHA had been in a 
better position to respond to changing market forces in the 
past few years. The popularity and relevance of FHA single 
family mortgage insurance programs waned over the past 2 
decades as its programs failed to keep pace with mortgage 
market developments and needs. That vacuum was exploited during 
the past 5 to 7 years as competing subprime mortgage loan 
programs lured many borrowers into untenable situations.
    FHA's lack of responsiveness to market needs has placed 
many borrowers in highly risky and inappropriate loan 
structures where they were charged unreasonably high fees and 
interest rates and often faced onerous pre-payment terms. Many 
of these borrowers, despite limited cash resources and/or 
tarnished credit, could have qualified for market rate FHA-
insured loans. In numerous instances, this is due to statutory 
constraints that have limited FHA's ability to respond to the 
needs of borrowers who might have otherwise chosen FHA.
    So NAHB looks forward to working with the committee in the 
coming weeks to advance comprehensive FHA reform legislation 
that includes, among many other worthy changes, the following 
key reforms.
    First, the current limit for FHA-insured 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 the country and in many areas FHA loan limits 
preclude borrowers from purchasing new or recently constructed 
homes. So NAHB supports recalibrating local loan limits to 100 
percent of the area median and increasing the national floor 
for FHA loan limits.
    Second, NAHB believes that FHA can effectively serve a 
broad range of borrowers while acknowledging that the risk of 
default varies widely. In fact, some delineation in credit risk 
is necessary if FHA is going to prudently provide an 
alternative to subprime borrowers who cannot get reasonable 
loan terms on conventional loans. To be competitive, FHA must 
also have greater flexibility in establishing down payment 
requirements and both comprehensive reform bills currently 
before the subcommittee contain provisions that would alter the 
present structure for determining the amount of cash a borrower 
would have to invest to qualify for an FHA-insured loan in 
addition to the parameters to which the mortgage inserts 
premium would be determined. NAHB has long supported efforts to 
provide the FHA flexibility in these areas, and we look forward 
to working with this committee to advance such needed reforms.
    Third, in many communities condominiums represent the most 
affordable path to homeownership. Unfortunately, FHA's 
requirements for condo loans are burdensome, differing 
significantly from requirements for mortgage loans that are 
secured for single family detached homes. The net result is a 
severe limitation on the availability of FHA-insured mortgages 
for those attempting to purchase a condo unit. So NAHB supports 
efforts 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 to this critical affordable market segment.
    Fourth, FHA's Home Equity Conversion Mortgages, or HECMs, 
allow homeowners who are at least 62 years old to access equity 
in their homes without having to make mortgage payments until 
they move out of their home. HECMs have found increasing 
acceptance among seniors as a financial alternative. However, 
the current program cap and the unrealistically low loan limit 
keep FHA from serving this growing segment of the population. 
Reform legislation should also ensure that seniors are able to 
employ HECMs to purchase homes that are more suitable to their 
current lifestyle and activities, including newly built homes 
that typically offer lower maintenance and operating costs.
    And, finally, NAHB supports efforts to increase limits on 
FHA-insured multi-family loans in high-cost areas. Currently, 
there are some areas in the country where construction costs 
are so high that use of the FHA programs is just not possible. 
With severe shortages of affordable rental housing in most of 
the high-cost markets, this change would enable developers to 
provide much needed new affordable housing to low- and 
moderate-income families.
    Thank you once again for this opportunity, and I would 
welcome any questions you may have.
    [The prepared statement of Mr. Killmer can be found on page 
56 of the appendix.]
    Chairwoman Waters. Thank you very much. We are going to 
move right into our questions now, and I will recognize myself 
for 5 minutes. For the first set of questions, I want to go 
directly to you, Ms. Harrison. You said you submitted a set of 
recommendations to HUD. Do we have a copy of those 
recommendations by any chance? If not, would you please submit 
them.
    Ms. Harrison. It has been sent to staff and we can make 
sure that you and the other members of the committee receive 
those directly.
    Chairwoman Waters. I would appreciate it because it sounds 
as if you have some very, very good recommendations. I have 
heard twice now about the condo problem.
    Ms. Harrison. Yes.
    Chairwoman Waters. Mr. Killmer has referenced it and you 
referenced it first, so would you explain to me what is the 
problem with the financing of condos by FHA?
    Ms. Harrison. Certainly, ma'am, thank you. There are 
several provisions, at this moment condos are financed, there 
are four different funds that FHA uses. Single family is the 
MMIF fund. What we propose is that condos be moved to the 
single family, the MMIF, because it is an appropriate place for 
it to be and it does not have the problems with--occasionally 
funds stop for these programs under the other fund. The 
continuity of funds is important for us as Realtors and for 
home buyers because if you have written a contract to purchase 
a home, one assumes that the funds will be there when you are 
ready to close. And if the availability stops due to some other 
constraint in a multi-family area or some other problem, it is 
extremely frustrating, and we are talking about probably a 
major life event for that first time home buyer who is 
purchasing the condo. There are other--the smaller strictures, 
for instance, if you are buying a condominium in a development, 
you have to prove that 51 percent of those are homeowner 
occupied. I myself can remember--and this has not changed 
throughout time, so you can see that the paperwork involved in 
even trying to ``prove'' who lives in a house at some time can 
be very difficult and that prevents a borrower from perhaps 
purchasing a home, and this was in the Fort Washington area of 
Maryland, that would have been a very feasible option in every 
other way but the funding was not available.
    Chairwoman Waters. I get it. We are going to take a look at 
that.
    Ms. Harrison. You are a quick study.
    Chairwoman Waters. The other thing that I am going to ask 
you and others maybe to refer to in the few minutes that I have 
left is, is this refinancing of existing mortgages by FHA a 
problem, or is it not allowed?
    Ms. Harrison. Currently, my understanding is that if the 
homeowner is considered to be in default, that does not even 
have to be in foreclosure, they are behind on their payments, 
they are not allowed to refinance, and we think that if they 
are credit worthy in every other respect that the opportunity 
to refinance into an FHA product would prevent a defaulting 
borrower from becoming a foreclosure borrower.
    Chairwoman Waters. Okay, so you would suggest to me that we 
could help to straighten out the situation for those who are 
about to be in trouble, or may have gotten into trouble 
already, so that they could refinance and FHA would be able to 
save them from losing their homes right now with this crisis 
that we have going on, is that correct?
    Ms. Harrison. That is our proposal and, yes, we believe 
that is indeed possible, but of course it would call for 
expeditious passage of legislation to allow that.
    Chairwoman Waters. Okay.
    Mr. Robbins. Very briefly, let me add?
    Chairwoman Waters. Yes?
    Mr. Robbins. Madam Chairwoman, one of the problems is that 
it is very difficult to get to borrowers when they go into 
delinquency. Like human nature dictates, sometimes when you owe 
people money, they are the last ones you want to talk to. And 
so they do not respond to queries and many times we have to use 
consumer groups and whatever means we have to get to them. 
Under current FHA regulation, at the time they go into 
delinquency, FHA could not come in and be one of the solutions 
or represent one of the solutions. So Commissioner Montgomery's 
ability to change that language, I think, would be imperative 
to helping many, many homeowners who are trapped in those 
mortgages today.
    Chairwoman Waters. All right, we will certainly make note 
of that. I am going to go to our ranking member, Mrs. Biggert, 
now for questions for 5 minutes.
    Mrs. Biggert. Thank you, Madam Chairwoman. Mr. Killmer, how 
do we ensure that there are adequate underwriting standards for 
FHA products so that the expansion into a pool of risky 
borrowers will not pose a threat to the Mutual Mortgage 
Insurance Fund?
    Mr. Killmer. I think that is a careful balance that the 
subcommittee has to strive for--clearly diving deeper into that 
pool is going to help the broad strata of folks that FHA could 
reach. NAHB believes that the provisions that are in both of 
the bills go in the right direction in terms of risk-based 
credit pricing and the changes in the down payment requirements 
and certainly the mortgage insurance premium provisions. And we 
would urge that those provisions be as simple and 
straightforward given the nature of the complexity for the 
borrower to understand so that they will be utilized to a more 
full extent.
    Mrs. Biggert. Thank you. Would anyone else like to respond 
to that?
    Mr. Robbins. Yes, just a very brief comment for you.
    Mrs. Biggert. Mr. Robbins?
    Mr. Robbins. Part of the foreclosure issue that we are 
going to be facing and looking at currently was caused by low 
FICO scores, no income, and no asset underwriting. FHA, I would 
like to remind all of the Congress, that FHA uses specific 
underwriting, more traditional underwriting, in the approval of 
their loans. And so it is relatively rigorous and should not be 
confused with what caused some of the problems that we are 
currently facing.
    Mrs. Biggert. Thank you. Ms. Harrison, in one of my former 
lives, I did real estate as an attorney. In Illinois, there was 
a court case which after that required attorneys to be present 
at closings. And one of our jobs obviously was to go over the 
loan agreement and explain that to the purchaser. How close are 
the Realtors to examining the loan documents since Realtors are 
the ones that really are on the forefront of encouraging a 
buyer to be able to come up with the monies for a home, and I 
was just wondering if Realtors ever really see, well, this 
person really is never going to make it but we are going to go 
ahead with the sale?
    Ms. Harrison. That is an excellent question and we as 
Realtors, indeed Realtors and not attorneys, and certainly we 
would never set ourselves out to be attorneys, traditionally 
accompany our buyer clients and our seller to the settlement 
table and sit there and will assist them with our own advice 
but the need for counsel and to review documents is still 
something that we would encourage our buyers to do, to have 
their own counsel. In the State of Maryland, you often make 
settlements in an attorney's office, but very often it may 
simply just be a settlement officer not actually an attorney 
who explains the documents. And, quite frankly, if you have 
seen--if any of you have seen loan documents recently, they are 
extraordinary in their complexity. I remember the former 
secretary, Mel Martinez, said that he as an attorney was 
absolutely floored by the volume of documents that they look 
at. We give people the opportunity to examine their Truth in 
Lending statement at the time that they are making loan closing 
and again will offer what expertise we have. But once again we 
are facilitators of the transaction and certainly would never 
set ourselves up to give them that type of advice.
    Mrs. Biggert. Thank you. I will yield back so we can 
continue.
    Chairwoman Waters. Thank you very much. Mr. Cleaver?
    Mr. Cleaver. Thank you, Madam Chairwoman. Since we have a 
vote coming, I will be brief. In H.R. 1852, which was 
introduced by Chairwoman Waters and Financial Services Chairman 
Barney Frank, it includes a requirement for pre-purchase 
counseling for zero or lower down payment borrowers, the higher 
risk borrowers. I am interested in getting a response from each 
of you. Do you feel that is cumbersome, that it burdens those 
who are in the business of trying to get these mortgages done?
    Mr. Smith. I would like to take that answer.
    Mr. Cleaver. Thank you.
    Mr. Smith. On behalf of our organization, financial 
literacy skills and financial literacy subsets are the 
cornerstone of our process. We strongly advocate financial 
literacy skills for individuals at an earlier age, even before 
they start buying a home, but especially when it comes to 
buying the largest investment of their life. Currently, under 
some government subsidized programs, down payment assistance 
programs, in order to qualify for those programs, you have to 
participate in pre-purchase counseling. From our Association's 
standpoint, we strongly agree with that and it helps not only 
in that particular transaction but those skill sets can be 
extrapolated into future financial decisions. We strongly agree 
with that and it is not a cumbersome process.
    Mr. Cleaver. Thank you. Ms. Harrison?
    Ms. Harrison. Yes, we, the National Association of 
Realtors, support borrowers having the option of getting 
information about the availability of counseling services and 
recognize the importance for many families to get that extra 
instruction to make financial decisions about this very 
important purchase.
    Mr. Robbins. I would also add that we support counseling 
strongly, but not mandatory counseling, because it increases 
costs to the borrower and slows down the process.
    Mr. Cleaver. I am sorry, the last part?
    Mr. Robbins. Because it increases the cost to the borrower 
and slows the process down. So we support counseling absolutely 
but not mandatorily required. My understanding is that it is 
not mandatory in the bill, it gives the commissioners 
guidelines to determine the extent of counseling that should be 
available. But it is our experience that counseling has been 
really effective to avoid poor decision-making because of lack 
of information. And so we have been working very hard to expand 
those services broadly and any time it could be inserted into 
the process, we found it helpful to low- and moderate-income 
buyers.
    Mr. Diaz. Yes, I would say that we join with the others and 
are in strong favor of the provisions that are in the bill, 
would not find them cumbersome, but only say that if this moves 
forward as part of the reform legislation, that the Congress 
work to appropriate enough HUD funds so that the counseling 
services would be available.
    Mr. Cleaver. I think in the HUD budget, there is like $50 
million?
    Mrs. Biggert. Would the gentleman yield just for a quick 
insert here?
    Mr. Cleaver. Yes.
    Mrs. Biggert. We have a problem in Illinois where in one 
county, it started out just in a small section but there is a 
requirement for counseling and it is for everyone no matter 
what size mortgage it is, and there just are not the people 
there to do the counseling, people cannot close, and they are 
losing houses because their mortgage does not go through. So we 
need to look closely at that.
    Chairwoman Waters. Let me just, if I may, Mr. Cleaver, ask 
you to yield, so that Mr. Ellison may ask a question, and then 
we are going to adjourn the committee. We have votes, and have 
about 8 minutes left on the Floor. May I?
    Mr. Cleaver. I yield to the ranking member of the 
committee.
    Mr. Ellison. Madam Chairwoman?
    Chairwoman Waters. Yes.
    Mr. Ellison. The questions I have maybe I can catch one of 
our panelists in the hallway. Okay, well, let me just ask you 
this question, and particularly Mr. Smith, your experience as 
mortgage originator, after you do the deal, the mortgage 
originator takes their fees out and then moves it on and a loan 
officer will--after the loan goes to the secondary market, what 
happens to loans that end up in foreclosure once they enter the 
secondary market and are securitized, could you speak to that 
reality and how that impacts on the generalized effect of the 
foreclosure phenomena we see happening nowadays.
    Mr. Smith. That is a good question. Once a transaction is 
closed with a mortgage broker and it is actually moved on to 
the secondary market, that loan is then taken over by a loan 
servicer. That loan servicer is the one who is in communication 
with the customer on a monthly basis collecting payments and 
paying taxes if it is impounded. Once that transaction goes 
beyond--gets into default, that customer is notified and called 
and continuously attempted to be contacted to work out some 
type of plan or to determine what in fact the problem is to get 
that person back on track. Yes, sir?
    Mr. Ellison. If I could just follow up real quick. So one 
of the things that I have been concerned about is who is left 
to do a workout with the customer once the mortgage has been 
sold to the secondary market, the bank no longer has it, who in 
your view is in a position to re-work the terms of that 
mortgage so that it doesn't end up in foreclosure?
    Mr. Smith. The loan servicer would be the first avenue of 
redress for the consumer who has experienced a payment default. 
And there are programs, I need to be real clear with you, the 
loan servicer on the secondary market is extremely, extremely 
motivated in working with the customer to keep that loan on the 
books and get it back into a paid-as-agreed status.
    Mr. Ellison. Thanks.
    Chairwoman Waters. I would like to thank all of the members 
of the committee for being here today to help us learn more 
about this FHA reform that we have embarked upon, and I would 
like to also thank the panelists for taking time from their 
busy schedules to travel to be here with us today. Your 
information is invaluable. We will get an FHA reform bill 
through this Congress. We certainly have a few differences to 
work out, but I am convinced that just as we were able to move 
the bill before, we will be able to move it again, and it will 
be a bill that I think most people can embrace. So thank you so 
very much for being here today, and I look forward to working 
with you.
    Mr. Smith. Thank you very much.
    [Whereupon, at 12:00 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             April 19, 2007
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