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




 
                    HOMEOWNER DOWNPAYMENT ASSISTANCE
                      PROGRAMS AND RELATED 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

                               __________

                             JUNE 22, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-45



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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             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia
DAN BOREN, Oklahoma

        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:
    June 22, 2007................................................     1
Appendix:
    June 22, 2007................................................    39

                               WITNESSES
                         Friday, June 22, 2007

Ashburn, Ann, President and CEO, Ameridream, Inc.................    28
Burns, Margaret, Director, Office of Single Family Housing 
  Program Development, Federal Housing Administration............     8
Fuller, Dr. Steven S., Center for Regional Analysis, George Mason 
  University School of Public Policy.............................    33
Heist, James A., Assistant Inspector General for Audits, Office 
  of the Inspector General, U.S. Department of Housing and Urban 
  Development....................................................     9
Osta, John F., Vice President, Gallinger Realty USA..............    32
Queen, Beverly, Homeowner........................................    34
Richardson, Todd, Vice President of Legal Affairs, C.P. Morgan...    32
Shear, William B., Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office..............    11
Syphax, Scott C., President and CEO, Nehemiah Corporation of 
  America........................................................    30

                                APPENDIX

Prepared statements:
    Carson, Hon. Julia...........................................    40
    Maloney, Hon. Carolyn B......................................    41
    Ashburn, Ann.................................................    43
    Burns, Margaret..............................................    54
    Fuller, Dr. Steven S.........................................    57
    Heist, James A...............................................    62
    Osta, John F.................................................    70
    Queen, Beverly...............................................    73
    Richardson, Todd.............................................    76
    Shear, William B.............................................    82
    Syphax, Scott C..............................................   100

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Statement of the American Enterprise Institute...............   114
    Statement of the National Association of Realtors............   120
Miller, Hon. Gary:
    Bloomberg News article dated June 5, 2007....................   124


                    HOMEOWNER DOWNPAYMENT ASSISTANCE
                      PROGRAMS AND RELATED ISSUES

                              ----------                              


                         Friday, June 22, 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 10:10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Waters, Velazquez, Cleaver, Green, 
Maloney, Sires, Ellison, Wilson; Biggert, Miller, and 
Neugebauer.
    Also present: Representative Scott of Georgia.
    Chairwoman Waters. This hearing of the Subcommittee on 
Housing and Community Opportunity will come to order.
    The Chair asks unanimous consent that Mr. David Scott, the 
gentleman from Georgia, and a member of the Committee on 
Financial Services, but not of this subcommittee, be allowed to 
participate in today's hearing by delivering an opening 
statement and asking questions of the witnesses.
    Without objection, it is so ordered.
    Ladies and gentlemen, I would like to thank the ranking 
member, Mrs. Judy Biggert, and members of the Subcommittee on 
Housing and Community Opportunity for joining me today in this 
hearing entitled, ``Homeowner Downpayment Assistance Programs 
and Related Issues.'' Without objection, all members' opening 
statements will be made a part of the record.
    The downpayment assistance programs have been the basis for 
audit reports by the HUD Inspector General as well as by the 
Government Accountability Office study issued in 2005. On May 
11, 2007, HUD issued a proposed rule related to downpayment 
assistance programs that mimics a rule issued in September 1999 
that was not finalized. Further, the Internal Revenue Service 
issued a ruling last year related to downpayment assistance 
programs and charitable organizations.
    I have not taken a position on downpayment assistance 
programs. The purpose of today's hearing is to address public 
interest on this issue and to answer questions surrounding 
downpayment assistance programs that are offered in communities 
all over the country. While the proposed HUD rule published on 
May 11, 2007, changes the tenor and level of interest on the 
issue of downpayment assistance, I and other members of the 
subcommittee have questions about downpayment assistance 
programs.
    Many of us have heard about the existence of downpayment 
assistance programs. Many of us have heard not only about the 
programs, but about the existence of downpayment assistance 
programs and our low/moderate income constituents' reliance on 
some form of downpayment assistance to purchase a home. Others 
claim that this type of assistance has led to defaults because 
of inflated sales prices tied to homes.
    The Nehemiah Corporation of America, represented here 
today, happens to have been the first major, nationally 
recognized provider of downpayment assistance programs. As far 
back as 1997, Nehemiah Corporation began providing downpayment 
assistance to homeowners. In fact, according to some estimates, 
downpayment assistance is so prevalent in real estate 
transactions that between 2000 and 2005, 680,000 home buyers 
were supported by a gift from downpayment assistance providers. 
Interestingly, the Federal Housing Administration has routinely 
allowed downpayment assistance programs in support of its 
R203(b) program, and estimates indicate that from 30 percent to 
40 percent of FHA mortgages have been supported by downpayment 
assistance.
    In 2003, legislative proposals were introduced in Congress 
to provide downpayment assistance grants to as many as 40,000 
homeowners under the American Dream Downpayment Act. In 
addition, there is a provision in H.R. 1852, the Expanding 
American Homeownership Act of 2007--which I sponsored and the 
Committee on Financial Services passed--that provides for zero 
downpayments for first-time home buyers.
    While downpayment assistance programs are not new, they 
have not escaped some controversy. Under the typical 
downpayment assistance program, a low- to moderate-income 
person or family is provided downpayment assistance as a gift 
toward the purchase of a home. The gift must not be a quid pro 
quo. The seller cannot provide funds to an organization. In 
providing downpayment assistance in exchange for downpayment 
assistance to the buyer, in essence, the nonprofit organization 
cannot be reimbursed for the downpayment assistance.
    Sellers, buyers, builders, and other parties with an 
interest in the transaction are also prohibited from providing 
downpayment assistance to the home buyer. The homeowner does 
not repay the gift. Downpayment assistance programs that meet 
these requirements appear to be legal. Downpayment assistance 
programs that circumvent these programs appear not to be legal.
    In an effort to further develop the public record on this 
issue, I have asked today's witnesses to answer several 
questions. As such, I look forward to hearing the witnesses' 
testimony on the issue of homeowner downpayment assistance 
programs.
    Now I would like to recognize our ranking member, Mrs. 
Biggert, for 5 minutes for her opening statement.
    Mrs. Biggert. Thank you, Madam Chairwoman, and thank you 
for holding this hearing today on the use of downpayment 
assistance in FHA-backed mortgages. I will keep my remarks 
brief, as I know we have three panels of witnesses to hear from 
this morning. But before I begin, I would like to say, ``Happy 
Homeownership Month,'' to everyone; June is National 
Homeownership Month.
    I must disclose that in my former life I was a real estate 
attorney, and I learned, I think firsthand, about the 
difficulty that first-time home buyers have had with presenting 
that downpayment check. However, I also saw firsthand the joy 
that homeowners had once they were handed the keys to their new 
homes; it was their piece of the American dream.
    This month, I have heard from a dozen of my constituents 
about the benefits of downpayment assistance, and quoting one 
of their letters, ``Helping people become homeowners adds to 
the tax base, improves communities, helps children to do better 
in school, and helps people gain wealth through the equity in 
their homes. Home equity is a family's biggest asset and is 
often used to fund school tuition and retirement. Homeownership 
should be encouraged for all.'' I could not agree more.
    To overcome a barrier to homeownership for many low- and 
middle-income Americans, privately funded downpayment 
assistance programs began surfacing in the 1990's. In 2003, 
this committee worked on legislation that resulted in a law 
which created the American Dream Downpayment Initiative, ADDI. 
I would also like to note that both my FHA modernization bill 
and the chairwoman's FHA modernization bill contain a provision 
that authorizes FHA to offer zero downpayment insured loans.
    As a result of downpayment assistance, more Americans are 
becoming homeowners. Today, over 70 percent of Americans own a 
home. Administered as part of HUD's Home Investment 
Partnerships Program, ADDI has helped thousands of Americans 
overcome the downpayment hurdle and has helped them to secure a 
home.
    I hope that we can discuss the downpayment assistance, 
ADDI, as part of the dialogue. The program has been 
administered in my district to a small extent, but particularly 
in my neighbor to the east, the City of Chicago, and its 
surrounding counties.
    We are here today to discuss the private sector's role in 
helping Americans achieve the dream of homeownership, and I 
would first like to thank our witnesses today whose 
organizations have provided hundreds of my constituents with 
downpayment assistance, have helped them secure a mortgage, and 
have enabled them to own and stay in a home.
    I understand there is some concern about the downpayment 
assistance industry, or perhaps some bad actors in this 
industry, and downpayment assistance entities have been highly 
scrutinized by HUD, by the IRS, and by GAO in recent years. I 
understand that FHA data indicates that over one-third of 
homeowners receiving downpayment assistance have low FICO 
scores and high delinquency rates.
    In addition, my office has learned from a variety of 
sources in Washington and in Illinois that downpayment 
assistance may contribute to an inflated house price, resulting 
in a seller's seeing more benefits than a buyer. I hope that we 
can address some of these issues during today's hearing.
    Again, I thank the chairwoman for holding this important 
hearing, and I yield back the balance of my time.
    We must also be thinking about the environment because I 
see that there is an awful lot of green up here.
    Chairwoman Waters. Thank you very much.
    I would like to recognize Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. I will hold my 
opening comments in the interest of time. Thank you.
    Chairwoman Waters. Excuse me, Mr. Cleaver. Before you get 
started, I have been advised that a vote has been called, and 
we only have 7 minutes left on the vote. Let me beg your 
indulgence. Please do not start your opening statement.
    I would like to ask our witnesses to, if you can, remain 
here until we return. We have votes on the Floor. It should not 
be too long. How many votes do we have on the Floor? We have 
two votes on the Floor, so we should return in about 15 to 20 
minutes. Thank you very much.
    [Recess]
    Chairwoman Waters. Thank you very much, ladies and 
gentlemen.
    Mr. Cleaver had started on his opening statement, but he 
has not returned yet, and so I am going to recognize the 
gentleman from California, Mr. Gary Miller, for a 5-minute 
opening statement.
    Mr. Miller. Thank you, Madam Chairwoman.
    This hearing, I think, is absolutely appropriate. Since I 
have been in Congress, one of the important endeavors I have 
taken on is the creation of homeownership; and one of the keys 
to personal wealth in this country is individuals being able to 
own a home, and the prices as they inflate over the years 
create equity for individuals who otherwise do not have that 
opportunity. It is one of the main drivers of the economy in 
this country.
    One of the main barriers in achieving the dream of 
homeownership, in any case, is the lack of accumulated wealth 
and disposable income. Rents are skyrocketing in this country. 
By the time people pay their rent and they pay for their food 
and they pay for their health care, there is really no money 
left for a downpayment, and that is one of the problems we have 
seen in this country. Over the years, some nonprofit 
organizations have developed programs to provide downpayments 
to qualifying families. Such programs target individuals and 
families who lack the necessary funds for a downpayment and 
other related costs, but who can afford the monthly payment, 
and they become homeowners. These downpayment assistance 
programs have proven successful in providing homeowner 
opportunities to low- and moderate-income families. These 
programs will allow families to enter homeownership years 
earlier than if they had to save the money the traditional way 
and acquire the downpayment on their own.
    HUD has permitted the use of these programs in conjunction 
with the FHA-insured loan programs. In fact, in 1998, HUD's 
Office of General Counsel found that funds paid to homeowners 
from a seller-funded nonprofit were not in conflict with FHA's 
guidelines that profit from further downpayment for assistance 
to sellers. Regulatory changes have been proposed by HUD that 
would basically eliminate the programs that we have here today, 
and I guess one of the problems I am having with this is--I 
have read a lot of information. In fact, I have read a lot of 
correspondence from HUD to some of these nonprofits back to 
1999 that when some of the nonprofits were asking to be 
regulated in certain fashions, HUD was saying, no, they did not 
think that was appropriate or necessary at the time.
    For a lot of the time we spend on this committee, we talk 
about homeownership. That is our focus, and we deal a lot with 
PHAs and government housing, and we get people out of 
government housing, people who are in Section 8. And we have 
come up with new programs to move people out of government 
housing, out of Section 8, so that we can bring more people in 
who need assistance. In fact, in 2003, we came up with the 
American Dream Downpayment Assistance Act where government 
comes in and provides downpayment assistance.
    Now, the problem I am having with this is that if it is 
okay for government, why is it not okay for the private sector? 
If underwriting is a problem, let us fix the problem. If we are 
concerned about appraisals, let us fix the appraisals.
    We have programs here that basically, from the information 
I have read, 85 percent of these loans are made to individuals 
who do not have any money for a downpayment. So these are not 
people who have a lot of disposable income. These are people 
who can afford to pay their rent, who are working hard in life, 
and they have an income, but they just do not have money to pay 
the closing costs and the downpayment.
    If 85 percent are performing, the last time I was in 
school, 85 percent was pretty good. If I look at the subprime 
market today and the problems we are having in the subprime, 
they are far worse than what we are facing in this program, and 
we have worked really hard to come up with a new proposal for 
FHA for zero downpayment.
    Now, that comes with oversight, with guidelines, with 
requirements, and restrictions, that have to be put in place to 
do that. Why can't we do it here? Instead of throwing the baby 
out with the bath water, like we seem to be doing here, we are 
just closing our eyes and turning our head and saying, ``Well, 
we are just going to eliminate the program,'' and it is a 
program that when you figure the percentage of FHA loans that 
are made to a buyer Downpayment Assistance Program there are a 
whole lot of people in this country in homes who would not be 
in a home today; they would still be out renting some home that 
maybe somebody who came off of Section 8 might need to rent, 
thereby creating a situation where there are no available 
rental homes. People are moving into homes, and if they are 
moving into homes, 85 percent of these people have acquired 
wealth who did not have wealth before.
    I remember touring one of these nonprofits in 2000, and 
there were probably 40 to 45 women working in this nonprofit, 
and as I went through this place and talked to people--can I 
have an additional 1 minute, being as there is nobody on our 
side to speak?
    Chairwoman Waters. You may have an additional 25 seconds.
    Mr. Miller. 25 seconds.
    Every one of these women had been on welfare, and every one 
of these women owned a home. The majority of the loans made 
from this Downpayment Assistance Program were to minorities. 
These people had a dream of owning a home, but no opportunity.
    It seems like we can do better than just saying ``no.'' If 
there are problems, let us address the problems. If there are 
requirements, let us impose the requirements, but let us not 
just throw a program out that obviously is benefiting hundreds 
of thousands of low-income people who otherwise would never 
have an opportunity to own a home.
    And I will have to talk later when I have a chance for 
questions. Thank you. I yield back.
    Chairwoman Waters. Thank you very much.
    Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Madam Chairwoman, I think I will forgo a 
statement in the interest of time.
    Chairwoman Waters. Thank you very much.
    Mr. Green for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and I thank the 
ranking member as well. Madam Chairwoman, I thank you for 
framing this issue for us. I also would like to thank Mr. 
Miller because I think that he has stated quite well some of 
the concerns that I desire to express.
    I do want to say, however, that we know that there are many 
persons who will inherit a legacy of poverty. They will not 
have the same opportunities that many others will have, but 
they do have the same hopes, the same dreams, and the same 
aspirations. I commend the organizations and institutions that 
have worked to assist them in fulfilling the American dream of 
homeownership.
    Homeownership does more than provide shelter. It causes 
persons to be in neighborhoods where they develop special 
relationships, where they have a greater degree of safety. The 
asset, itself, can be utilized for education. Many people start 
their first business with the equity in their home. It just 
means so much to give people the leg up out of poverty.
    So, as Mr. Miller has said, Congressman Miller, we should 
not end this program. We should amend it and make it work. We 
should not eliminate it. We can regulate it appropriately and 
make it work. We should show some degree of patience and 
understanding when it comes to the least, the last, and the 
lost, the persons who do not find themselves in the same 
station of life that most of the people in this room happen to 
enjoy.
    So I am honored that the Chair has assembled these 
spokespersons this morning to give us the intelligence that we 
need to preserve this program. There may be some who will 
differ with me, but I think, in the final analysis, most people 
in this country would like to see persons have the opportunity 
to own a home, notwithstanding the station in life that they 
are born into.
    I yield back the balance of my time.
    Chairwoman Waters. Thank you very much.
    Mr. Sires, would you like to have an opening statement for 
5 minutes?
    Mr. Sires. Yes.
    Thank you, Madam Chairwoman, for having such, what I 
consider to be, very important hearings.
    I have been a mayor of a municipality where, of 73 percent 
of the student body, their families fell below the poverty 
level. It is very hard for those people, without any kind of 
assistance, to own a home.
    I have seen this program where it has helped boost those 
families whom we were able to help, and I cannot think that 
such programs will be eliminated for these people. When we are 
spending money abroad on all sorts of things, I think this is 
one of the things that we have to focus on at home--giving 
people the opportunity to own, to feel good. It just changes 
the whole family structure when people have a place that they 
can be proud of.
    I am surely a strong supporter. I know the chairwoman is, 
and the members here, and I am looking forward to seeing how we 
can make this program work better. This is taking these people 
who are really in need and bringing them to another level, and 
if I can assist a little bit, that is something that I will be 
very proud of doing for the rest of my life.
    So thank you very much, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you, Madam Chairwoman, and I really 
appreciate your kindness and generosity in allowing me to 
participate in this subcommittee meeting on such an important 
issue and timely issue as downpayment assistance.
    Owning a home is so central to the American way of life. It 
is so essential to a person or to a family in having a sense of 
self-worth. It is that instrument that helps start the cinder 
blocks for building wealth, for having dignity, and we need to 
keep it. We need to find ways to keep this, not of trying to 
find reasons or rationales for dismantling it.
    We need to keep this. We need to do more to make sure that 
we are reaching out to the people who need it and who need it 
the most. Downpayment assistance has helped those who may not 
have originally qualified for a home loan. It is so important, 
and it creates that instant equity for the homeowner.
    I am particularly interested in hearing from the witnesses 
on findings from the 2005 study conducted by the GAO in which 
outcomes of FHA loans with downpayment assistance programs were 
compared with those loans that were originated without this 
assistance. I understand that the GAO and certain nonprofit 
housing organizations have differing views on the outcome of 
this report. That is so essential, and I think it is important 
for this committee to hear from both sides on this issue.
    In addition, we are all concerned about our constituents 
and the rising foreclosure rates throughout the country, 
especially in Georgia and especially in the Atlanta metro area, 
which leads the Nation. So I will be pleased to hear your 
thoughts on the relationship and role, if any, between 
downpayment assistance and the subprime market.
    These programs have worked. They have been popular. They 
have been successful. I think that when we look at situations, 
there is no way we can look at perfection, because none of us 
is perfect. The world is not perfect. What we can look at and 
continually strive for is the goodness and decency in man. 
Nowhere is that more applicable than in making sure that this 
Downpayment Assistance Program continues and is strengthened.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    Having exhausted all of the opening statements, we will 
move to our first panel. I would like to welcome you to this 
committee hearing, and thank you for your patience.
    On Panel one, we have:
    Ms. Margaret Burns, Director of the Office of Single Family 
Housing Program Development, Federal Housing Administration;
    Mr. James Heist, Assistant Inspector General for Audits, 
Office of the Inspector General, U.S. Department of Housing and 
Urban Development; and
    Mr. Bill Shear, Director of the Financial Markets and 
Community Investment team, U.S. Government Accountability 
Office.
    I want to welcome each of you, and thank you for appearing 
before the subcommittee today. Without objection, your written 
statements will be made part of the record. Each of you will 
now be recognized for a 5-minute summary of your testimony, and 
we will begin with Ms. Burns.

STATEMENT OF MARGARET BURNS, DIRECTOR, OFFICE OF SINGLE FAMILY 
  HOUSING PROGRAM DEVELOPMENT, FEDERAL HOUSING ADMINISTRATION

    Ms. Burns. Chairwoman Waters, Ranking Member Biggert, and 
members of the subcommittee, thank you for inviting HUD to 
participate in this hearing. My name is Meg Burns, and I am the 
Director of Single Family Program Development for the Federal 
Housing Administration.
    I appear today representing FHA Commissioner Brian 
Montgomery, who sends his regrets that he is unable to attend. 
I have been asked to testify on the recently published proposed 
rule which continues HUD's longstanding policy of permitting 
FHA borrowers to rely on downpayment assistance from family 
members, employers, governmental entities, or charitable 
nonprofits, but clarifies that the funds cannot be derived from 
sellers or from any other party that stands to benefit 
financially from the purchase transaction.
    As you may know from previous public statements, and from 
testimony offered by the FHA Commissioner, our Agency has been 
concerned with seller-funded downpayment assistance for some 
time now. While well-intended, the programs have had a 
significant negative impact on FHA's business for the last 
several years. Loans made to borrowers who rely on these types 
of seller-funded gifts perform very poorly. The foreclosure 
rates on these loans are more than twice that of all other home 
purchase loans insured by FHA.
    Moreover, FHA experiences higher loss rates from the sale 
of the properties associated with these particular 
foreclosures, a reflection of the overvaluation that occurs 
with these programs. The higher foreclosure rates represent a 
financial burden for FHA, but of greater concern, they hurt the 
families who lose their homes and the neighborhoods in which 
those homes are located.
    The core problem with these programs is that they disrupt 
the natural negotiations between buyers and sellers in a way 
that results in inflated sales prices and, thus, higher 
mortgage amounts. Seller-funded downpayment assistance programs 
flourish in weak real estate markets where sellers are less 
likely to get full asking prices for their homes. These 
programs help them sell at a higher price than they would 
otherwise get. As such, the property overvaluation associated 
with these programs occurs in markets that are least able to 
accommodate pricing variations. The harmful effects of seller-
funded downpayment assistance were highlighted in 2004 and in 
2005 studies prepared by Concentric Consulting on behalf of FHA 
and GAO.
    In 2006, the IRS issued guidelines, stating that seller-
funded downpayment assistance from sellers to buyers through 
self-serving circular financing arrangements is not charitable. 
So why is FHA proposing this rule, and why now?
    Prior to November 2006, the FHA publicly acknowledged the 
problematic nature of the seller-funded gift programs, stating 
on several occasions that these programs pose a higher cost and 
risk to borrowers and to the soundness of FHA's insurance fund. 
However, the agency resisted the development of an outright 
prohibition of seller-funded gifts, pursuing instead an 
alternative FHA financing arrangement for borrowers lacking the 
funds for a downpayment.
    FHA sought legislative authority to eliminate the 3 percent 
cash investment requirement to offer cash-poor but creditworthy 
borrowers a safer, more affordable alternative to the seller-
funded gift programs. It was our view that a 100-percent 
financing option would reduce borrowers' reliance on seller-
funded gift programs, an outcome that would be good for 
borrowers and for FHA.
    That said, we will continue to work closely with this 
committee to enact needed reforms for FHA, such as 100 percent 
or zero-down financing, as well as the reauthorization of the 
American Dream Downpayment Initiative.
    I want to conclude my testimony by thanking this committee 
for the bipartisan support and leadership it has shown on FHA 
modernization. I also want to point out that if enacted, both 
the legislation introduced by Chairwoman Waters and the 
legislation introduced by Ranking Member Biggert, would go a 
long way toward resolving the issue before us today by 
authorizing FHA to ensure a zero-down mortgage.
    Thank you for having me here, and I will be happy to answer 
any questions you may have.
    Chairwoman Waters. Thank you very much.
    [The prepared statement of Ms. Burns can be found on page 
54 of the appendix.]
    Chairwoman Waters. Next, we will have Mr. James Heist.

 STATEMENT OF JAMES A. HEIST, ASSISTANT INSPECTOR GENERAL FOR 
  AUDITS, OFFICE OF THE INSPECTOR GENERAL, U.S. DEPARTMENT OF 
                 HOUSING AND URBAN DEVELOPMENT

    Mr. Heist. Chairwoman Waters, and members of the 
subcommittee, thank you for inviting me to testify today.
    In 1998, less than 1 percent of all FHA borrowers received 
seller-funded downpayment assistance from nonprofits. By 2006, 
loans with nonprofit downpayment assistance approached 25 
percent of all FHA new business. The default and claim rates 
for these loans are twice as high as are loans without gifts, 
and this adverse performance has become a serious financial 
concern to HUD. HUD has recently proposed regulatory changes 
that would establish specific standards for an FHA borrower's 
investment in the mortgaged property.
    The Office of the Inspector General strongly supports the 
Department. My office has recently audited FHA lenders. For 
example, the Broad Street Mortgage audit found documents 
showing that sellers increased sales prices to cover the cost 
of donations to downpayment assistance providers. 
Correspondence between lender staff cited specific amounts 
needed from sellers to close the loan and the price markups 
required to fund the seller's gifts.
    In 2002, at the request of FHA, we reviewed a statistical 
sample of over 1,000 FHA files to determine the percentage of 
borrowers who were receiving downpayment assistance from 
nonprofits and to find out if the downpayment assisted loans 
were more likely to default than loans without such assistance. 
The audit found that such loans have a greater tendency to 
default. We have not been the only voice of concern.
    The Government Accountability Office cautioned in a 
November 2005 report that the FHA needed to better manage the 
risk of FHA-insured loans with downpayment assistance. FHA's 
actuaries have also commented on the impact of downpayment 
assisted loans for fiscal year 2005. Their conclusion: an 
almost $2 billion decrease in the estimated economic value of 
FHA's insurance fund.
    HUD's contractors conducted an independent analysis in 
2004. Their conclusion: median house prices and seller 
contributions tended to be higher when gifts from nonprofits 
were present.
    In May 2006, the IRS issued a revenue ruling that nonprofit 
organizations that fund downpayment assistance programs with 
contributions from the property's sellers do not meet legal 
requirements for tax-exempt status. The IRS is currently 
conducting a large number of investigations of organizations 
involved in such activities.
    Nonprofit downpayment assisted loans will continue to have 
a negative impact on the economic value of the FHA insurance 
fund and on FHA borrowers. FHA's fiscal year 2008 budget 
states, ``Because of adverse loan performance, the baseline 
credit subsidy rate for FHA's single family program is 
positive, meaning that the total costs exceed receipts on a 
present value basis and, therefore, would require 
appropriations of credit subsidy budget authority to continue 
operation.'' This is primarily attributable to the poor 
performance of seller-funded, nonprofit downpayment assisted 
loans.
    When the HUD Inspector General testified in March before 
the Senate Committee on Appropriations, the committee was very 
concerned about having to fund a new appropriation to cover the 
shortfall. Since HUD has indicated that it would not seek 
appropriations, this burden will fall on all new FHA borrowers 
through increased premiums. The subcommittee will hear other 
testimony highlighting the growth of homeownership 
opportunities through nonprofit downpayment programs.
    This growth comes at a price. It is often the borrower who 
suffers the most when financed into a home at an inflated value 
because the sales price was raised to pay for the nonprofit 
gift. Borrowers are sometimes unable to keep current on their 
inflated mortgage loans and eventually lose their homes to 
foreclosure. To prevent this, and to help address the looming 
budget shortfall, FHA should implement the proposed rule to end 
seller-funded nonprofit gifts.
    That concludes my testimony. I thank the subcommittee for 
holding this hearing, and I look forward to answering any 
questions the members may have.
    Chairwoman Waters. Thank you very much.
    [The prepared statement of Mr. Heist can be found on page 
62 of the appendix.]
    Chairwoman Waters. Mr. Shear.

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL MARKETS AND 
  COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Shear. Madam Chairwoman, and members of the 
subcommittee, it is a pleasure to be here this morning to 
discuss issues concerning downpayment assistance for home 
buyers.
    Making a downpayment on a mortgage can benefit both the 
home buyer and the mortgage provider. However, many families 
have difficulty saving sufficient funds for a downpayment and 
loan closing costs. In many instances, obtaining downpayment 
assistance from third parties, such as relatives and government 
agencies, can create instant equity and make homeownership 
affordable to more families.
    Largely in contrast to other key mortgage industry 
participants, the FHA allows borrowers to obtain downpayment 
assistance from nonprofit organizations that operate programs 
supported partly by property sellers, which I will refer to as 
``seller-funded downpayment assistance.''
    My testimony today is based on a report we issued in 
November 2005 on downpayment assistance used with FHA-insured 
mortgages. My discussion will focus on, first, trends in the 
use of downpayment assistance with FHA-insured loans; second, 
the impact that the presence of such assistance has on purchase 
transactions and house prices and; third, the influence of such 
assistance on loan performance.
    In summary, we found, first, the proportion of FHA-insured 
purchase loans with loan-to-value ratios above 95 percent; 
those that were financed, in part, by seller-funded downpayment 
assistance grew from about 6 percent in 2000 to about 30 
percent in 2004 while the overall number of loans that FHA 
insured fell sharply.
    Second, seller-funded downpayment assistance can alter the 
structure of the purchase transaction in important ways. When 
home buyers receive such assistance, many of the nonprofits 
require property sellers to make a payment to the nonprofit 
that equals the amount of assistance the home buyer receives 
plus a service fee. This requirement creates an indirect 
funding stream from property sellers to home buyers that does 
not exist in other transactions, including those involving more 
traditional forms of downpayment assistance. According to 
mortgage industry participants, a HUD contractor study and our 
analysis, property sellers who have provided such assistance 
then often raise the sales price of the homes involved in order 
to recover the required payments to the organizations.
    Finally, turning to loan performance, our evaluation 
included, among other things, an analysis of the national 
sample of FHA-insured loans while we controlled for other 
variables affecting FHA insurance claims. Here, we found that 
the probability of claims was 76 percent higher for loans with 
seller-funded downpayment assistance than it was for comparable 
loans without assistance. The weaker performance of loans with 
seller-funded downpayment assistance may be explained, in part, 
by the higher sales prices of homes bought with this assistance 
and the home buyers' having less equity in the transactions.
    In fact, the higher sales price that often results can have 
the perverse effect of denying buyers any equity in their 
properties and creating higher effective loan-to-value ratios. 
Due partly to the adverse performance of loans with seller-
funded downpayment assistance, FHA has estimated that, in the 
absence of program changes, its single family mortgage 
insurance program would require a subsidy in 2008.
    Our 2005 report made recommendations, including a 
recommendation that FHA treat seller-funded downpayment 
assistance as a seller inducement and, therefore, subject to 
the prohibition against using seller contributions to meet the 
3 percent borrower contribution requirement.
    Madam Chairwoman, this concludes my oral statement. It is 
really a pleasure to be here.
    Chairwoman Waters. Thank you very much.
    [The prepared statement of Mr. Shear can be found on page 
82 of the appendix.]
    Chairwoman Waters. I will now recognize myself for 5 
minutes for questions.
    First, let me just try and clear up something with you, Ms. 
Burns, and you, Mr. Heist.
    The FHA did come to us regarding the formulation of our 
legislation and asked us to include in the legislation zero 
downpayments. That means that they would like to outreach and 
to service the same kind of people who are being serviced by 
the programs that we are here to discuss today, who may not be 
able to afford a downpayment. If the FHA is going after the 
same clientele, what is going to be the difference in the so-
called ``foreclosure rate?''
    I also want you to be more specific and give me some hard 
numbers on the foreclosure rate.
    I will start with you, Ms. Burns.
    Ms. Burns. Thank you. It is an excellent question.
    We felt very, very strongly when we came to Congress with 
that proposal because we want to reach these exact borrowers, 
just as you said. We believe that these are the borrowers FHA 
was always intended to serve. However, we are putting them in a 
program today that gets them in trouble. We are putting them in 
harm's way today.
    A 100-percent financing program is a way to reach them 
safely and affordably. That is what FHA is here for. What we 
know about these programs today is that the foreclosure rate is 
twice as high as it is for--
    Chairwoman Waters. Excuse me. I only have 5 minutes.
    Ms. Burns. Okay.
    Chairwoman Waters. I want you to tell me--
    Ms. Burns. Yes.
    Chairwoman Waters. --how the FHA is going to have a program 
with no downpayments and not have the foreclosure exposure that 
you have described here in some detail.
    Ms. Burns. That is right.
    The reason that these particular borrowers get into trouble 
is because these programs only work in weak markets. Sellers do 
not want to participate in this kind of a program in a market 
where they can get the full asking prices for their homes. What 
that means is, when borrowers receive one of these gifts and 
pay a higher sales price as a result and essentially finance 
their own gifts and get an inflated mortgage amount, they are 
already upside down. They do not have instant equity. They have 
no equity.
    Chairwoman Waters. In essence, what you are telling me is, 
with the FHA program, there is going to be some assurance that 
they are going to know that the selling price of the home that 
is being purchased is of fair market value, that it is not 
going to be inflated, that it is going to be a price where, if 
the same person were to get a downpayment from these programs, 
he would be able to perform better with the FHA? Is that what 
you are telling me?
    Ms. Burns. Yes. Absolutely.
    Chairwoman Waters. How will they guarantee a fair market 
price on the purchase or on the sale of homes?
    Ms. Burns. For every financing transaction, there is an 
appraisal performed, and the appraisal determines the 
appropriate value of the home, and that is exactly what would 
happen.
    Chairwoman Waters. So am I to understand that they do not 
have appraisals in Nehemiah and in the other programs?
    Ms. Burns. There are appraisals that are performed today.
    Chairwoman Waters. Is something wrong with those 
appraisals?
    Ms. Burns. I think we all--
    Chairwoman Waters. Are they illegal?
    Ms. Burns. No, absolutely not. They are not illegal. The 
appraisers are doing the best that they can.
    Chairwoman Waters. What is going to be the difference 
between the appraisals that the FHA will have and the 
appraisals that are now working with these programs? How do you 
know that the price of the house will not be inflated?
    Ms. Burns. There will not be any reason for price 
inflation. There will not be a nonprofit involved in the middle 
of the transaction providing the seller--
    Chairwoman Waters. So the only time that you have inflated 
prices in the market is when you have a program like this, but 
they are probably never inflated? When you are dealing with the 
market and with the FHA or with other financial institutions, 
you never have inflated home prices?
    Ms. Burns. I cannot speak to other types of transactions, 
but I can speak to this particular type of transaction.
    Chairwoman Waters. So you cannot guarantee me that FHA 
contracts will not have inflated prices?
    Ms. Burns. Yes, there will be no reason for an inflated 
sales price. That is correct.
    Chairwoman Waters. But you do not know that there will not 
be. I am just trying to understand.
    Ms. Burns. Right. I mean, we do not know that there will 
not be, no, but we know that there will not be a reason for it. 
We will be eliminating the cause that exists today.
    Chairwoman Waters. So the reason for inflated prices, 
wherever it occurs, is that people want to make more money.
    Ms. Burns. Oh, absolutely.
    Chairwoman Waters. Wherever it occurs, that is the reason 
for inflated prices. You simply cannot tell us that the only 
place for inflated prices is in a program like this where you 
have the nonprofit who is, in some way, inflating the price of 
the sale of the house just to make the downpayment. I suspect 
that may be true, and I am not arguing that point.
    The point that I am arguing is that the prices of homes do 
get inflated. The appraisals, we hope, would always be good 
appraisals, but they are not. Those of us who are real estate 
people here on the panel know something about that.
    Okay. Do you have anything you would like to say about 
this, Mr. Heist?
    Mr. Heist. Only that in conjunction with some of our audit 
work, we have seen examples of where there is pressure put on 
the home seller to raise the price of the property to cover the 
downpayment gift that the seller has to provide to the 
nonprofit. In fact, we have seen examples of where there is a 
list price put out by the builder of the home, and actually, 
the borrower is going into the closing, expecting that is going 
to be the price of the property, and yet, when they come to the 
closing, they find that the price of the home has increased to 
cover the cost of the downpayment gift that they are expected 
to provide to the nonprofits.
    So that is--
    Chairwoman Waters. So what you are basically describing to 
me--as for the appraisers, as I understand it, when they go 
into an area, they get comparables, and what you are saying is, 
if Nehemiah or if one of these programs is involved with the 
sale of a property, that they may increase it beyond the 
comparable value of the other houses in the community; and the 
person who is selling does not know, and the buyer does not 
know, that they are all being duped.
    Mr. Heist. I am only saying that the buyer may not be aware 
of the increase in the sales price. Oftentimes, these are 
first-time home buyers who have not gone through the 
transaction they are confronted with.
    Chairwoman Waters. I see. All right. Thank you very much. I 
will recognize our ranking member, Mrs. Biggert.
    Mrs. Biggert. Thank you, Chairwoman Waters.
    Mr. Heist, on pages 7 and 8 of your testimony, you present 
two cases there which, I think, are similar to what you were 
referring to with Ms. Waters where there has been the gift. But 
after you have gone through these two cases, you say that 
neither borrower was able to keep current on their inflated 
mortgage loans, and they eventually lost their homes to 
foreclosure.
    In the FHA modernization bills we have put in, as for the 
zero downpayment, there was one where, if you have the zero 
downpayment, then you have to pay more annually; at least in 
the bill that I have, we raised the premium without the 
downpayment.
    Would that same thing occur if the annual premium were 
raised by FHA? I mean, the property value in that case would 
not be inflated, would it?
    Mr. Heist. I do not know if that would have an effect on 
the price, but it would certainly affect the amount that would 
be financed under the mortgage because you have additional 
mortgage insurance premiums which may or may not be financed as 
part of the mortgage, so it may not affect the price, but it 
could affect the amount of the mortgage, certainly.
    Mrs. Biggert. Well, there seem to be people who do not have 
the money for the downpayment, but--they have the money to meet 
the monthly payments just based on salary, but they do not have 
a savings to make the downpayment. I am trying to distinguish 
what the difference is between that and having somebody give a 
gift of the downpayment.
    Mr. Heist. Well, one thing that would not be present would 
be the processing fee that the nonprofit charges to make the 
transaction.
    Mrs. Biggert. Okay. Can you give us an idea of what those 
charges are?
    Mr. Heist. I believe they run around 1 percent, but I am 
not certain.
    Mrs. Biggert. Okay. Ms. Burns, do you know, or Mr. Shear?
    Ms. Burns. The most recent figure I had heard was that the 
average is $500.
    Mrs. Biggert. So it is like another closing cost. Okay.
    Then, Ms. Burns, I understand that FHA data indicates that 
over one-third of homeowners receiving downpayment assistance 
have low FICO scores and high delinquency rates; is that true?
    Ms. Burns. I am not familiar with those statistics. Sorry.
    Mrs. Biggert. Okay. Well then, you would not know, on the 
flip side, if two-thirds of homeowners receiving downpayment 
assistance have average or above average FICO scores and lower 
delinquency rates?
    Ms. Burns. No. I am not familiar with those figures.
    Mrs. Biggert. Okay. Thanks.
    I yield back.
    Chairwoman Waters. Thank you very much.
    Let us just go right down and start with Ms. Velazquez.
    Ms. Velazquez, do you have questions?
    Ms. Velazquez. Ms. Burns, either you or Mr. Heist, can you 
tell me, in terms of the audit that found that 19.39 percent of 
the loans were in default for at least 90 days, how many of 
those at the end became foreclosed?
    Mr. Heist. I believe, overall, there are statistics that 
suggest that roughly a third of 90-day defaults end up in 
foreclosure. One has to wait for a particular year's portfolio 
to mature before you realize what the exact percentage is.
    Ms. Velazquez. How does that compare with a subprime 
foreclosure?
    Mr. Heist. I do not have that information.
    Ms. Velazquez. Do you?
    Ms. Burns. No, I do not know the subprime foreclosure rate. 
However, the average foreclosure rate for these particular 
loans is approximately 16 percent.
    Ms. Velazquez. Ms. Burns, what is your response to those 
supporters of downpayment programs such as Nehemiah who argue 
that even if HUD's audit conclusion is correct, this 
Downpayment Assistance Program serves low-income home buyers 
better than subprime mortgages, which have even higher default 
rates?
    Ms. Burns. I would say that the FHA could serve them even 
better, which is why we would hope to have 100 financing--
    Ms. Velazquez. Traditionally, you have not.
    Ms. Burns. Traditionally, the FHA, previous to the last 5 
years, did serve low- and moderate-income families. It is true 
that over the last 5 years the trend has gone to subprime 
loans. That is very true, and that is of great concern to us.
    Ms. Velazquez. Well, let me just say this. I will recommend 
very strongly to both the chairwoman and to the ranking member 
that we study this further. The fact of the matter is that 
transformation and renaissance have been taking place in 
neglected areas like in New York. In New York, there were areas 
that were low-income communities, totally neglected. The 
Federal Government never really put any type of program to 
assist low-income earners to become homeowners.
    Today, there is a renaissance happening in those places, 
and it is because of Nehemiah's presence in that community. So 
we need to study this further. I am not convinced, and I will 
strongly advocate to oppose this regulation.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    Mr. Miller.
    Mr. Miller. Thank you.
    I am usually the guy on HUD's side, and I am really 
confused. I mean, I have been going through this paperwork for 
weeks.
    Mr. Heist, do you know who the bad guys are? You said you 
reviewed paperwork, and there were letters saying that the 
prices were inflated.
    Who is doing this? Do you know?
    Mr. Heist. Only to the extent that we--
    Mr. Miller. Well, no. If you read the stuff, then you know 
who the bad guys are; is that not fair?
    Mr. Heist. Well, the focus of our lender audits is on the 
origination of the--
    Mr. Miller. No. I only have 5 minutes.
    You told me in testimony that you read letters saying they 
inflated the appraisals, and they did this and that. So you 
have to know who they were. What did you do?
    Mr. Heist. Our focus was on the--
    Mr. Miller. No. What did you do? I do not have time. Did 
you do anything, ``yes'' or ``no?''
    Mr. Heist. To look at the--
    Mr. Miller. Did you do anything to correct the problem, 
``yes'' or ``no?''
    Mr. Heist. Not to--
    Mr. Miller. Okay. Thank you.
    GAO, you came out with a study in 2005, and you made some 
legitimate--I am on your side. I am not chewing you out. You 
made some good recommendations.
    Did you guys do anything, ``yes'' or ``no?''
    Ms. Burns. No.
    Mr. Miller. No, you did not do anything?
    I read a letter from Nehemiah back in 1999 to HUD, and it 
says, ``You need to regulate our industry. You need to do these 
things.'' HUD's response was, ``At the very least, we believe 
that several of your proposals may require the rather 
protracted and rigorous process of rulemaking rather than the 
simple issue of a mortgage letter, as you suggested. In any 
event, we will keep your letter and accompanying brochures as 
reference material should we elect to seek changes in the 
future.''
    So you have probably the largest downpayment assistance 
program saying, ``Please regulate our industry so we do not 
have bad guys,'' and under Cuomo's charge--and Carter wrote 
this letter--he said, ``No, we do not want to do anything.''
    Now, the problem I am having is, you have guys trying to 
put them out of business--and I love you guys, we are buddies. 
So you are trying to put them out of business. The IRS is 
trying to tax them to death when they did not make any money. I 
have a real problem with this.
    Ms. Burns, you said it is better with the zero downpayment. 
You set standards, and you guys require certain underwriting 
standards from an FHA loan, do you not, ``yes'' or ``no?''
    Ms. Burns. Yes.
    Mr. Miller. You do. Good. Okay.
    Now, if you require standards for underwriting and 
standards for appraisal, you are telling me that they are 
better off with a zero downpayment on a $200,000 home than they 
are getting $6,000 from a nonprofit as a downpayment, only 
owing $194,000 rather than $200,000. That does not make sense 
to me.
    I was a developer for over 35 years. Sorry, it does not 
make sense. I know nonprofits who require the seller to certify 
in writing under penalty of perjury that they are not inflating 
this price at all, that this is the normal market price, so 
some of them are trying to do it. If some are not, let us fix 
them.
    You said this only works in a downward market; is that 
correct?
    Ms. Burns. Yes.
    Mr. Miller. What happened between 1998 and 2005? Were there 
any downpayment assistance programs processed through you, 
``yes'' or ``no?''
    Ms. Burns. FHA--
    Mr. Miller. Yes, there were.
    What was happening during 1998 to 2005? Was it a bad real 
estate market or was it probably the best real estate market we 
have ever seen in history? Was it better or worse?
    Ms. Burns. The real estate market--
    Mr. Miller. The real estate market was the healthiest 
market we have ever experienced in my lifetime. I am 58 years 
old; that is not young. So, if they are making all of these 
downpayment assistance programs in a marketplace where buyers 
are standing in line to buy homes, I love you, but the argument 
does not hold water.
    Now, if you are saying that in the last year things have 
been tough in the marketplace, and buyers are sitting out there 
wondering who is going to buy their homes, well, okay.
    Let us talk about the last 12 months. Nehemiah received a 
letter on September 15, 1999 from HUD that said, ``Please, 
let's regulate our industry,'' because they believed that there 
could be problems in the industry, that things could go wrong.
    If you guys are doubting an appraisal, you need to hold 
people accountable and fix it. If you are doubting 
underwriters' standards, hold them accountable and fix it.
    But why not establish the same criteria for downpayment 
assistance as you do for zero down? Monitor it. Have oversight. 
Make sure the guarantees are established in law. But you cannot 
convince me that if I borrow $200,000 from you on a zero 
downpayment, and owe $200,000, that I am better off than if I 
owe $194,000, when somebody gives me $6,000 as a downpayment, 
and there are, maybe, some closing costs.
    So, somehow we have to fix this thing. If we can have the 
government's help, we can sure allow the private sector to help 
if it does not hurt us at all. And if we have to introduce 
legislation, I am sure I can find a bunch of people on this to 
join me in drafting legislation to say, let us tighten the 
restrictions and let us tighten the requirements, but let us 
not throw the baby out with the bath water, and let these 
people do their jobs as you are doing your job, but let us work 
together.
    If they want guidelines and oversight, give it to them. If 
they are saying, hold the bad guys accountable, hold them 
accountable, but let us not, please, adopt a rule where you get 
in a fist fight with all of us over a program that we think has 
some viability.
    And if there is something wrong, Lord, believe us, we want 
to fix it. I think we are making a mistake.
    I yield back.
    Chairwoman Waters. Thank you very much.
    Mr. Cleaver.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Let me, first of all, associate with the liberal comments 
of Mr. Miller.
    Mr. Miller. I am buying you lunch today. We have to talk.
    Mr. Cleaver. When the DPAs are granted, are they tax 
exempt?
    Ms. Burns. Yes. The providers of downpayment assistance 
today are nonprofit 501(c)(3)--
    Mr. Cleaver. No. No. No. No.
    When someone receives a gift of downpayment assistance, is 
it nontaxable?
    Ms. Burns. I am sorry. I cannot speak to the tax side of 
it.
    Mr. Cleaver. Mr. Heist?
    Mr. Heist. I cannot either.
    Chairwoman Waters. If the gentleman would yield, it is my 
understanding that if you receive a gift of $10,000 or more, it 
is reportable. I do not think it is necessarily reportable 
under $10,000.
    Is that your understanding, Mr. Tax Attorney Green?
    Mr. Green. I do not claim to be a tax attorney, but I 
believe that is correct.
    Mr. Miller. Would the gentleman yield for 1 second? I can 
directly respond to that.
    They are trying to not only tax the people who gave the 
money, where the nonprofits charge them a tax, but they can 
also go to the person who received it and tax him for a gift.
    Mr. Cleaver. Yes, that is where I was going. Thank you. We 
are kindred spirits, Mr. Miller.
    I know the IG is an independent agency, or it is supposed 
to be. Did the IG's office have any impact on this new rule? 
Was there any influence from the Inspector General's office in 
HUD or on HUD that resulted in this new proposed rule?
    Mr. Heist. Well, we have certainly expressed our concerns 
and have made that recommendation in the past, and as other 
studies have confirmed the results of our initial concerns, we 
have continued to make that recommendation, yes.
    Mr. Cleaver. So then, you would know the number of non-FHA 
loans using downpayment assistance, and you would probably also 
know the ratio of foreclosures with non-FHA to those with FHA?
    Mr. Heist. No, sir, I would not. Our jurisdiction is 
basically auditing FHA's program.
    Mr. Cleaver. Well, how do we know whether or not this is 
something that is horrible or how do we know that this is, you 
know, the way the market is moving?
    Mr. Heist. Because one can measure the performance of these 
loans versus the rest of the portfolio.
    Mr. Cleaver. But that is comparing apples and pineapples.
    I mean, the only accurate comparison, I think, and maybe 
you would agree, are the non-FHA loans using downpayment 
assistance that go into foreclosure and the FHA loans; isn't 
that right?
    Mr. Heist. That might be a legitimate comparison if one 
could make one. That is not something that we have done now.
    Mr. Cleaver. That is the point I am making. That is 
precisely the point I am making, so--
    Mr. Heist. What our initial work did back in 2002 was to 
compare downpayment assisted loans with loans that did not 
receive gift assistance.
    Mr. Cleaver. Just stop right there. Let's hang out right 
there. You can't make a comparison like that. I mean, they 
don't go together, don't you agree?
    Mr. Heist. Respectfully, I don't agree with that.
    Mr. Cleaver. Explain to me why those comparisons are 
legitimate.
    Mr. Heist. The point is, the loans represented increased 
risk to the insurance fund above and beyond what you could 
expect with loans that either to the extent they are funded 
through gifts from relatives or don't require a gift and 
actually meet the 3 percent investment requirement and are able 
to make a downpayment. Those homes have a greater degree of 
equity going into the transaction.
    Mr. Cleaver. Okay, thank you.
    My last question, can you give me an idea of the cost to 
the Treasury of this benefit? I mean, how much revenue is lost 
because of the DPA?
    Ms. Burns. I don't know.
    Mr. Cleaver. Would you say negligible?
    Ms. Burns. No. I would say from an FHA perspective that the 
concern is with the budget, and that if we continue to permit 
these kinds of programs, we would grow positive next year; we 
would need appropriations to operate next year.
    Mr. Cleaver. But we don't know how much they are losing. We 
just know that they need to go next year with appropriations, 
but--
    Ms. Burns. I am sure someone in FHA's budget office could 
provide you with those figures if you would like us to provide 
that after the hearing.
    Mr. Cleaver. I would. It would seem to me that a major 
issue here is, I was expecting someone to say that we are 
losing $25 billion a year.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    Mr. Neugebauer.
    Mr. Neugebauer. Well, thank you, Madam Chairwoman. I have 
been in a markup. I understand that my good friend from 
California, Mr. Miller, had some interesting dialogue going on 
prior to my getting here, and so I will yield him my time to 
let him have some follow-up time.
    Chairwoman Waters. Very good.
    Mr. Miller. Thank you very much. Oh, welcome back.
    How do you propose preventing risk in the future associated 
with the new zero downpayment program?
    Ms. Burns. There are several measures we will take. One is 
clearly on the underwriting side; with underwriting the core 
components that you look at are the credit history of the 
borrower--
    Mr. Miller. Standards, that is good. And what else?
    Ms. Burns. It would be primarily on the underwriting 
standards. That is really where we will--
    Mr. Miller. Could you not apply this same standard to 
downpayment assistance?
    Ms. Burns. Yes.
    Mr. Miller. Could you enforce that standard?
    Ms. Burns. Absolutely.
    Mr. Miller. So you are telling me that it is possible to be 
certain on appraisals, it is possible to be certain on 
underwriting standards where the program would be safe and 
sound. That is possible? Because I am very concerned about 
whether we are making loans that put the program at risk. I 
don't want do that.
    Based on your testimony, it is possible to do that?
    Ms. Burns. It is possible to put--
    Mr. Miller. Then why don't we?
    Ms. Burns. --more stringent underwriting standards.
    Mr. Miller. Why don't we?
    Ms. Burns. Well, we are in the middle of a rulemaking 
process.
    Mr. Miller. No, we are in the middle of saying, we don't 
want these babies thrown out--
    Ms. Burns. That is an indication of FHA's position but--
    Mr. Miller. I would like to propose that you listen to your 
testimony, and if it is possible--I think we should do it. So I 
am just adding to the debate at this point in time; you haven't 
released the rule.
    I am strongly suggesting, and I think many will echo this, 
that maybe that is the approach we should take, because that is 
not the approach I am reading of this coming down.
    Ms. Burns. Right. And just so you know, we certainly hear 
you and that is what the rulemaking process is all about.
    Mr. Miller. I love you, and I am glad.
    Do you know how many people in the last 8 years, who are 
lower creditworthy borrowers, who would not be in a home today 
if it weren't for downpayment assistance programs? Do you have 
any idea?
    Ms. Burns. I believe the figure is approximately 50,000.
    Mr. Miller. I think it would be more than that. I know they 
made more than a million loans.
    Let's say a million people out there wouldn't be in a home 
today. There are 850,000 families in homes that are making the 
payments, they are not a risk, they would probably be renting 
an apartment somewhere.
    Let's say some of those people could have put together the 
money for a downpayment, let's say--is 15 percent a fair 
number? Is 20 percent a fair number? Throw me a number. Give me 
a number. I will go with it.
    Let's say 20 percent.
    So let's take 180,000, out of 850,000, might have gotten 
into a home, and then the other 15 percent that maybe you might 
come back and foreclose the other 5 or 6 percent; the others 
might work it out somehow.
    Some of the 15 percent may sell that house and even pay you 
off and make a profit. If they bought their home back in 2000, 
something happened that they can't make the payment today, the 
numbers are there they are probably going to be able to sell 
that home and make a profit. Even if that market had inflated 
that sales price by 6 percent or 4 percent or 3 percent to come 
up with the downpayment, because when I read the charts on how 
much housing was inflating from 2000 to 2006, it doubled in 
most areas.
    So if they inflated to 3 percent, they will probably still 
make a profit. And that is where I am having problems: If it 
was possible to establish standards, and we didn't establish 
standards, and GAO said, you should have established standards 
in 2005. And Nehemiah said in 1998-1999, do we need some 
standards? In all the paperwork I have back here everybody 
says, ``no.''
    Why didn't you implement some standards?
    Ms. Burns. We decided internally that a better way to deal 
with this was to request additional authority to offer 100 
percent financing programs. We have been pursuing that.
    Mr. Miller. You have asked us to implement--I have been 
working for 3 years on the zero downpayment. I think it is a 
good idea. Because that was a concept that we couldn't 
guarantee would happen, we did nothing with what was assumed to 
be a problem.
    I love Alphonso.
    Shame on us. If we had known there was a problem and we do 
nothing about it--and the problem is not everybody, I don't 
believe that at all. There are some bad apples, and some doing 
a great job. So if we did nothing about the bad apples, and now 
based on language I am seeing in the proposed ruling, we are 
going to throw them all out, maybe we need to rethink it.
    Thank you. I yield back.
    Chairwoman Waters. Thank you very much.
    Let me say, Mr. Miller, before I call on Mr. Green, that 
none of us were told that is the reason why FHA wanted zero 
downpayment in the bill that we had put together. I feel a 
little bit duped.
    Mrs. Biggert was not told; I just consulted with her. You 
may want to look at the FHA bill and may want to save the 
trouble with pursuing the regs by just overlapping with 
legislation.
    I call on Mr. Green at this point.
    Mr. Green. Thank you, Madam Chairwoman. I want to thank 
Congressman Miller for showing some love this morning. You 
indicated that you love Secretary Jackson. I want you to know 
that I love you. Just to make sure that I spread the love 
around, I want all of the panelists to know that I love you 
too.
    What Mr. Miller has made clear, I shall now make 
transparently clear. You agree--I have to say this, sometimes 
when people finish, I don't know whether they have said, 
``yes,'' or ``no,'' so I am going to ask that you say, ``yes,'' 
or ``no,'' and then perhaps we will hear an explanation.
    But do you agree that price inflation was one of your 
primary concerns in instituting this new policy? Do you agree? 
Do you agree that a seller can cover the cost of downpayment 
and you can have a legitimate transaction, one that is not 
invidious, that is not onerous, do you agree that that can take 
place, ma'am? Or are you saying that every time a seller covers 
a downpayment, it is inherently evil? No.
    Ms. Burns. No.
    Mr. Green. So do you agree that you can have a legitimate 
transaction where the seller covers part of the downpayment, 
assuming that the price is right, meaning the price has not 
been inflated? Do you agree?
    Ms. Burns. Yes, that can happen.
    Mr. Green. Do you agree, sir?
    Mr. Heist. I would say it is possible.
    Mr. Green. It is possible. If the price is not inflated, 
and the seller wants to give his money away, the law does not 
prevent people from giving their money to whomever they choose.
    Do you agree that a seller can give his money to whomever 
he chooses and pay a downpayment and that can be legitimate?
    Mr. Heist. Well, the law addresses that--
    Mr. Green. Can you have a legitimate transaction with the 
seller paying a part of the downpayment?
    Mr. Heist. I think that depends on how you evaluate 
legitimacy.
    Mr. Green. Assuming that the price has been properly 
staged, that there is no inflated price.
    Now, sir, if there is no inflated price, and the seller 
wants to give his money to someone, do you agree that he can?
    Mr. Heist. Under current guidelines and interpretations, 
yes.
    Mr. Green. Sir?
    Mr. Shear. I would say the answer is ``yes.'' It is a 
question of facts and circumstances.
    Mr. Green. All the facts and circumstances are legitimate; 
the seller has a legitimate appraisal and the seller decides, I 
want to give some of my money to this buyer.
    Mr. Shear. Yes. Then it is a gift. It is a gift and, yes, 
that can happen.
    Mr. Green. That can be a legitimate transaction?
    Mr. Shear. Yes.
    Mr. Green. Listen, now, you have to realize people are 
listening to you and this makes sense to the other people here 
and to the people who may not be in this room who are 
listening. People with common sense can tell you that a seller 
can have an appraisal that is legitimate and give his money to 
whomever he chooses. That makes sense.
    Now, if this is the case, if you can have these legitimate 
transactions, the question becomes, why would we end a process 
as opposed to amend the process to make the process legitimate 
such that we can continue the process?
    Why would we want to eliminate as oppose to regulate? That 
is the question we are trying to get to, because truthfully, it 
appears to me that what you have done is overreact. It was not 
necessary to go to the extreme that you have gone to when you 
could have done some things in between and protected people who 
truly want to buy homes and don't have downpayments.
    Now, given that we can have this legitimate transaction, 
the question becomes this as to your statistical information. 
In your statistical information, do you agree that it includes 
those loans where the persons were foreclosed on--the 16 
percent that we are talking about, it includes those loans 
where you had persons who could not pay the inflated price, as 
well as persons who probably could not have paid a price that 
was not inflated?
    You see, you commingled inflated, and you don't know 
whether the persons--let me give you an example since you are 
shaking your head, ma'am.
    Suppose some of these persons actually went into 
foreclosure and they had to file for bankruptcy. It may have 
been totally unrelated to the home, they could have had some 
other circumstance in life that they had to cope with. So you 
have those persons who could not have paid even a lower loan 
included those with the inflated prices.
    So you commingled them, have you not--if you do statistical 
analysis appropriately, you have to dissect and take out those 
that would have paid less and would have still lost their 
homes.
    Madam Chairwoman, you have been very generous with the 
time, and I want you to know that I truly do love you; you will 
get Christmas cards from me. Thank you.
    Chairwoman Waters. Thank you very much.
    Mr. Sires.
    Mr. Sires. There is a lot of love going on here, but I just 
want to thank Mr. Miller for clarifying a couple of things in 
your questioning that I had some doubts about.
    What is the average mortgage payment for people who get 
downpayment assistance?
    Ms. Burns. Monthly mortgage payment?
    Mr. Sires. Yes.
    Ms. Burns. I don't know. It would depend on the loan 
amount. The average loan amount for FHA borrowers is 
approximately $130,000, an average payment for that would be--
actually, I am not sure. I don't know.
    Mr. Sires. Somebody mentioned that 16 percent of these 
people are foreclosed, the people that you give loans to, 
something around that area.
    Ms. Burns. The borrowers who rely on downpayment assistance 
from seller-funded nonprofit, correct.
    Mr. Sires. Are there any programs for the people who fall 
in this 16 percent to assist them so they don't lose their 
homes? Do these people maybe qualify for Section 8 so they 
don't lose their homes? Do people on Section 8 qualify for 
first-time payment assistance?
    Ms. Burns. These people would certainly receive loss 
mitigation services, but part of the problem is that once 
someone is in a position where the loan balance is 
substantially higher than the property value, there are fewer 
options available to them, which is why we are so concerned 
that these problems operate--or thrive, I should say--in weak 
markets.
    Foreclosure rates are higher when that event occurs. When 
they can't get out from under that loan balance, they can't 
sell, they can't get out from under.
    Mr. Sires. There are no assistance programs?
    Ms. Burns. There are loss mitigation services and 
counseling services that try to help--
    Mr. Sires. Monetarily, there is nothing?
    Ms. Burns. Offered by the Department of Housing and Urban 
Development?
    Mr. Sires. Yes.
    Ms. Burns. There are HOME funds that go to State 
organizations, CDBG money to go to State organizations that run 
rescue funds, but there is not a specific pot of money that is 
intended specifically for foreclosure prevention, no.
    Mr. Sires. I was involved with tax credits, building 
affordable homes. When you build with tax credits, these people 
qualify for the downpayment assistance program after you are 
building affordable housing. Do you know that?
    Ms. Burns. I am sorry, I don't know.
    Mr. Sires. If I build 50 homes for low income and these 
people qualify, are they entitled to get the money for the 
downpayment of those homes? Do you know that?
    Ms. Burns. If they qualify for FHA financing?
    Mr. Sires. Yes.
    Ms. Burns. Could they rely on downpayment--
    Mr. Sires. Even though it is a tax credit project?
    Ms. Burns. I am not sure. I am sorry.
    Mr. Sires. I think the public-private partnership is the 
way to go, in my eyes, in the future. If these people would 
need a home, have an assistance on the downpayment, even though 
it is a tax credit project, I think that is something that may 
be worthwhile exploring, to help these people get their homes.
    I don't know why you wouldn't qualify, if you qualify for 
an FHA loan for the downpayment assistance.
    You are not following me?
    Ms. Burns. No, I am sorry, I am not.
    But people who qualify for FHA financing can rely on--
    Mr. Sires. They automatically qualify for the downpayment 
assistance.
    Ms. Burns. Right. I am just not familiar with tax credits 
in owner occupancy scenarios, only in rental development. So I 
am sorry, I am not really sure.
    Mr. Sires. There is a problem out there, at least in the 
State that I come from, and I know some of the other States 
also have it, where you build affordable housing. But many 
times the problem is, you are trying to find people who need 
homes, but again they can't afford the downpayment. And it is 
not so much the monthly payment, because I think the average 
mortgage for those is something like $800, $875.
    So I think that is something we might want to work on to 
qualify people under these programs.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    Mr. Wilson.
    Mr. Wilson. Thank you, Madam Chairwoman.
    Ladies and gentlemen who are testifying here today, I am 
one of the Representatives from the State of Ohio where we have 
the absolutely terrible reputation of leading the Nation in 
foreclosures. Somehow, some way, we are going to find solutions 
to these problems and I believe that not necessarily your group 
that is here today, but other Federal regulators that we have 
talked with--and that is the OCC, the FDIC and the Fed--it just 
seems to be sort of a disconnect.
    I think the reason there is a disconnect, it is not the 
banking community that are these predators. It is really the 
secondary mortgage people that are causing it, and I am not 
sure how, Madam Chairwoman, and what we can do, but it is 
certainly going to change.
    Last year, when I was in the Ohio senate, we did senate 
bill 185, which was a beginning, and we identified one of the 
problems with some of the appraisals that were going on. And I 
recently introduced a bill that says that we won't have 
favoritism, but rather the appraisers will be distinguished by 
a draw, where we had copies of e-mails, ladies and gentlemen, 
where the loan generator had e-mailed to the appraiser the 
number he had to hit to get the loan. So that is the kind of 
thing that we can't have.
    And one of the things my colleague from New Jersey was 
saying was about the homeowner downpayment assistance program. 
Couldn't that be a connecter, that if a person would be able to 
qualify, Madam Chairwoman, for the downpayment assistance, 
wouldn't that help validate the value of that home and the fact 
that it wouldn't be overappraised. That would be a question I 
have to you.
    In other words, if someone applies for downpayment 
assistance, I would assume that would be scrutinized so that 
they were not buying something that was overly inflated; is 
that correct?
    Ms. Burns. Yes.
    Mr. Sires. Is there anything that we can do that will make 
sure that those--in other words, I just get the feeling, as a 
relatively new legislator here, with 6 months, that we are just 
not connecting the dots. I think that everybody's interested in 
the oversight that needs to be done so that we in Ohio, and 
certainly in the Nation, don't continue to have these predatory 
lendings and have people who are just victims of certainly the 
educational process, but I believe the initiative in this 
committee is to try to connect the dots so that we make sure 
that we are protecting people who in many cases just don't 
understand what they are going through, how we can get more 
people into homeownership. And I think that is where--it comes 
back to the opportunity for the downpayment program.
    So those are the kinds of things, at least that I am 
hearing, and I look forward to learning more about.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    Mr. Scott.
    Mr. Scott. Thank you, Madam Chairwoman.
    Ms. Burns, would you explain the proposed HUD rule that you 
are proposing to eliminate regarding downpayment?
    Ms. Burns. Yes. The proposed rule frankly clarifies that 
FHA does permit downpayment assistance from a variety of 
sources. However, the funds cannot be in any way derived from 
the seller or another party to the transaction who will 
financially benefit from that transaction.
    Mr. Scott. Does this rule eliminate the downpayment 
assistance program?
    Ms. Burns. This rule would prohibit downpayment assistance 
that comes from a source that is related to the seller or from 
any other party to the transaction.
    Mr. Scott. But does it eliminate the downpayment program?
    Ms. Burns. No.
    Mr. Scott. Okay. So what are the exact stipulations behind 
the program?
    Ms. Burns. Well, downpayment assistance providers can not 
continue to provide assistance to other borrowers, those who 
receive funds from the sellers.
    For FHA borrowers, they can only receive downpayment 
assistance from parties where there is not seller money 
involved or money from any other party to the transaction.
    Mr. Scott. I want to try to get it sort of plain where I 
can understand it.
    So, first of all, the proposed HUD rule does not or has no 
plans to eliminate the downpayment assistance program?
    Ms. Burns. No.
    Mr. Scott. How are individuals chosen to participate in the 
downpayment program?
    Ms. Burns. Are you referring to the seller-funded 
downpayment programs that exist today?
    Mr. Scott. The program that the rule does not eliminate.
    Ms. Burns. For FHA borrowers, FHA makes it possible for 
them to rely on downpayment assistance from any source, but 
there is not a particular program for which they are eligible. 
We don't deem them eligible to receive downpayment assistance. 
It is a personal choice on the part of the borrower to go out 
and seek some form of downpayment assistance.
    Mr. Scott. So there are no requirements, no requirements 
that are there to make a person eligible? I am looking for 
reasons why this person is chosen to participate in the 
program.
    Ms. Burns. Right. No, no, FHA does not have criteria for 
eligibility.
    Mr. Scott. What role is the downpayment program playing in 
the subprime market?
    Ms. Burns. I don't believe any role today. I believe on the 
subprime side, when people need 100 percent financing, they get 
a first and a second mortgage or they get a full 100 percent 
financing product.
    Mr. Scott. Now, should your rule go through, how will this 
affect those individuals in the process now of receiving 
downpayment assistance?
    Ms. Burns. It would not. We would obviously recognize all 
borrowers who had signed a sales contract prior to an effective 
date for the rule to take effect so that anyone who was in the 
process of purchasing a home and financing that home, they 
would not be affected.
    Mr. Scott. So your proposal rule changes are retroactive?
    Ms. Burns. Proactive. It would only be for those 
transactions that occur in the future.
    Mr. Scott. Okay. Are there any plans in place--I know you 
said this will not eliminate the program, but are there any 
other plans in place that could very well take the place of 
this program?
    Ms. Burns. I don't know if you call it a ``plan,'' but 
there is a hope that FHA will offer a 100 percent financing 
product of its own.
    Mr. Scott. Why are my constituents calling me very 
concerned? Why are they saying to me that you are proposing in 
this rule to eliminate the program? And when I ask you the 
question, you say you are not eliminating the program.
    Where is this misunderstanding?
    Ms. Burns. I understand that there is a campaign of some 
misinformation out there to try to stop FHA from moving forward 
with this rulemaking process. And I would also say that the 
rulemaking process is actually beneficial for parties who feel 
that the rulemaking is inappropriate.
    This is an opportunity for parties to comment to FHA, to 
the Department of Housing and Urban Development, to make 
substantive constructed proposals for alternative regulatory 
fixes. This is an opportunity for that to take place.
    The campaign of misinformation won't necessarily do that. 
It is really through the rulemaking process, through those 
protocols that a change could occur.
    Chairwoman Waters. Thank you very much.
    I would like to thank the panel for your testimony here 
this afternoon and a question has been asked of me about the 
possibility of extending the rulemaking process. As I 
understand it, you have until July 10th to give comments; is 
that right?
    Ms. Burns. That is right.
    Chairwoman Waters. What is the possibility of extending 
that another 30 days?
    Ms. Burns. I am not an attorney, but we can certainly look 
into that and let you know.
    Chairwoman Waters. Would you please get back to me early 
next week about extending that while we talk more.
    We thank you for being here. The Chair notes that some 
members may have additional questions for the panel which they 
may wish to submit in writing. Without objection, the hearing 
record will remain open for 30 days for members to submit 
written questions to these witnesses and to place their 
responses in the record.
    Chairwoman Waters. Panel One is now dismissed, and I would 
like to welcome our second panel.
    I am going to combine the second panel and the third panel. 
I am pleased to welcome our distinguished second and third 
panels of witnesses. Our first witness will be Ms. Ann Ashburn, 
president and chief executive officer, AmeriDream, 
Incorporated. Our second witness will be Mr. Scott Syphax, 
president and chief executive officer, Nehemiah Corporation of 
America. Our third witness will be Mr. John Osta, vice 
president, Gallinger Realty USA. Our fourth witness will be Mr. 
Todd Richardson, vice president of legal affairs, C.P. Morgan. 
Next, we will have Dr. Steven Fuller from The Center for 
Regional Analysis, George Mason University School of Public 
Policy. And, finally, we will have Ms. Beverly Queen. Would you 
please join us at this end of the table?
    I wanted to make sure that we got everyone in. With that, 
Ms. Ashburn, would you please begin with your testimony for 5 
minutes.

 STATEMENT OF ANN ASHBURN, PRESIDENT AND CEO, AMERIDREAM, INC.

    Good morning, Chairwoman Waters, and Ranking Member 
Biggert. Thank you for your work in increasing and supporting 
affordable housing policy and the opportunity to testify today.
    My name is Ann Ashburn, and I am president of AmeriDream, a 
501(c)(3) organization that increases homeownership 
possibilities for the underserved. AmeriDream was established 
in 1999 and is now one of the largest affordable housing 
nonprofits in the country.
    I ask this committee to bear in mind one proposition: 
Downpayment assistance works. I appreciate the comments you 
made earlier and I hope the added comments will support and 
affirm your earlier comments.
    We have educated 61,000 home buyers, counseled 1,200 people 
in foreclosure prevention, built and committed over $30 million 
to affordable housing projects, and have provided downpayment 
assistance to over 200,000 lower-income home buyers in every 
congressional district in the United States.
    Our gift recipients are lower-income individuals including 
minorities, legal immigrants, women-headed households, and 
first-time home buyers. We are not subprime lenders and we are 
not a lender.
    No one disputes that DPA programs have assisted hundreds of 
thousands of lower-income families. No one questions whether 
the beneficiaries of these programs have received every penny 
promised, and no one doubts that these programs have lifted 
homeownership rates to record levels, particularly among 
minority groups.
    HUD itself has used our downpayment assistance program when 
selling its properties. This is a new charitable sector, barely 
a decade old, and it has experienced significant growing pains. 
AmeriDream and Nehemiah here today have recognized that the 
program is not perfect, and we have aggressively sought 
guidance from HUD and the IRS.
    Unfortunately, that outreach has been rebuffed, and 
policies drafted without our input which seek to shut the 
program down. I respectfully suggest to this committee that 
such a result would be disastrous for the housing market, for 
the families we serve, and for the major work that this 
committee does to promote homeownership for all Americans.
    I would like to take a moment to address a few points that 
came up and clarify and reaffirm your understanding. 
Appraisals: claims have been made that, using DPA, lead to 
overvalued property. The fact of the matter is, all FHA homes 
have HUD-certified appraisals. We have long recognized that the 
appraisals were an issue with DPA as well as the entire lending 
industry. We proposed a system of a line draw similar to the 
Veterans Administration. Unfortunately, HUD ignored our 
suggestions. However, we commend Congressmen Wilson and Clay 
for their bill on appraisal reform and for taking the steps to 
restore the integrity in the appraisal process.
    The claim rates: The DPA claim rate has been consistently 
overstated. Page 10 of the GAO study today shows a true 
national claim rate in figure 2. Loans seasoned 3 and 5 years 
have a 94 percent and 91 percent success rate.
    DPA-assisted loans should be compared to other assisted 
loans, particularly family-assisted loans. These are both 
groups that need help with the downpayment. When you compare 
these groups, there is only a 1 percent difference in the claim 
rate. This 1 percent allows home buyers who do not have family 
wealth to become homeowners.
    Fund insolvency: The assertion that the downpayment 
assistance program is primarily responsible for potentially 
making the FHA fund insolvent is inaccurate. GAO studies in 
1990, 1998, and 2002, to name a few, have cautioned that if the 
market slowed down, and the private sector became more active, 
for instance, the insurance fund would be in danger. We have 
seen subprime loans reduce FHA's market share. In times of low 
house appreciation, such as today, foreclosures are more likely 
to occur and would impact the fund.
    GAO also determined that HUD did not have the ability to 
reliably estimate or evaluate the full impact of policy changes 
on the fund, and HUD relaxed its underwriting standards to 
increase homeownership--all actions that will impact the fund. 
All of these issues have contributed to the proposed HUD rule 
which, if implemented as drafted, will eliminate DPA.
    We oppose the rule because the program works and the 
related issues can be addressed through specific policy 
adjustments, because requests to HUD have gone without action 
for the past 10 years.
    Finally, one of the most alarming statements about DPA came 
from comments from HUD officials in which they suggested that 
despite public comment, they were determined to implement the 
final rule. This is alarming because over here we have 7,000 
comments that have been received in support of DPA and 
requesting HUD to withdraw the rule. Only 16 comments are in 
favor of the rule.
    [The prepared statement of Ms. Ashburn can be found on page 
43 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Our next witness is Mr. Scott Syphax.

   STATEMENT OF SCOTT C. SYPHAX, PRESIDENT AND CEO, NEHEMIAH 
                     CORPORATION OF AMERICA

    Mr. Syphax. Madam Chairwoman, Ranking Member Biggert, and 
members of the subcommittee, thank you for inviting me to 
testify today. I am Scott Syphax, president and CEO of Nehemiah 
Corporation of America, the oldest of the downpayment 
assistance providers under discussion today. Since our 
inception, Nehemiah has made $909 million in downpayment 
assistance grants to over 228,000 families across the United 
States.
    When I joined Nehemiah 7 years ago, it was because I 
believed in the mission of homeownership among the 
traditionally underserved, and helping those folks who had been 
locked out, whether it was because of their recent immigration 
to this country, the fact that their families never received 
their 40 acres and a mule, or just that they were locked out of 
opportunity because of family circumstance, that this model 
brought promise, hope and success to the ability of people to 
reach the American dream.
    The Nehemiah program was birthed in a way that I think is 
important for all of you to hear. It was birthed by a 
grassroots movement. A small black Baptist church in 
Sacramento, California, Antioch Progressive Baptist Church, put 
up a pool of $5,000 because a local city councilman had found 
someone who wanted to help 160 low-income renters become 
homeowners and couldn't figure out a legal way to do it.
    When he moved forward and was able to come up with the 
program to fix that problem, a young man by the name of Don 
Harris sought out HUD's assistance in establishing a pilot 
project. That pilot project has now grown into the movement 
that this committee is discussing today.
    However, along the way, groups like AmeriDream, Nehemiah, 
and others have sought out HUD's partnership and assistance in 
taking care of the issues that we ourselves brought forward to 
the government and tried to address in a way before they became 
a large outstanding issue, but as Congressman Miller pointed 
out, to no avail.
    We stand before you here today because of the fact that we 
are threatened once again, the second time in a decade, with an 
extinction. Whose interest does it really serve? Well, it is 
certainly not the almost 1 million families that we have served 
collectively in the time this program has been around. It 
certainly does not serve the communities where those homeowners 
pay taxes and strengthen the very civic fabric of the cities 
and towns that they live in. In fact, it is ironic that today, 
in the middle of National Homeownership Month, we would be in a 
place where HUD would be proposing the extinction of this 
program.
    I have said to many, mend it, don't end it, and the reason 
is, whatever outstanding issues there are, there is a willing 
community that wants to fix the problems, only our arms are not 
long enough to box with HUD's god.
    So, therefore, we come before you today humble and thankful 
for your interest in this issue and ask once again, please 
assist us in assisting the dreams of the millions of families 
yet unserved, not only by this program, but by the programs 
that this committee has authored through the reformat.
    We look forward to that competition. We look forward to HUD 
having additional tools, but we too can play a role. It is 
ironic that at this very moment HUD would immediately eliminate 
40 percent of its business today. No, it does not stand to 
rational reason.
    I will close by asking all of you to consider a question 
that, frankly, I borrowed from one that Ronald Reagan asked in 
the 1980 election, but I have rephrased it in my own way. And 
that is, would America and the million or so families that 
downpayment assistance has served because of organizations like 
AmeriDream, and Nehemiah, and others, would America and those 
families be better off today if we had never come into 
existence and all those people were renters?
    If you believe the answer is ``yes,'' then kill us, allow 
HUD to do their deed and take us out. But if you agree with us, 
that in fact America and those families and the communities 
they reside in are better off today because of their existence 
and the help provided, then please help us to continue to help 
others.
    Thank you very much.
    [The prepared statement of Mr. Syphax can be found on page 
100 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Witnesses, I am going to ask you to keep your testimony 
very tight and reduce it to 3 minutes, because we are going to 
have to go and vote. If we leave, we will be gone for almost an 
hour because we have 50 minutes' worth of votes, and I know you 
don't want to sit here and wait another hour for us to come 
back. So I will get Mr. Osta started right now.
    Mr. Miller. Madam Chairwoman, based on HUD's testimony, I 
think this should be introduced into the record:
    ``June 5th, Bloomberg, U.S. Department of Housing and Urban 
Development will ban a downpayment assistance program for home 
buyers over the objection of nonprofit groups. HUD Secretary 
Alphonso Jackson said, `I am very much against it.' Jackson 
said in the interview, `I think it is wrong and I don't want 
this to continue to be a partner.' Jackson said in the 
interview that HUD intends to approve the new rule by the end 
of the year, even if the agency receives critical comments.''
    That is germane to our discussion earlier.
    Chairwoman Waters. Without objection it shall be submitted 
into the report.
    Mr. Osta.

STATEMENT OF JOHN F. OSTA, VICE PRESIDENT, GALLINGER REALTY USA

    Mr. Osta. Thank you for allowing me to be here. I have 
submitted my remarks, but after listening to representatives of 
HUD, I did want to reiterate that I am affiliated with a real 
estate company. I have no affiliation with any of the 
downpayment assistance programs.
    In my whole career, I have had the same dream as many of 
you have had, and that is trying to provide affordable housing 
for all Americans. This program, when first introduced to our 
company and to me, certainly met those criteria.
    The only comments that I would like to make to stay within 
your timeframe is that I was sort of almost breathless in 
listening to some of the comments that came from HUD about the 
facts and figures of what buyers and sellers do in this 
program. Some of it was inaccurate, in some cases very 
inaccurate.
    The fact of the matter remains that a seller has a right to 
sell a property and a buyer has a right to buy a property. It 
is a negotiated item. All of the statements made from some of 
the HUD representatives really are not factual in the real 
world, and I just wanted you to be aware of that, and also 
state that you and your committee have said a lot of things 
that are in my testimony, so I really am pleased to hear what 
is happening.
    My concluding remark would have been to you, please do try 
to bring these parties together.
    Congressman, you said it, I had it in my mind: Don't throw 
the baby out with the bath water; let's keep this going.
    [The prepared statement of Mr. Osta can be found on page 70 
of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Richardson.

STATEMENT OF TODD RICHARDSON, VICE PRESIDENT OF LEGAL AFFAIRS, 
                          C.P. MORGAN

    Mr. Richardson. Thank you, Chairwoman Waters, and members 
of the subcommittee, for the invitation to speak today 
regarding downpayment assistance. Also, thank you for the 
robust discussion that occurred with Panel One; most of those 
points were also in my document, and I can truncate my 
discussion.
    There are many different opinions on downpayment assistance 
that I will allow others to more eloquently state. However, as 
a home builder that serves the first-time home buyer market, I 
hope to provide a unique perspective on the topic of the 
downpayment assistance program, the impact it has had on our 
homeowners, and the implications the proposed HUD rule would 
have, effectively eliminating downpayment assistance.
    Over the last 24 years, C.P. Morgan has had the pleasure of 
building over 23,000 homes for first-time home buyers. Nearly 
half of our home buyers are minorities. Nearly one-third of our 
home buyers utilize downpayment assistance, namely the Nehemiah 
program, and have done so with great ease. Downpayment 
assistance clearly has enabled otherwise underserved groups the 
opportunity to take part in the American dream.
    C.P. Morgan's mission and statement is to provide more 
people with more home than they have ever dreamed possible. 
Downpayment assistance has served as a useful tool to help C.P. 
Morgan achieve its vision.
    With that said, it is important to understand what will 
happen if and when the proposed rule goes into effect and 
downpayment assistance is eliminated.
    Thousands of our customers, specifically minorities and 
first-time home buyers, will be precluded from experiencing the 
dream of homeownership. With the appropriate dissolution of the 
subprime market, these home buyers will be left with few 
funding options and will be forced to continue renting.
    Furthermore, with one-third of C.P. Morgan, there will be 
an adverse impact on our employees, subcontractors, and 
suppliers. This impact will occur throughout the Nation and is 
not C.P. Morgan-specific. Remember that over 100,000 homeowners 
utilized downpayment assistance in 2006; imagine the national 
impact caused by eliminating 100,000-plus home sales annually.
    All of this discussion raises questions that I trust HUD 
will respond to, and it is quite evident you all have your eyes 
on: Number one, is a reformed downpayment assistance program 
possible using the experience we have gained over the last 10 
years?
    If it is determined that downpayment assistance should be 
eliminated, is it appropriate to put the rule into effect 
without first having an alternative mechanism?
    Would it be prudent also to note the fate of the FHA 
Modernization Act?
    And an issue that hasn't been necessarily been spoken about 
here, but with downpayment assistance representing 40 percent 
of FHA loans, what will happen to the FHA reserve fund if 
downpayment assistance is eliminated?
    Chairwoman Waters. I am sorry to do this to you, but if we 
want to finish this before we take those votes, I have to move 
to Dr. Fuller.
    Mr. Richardson. I understand. Thank you.
    [The prepared statement of Mr. Richardson can be found on 
page 76 of the appendix.]

    STATEMENT OF DR. STEVEN S. FULLER, CENTER FOR REGIONAL 
   ANALYSIS, GEORGE MASON UNIVERSITY SCHOOL OF PUBLIC POLICY

    Dr. Fuller. Thank you very much. Thank you, Madam 
Chairwoman, and distinguished members of the subcommittee.
    You have my comments. There are a couple of points I would 
like to make in the few minutes I have.
    We have just completed a study called, ``A Comprehensive 
Analysis of Nonprofit Downpayment Assistance.'' It hasn't been 
released yet, but we will make sure you get a copy.
    One of the issues that we undertook in this analysis was to 
look at the criticism of the nonprofit downpayment assistance 
programs. The opponents of the NDPA industry based their 
arguments primarily on three studies; we heard from those 
today. There are two important issues that I think are 
important to bring to your attention because I have heard 
statistics used here this morning that just aren't correct.
    It is useful to recognize that the Department of Housing 
and Urban Development Office of Inspector General's report only 
looked at four cities. It is not a national study; its results 
cannot be applied nationwide.
    The results of the GAO study provide more rigorous 
analysis, but they also have some problems in them. And all of 
the comparisons today, the comparisons were made between the 
total industry nationwide and the recipients of the downpayment 
assistance--two different groups.
    They also have another group. There are other kinds of 
downpayment assistance--from family, friends, parents, and that 
kind of thing. We look at these differences. Nationwide it is a 
1 percentage difference in the default rate between the two 
groups.
    One last point that I think is very important: The claim 
rates quoted here, the 15 percent, are from three cities. That 
isn't a national statistic; it is only 8 percent, 1 percent 
more than similar recipients.
    [The prepared statement of Dr. Fuller can be found on page 
57 of the appendix.]
    Chairwoman Waters. Thank you very much. We'll have your 
written testimony to review.
    I would like to get to Ms. Beverly Queen, the homeowner, 
before we go to vote.

             STATEMENT OF BEVERLY QUEEN, HOMEOWNER

    Ms. Queen. Yes, Madam Chairwoman, and distinguished 
committee members. Thank you for taking the time to hold this 
hearing on such an important issue.
    I grew up in a housing project in Washington, D.C., with my 
eight brothers and sisters. My mother was a high school 
graduate who supported our family on roughly $1,500 a year, as 
a sole breadwinner.
    When I heard about the downpayment assistance program, I 
was living in a basement in Section 8 housing with my four 
children. I knew it was time to get out when my eldest son, 
then 17, was robbed by a group of kids in our neighborhood for 
his tennis shoes. He also started falling in with the wrong 
crowd and getting into fights.
    I was worried for the welfare of my youngest son, then 12, 
because I didn't want him to follow the same path. I prayed to 
God to take us away from that place. At that time my husband, 
who was still my boyfriend back then, and I worked full-time 
jobs to afford our $795 a month rent and tried to make ends 
meet, but we were not able to save any money for a downpayment 
on a house.
    Nevertheless, we knew that owning our own home was the 
answer, so we went looking for property. When we found our 
dream home, the real estate agent introduced us to a lender who 
was familiar with the Homeowners Assistance Program. They 
walked us through the process, and we were comfortable when we 
decided to go with the Downpayment Assistance Program through 
AmeriDream.
    One of the best parts of the process was learning how to 
budget our income and save. AmeriDream provided us with so much 
information and told us about things that we never knew before.
    Our home has four bedrooms with a full dining room, 
kitchen, sitting room, and a family room, on a half acre of 
land in Fort Washington, Maryland. It borders government land, 
so there are often cows grazing, much different than our 
basement view, which was a brick wall.
    When we bought our home in 2000, it cost $173,000. This was 
a lot of money actually for many people in our country, but for 
Washington, D.C., it was cheap. I am happy to say that the 
value of my house has doubled in the 3 years that I have lived 
there. And I am so also proud to say that we have never been 
late on our mortgage payment.
    Without a downpayment assistance program like AmeriDream, I 
know in my heart that I would have lost my dream home, and in 
the time it would have taken for me to save up for my own 
house, it would have been sold, plus I would have needed to 
stay in a desperate living situation until I was able to scrape 
together the money.
    The most important part of my story is how downpayment 
assistance enabled me to give my children a better life. My 
youngest son is now a 4.0 student, studying criminal justice 
and is working as an intern for the State's Attorney--
    Chairwoman Waters. I am sorry, I am going have to ask you 
to discontinue. I think we get the point. Your written 
statement will be part of the record for all of us to review.
    [The prepared statement of Ms. Queen can be found on page 
73 of the appendix.]
    Chairwoman Waters. Members, we have 10 minutes left. I will 
not ask any questions. I will yield to my ranking member, Mrs. 
Biggert.
    Mrs. Biggert. I will yield to the gentleman from 
California.
    Mr. Miller. Thank you for yielding. My question is for 
Nehemiah. I read this letter that you gave me yesterday, and 
when you asked HUD to impose additional regulations on 
nonprofits, what were you asking them to do?
    Mr. Syphax. Well, we were asking them to do a number of 
things. We were asking them, one, to oversee and create a more 
robust appraisal process.
    As Ms. Ashburn recently testified, we did ask for two 
things. One was some sort of appraisal process where people had 
to sign, upon penalty of perjury, that there was no 
manipulation of the appraisal, or secondly, the blind pool 
arrangement where HUD could contract with the VA or create 
their own blind pool.
    Secondly, mandatory homeownership education for everyone 
who received downpayment assistance.
    The third thing, for existing homes, was multiyear home 
warranties.
    And number four, we were looking to impose a mandatory 
requirement for post-home-ownership counseling, which is 
something that AmeriDream and Nehemiah do today. So none of the 
things that we asked for are new; we have been consistently 
asking for them for over a decade.
    Chairwoman Waters. Thank you very much. We are going have 
to go. We have about--
    Mr. Miller. I yield back the balance of my time.
    Chairwoman Waters. Mr. Green.
    Mr. Green. Yes, ma'am; quickly, Madam Chairwoman.
    It seems to me that someone has made the assumption that we 
will trade one program for another, and you have commented on 
this, Madam Chairwoman, so I think it would be appropriate for 
us to somehow send a message to the appropriate authorities 
that we never intended to trade one program for another.
    I can see how both of these programs have a place and can 
be maintained and should be.
    Chairwoman Waters. Thank you very much.
    Mr. Ellison, I know you have been in and out today; 
quickly, about 6 minutes?
    Mr. Ellison. Is there room for the rule change and for the 
seller-funded downpayment assistance providers? As I listen to 
both presentations, and I had read the remarks earlier, the 
question that came to mind is, would the rule change wipe out 
seller-funded assistance or is there room for both the rule and 
seller-funded assistance?
    I do believe in hearings like this sometimes people draw 
stark and clear lines because they want to be persuasive, but 
in truth, is there room for in the market for both?
    Ms. Ashburn. I think I will answer that, because Scott and 
I have talked about it. And please amend these remarks, as 
written. As written--if it is passed as written, it does 
absolutely eliminate the work that our programs do. Our request 
is that the rule be withdrawn, so that there is a public debate 
and discussion about the issue. Because it is a significant 
issue, it is complex, there are a lot of nuances to it; and we 
don't think it can be satisfied through paper dialogue. I think 
people have to sit down and come together.
    Mr. Ellison. Have you had a chance for dialogue with HUD? 
And one last question, do you deny that the seller-funded 
downpayment programs inflate the price of the house?
    Mr. Syphax. To answer question one, which is, have we had 
the opportunity for a dialogue, we have been attempting to have 
that dialogue for a decade and the paper record reflects that, 
that is, on both of our parts.
    Number two, with regards to whether or not there is room 
for this rule and whether that can take place, theoretically, 
sure, but the fact of the matter is that for over a decade we 
have attempted--and one of the reasons that we so much 
appreciate this forum is because, frankly, after 10 years of 
not taking action, it may be that it takes legislation to 
figure this out.
    Number three, in terms of the denial issue, price appraisal 
can and does take place on an anecdotal basis. We have 
standards very similar to each other where it is that we 
actually kick out home purchases if we can find evidence of 
manipulation. The problem is that without broad standards that 
everyone has to pay attention to, whoever tried to originate 
that loan can take it down the street to somewhere else. And so 
we need help because of the fact that ultimately we are the 
ones that are punished by the fact that whatever lawless 
activity takes place does take place. It is too honest to 
benefit from regulation.
    Chairwoman Waters. Thank you very much, I am sorry, we are 
going to have to leave to go to the Floor.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    This panel is now dismissed. And before we adjourn, the 
Chair notes that the record of the hearing will remain open for 
5 days to allow for the submission by members of additional 
materials.
    The Chair would ask unanimous consent that the letter 
containing the written statement of Dr. Kevin Haskett of the 
American Enterprise Institute be included in the record and the 
written letter of the National Association of Realtors also be 
included in the record without objection. It is so ordered.
    This hearing is now adjourned. I thank all of the witnesses 
for being here today. You are now officially on the record in 
describing what it is and what it is not.
    We have other members who will be taking some action as a 
result of this hearing. We will look closely at the FHA bill 
and the no-downpayment program. We will also be looking at the 
other bill that was referenced here today about appraisals to 
see if we can't be fair and just in the way that we manage the 
ability for our constituents to have assistance with 
downpayments.
    Thank you very much.
    [Whereupon, at 12:38 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             June 22, 2007


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