[Senate Hearing 110-491]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-491
 
 FEDERAL HOUSING ADMINISTRATION'S ROLE IN ADDRESSING THE HOUSING CRISIS

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     APRIL 10, 2008--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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44-266 PDF                       WASHINGTON : 2008 

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                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee

                    Charles Kieffer, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

 Subcommittee on Transportation and Housing and Urban Development, and 
                            Related Agencies

                   PATTY MURRAY, Washington, Chairman
ROBERT C. BYRD, West Virginia        CHRISTOPHER S. BOND, Missouri
BARBARA A. MIKULSKI, Maryland        RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin                 ARLEN SPECTER, Pennsylvania
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
PATRICK J. LEAHY, Vermont            SAM BROWNBACK, Kansas
TOM HARKIN, Iowa                     TED STEVENS, Alaska
DIANNE FEINSTEIN, California         PETE V. DOMENICI, New Mexico
TIM JOHNSON, South Dakota            LAMAR ALEXANDER, Tennessee
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
                                     THAD COCHRAN, Mississippi (ex 
                                         officio)

                           Professional Staff

                              Peter Rogoff
                          Meaghan L. McCarthy
                             Rachel Milberg
                            Jonathan Harwitz
                         Jon Kamarck (Minority)
                      Matthew McCardle (Minority)
                        Ellen Beares (Minority)

                         Administrative Support

                              Teri Curtin
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Patty Murray........................     1
Opening Statement of Senator Christopher S. Bond.................     3
Statement of Senator Wayne Allard................................     6
    Prepared Statement...........................................     6
Statement of Hon. Brian D. Montgomery, Assistant Secretary for 
  Housing and Federal Housing Commissioner, Department of Housing 
  and Urban Development..........................................     7
    Prepared Statement...........................................     8
FHASecure........................................................     8
Additional Actions...............................................     9
FHA Modernization................................................    10
Downpayment Assistance...........................................    11
Statement of Kenneth D. Wade, Chief Executive Officer, 
  Neighborworks America, Washington, DC..........................    12
    Prepared Statement...........................................    13
Statement of David G. Kittle, Chairman-Elect, Mortgage Bankers 
  Association, Washington, DC....................................    18
    Prepared Statement...........................................    19
Introduction and Summary.........................................    20
FHA's Record.....................................................    20
The Need for FHA Today and Tomorrow..............................    21
Unleashing FHA's Potential.......................................    22
MBA Supported FHA Modernization Principals.......................    23
Additional Issues................................................    25
FHASecure........................................................    27
Subordinate Loans................................................    28
Appraisals.......................................................    29
FHASecure Expansion..............................................    29
Predatory Lending................................................    30
HUD's Workforce..................................................    31
PART Program.....................................................    32
Risk to FHA......................................................    33
Mutual Mortgage Insurance (MMI) Fund.............................    34
Seller Down Payment Program......................................    35
Housing Counseling...............................................    35
ARM Resets.......................................................    36
Temporary or Permanent Programs..................................    37
Homeowner Benefit................................................    38
Statement of the National Association of REALTORS...............    39
Additional Committee Questions...................................    39
Questions Submitted to Hon. Brian D. Montgomery..................    40
Questions Submitted by Senator Patty Murray......................    40
FHASecure........................................................    40
Troubled Borrowers...............................................    40
Dodd/Frank Proposals.............................................    41
FHA Underwriting.................................................    41
FHA Staffing.....................................................    41
Risk-Based Pricing...............................................    42
FHA Foreclosures.................................................    42
Asset Control Area Program.......................................    43
FHA Downpayment..................................................    43
Private Market Down Payments.....................................    43
FHA Loan Limits..................................................    44
MMI Fund.........................................................    44
Seller Downpayment Program.......................................    44
Contract Funding.................................................    45
Questions Submitted by Senator Dianne Feinstein..................    46
FHA Loans........................................................    46
National Licensing Standards.....................................    46
FHASecure........................................................    46


 FEDERAL HOUSING ADMINISTRATION'S ROLE IN ADDRESSING THE HOUSING CRISIS

                              ----------                              


                        THURSDAY, APRIL 10, 2008

                           U.S. Senate,    
 Subcommittee on Transportation and Housing
       and Urban Development, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:59 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Patty Murray (chairman) presiding.
    Present: Senators Murray, Bond, and Allard.


               opening statement of senator patty murray


    Senator Murray. The subcommittee will come to order.
    This morning we are discussing the Federal Housing 
Administration and its role in solving our Nation's housing 
crisis.
    I am pleased to welcome back to the subcommittee our 
Federal Housing Commissioner, Brian Montgomery. A year ago when 
Commissioner Montgomery testified before us it was to talk 
about the fact that FHA was almost irrelevant to the housing 
market. At the time, the FHA's presence in the market had 
dropped to only 3 percent because so many lenders had taken 
advantage of the housing boom and instead offered exotic 
mortgage products without the FHA guarantee.
    Well, a lot has changed in 1 year. The housing crisis has 
swept across our communities and some are now calling for the 
FHA to be the savior of the housing market. They are hoping 
that the Federal guarantee behind FHA loans could help jump-
start the market again, and they hope it could allow 
unaffordable loans to be repackaged into affordable ones.
    With all these proposals flying around, it is critical that 
this subcommittee take a fact-based, realistic look at what the 
FHA can actually do. We all want to lend a helping hand to 
struggling families who need it, but we need to focus on 
exactly who the FHA could help through updated laws and revised 
policies. And we need to recognize that some borrowers might be 
beyond reach. We do not want to invite a trend in which the 
worst mortgages are moved off the bankers' books and onto the 
Federal Government's.
    My constituents have been clear that they do not want to 
wake up to learn that Congress has taken steps that leave the 
taxpayer holding the bag. And that is exactly what could happen 
if the FHA is pushed to buy loans that we know will go bad, if 
not this year, then next year, or the year after that.
    So before we expand the role of the FHA, we absolutely must 
be sure that the proposals we are considering are not going to 
threaten its solvency, and we must ensure it has the tools and 
the flexibility to charge enough in fees to cover its costs 
because I cannot emphasize this enough. If the FHA cannot pay 
its debts, it will be this subcommittee's responsibility to 
appropriate the necessary funds to cover the shortfall. Every 
dollar we spend to cover defaults at the FHA is one less dollar 
we will have to spend on housing the homeless, providing 
section 8 vouchers to families who could not dream of owning a 
home, or rehabilitating public housing units to a safe and 
sanitary condition.
    Now, at last year's hearing, we talked about many of the 
longstanding problems that burden the FHA, such as antiquated 
computer systems, short staffing, inadequate underwriting, and 
the inability to work seamlessly with lenders. The fact that we 
are now talking about pushing the FHA to salvage a distressed 
housing market does not mean that any of those problems we 
discussed last year have suddenly disappeared. We need to get 
real as we think about expanding FHA's responsibility to manage 
more troubled loans. Doing so will require more rigorous 
oversight and underwriting, not less.
    So I believe that as we talk about expanding FHA's role, we 
must take several steps. We must talk about how we are going to 
strengthen the agency to protect the taxpayers who guarantee 
those loans, and since any proposal is expected to be voluntary 
for borrowers and lenders, we must get a realistic idea of how 
many people will actually participate. Third, we must be honest 
and recognize that the proposed solutions that make the best 
press release are not necessarily the ones that will best 
stabilize the market and keep families in their homes.
    I am glad this morning to welcome Mr. David Kittle to the 
subcommittee. He is the incoming chairman of the Mortgage 
Bankers Association. He is not only a leader in his industry 
association; he is a lender who participates in FHA products 
today. I look forward to hearing his views on the kinds of 
programs he believes that will get the voluntary participation 
of both lenders and borrowers to help ease this problem.
    And finally, I want to welcome Ken Wade, the CEO of 
NeighborWorks America. This subcommittee provided an historic 
increase in housing counseling funding as part of our 2008 
Appropriations Act. It was, I think, the only legislation 
dealing with the housing crisis that became law last year.
    Senator Bond and I provided this increase in funding 
through Mr. Wade's organization instead of through HUD so that 
we could get those dollars out quickly. Hundreds of thousands 
of homeowners are seeing the interest rates on their mortgages 
rise every quarter. So it was critical to put that money to use 
right away. And I want to thank Mr. Wade and all of his great, 
hard-working staff for getting a very large portion of that 
money out the door in record time.
    Now, last night, working with Senator Bond, we were 
successful in boosting the additional funding for housing 
counseling up to $180 million during the Senate debate on our 
Foreclosure Prevention Act (H.R. 3221 EAS).
    Mr. Wade works every day to help struggling borrowers keep 
their homes. So I look forward to hearing his thoughts about 
how FHA can be a strong partner. And I also look forward to his 
thoughts on our future housing counseling needs and challenges.
    So thank you all for being here. I look forward to your 
testimony, and I will turn it over to my ranking member, 
Senator Bond for his comments.


            opening statement of senator christopher s. bond


    Senator Bond. Thank you very much, Madam Chair. I join you 
in welcoming our witnesses.
    I am very pleased to support your comments about the need 
for fiscal responsibility in FHA because we have too many needs 
that we cannot meet now to put more burdens that might take 
away dollars which go to those people who cannot even think 
about owning homes.
    As the chair has indicated, there are families in 
Washington, there are families in Missouri and across the 
Nation who are feeling the pain of the housing crisis, and they 
need our help now. When these people lose their homes, it has a 
devastating effect on the family.
    But as I traveled around Missouri over the Easter recess, I 
found out just how disastrous these foreclosures are to the 
community, to the towns and cities in which they are located. 
The most vociferous advocates of stopping foreclosures were the 
mayors, the city councilmen, the neighborhood activists who 
realize what this can do to the whole community.
    I am particularly interested today in hearing your views on 
how best we address the responsibility of the Federal 
Government in resolving the subprime crisis, as well as other 
market concerns. I think it is critical we take the right steps 
now to rebuild and strengthen the mortgage and housing market. 
The market is going to have to play itself out. There are some 
things that we can do and some things that reach too far. But 
clearly, this problem in the subprime and the housing and 
related industries has had a very, very deleterious effect on 
our economy and the world's economy.
    I know many of these issues cannot be answered easily 
today, but I hope we can at least begin to address the 
stabilization of the subprime market. It is especially critical 
since I understand some 1.4 million subprime mortgages will 
face interest rate resets next year, and that from the resets, 
we can expect to see as many as 300,000 to 400,000 mortgage 
foreclosures. If we start to solve the subprime crisis now, we 
may be able to save many of these families from foreclosure, as 
well as beginning to turn around the larger economic issues 
facing the Nation.
    Housing used to be one of the locomotives that pulled the 
U.S. economy. Right now it is pulling in the other direction, 
and we want to see that change.
    Mr. Montgomery, your position in this is critical. 
Everybody tells us that you are the one who is going to solve 
it. So we are watching anxiously to see where you go. I am 
sorry there are votes that begin at 10:45 because I hope you 
have got a lot to tell us. I know you have announced some 
regulatory reforms that are designed to help resolve the 
subprime market without a bailout for either the homeowner or 
lender. I applaud you for those efforts and look forward to 
hearing the details of the reform, the timing, and the 
potential problems.
    I am, however, very concerned about reports concerning the 
possible insolvency of FHA, and that needs to be cleared up, as 
the chair indicated. Obviously, we need to hear the views of 
Mr. Wade and Mr. Kittle on the proposed reforms. I also would 
like to know why it has taken FHA so long to propose these 
subprime reforms if legislation was not needed.
    I also remain very concerned that the FHA is continuing to 
insure housing finance with seller down payments. I have fought 
this effort. It has been proposed by the administration, and it 
is actually occurring. But in general, where the seller-funded 
nonprofits provide down payment assistance to families in order 
to qualify for FHA mortgage insurance, they are putting the FHA 
and the families themselves at risk. Too often with these 
seller-funded down payments, families are put in homes they 
cannot afford, which has increased the risk of default, leading 
to the serious foreclosures we are seeing today. And that 
practice has serious consequences. Putting families in homes 
they cannot afford costs future homeowners by inflating real 
estate practices, by threatening the solvency of FHA, and not 
the least, ruining the credit status of those families 
foreclosed.
    From 2000 to 2004, these loans, as a percentage of FHA's 
business, grew from 6 to 30 percent, with an approximate 35 
percent default rate on seller-financed down payments with 
NEAMIA and other programs. Without some change in the law or 
elimination of the program, seller down payments of mortgages 
are expected to cost taxpayers as much as $1.4 billion in 
appropriations to pay for losses in fiscal year 2009.
    As I understand it, the courts have not been receptive to 
HUD's attempts to ban this practice and have justified the most 
recent decisions on procedural grounds.
    But putting families in homes they cannot afford costs 
communities. As we are seeing now, when one or two houses are 
foreclosed in a community, or in some instances, as many as 20 
percent in some neighborhoods in Missouri, the entire community 
is afflicted by lower property values. The FHA witnessed this 
problem in the late 1980s caused by other poor FHA practices 
and decisions.
    While I believe that Congress may have to take some 
legislative action to eliminate the seller down payment program 
in order to preserve FHA as a viable mortgage insurance 
program, I also assume you are rewriting your regulations to 
ban the program in a manner consistent with the courts' 
decisions.
    I am also concerned that you have not taken other positive 
actions against this program. First, there appears to be fraud 
on the part of some sellers. Now, that is a good reason for 
termination or prosecution. The default rate alone for the 
program sounds like a reasonable justification for terminating 
participation under FHA. And I was under the impression that 
FHA can return defaulted mortgages to lenders under many 
circumstances. I hope that HUD, FHA are not sitting on their 
hands and are taking as aggressive steps as possible to 
terminate the losing program.
    Also, I would like to hear about FHA's efforts to eliminate 
predatory lending. Back in the previous days when Senator 
Mikulski and I led the VA, HUD Appropriations Committee, we 
made the elimination of predatory lending a priority. However, 
I hear little out of HUD now about eliminating predatory 
lending throughout the mortgage industry. I think we all know 
that predatory lending contributed significantly to the 
subprime crisis, and I would like to know what HUD is going to 
do about it.
    Mr. Wade, it is a pleasure to see you again. I thank you 
for joining me when we met on February 26, to announce the 
first $130 million in grant awards under the National 
Foreclosure Mitigation Counseling Program. I was proud to work 
with the chair and our Banking Committee Chair, Senator Dodd, 
to get these counseling funds approved by Congress in December.
    As I said, over Easter I met with housing advocates, 
families, community leaders, officials across Missouri about 
the current crisis. I heard again and again about the 
importance of financial education like these counseling funds 
provide. Housing counselors I met with over the recess told me 
how these counseling funds are helping families know how to 
renegotiate with their banks or their lenders to get good 
refinancing and keep their homes.
    They also emphasized the very important need for pre-
mortgage counseling, and there is a program in HUD to do that. 
Has it not worked? Have we not funded it adequately? We need to 
know if we are getting adequate pre-mortgage counseling to make 
sure people do not get into these problems.
    I know it is still early in this foreclosure mitigation 
program, but we will be anxiously awaiting the results of it. 
As I believe I told you, Mr. Wade, I am a Show Me Senator, and 
this sounds like a good idea. And we are looking to put more 
money into it, and they are talking about the need for much 
more. But I want to see the results. I want to know how many 
people you have been able to help. Is this working? Are there 
changes needing to be made? And we will expect to hear from you 
how well this program works.
    Mr. Wade, I would also like to get your views on FHASecure. 
Everybody says it is a great idea to help threatened homeowners 
refinance their mortgage. They said they needed to see the 
eligibility for the program expanded so more people can be 
helped in staying in their homes.
    Finally, Mr. Kittle, I look forward to your testimony as 
the only testimony from the private housing industry. I know 
mortgages are the lifeblood of your industry, and I expect the 
subprime market has impacted the ability of many of your 
members to make their normal livings, and the job problems cut 
across all mortgage and housing-related industries. I would 
like to hear about the overall impact on your industry and the 
related industries. And I would appreciate your views on the 
Government's role in the housing crisis and what you view as 
the key areas in which the Government can be helpful and not 
harmful.
    With that, thank you, Madam Chair. We look forward to the 
witnesses' testimony.
    Senator Murray. Senator Allard.


                   statement of senator wayne allard


    Senator Allard. Madam Chairman, just out of respect for the 
subcommittee's time and the witnesses' time here, who I think 
we want to hear from, I am going to ask that my full statement 
be made a part of the record. I am just to make about a 10 or 
15-second statement.
    I just hope that if we decide to intervene in some way that 
we do not bail out irresponsible behavior both on the part of 
the lender, as well as the borrower. I hope that we do not end 
up saddling the taxpayer with a lot of obligation in this 
process.
    Aside from that, I think that both you and Senator Bond are 
on the right track, and we will be anxious to hear from our 
witnesses.
    [The statement follows:]
               Prepared Statement of Senator Wayne Allard
    I would like to thank Chairman Murray and Ranking Member Bond for 
holding this hearing to examine ways to help prevent foreclosures.
    Homeownership has long been the American dream, and over the last 
decade record numbers of families were able to become homeowners. 
Unfortunately, too many homeowners, some knowingly, some unknowingly, 
bought homes they couldn't afford. Many of them took out exotic 
mortgages that made wildly unrealistic assumptions about the housing 
market, namely that housing values would continue to dramatically 
increase.
    As we all now know, home price growth was unsustainable. 
Unfortunately, too many families are now facing the possibility of 
foreclosure. Just as ownership brings many benefits to families and 
neighborhoods, foreclosures have dramatic negative consequences for 
both individual homeowners and the economy as a whole.
    We have seen a rapid increase in the number of foreclosures, and 
many experts predict that the number will continue to climb in the near 
future. Accordingly, Congress is currently considering various 
proposals to help prevent foreclosures.
    This hearing will be an important step towards better understanding 
some of the suggestions to assist struggling homeowners. As part of any 
proposal, though, I think we must be careful not to reward 
irresponsible behavior. Borrowers have a responsibility to understand 
the terms of their loan, and lenders have a responsibility to provide 
them with clear, accurate information in order to help them understand 
the terms.
    Borrowers have a responsibility to only borrow what they can repay, 
but lenders have a responsibility to only lend to those who can repay.
    Should Congress choose to provide relief, it should not do so in a 
manner that is simply a ``bail out'' for either lenders or borrowers 
who acted irresponsibly. We should also not set a broad precedent that 
the Government will simply bail people out whenever they lose money or 
face tough times in the housing market.
    I also believe that any efforts to address foreclosures should be 
done in a thoughtful, comprehensive manner. Any effort to provide 
foreclosure relief must carefully address any risk to taxpayers.
    I would like to thank the witnesses for being here today. Your 
testimony will be helpful in understanding the many proposals currently 
pending to assist the families facing foreclosure.

    Senator Murray. Thank you, Senator. I think the 
subcommittee shares your concern. Thank you.
    With that, we will turn to our witnesses and begin with Mr. 
Montgomery. He is the Assistant Secretary for Housing and the 
Federal Housing Commissioner at HUD. We will then turn to 
Kenneth Wade, Chief Executive Officer of NeighborWorks America, 
and finally, David Kittle, who is the Chairman-Elect of the 
Mortgage Bankers Association.
    Mr. Montgomery.
STATEMENT OF HON. BRIAN D. MONTGOMERY, ASSISTANT 
            SECRETARY FOR HOUSING AND FEDERAL HOUSING 
            COMMISSIONER, DEPARTMENT OF HOUSING AND 
            URBAN DEVELOPMENT
    Mr. Montgomery. Good morning, Chairwoman Murray. I would 
like to thank you, Ranking Member Bond, other Senators, for 
inviting me to testify.
    As you know, the FHA has a valuable role in addressing the 
current challenges in the housing market, and there are many. 
In August of last year, the President introduced FHASecure to 
help more Americans facing foreclosure refinance into a safer, 
more affordable FHA loan. Since that time, almost 153,000 
families have been able to refinance with FHA, and by year's 
end, we expect FHA will be able to help several hundred 
thousand families refinance into an affordable FHA-insured 
mortgage.
    We have also made significant and positive impact on 
liquidity, something you hear a lot of late. Also, since 
September of last year, FHA has helped pump more than $68 
billion of much-needed mortgage activity into the housing 
market. I want to say that almost $29 billion of that 
investment came through FHASecure.
    Well, I think we could do more with FHASecure and we are. 
In fact, expanding the FHASecure program is the most 
appropriate and quickest means to help families in need. In 
fact, yesterday I announced the administration's plan to expand 
FHASecure. This expansion is appropriately tailored to 
homeowners who have demonstrated their commitment to making on-
time payments perhaps though they have hit a financial rough 
spot. I want to emphasize that it is critically important to 
focus Government resources and programs on those homeowners who 
are working hard to fulfill their obligations.
    In short, we will now back loans for borrowers who are 
financially capable but who have a spotty credit record. To 
qualify for a standard 97 percent LTV loan, borrowers will 
still be eligible if they were late on no more than 2 monthly 
mortgage payments, either consecutively or at two different 
times over the previous 12 months.
    For borrowers who cannot meet the standard, FHA will permit 
up to 3 months of delinquencies, which again could be one 
consecutive 90-day late period or three 30-day late periods. 
But FHA will limit the LTV ratio for those borrowers to 90 
percent.
    Similar to existing practice, we will permit and encourage 
lenders to voluntarily write down outstanding principal and 
allow them to make any other arrangements, including new 
subordinate liens, to fill the gap between an existing loan 
balance and the new loan amount, be it a 97 percent or a 90 
percent LTV loan.
    These underwriting changes will also be coupled with a new 
and more flexible pricing policy at FHA. As you know, our 
program is funded through insurance premiums that homeowners 
pay. We are rolling out a new pricing plan that will base 
premiums on an individual's risk profile. This new 
administrative change will ensure the integrity of the FHA 
insurance fund. It will also protect the taxpayer and guarantee 
that FHA will be around to help struggling homeowners in the 
future.
    With this expansion, we believe that by year's end, 
FHASecure will reach more than half a million homeowners. This 
figure represents a substantial portion of the total universe 
of homeowners. We have subprime ARM's who are owner occupants. 
They have documentation to demonstrate their ability to repay 
and are not already in foreclosure. We believe Government 
efforts should be focused on these struggling homeowners.
    Because our underwriting standards remain strong, we will 
help more families keep their homes while managing an 
acceptable level of risk to the insurance fund. By charging a 
higher premium, we will also offset risk in many cases.
    FHA modernization is another important step to strengthen 
the real estate market. The administration continues to urge 
Congress to reach agreement on a bill to modernize the FHA that 
the President can sign into law.
    Quickly, there are two key components that must be part of 
any final FHA bill.
    First, as previously mentioned, we must maintain our 
ability to offer a fair and equitable mortgage insurance 
premium structure. Any bill must give FHA the tools it needs to 
price for additional risk.
    Second, legislation must include a provision, similar to 
one that passed in the Senate, to expressly prohibit down 
payment assistance from the seller or any other person or 
entity that stands to benefit from the transaction. Insured 
loans relying upon seller-funded down payment assistance have 
been demonstrated to have an unacceptably high risk of default 
and foreclosure. And data clearly demonstrate that FHA loans 
made to borrowers relying on this type of assistance go to 
foreclosure at close to three times the rate of loans made to 
borrowers who make their own down payments.

                           PREPARED STATEMENT

    We simply cannot sustain seller-funded down payment 
business. We want FHA to be here not just for this generation, 
but for generations to come. And we must ensure the financial 
solvency of the fund is not compromised.
    Thank you again for inviting me here to testify.
    [The statement follows:]
             Prepared Statement of Hon. Brian D. Montgomery
    Thank you, Chairwoman Murray. I would like to thank you and Ranking 
Member Bond for inviting me to testify.
    As Commissioner of the Federal Housing Administration (FHA), you 
have asked me to comment on the role my agency is playing in the 
current housing crisis. I will explain this by discussing the 
following: our efforts to help homeowners under FHASecure, our recent 
administrative actions that extend FHA assistance to even more 
homeowners, the prompt need for FHA Modernization, and the proper way 
to provide downpayment assistance. By covering each of these topics, 
Madam Chairwoman, I believe you will see that FHA has taken action to 
help responsible homeowners stay in their homes.
                               fhasecure
    FHA has been able to use our administrative authority to help 
hundreds of thousands of Americans refinance their home loans. In 
August 2007, the President, Secretary Paulson, and Secretary Jackson 
introduced an effort, FHASecure, to help more Americans facing 
foreclosure refinance into a safer, more secure FHA loan. Since then, 
more than 150,000 families have been able to refinance with FHA. By 
year's end, we expect FHA will be able to help a total of about 500,000 
families refinance into affordable FHA-insured mortgages.
    It is important that the American people know about FHA 
opportunities. That is why FHA has mailed letters to hundreds of 
thousands of at-risk homeowners to urge them to refinance with safer, 
more affordable FHA-backed mortgages. These letters are being sent to 
homeowners who already have or soon will confront the first reset of 
their adjustable rate mortgage, and are currently living in locations 
subject to FHA loan limits. We will be sending these letters out to 
about 850,000 at-risk homeowners. Our response rate to the call centers 
has been so high that we need to add staff to accommodate the demand.
                           additional actions
    We believe there is more that we can do with FHASecure. The reach 
of this program can and should be extended in a responsible way. Any 
expansion of FHASecure should continue its temporary nature and be 
focused on helping homeowners who are financially able and responsible, 
but who cannot refinance and stay in their homes without FHA 
assistance.
    Expansion of FHASecure also would need to be achieved in a way that 
is consistent with the administration's principles on FHA 
Modernization. An expansion of FHASecure should include special 
underwriting flexibility to help more families qualify for FHA-insured 
mortgages. This includes making eligible more borrowers who were late 
on a couple of mortgage payments. These underwriting changes could also 
be made in exchange for lenders voluntarily writing down some of the 
outstanding mortgage principal if necessary to attain a prescribed 
loan-to-value ratio, and/or balanced with insurance premium adjustments 
when necessary to protect both the FHA insurance fund and the taxpayer.
    FHA operates as a negative credit subsidy program, which means that 
it does not require Federal appropriations for its credit subsidy cost. 
Rather, the FHA program is funded through insurance premiums that 
homeowners pay themselves. In order to keep FHA operating without 
taxpayer subsidies, the expansions I outlined would be implemented with 
a new structure under which premiums would be set according to the 
relative risk borrowers pose. Basing mortgage insurance premiums on the 
individual risk of each loan, where risk is judged using traditional 
underwriting standards, is the best way to ensure that the taxpayer is 
protected and that FHA can help more families stay in their homes. It 
is how every responsible insurance company operates.
    I believe these actions are consistent with our shared view that a 
robust FHA is needed to address the housing situation. However, it is 
essential that Congress not legislate specific underwriting criteria 
that would unnecessarily limit FHA's flexibility.
    Certain bedrock principles also need to be maintained. For example, 
we require that an eligible family live in the FHA-insured home and 
have documented, verifiable income. That is something that FHA has 
always done, but in the era of no-doc loans, was a bit of an anomaly. 
As you know, Madam Chair, many of the problems in the housing market 
have occurred as a result of lax underwriting standards, and FHA should 
not be forced legislatively to compromise its fundamental criteria at 
the future expense of the taxpayer.
    With all of this in mind, yesterday HUD announced some further 
administrative steps that will extend FHA opportunities to more 
homeowners. These efforts, using current regulatory authority, have 
extended FHA to the limit of what it can safely and prudently do under 
its authorizing legislation.
    Let me be more specific. Yesterday, at a hearing before the House 
Financial Services Committee, I announced a plan to help break the 
cycle of foreclosures. This new plan is targeted to distressed 
homeowners struggling to make their current mortgage payments and have 
no place to turn to refinance their loans as their homes lose value.
    By tapping into its existing authority, FHASecure will now serve 
borrowers in subprime ARMs who have gone in to default as the result of 
some extenuating financial circumstance that has temporarily hindered 
their ability to afford their existing mortgage payments. These 
borrowers would still have sufficient income to make payments on the 
new FHA mortgage, but are stretched or unable to meet the terms of 
their existing mortgage. The refinance will put them in a sounder 
financial position. Borrowers who meet FHA's other underwriting 
criteria but have missed two monthly mortgage payments, either 
consecutively or at two different times over the previous twelve 
months, will qualify for a standard 97 LTV loan. For borrowers who 
cannot meet these standards, FHA will permit up to 3 months of 
delinquency, again, which could be a consecutive 90-day late period or 
three 30-day late periods. But, FHA will limit the LTV ratio for these 
borrowers to 90 percent. The 10 percent equity cushion, along with the 
required premiums, will protect taxpayers against unnecessary risk.
    Last August, FHASecure was targeted to help creditworthy homeowners 
who faced a rate reset. We have now helped over 150,000 homeowners 
refinance into a safer option. Now, expanding FHASecure to additional 
borrowers will offer lenders a refinancing alternative that makes 
voluntarily write-downs a viable option.
    Madam Chairwoman, reducing the principal amount owed on subprime 
mortgages helps both troubled borrowers and lenders. Borrowers would 
reduce their principal payments and get to keep their homes. Lenders 
avoid taking a more significant loss at foreclosure. Neighbors avoid 
vacant homes in their neighborhood, depressing their home values. And 
localities keep a viable tax base to fund community health, schools, 
and other valuable services.
    FHA underwriting standards will minimize the risk of helping more 
families use FHASecure to keep their homes. Let me emphasize that last 
point. FHA will ensure borrowers have the capacity to repay their 
mortgages, regardless of their current credit score or potential 
delinquency on their existing mortgage, and will ensure the borrower 
did not make misrepresentations on their application. Borrowers must 
also show a reasonable credit history, show employment history, and 
have some personal equity in the deal, and fully document and verify 
their income. Borrowers will be required to pay upfront and annual 
premiums on their loans, which directly contribute to the soundness of 
FHA's insurance fund and protect taxpayers. Since more than 90 percent 
of FHA-backed loans are 30-year fixed rate mortgages, this gives us 
predictable, stable income.
    I want to also stress this: all the changes to FHASecure we have 
implemented or about to implement will help us reach about 500,000 
homeowners in total by the end of this year.
    Of course, the President's stimulus package is also making a 
difference. By temporarily increasing FHA loan limits, we can back more 
mortgages in high-cost States and help homeowners hold on to their 
houses. The new loan limits were announced last month, and I have 
spoken with many people in the housing industry who believe that this 
action will quickly assist many.
                           fha modernization
    For the last 2 years, the administration has suggested ways to 
improve the agency's ability to fulfill its mission to help low-income 
and first-time homebuyers who are not served by the conventional 
mortgage market. I believe FHA should remain true to its mission. FHA 
Modernization is one constructive step, a step I know you have strongly 
supported. And I want to thank the subcommittee for that bipartisan 
support. The administration continues to urge Congress to reach 
agreement on a bill to modernize FHA that the President can sign it 
into law.
    However, there are two key components that must be part of any 
final FHA Modernization bill.
    First, we must maintain FHA's ability to offer a fair and equitable 
mortgage insurance premium structure that is commensurate with the risk 
presented by the loans it insures. Any bill must give FHA the tools 
needed to price for additional risk. Unfortunately, neither the House 
(H.R. 1852) nor Senate (S. 2338) provisions succeed in accomplishing 
this. Instead, the Senate bill would impose a 12-month moratorium on 
HUD's proposed modification to the current FHA premium structure. To 
ensure the solvency and continued operation of FHA's single family 
mortgage insurance fund, flexible risk-based premiums are necessary 
both now and in the future.
    Over the next several months FHA plans to implement a risk based 
premium structure administratively, up to our 2.25 percent cap. We hope 
that Congress will modify the bills to support this effort to permit 
FHA to continue to be a self sustaining Government agency. As you know, 
few Government programs can claim the same. We do not want to cross 
that line, particularly at a time when we are most needed, and as I 
have testified to other committees, reforms or changes to the program 
are already needed to avoid crossing the line in October at the start 
of fiscal year 2009.
    Second, legislation must include a provision, like that in S. 2338, 
to expressly prohibit down-payment assistance from the seller or any 
other person or entity that stands to benefit from the transaction 
financially. Insured loans relying upon seller-funded down payment 
assistance have been demonstrated to have an unacceptably higher risk 
of default and foreclosure--harming borrowers they intend to help and 
risking the integrity of the entire FHA program and its ability to help 
more at-risk low- and moderate-income homeowners. Data clearly 
demonstrates that FHA loans made to borrowers relying on seller-funded 
downpayment assistance go to foreclosure at three times the rate of 
loans made to borrowers who make their own down payments. We simply 
cannot sustain this business. We want FHA to be here not just for this 
generation, but for generations to come.
    FHA Modernization has bipartisan support. It is the appropriate 
next step to address the housing downturn. Congress needs to make this 
important bill an immediate priority over other housing proposals that 
are under consideration. As a first order of business, a good FHA 
Modernization bill must be sent to the President. We need FHA 
modernization as soon as possible. Every day of delay places qualifying 
homeowners at unnecessary risk.
                         downpayment assistance
    That is why it is extremely important to make the right choice on 
downpayment assistance. I know there is legislation under consideration 
that would ban seller-funded downpayment assistance. Yes, it should be 
banned. That would be a good thing to do.
    As you know, in September, FHA proposed a rule to clear up this 
situation. Because of court action, the rule has not been implemented. 
But I believe our approach is sound. The FHA rule proposed in September 
preserves HUD's long-standing policy of permitting FHA-insured 
borrowers to rely on downpayment assistance from family members, 
employers, governmental entities, or charitable organizations. It also 
preserves HUD's long-standing policy of permitting sellers to 
contribute up to 6 percent of the sales price toward the buyer's actual 
closing costs, prepaid expenses, discount points and other financing 
concessions, such as temporary interest rate buydowns. It clarifies 
that the downpayment funds cannot be derived from sellers--directly or 
indirectly--or any other party that stands to benefit financially from 
the purchase transaction. Of course, nonprofits can still play a role 
in providing downpayment assistance in the form of a gift as long, so 
long as they do not collect ``donations'' from sellers, who have a 
financial stake in the sales transactions.
    The administration does not support seller-funded downpayment 
assistance. That practice is nothing but a financial shell game where 
the seller wins and the homebuyer often loses. The FHA rule on down 
payments helps to maintain the integrity of our process and is crucial 
to the work of FHA. Our rule puts an end to a type of self-serving, 
circular-financing arrangement. It avoids the harmful effects on 
homeowners and the housing market.
    By closing this loophole, FHA will help prevent more people from 
being steered into a situation where they do not understand the fine 
print and end up being foreclosed upon. Closing this loophole also 
helps ensure the financial health of the fund. FHA operates as a 
negative credit subsidy program, which means that it does not require 
Federal appropriations for its credit subsidy cost. Rather, the FHA 
program is funded through insurance premiums that homeowners pay 
themselves. However, the continuation of seller-financed downpayment 
assistance loans ensured by FHA threatens to force the fund into a 
positive credit subsidy for fiscal year 2009. We must ensure that the 
financial solvency of the Fund is not compromised. I really want to 
stress this last point . . . the financial solvency of the fund must 
not be compromised.
    In other words, the administration would welcome a legislative ban 
on the practice of seller-funded downpayment assistance. That would be 
a prudent action. And I am hopeful that the court injunction against 
the FHA proposed rule will be lifted, allowing us to put in place the 
regulatory action that will protect homebuyers and preserve the 
integrity of the FHA process.
                               conclusion
    Madam Chairwoman, in conclusion, promoting homeownership remains 
one of the central goals of this administration, and I know it is a 
goal you share. We are proud of the fact that millions of new 
homeowners were created since the start of the decade.
    We believe FHA has a role to play, provided it remains within our 
mission and we maintain its fiscal integrity so that it is here for 
future generations.
    Thank you again for inviting me to testify today.

    Senator Murray. Mr. Wade.
STATEMENT OF KENNETH D. WADE, CHIEF EXECUTIVE OFFICER, 
            NEIGHBORWORKS AMERICA, WASHINGTON, DC
    Mr. Wade. Thank you, Chairman Murray and Ranking Member 
Bond and members of the subcommittee. My name is Ken Wade, CEO 
of NeighborWorks America. I am pleased to be able to talk to 
you today about some of the things that we are doing to respond 
to this very challenging crisis we have before us.
    First, I would like to commend the subcommittee for its 
leadership in providing the $180 million for the National 
Foreclosure Mitigation Counseling Program. It is essential that 
resources are provided to counselors so that they can work with 
borrowers and help prevent foreclosures in those cases where 
that is possible. This was the first and most significant 
resource actually to be provided for this purpose.
    We were named to administer this program, and the 
legislation required that we were to disburse $167 million 
directly to qualifying counseling organizations that were 
providing mortgage foreclosure mitigation assistance, primarily 
to States and areas of high default rates and foreclosures 
primarily in the subprime housing market.
    We also would like to thank HUD and their staff for 
assisting us in designing the program.
    We are pleased to be able to report that we were able to 
award $130 million within 60 days of enactment as we were 
required to do a minimum of $50 million in that time frame, and 
we were successful in being able to do much more than that. I 
think that demonstrates the significant demand for this 
resource. As I said earlier, it is the only dedicated resource 
out there to support folks who are doing some very heroic 
things out there in the communities to prevent foreclosures.
    We were able to award $130 million to 130 organizations. 
All of them are HUD-approved organizations, whether they be 
State housing finance agencies or NeighborWorks organizations. 
And then there is another $5 million that was set aside to 
support our counselor training, and we are pleased to be able 
to report that to date we have already been able to train 475 
people as a result of this resource.
    We identified this issue of rising foreclosures over 4 
years ago. That led us to set up our Center for Foreclosure 
Solutions. We are doing a number of things, encouraging 
borrowers to reach out for assistance before it is too late. We 
have got a public awareness campaign that we have launched 
through the Ad Council that is designed to increase consumers' 
awareness that they can seek assistance and get that in order 
to prevent a foreclosure. One of the reasons that we did that 
is because historically up to 50 percent of all consumers who 
went to foreclosure had no contact with their servicer. So, 
obviously, you cannot do anything with a consumer unless they 
come in to get assistance.
    We are also working to ensure that the FHA products are 
broadly available to the counselors and the folks that we work 
with. It is a critical new resource, the FHASecure program. I 
know that the FHA has recently announced some additional 
changes that we think will be critically important to serve 
more consumers, and so we are pleased to hear the 
commissioner's latest proposals in that regard and look forward 
to working with them very closely in that case.
    We are offering through our own secondary market the 
FHASecure program. So we expect that we will be cooperating 
with the FHA in that regard.
    And then just in the remaining time, let me just say that 
in closing let me just highlight a few remaining challenges 
that we are seeing. Five of those right quickly.
    There still appears to be the lack of responsiveness on the 
part of servicers, given the scale and scope of the problem. 
Our foreclosure counselors continue to experience significant 
levels of lack of flexibility, lack of ability to contact 
servicers in a systematic way, and lack of clarity about the 
rules that govern what is available to help consumers. So 
everything is pretty much on a one-off basis which makes it 
very difficult to scale up.
    Number two, there continues to be an unequal distribution 
of the foreclosure counseling efforts. Obviously, there are 
still underserved areas and populations, and through the awards 
that we recently made, there are still--particularly in rural 
areas and linguistically isolated populations--insufficient 
resources to meet that demand.

                           PREPARED STATEMENT

    There is disparate impact of the foreclosure problem on 
low- and moderate-income and minority communities, and that is 
particularly troubling and something that we need to pay 
attention to.
    And there are increasing rescue scams taking advantage of 
people who are in foreclosure.
    So let me just wrap up with that, and I look forward to 
answering any questions the subcommittee might have.
    [The statement follows:]
                 Prepared Statement of Kenneth D. Wade
    Chairman Murray, Ranking Member Bond and members of the 
subcommittee, my name is Ken Wade, and I am CEO of NeighborWorks 
America. I appreciate the opportunity to talk with you today about the 
mortgage crisis and some of the actions that NeighborWorks America has 
taken in addressing the problem.
    By way of background, NeighborWorks America was established by 
Congress in 1978 as the Neighborhood Reinvestment Corporation. As you 
know, the Corporation receives a Federal appropriation from the 
Transportation, Housing and Urban Development, and Related Agencies 
Appropriations Subcommittee. For fiscal year 2008, the Corporation's 
appropriation is $119.8 million, in addition to a targeted amount of 
$180 million for foreclosure prevention counseling grants. The 
corporation's Board of Directors is made up of the heads of the Federal 
financial regulatory agencies (the Federal Reserve; the Federal Deposit 
Insurance Corporation; The Comptroller of the Currency; the Office of 
Thrift Supervision; the National Credit Union Administration) and the 
Secretary of HUD.
    NeighborWorks America's primary mission is to expand affordable 
housing opportunities (rental and homeownership) and to strengthen 
distressed urban, suburban and rural communities across America, 
working through a national network of local community-based 
organizations, known collectively as the NeighborWorks network.
    The NeighborWorks network includes 234 nonprofit organizations, 
serving more than 4,450 communities across the United States--in all 50 
States, the District of Columbia and the Commonwealth of Puerto Rico. 
NeighborWorks organizations operate in our Nation's largest cities and 
in some of its smallest rural communities.
    NeighborWorks organizations provide a wide variety of services that 
reflect the needs of their neighborhoods and communities, and in recent 
years, with the generous support of Congress, NeighborWorks has:
  --Provided homeownership counseling to more than 500,000 families;
  --Assisted nearly 150,000 families of modest means to become 
        homeowners (of which, 91 percent are low-income and 53 percent 
        are ethnic/racial minorities); and
  --Provided nearly 50,000 professional training certificates to 
        community development practitioners from over 5,000 
        organizations and municipalities nationwide.
    NeighborWorks organizations also own and manage more than 65,000 
units of affordable rental housing.
    In fiscal year 2007 alone, the NeighborWorks network generated more 
than $4.25 billion in direct reinvestment in distressed communities 
across the Nation.
    Today, my testimony will focus on the precipitous rise in 
foreclosures and the essential role that FHA and others have to play in 
providing tools to not only keep families in their homes, but also 
advance more sustainable, livable communities. The problem of 
foreclosure is complex, and we don't believe any single solution will 
eliminate the threat, but the scope and scale of the crisis demands 
intervention at the Federal, State and local level.
    The number of loans that entered into the foreclosure process hit 
an estimated 1.5 million nationwide in 2007, according to an analysis 
of data from the Mortgage Bankers Association conducted by 
NeighborWorks America's Applied Research division. While more than 
three quarters of all existing loans were prime, subprime loans 
accounted for more than half (54.6 percent) of all foreclosure starts. 
Approximately 823,000 subprime loans started the foreclosure process in 
2007, compared to 534,000 prime loans, even though there were six times 
as many prime as subprime loans being serviced.
    It's clear that when homes go into foreclosure, the impact reaches 
far beyond the individual tragedies confronting homeowners who lose 
their home. Foreclosed homes can threaten the stability of entire 
communities. As foreclosed properties are abandoned, crime rates 
increase. The value of surrounding homes declines and other homeowners 
will have difficulty selling or refinancing their homes, leading to 
further disinvestment in communities. As a result, property taxes 
collected will be lower, affecting schools and government services, 
creating a downward spiral that is detrimental to the entire community.
    A report (The Impact of Single-Family Mortgage Foreclosures on 
Property Values, by Dan Immergluck and Geoff Smith) demonstrated that a 
single foreclosure reduces total surrounding property values within an 
eighth of a mile radius by .9 percent. Cumulatively, this means that 
the foreclosures analyzed in this study resulted in average property 
value losses between $159,000 to $371,000 per foreclosure. Multiple 
foreclosures in an area compound the reduction in property values of 
surrounding homes even further. Another study, The Municipal Cost of 
Foreclosures: A Chicago Case Study, by William C. Apgar and Mark Duda) 
reports that one foreclosed property can end up costing a municipality 
as much as $34,000. Furthermore, lenders report that each foreclosure 
can cost them from $35,000 to $58,000.
    Indeed, the negative impacts of foreclosure are now reverberating 
throughout the entire U.S. economy--and all projections indicate the 
problem is going to worsen.
    I want to commend the Committee for its leadership in providing 
$180 million for the National Foreclosure Mitigation Counseling program 
which gives borrowers facing foreclosure the opportunity to work with 
trained counselors and their servicers and, hopefully, work through 
problems that would otherwise result in the loss of their homes and 
even further losses to the communities they live in.
    NeighborWorks America was named in the fiscal year 2008 
Consolidated Appropriations Act to administer the National Foreclosure 
Mitigation Counseling program. The legislation requires that 
NeighborWorks America grant at least $167,800,000 to qualifying 
organizations that provide mortgage foreclosure mitigation assistance 
primarily in States and areas with high rates of defaults and 
foreclosures primarily in the subprime housing market. These funds are 
targeted to provide foreclosure mitigation counseling to help eliminate 
the default and foreclosure of mortgages of owner-occupied single-
family homes that are at risk of foreclosure. NeighborWorks America 
received grant requests totaling nearly $350 million, demonstrating a 
very high demand for resources to support foreclosure counseling 
services.
    On February 26, 2007, NeighborWorks America announced National 
Foreclosure Mitigation Counseling program grants totaling $130,438,408 
to 130 organizations (including HUD-approved housing counseling 
intermediaries, State Housing Finance Agencies, and NeighborWorks 
organizations.)

                   SUMMARY OF NATIONAL FORECLOSURE MITIGATION COUNSELING PROGRAM APPLICATIONS
----------------------------------------------------------------------------------------------------------------
                                              Number of      Number Awarded    Dollar  Amount    Dollar  Amount
                                             Applicants           Funds           Requested          Awarded
----------------------------------------------------------------------------------------------------------------
State Housing Finance Agencies..........                36                32    $69,978,778.68    $38,664,516.00
HUD-Approved Housing Counseling                         17                16    254,138,123.50     80,356,391.00
 Intermediaries.........................
NeighborWorks Organizations.............                90                82     23,854,667.00     11,417,501.00
                                         -----------------------------------------------------------------------
      Totals............................               143               130    347,971,569.18    130,438,408.00
----------------------------------------------------------------------------------------------------------------

    Up to $5 million in National Foreclosure Mitigation Counseling 
funds is being used to build the capacity of mortgage foreclosure and 
default mitigation counseling agencies.
    We anticipate awarding more than 3,000 certificates for foreclosure 
prevention counseling training through the National Foreclosure 
Mitigation Counseling program. More than 475 people have been trained 
already this calendar year. This training builds on NeighborWorks 
America's existing training programs, which issued more than 12,000 
training certificates to community development professionals in fiscal 
year 2007.
    NeighborWorks America strives to be at the forefront of issues 
affecting the community development field. The Corporation identified 
the problem of rising foreclosures over four years ago and created the 
NeighborWorks Center for Foreclosure Solutions, which is an 
unprecedented partnership between leading nonprofit organizations as 
well as State, local and Federal agencies and members of the mortgage 
lending and servicing sectors that involves a comprehensive, multi-
faceted approach to the foreclosure crisis.
    NeighborWorks America has been working in partnership with the 
Homeownership Preservation Foundation to support a national toll-free 
Homeowner's HOPETM Hotline for borrowers facing foreclosure (888-995-
HOPE). The HOPE NOW Alliance has embraced the HOPE Hotline as a key 
component of their outreach and counseling efforts. The hotline 
provides high quality telephone-based assistance (in English and in 
Spanish) around the clock. Individuals needing more intense service 
than can be provided over the phone are referred to local NeighborWorks 
organizations or other HUD-approved housing counseling agencies.
    We know that early intervention is critical for helping borrowers 
at risk of foreclosure. To encourage borrowers to reach out for 
assistance before it is too late, NeighborWorks America also launched a 
public awareness campaign through the Ad Council. The national public 
awareness campaign encourages struggling homeowners to reach out for 
assistance by calling the Homeowner's HOPE Hotline.
    Because NeighborWorks America has been so active in foreclosure 
prevention over the past 4 years, the Corporation was invited to 
participate in the HOPE NOW Alliance, announced by the Secretaries of 
the Treasury and HUD in October 2007. The mission of the HOPE NOW 
Alliance is to preserve homeownership and prevent foreclosures through 
outreach to delinquent borrowers, counseling and loan workouts based on 
the borrower's ability to repay. The HOPE NOW Alliance is also working 
to improve communications between lenders and counselors to assist 
homeowners more efficiently and effectively. There are 27 mortgage 
services in the HOPE NOW Alliance and they account for over 90 percent 
of the subprime mortgage market.
    NeighborWorks America is also providing support to our affiliated 
network of community-based nonprofit organizations and partnering with 
other national nonprofits, foundations and the public sector to develop 
strategies and tools to mitigate the impact of vacant and abandoned 
foreclosed properties on communities, especially in communities with 
high concentrations of foreclosure.
    In May 2008, NeighborWorks will be sponsoring a symposium, Battling 
Foreclosure in a Changing Environment as part of the NeighborWorks 
Training Institute in Cincinnati, Ohio to help build awareness of the 
challenges and potential strategies and solutions available to 
communities impacted by the foreclosure crisis.
    From our experience, we know that the best defense against 
delinquency and foreclosure is objective education and advice before 
the borrower begins shopping for a home and selecting a mortgage 
product. The most reliable and trusted home buyer counseling is 
provided through objective non-profit agencies (including local 
NeighborWorks organizations and other HUD-approved nonprofit housing 
counseling agencies) that put the consumers' and the communities' 
interest first. We also know that homeowners' odds of success are 
increased even further when they have access to post-purchase 
counseling and homeowner education.
    To ensure that consumers have access to the highest quality pre- 
and post-purchase homeownership counseling, NeighborWorks America, 
together with our partners, has developed National Industry Standards 
for Homeownership Education and Counseling. The National Industry 
Standards advance the highest quality of service across core areas 
ranging from competency of the counselor to performance in the delivery 
and recordkeeping
    NeighborWorks America has been closely tracking the loan 
performance of the many low-income families assisted by NeighborWorks 
organizations over the years, particularly with the overall rise in 
foreclosures in the broader marketplace. These loans continue to 
perform well. We have not seen any significant up-tick in delinquencies 
or foreclosures among NeighborWorks-assisted families.
    The data indicate that low- and moderate-income families can 
achieve sustainable homeownership through effective pre-purchase 
assistance and responsible loan products. Efforts to address the 
present foreclosure crisis should not limit homeownership opportunities 
for households of modest means or curtail our efforts to close the 
homeownership gap that persists for minority Americans.
    As conventional mortgage originators have lost ground to mortgage 
brokers, the threat to sustainable homeownership continues to grow. Of 
the $2.5 trillion in mortgages taken out last year, roughly 60 percent 
was handled by the Nation's 120,000 mortgage brokers, up from just 20 
percent in 1987. While there are many reputable and responsible 
mortgage brokers, the growth of this non-federally regulated sector has 
clearly contributed to the foreclosure crisis.
    Many consumers are unaware that they should shop around for the 
best loan terms when purchasing a home. Instead, these borrowers choose 
the most expedient or readily available credit, even if the terms are 
not competitive. For credit-impaired borrowers the challenge is even 
greater, because they are often willing to accept any rate offered to 
secure the loan they need. Subprime and predatory lenders use these 
circumstances to their advantage, often steering borrowers to loans 
that hold a greater profit for their institution--and greater risk and 
cost to the borrower.
    Unfortunately, many families did not have the benefit of pre-
purchase education and counseling--assistance in determining whether 
homeownership is the right decision and what price house and what 
mortgage product works best for that family. Many of those families 
entered into situations that were not sustainable, whether due to 
budget, house price, mortgage product or other factors.
    Studies demonstrate that women, minorities and lower-income 
borrowers rely on subprime lenders for a disproportionate share of 
mortgage and refinance loans, and are sometimes steered toward these 
loans even if their credit rating would qualify them for a prime loan.
    At the same time, the outdated, paper-driven underwriting processes 
of most community-based lenders is time consuming and expensive. To 
compete against subprime and predatory lenders the nonprofit sector 
must have the tools and ability to respond quickly to meet borrower 
needs.
    NeighborWorks is working to expand the market share of nonprofit 
lenders by increasing the capacity of the NeighborWorks network to 
directly originate first mortgages, and by providing research, 
training, financial support, technology tools and a secondary market to 
the NeighborWorks network. Several NeighborWorks organizations have 
been direct originators of first mortgage loans for some time. However, 
this is a critical area of growth for the NeighborWorks network in 
order to assure sustainable homeownership.
    One tool that will assist the NeighborWorks network to originate 
mortgages is a new computer-assisted web-based solution developed by 
our affiliate capital corporation, Neighborhood Housing Services of 
America (NHSA)--known as BestFIT. NHSA has worked with private sector 
investors to develop BestFIT, an automated underwriting platform to 
provide immediate turnaround on loan approvals for low- and moderate-
income homebuyers and homebuyers with non-conventional credit. BestFIT 
provides the NeighborWorks network and the broader community 
development field with a system that can get to ``yes'' quickly--a 
responsible alternative to the profit-motivated broker.
    Equally important, it can offer the homebuyer options for an 
increasingly wide range of loan types. Starting with a line of NHSA and 
Fannie Mae loan products designed specifically for low-income 
homebuyers served by the NeighborWorks network, BestFIT is expanding to 
include capacity to help consumers analyze options for FHA loans, State 
housing finance agency loans nationwide, and other loans. BestFIT has 
also attracted interest from a number of municipalities, trade groups 
and community development organizations outside the NeighborWorks 
network that serve minority and low income families, and contracts are 
currently being developed to provide BestFIT for their use. NHSA is 
also exploring using BestFIT to expand access to refinancing products.
    The automated features of BestFIT enable NeighborWorks 
organizations to reduce errors and the cost of hard copy transmission, 
while providing complete documentation for the loan.
    BestFIT automates the process of screening nonperforming mortgage 
loans, and its ``push-button'' structure reduces the cost of entry into 
the mortgage market for NeighborWorks organizations and other community 
development entities. The result is that potential homebuyers have 
increased access to prudent, reasonably priced capital, and existing 
homeowners who find themselves in troublesome mortgage products can 
work with housing counselors to restructure their loans or find 
appropriate refinance products.
    While the desire to own a home is strong across all socioeconomic 
groups, the responsibilities of homeownership are not for everyone. 
Therefore it remains important to have viable rental housing--
especially units that allow a safe, stable environment--with rents 
affordable enough for occupants to accumulate savings.
    Let me also add that from our experience, we know that FHA has 
played a key role in the mortgage market since its inception, but, for 
a number of reasons, over time has, represented a shrinking share of 
the overall mortgage market.
    The administration's proposed FHA Modernization legislation, which 
is being actively worked on by the Congress, would bring about some 
much needed changes and would help assure that FHA can reassume its 
leadership role in the market place with low- and moderate-income 
borrowers. With the changes (some already made by FHA and others 
proposed) FHA can provide a meaningful alternative to some of the 
higher risk mortgage products that have contributed to the Nation's 
current alarming rate of foreclosures as well as help millions of 
additional low- and moderate-income families fulfill the American dream 
of homeownership.
    In closing, I would like to highlight a few continued challenges:
    In a recent speech, Secretary Paulson stated: ``We have an 
immediate need to see more loan modifications and refinancing and other 
flexibility. For many families, this will be the only viable solution. 
The current process is not working well.''
    I couldn't agree more. There still appears to be a lack of servicer 
responsiveness to the scale and scope of the foreclosure problem. Many 
foreclosure counselors continue to experience a significant level of 
inflexibility by lenders and servicers in regard to loan modifications 
and refinancings. It appears that modifications and workouts are all 
being considered in a unique, ``one-off'' manner.
    This problem (inflexibility) has been exacerbated by falling home 
prices where the loan to value ratio exceeds the present appraised 
value of the property that is the security for the loan in foreclosure.
    One approach that should be given serious consideration would be to 
take the negative equity debt and place it into a subordinate mortgage 
to a new refinanced mortgage, where no payments nor interest are due on 
the subordinate debt until the property is sold. This alternative would 
prevent a windfall to the mortgagor if home prices eventually rise and 
preserves as much as possible of the investment that the investors have 
made in the loan that is being refinanced.
    I also encourage investors and servicers to develop more 
standardized approaches and rules to loan modifications and to share 
those with the counseling community so that we can all aggressively 
increase the volume of successful loan modifications and workouts.
    The HOPE NOW Alliance has also identified the need for a 
sustainable funding model for quality housing counseling. It is 
imperative that servicers agree to a fee-for-service model to 
compensate housing counseling agencies for foreclosure counselors who 
are meeting standards and working with thousands of borrowers to find 
successful solutions. Thus far, foreclosure counseling services has 
been almost exclusively supported by public funds and charitable 
grants.
    There also continues to be an unequal distribution of foreclosure 
counseling providers across the country, resulting in underserved areas 
and populations. This continues to be a particular challenge in rural 
areas and with linguistically isolated populations.
    The disparate impact of the foreclosure problem on low-income and 
minority communities and populations is also troubling. Studies confirm 
that foreclosures are much more likely to occur in predominantly 
minority neighborhoods, even when all other variables such as borrower 
credit and income are held steady. Rising foreclosure rates are 
currently threatening decades of gains in minority homeownership and 
community revitalization. Recent studies conducted in Atlanta, 
Philadelphia and Baltimore confirm that lower income, minority 
neighborhoods are at greater risk for concentrations of foreclosures.
    Federal, State, local governments and nonprofits will have to 
continue to work together with private industry to address the 
foreclosure crisis.
    I again thank you for the opportunity to testify and stand ready to 
answer any questions.

    Senator Murray. Thank you very much.
    Mr. Kittle.
STATEMENT OF DAVID G. KITTLE, CHAIRMAN-ELECT, MORTGAGE 
            BANKERS ASSOCIATION, WASHINGTON, DC
    Mr. Kittle. Good morning, Chairwoman Murray, Ranking Member 
Bond. Thank you for inviting me to share MBA's views on how FHA 
can help address the housing crisis.
    I am pleased to tell you my own first mortgage loan was 
FHA-insured.
    I have spent over 30 years working with FHA. I originated 
thousands of loans to families who achieved the dream of home 
ownership through FHA's programs. When I started in the 
mortgage business, FHA programs helped serve many borrowers who 
otherwise would not get a loan. In 1983, when I was a loan 
officer, over 90 percent of the loans I closed were FHA-
insured. During the latter part of the 1990s, FHA loans made up 
to 38 percent of our volume. In the past couple of years, only 
2 percent of our business went to FHA.
    My experience with the FHA program is similar to many other 
lenders. Financial institutions progressed, reacting quickly to 
the changing markets. Unfortunately during this time, FHA did 
not. FHA was not adapting to meet borrowers' changing needs. As 
a result, FHA became a bit player in the market.
    MBA strongly supports FHA and believes it has a vital and 
important role in today's market with troubled home borrowers. 
FHA's relevance in providing affordable home ownership 
financing has been hampered by statutory restrictions and 
bureaucratic obstacles over the last decade. With the current 
situation in the market, there is a strong need for a robust 
and nimble FHA. FHA reform must be completed as soon as 
possible. FHA needs to be given the tools to respond to an 
ever-changing market. With the new focus on the ability of FHA 
to help during this housing crisis, we strongly believe and 
have been advocating for several years Congress should empower 
FHA to allow it to meet today's needs and anticipate 
tomorrow's.
    MBA believes changes should be made in three areas. FHA 
needs more flexibility to introduce innovative new products, 
invest in technology, and manage their human resources.
    MBA appreciates Congress' and the administration's 
thoughtful approaches to developing rescue plans that involve 
FHA borrowers in troubled loans. MBA is carefully reviewing the 
administration's proposal to expanding FHASecure and Chairman 
Dodd and Frank's proposals for a more extensive FHA program to 
keep homeowners in their homes and avoid foreclosure. It is in 
the best interest of the homeowner, the lender, and the 
community to do all that can be done to keep the borrowers in 
their home.
    Additional personnel will also be critically necessary for 
FHA to meet an enhanced and enlarged mission. MBA notes with 
great concern in the administration's fiscal year 2009 budget 
proposal that the FHA Mutual Mortgage Insurance Fund threatens 
to go into the red next year unless changes to the existing 
program are made or additional appropriations are provided.
    MBA agrees with the administration the FHA's Mutual 
Mortgage Insurance Fund would run in the black with little or 
no premium increases necessary if FHA reform proposals were 
passed this year. Specifically, GAO has mentioned the 
technology issue in reports on FHA modernization efforts. FHA 
told GAO its systems are poorly integrated, expensive to 
maintain, and do not fully support the agency's operations and 
business requirements. We urge Congress to address this 
critical concern.
    In conclusion, FHA has an important role to play in the 
market in saving homes and assisting the underserved. For low 
and moderate income families, FHA provides borrowers the best 
opportunity to become successful and sustainable homeowners. 
However, over the past few years, the loss of market presence 
means we lost FHA's impact. We now know the result was some 
families turned to more expensive financing.

                           PREPARED STATEMENT

    Now is the time to reverse the trend. FHA stands at a 
critical crossroads. MBA urges Congress to enact legislation to 
reform FHA and give it all the tools it needs to increase its 
availability to borrowers, promote consumer choice, and ensure 
its ability to continue serving American families.
    MBA stands ready to work with you on this important issue.
    Thank you for inviting me today.
    [The statement follows:]
                 Prepared Statement of David G. Kittle
    Chairwoman Murray, Ranking Member Bond and members of the 
subcommittee, thank you for holding this hearing and inviting the 
Mortgage Bankers Association (MBA) \1\ to share its views on the 
Federal Housing Administration's (FHA) role in the housing crisis. My 
name is David Kittle and I am the President of Principle Wholesale 
Lending, Inc. in Louisville, KY and Vice-Chairman of the Mortgage 
Bankers Association (MBA). MBA believes FHA has an integral role to 
play during the current mortgage market turmoil, and we urge Congress 
to complete its work on important legislative changes to the National 
Housing Act so FHA will continue to be a financially sound tool for 
lenders to use in serving the housing needs of American families.
---------------------------------------------------------------------------
    \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 370,000 people in virtually every community in 
the country. Headquartered in Washington, DC, the association works to 
ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand homeownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 2,400 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's Web site: 
www.mortgagebankers.org.
---------------------------------------------------------------------------
    MBA particularly appreciates the Senate's recent rapid and 
bipartisan response to the difficult conditions in the national 
economy. MBA believes the housing legislation taken up in the Senate 
last week which includes provisions to provide for a modern and 
effective FHA, mortgage revenue bonds for State housing finance 
agencies to provide refinance, and additional money for counseling--all 
things that will be of great help to struggling homeowners. This 
legislation is a priority for MBA and the mortgage industry, and MBA 
will do all it can to assist Congress' work.
                        introduction and summary
    MBA has an extensive history representing its members before 
Congress and a long record supporting FHA. This is MBA's first 
testimony on FHA in 2008 and it is astonishing to consider the scope 
and magnitude of events that have transpired within the housing finance 
system over the last 15 months. One sector after another became 
debilitated by a market-shaking crisis, until the entire system ground 
to a near standstill as creditors began losing confidence in the 
portfolios of their lending partners. It can be described as a ``near 
standstill'' because at one point, there were only four entities 
engaging in meaningful secondary market transactions--Fannie Mae and 
Freddie Mac (the ``GSEs''), the Federal Home Loan Bank System, and 
Ginnie Mae. It is no exaggeration to say that as bleak as things have 
become, just imagine how much worse conditions in the housing finance 
system would be without the mortgage insurance provided by FHA and the 
guarantee of Ginnie Mae.
    It is just this type of calamity Congress sought to avoid when FHA 
was created as an independent entity by the National Housing Act on 
June 27, 1934, to encourage improvement in housing standards and 
conditions, to provide an adequate home financing system by insurance 
of housing mortgages and credit and to exert a stabilizing influence on 
the mortgage market. FHA was incorporated into the newly formed U.S. 
Department of Housing and Urban Development (HUD) in 1965. Over the 
years, FHA has facilitated the availability of capital for the Nation's 
multifamily and single-family housing markets by providing Government-
insured financing on a loan-by-loan basis.
    FHA reform legislation has been on the congressional agenda for 
several years, and MBA has staunchly advocated its passage. This reform 
is urgently needed. While most lenders have been able to adapt quickly 
to changes in the mortgage markets, FHA has been limited in its ability 
to react. The needs of low- and moderate-income homebuyers, of first-
time homebuyers, of minority homebuyers, and of senior homeowners have 
changed. FHA's programs, though, have not followed their historic path 
of adapting to meet these borrowers' changing needs. Even though 
current conditions seem bleak, there will come a day when the primary 
market will become vibrant and once again blossom with innovations in 
housing finance products and services. MBA continues to advocate for a 
vibrant FHA, one that will meet the challenges of today and evolve to 
serve its mission in the future.
    In reviewing the status of FHA over the past decade, and during the 
current market turmoil, MBA has come to the conclusion that FHA faces 
severe challenges in managing its resources and programs in a quickly 
changing mortgage market. These challenges diminished FHA's ability to 
serve its public purposes, particularly in the years leading up to the 
collapse of the subprime market, and also made it susceptible to fraud, 
waste and abuse. Unaddressed, these issues will hamstring FHA's ability 
to address the current market situation. This would mean a return to a 
diminished relevance when the private market improves, leaving families 
served by its programs with no alternative for homeownership or 
affordable rental housing.
    MBA proposes the following three steps to unleash FHA from overly 
burdensome statutory processes and restrictions, and to empower FHA 
with additional flexibilities to deal with the current market 
difficulties:
  --FHA needs greater autonomy to make changes to its programs and to 
        develop new products to better serve those who are not being 
        adequately served by others in the mortgage market, including 
        those homeowners who may find themselves without any other 
        financing alternative during the current credit market crisis.
  --FHA needs the ability to use a portion of the revenues generated by 
        its operations to invest in the upgrade and maintenance of 
        technology to adequately manage its portfolios and interface 
        with lenders.
  --FHA needs greater flexibility to recruit, manage and compensate 
        employees if it is to keep pace with a changing financial 
        landscape and ensure appropriate staffing up to the task of 
        managing approximately $400 billion in insurance funds.
                              fha's record
    Single-family FHA-insured mortgages are made by private lenders, 
such as mortgage companies, banks and thrifts. FHA insures single-
family mortgages with more flexible underwriting requirements than 
might otherwise be available. Approved FHA mortgage lenders process, 
underwrite and close FHA-insured mortgages without prior FHA approval. 
As an incentive to reach into harder-to-serve populations, FHA insures 
100 percent of the loan balance as long as the loan is properly 
underwritten.
    FHA's primary single-family program is funded through the Mutual 
Mortgage Insurance Fund (MMIF), which operates similar to a trust fund 
and has been completely self-sufficient. This allows FHA to accomplish 
its mission at little or no cost to the Government. In fact, FHA's 
operations have transferred surplus funds to the U.S. Treasury each 
year, thereby reducing the Federal deficit. FHA has always accomplished 
its mission without cost to the taxpayer. At no time in FHA's history 
has the U.S. Treasury ever had to ``bail out'' the MMIF or the FHA.
    More than any other nationally available program, FHA has 
traditionally focused on the needs of first-time, minority, and/or low- 
and moderate-income borrowers. In 1990, 64 percent of FHA borrowers 
using FHA to purchase a home were first-time homebuyers. Today, that 
rate has climbed to 80 percent. In 1992, about one-in-five FHA-insured 
purchase loans went to minority homebuyers. That number in recent years 
has grown to more than one-in-three. Minorities make up a greater 
percentage of FHA borrowers than they do conventional market borrowers.
    FHA is particularly important to those minority populations 
experiencing the largest homeownership gaps. According to recent data 
provided by HUD, both first-time homebuyers and minorities continue to 
make up a significant portion of FHA's customer base. To date in fiscal 
year 2008, FHA has insured 159,533 purchase mortgages and 126,735, or 
79.4 percent, went to first time homebuyers. Minorities have received 
103,462 FHA-insured mortgages in 2008, or 28.8 percent.\2\
---------------------------------------------------------------------------
    \2\ Source: FHA Outlook, March 1-15, 2008.
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                  the need for fha today and tomorrow
    Only a little more than a year ago, FHA's market share was about 3 
percent of total originations (see Table 1 below). MBA cites this 
number not because MBA believes there is a certain market share FHA 
should retain, but rather because this decline is consistent with many 
lenders' views that FHA had not kept up with changes in the market. 
FHA's decline gave rise to the subprime market, which quickly evolved 
and brought homeownership levels to historic highs.
    Since July, 2007 there has been unprecedented volatility in the 
secondary market for mortgage loans. The market for anything but long-
term fixed rate mortgages has tightened up, and investors are wary of 
anything outside the conforming or government arena. Both the GSEs and 
FHA have taken steps to protect themselves against declining market 
values, and tighter underwriting guidelines will remain in place for 
some time to come. Due to these factors, MBA believes FHA's market 
share is closer to 9 percent, and climbing fast. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    It is crucial FHA keep pace with changes in the U.S. mortgage 
markets. While FHA programs can be the best and most cost-effective way 
of expanding lending to underserved communities, we have yet to unleash 
the full potential of these programs to help this country achieve 
important societal goals.
    To be effective in the 21st century, FHA should be empowered to 
allow it to develop products and programs to meet the needs of today's 
homebuyers and anticipate the needs of tomorrow's mortgage markets, 
while at the same time being fully accountable for the results it 
achieves and the impact of its programs.
    Under the strong leadership of its current Commissioner, Brian 
Montgomery, FHA has undertaken significant changes to its regulations 
and operations. In just a little more than 2 years, FHA streamlined the 
insurance endorsement process, improved appraisal requirements and 
removed some unnecessary regulations. By doing so, Commissioner 
Montgomery has also instilled a spirit of change and a bias for action 
within FHA.
    MBA compliments the Commissioner on his significant accomplishments 
to date, though we recognize that more work lies ahead. MBA is 
confident in the Commissioner's ability to address these and other 
issues that are within his control. There is much, though, that is 
beyond FHA's control and needs Congressional action.
    The FHA single-family programs are vital to many homebuyers who 
desire to own a home but cannot find affordable financing to realize 
this dream. With the collapse of much of the private secondary market, 
FHA has become the first stop for many Americans looking to refinance 
their adjustable rate mortgages (ARMs). While FHA has had a number of 
roles throughout its history, its most important role has been to give 
first-time homebuyers the ability to climb onto the first rung of the 
homeownership ladder and to act as a vehicle for closing the 
homeownership gap for minorities and low- and moderate-income families.
                       unleashing fha's potential
    As homeownership remains the most effective wealth-building tool 
available to the average American family, MBA proposes empowering FHA 
to manage its programs and policies more effectively.
Flexibility to Create Products and Make Program Changes
    FHA programs are slow to adapt to changing needs within the 
mortgage markets. Whether it is small technical issues or larger 
program needs, it often takes many years and the expenditure of great 
resources to implement changes. This process overly burdens FHA from 
efficiently making changes to serve homebuyers and renters better and 
protect FHA's insurance funds. Today's mortgage markets require 
agencies that are empowered to implement changes quickly and to 
introduce or test new programs to address underserved segments of the 
market.
    A prime example of this problem can be found in the experience of 
FHA in offering hybrid ARM products. A hybrid ARM is a mortgage product 
which offers borrowers a fixed interest rate for a specified period of 
time, after which the rate adjusts periodically at a certain margin 
over an agreed upon index. Lenders are typically able to offer a lower 
initial interest rate on a 30-year hybrid ARM than on a 30-year fixed 
rate mortgage. During the late 1990s, hybrid ARMs grew in popularity in 
the conventional market due to the fact they offer borrowers a 
compromise between the lower rates associated with ARM products and the 
benefits of a fixed rate period.
    In order for FHA to offer this product to the homebuyers it serves, 
legislative approval was required. After several years of advocacy 
efforts, such approval was granted with the passage of Public Law 107-
73 in November 2001. Unfortunately, this authority was not fully 
implemented until the spring of 2005.
    The problem began when Public Law 107-73 included an interest rate 
cap structure for the 5/1 hybrid ARMs that was not viable in the 
marketplace. The 5/1 hybrid ARM has been the most popular hybrid ARM in 
the conventional market. As FHA began the rulemaking process for 
implementing the new program, they had no choice but to issue a 
proposed rule for comment with a 5/1 cap structure as dictated in 
legislation. By the time MBA submitted its comment letter on the 
proposed rule to FHA, we had already supported efforts within Congress 
to have legislation introduced that would amend the statute to change 
the cap structure. MBA's comments urged that, if passed prior to final 
rulemaking, the 5/1 cap fix be included in the final rule.
    On December 16, 2003, Public Law 108-186 was signed into law 
amending the hybrid ARM statute to make the required technical fix to 
the interest rate cap structure affecting the 5/1 hybrid ARM product. 
At this point, FHA was ready to publish a final rule. Regardless of the 
passage of Public Law 108-186, FHA was forced to go through additional 
rulemaking in order to incorporate the fix into regulation. Thus, on 
March 10, 2004, FHA issued a Final Rule authorizing the hybrid ARM 
program, with a cap structure that made FHA's 5/1 hybrid ARM unworkable 
in the marketplace. It was not until March 29, 2005 that FHA was able 
to complete rulemaking on the amendment and implement the new cap 
structure for the 5/1 hybrid ARM product.
    The hybrid ARM story demonstrates well the statutory straitjacket 
under which the FHA operates. A 4-to-6-year lag in introducing program 
changes is simply unacceptable in today's market. Every month a new 
program is delayed or a rule is held-up means that families who could 
otherwise be served by the program are prevented from realizing the 
dream of homeownership or securing affordable rental housing.
Ability to Invest Revenues in Technology
    Technology's impact on mortgage markets over the past 15 years 
cannot be overstated. Technology has allowed the mortgage industry to 
lower the cost of homeownership and streamline the origination process. 
The creation of automated underwriting systems, sophisticated credit 
score modeling, and business-to-business electronic commerce are but a 
few examples of technology's impact.
    FHA has been detrimentally slow to move from a paper-based process, 
and it cannot electronically interface with its business customers in 
the same manner as the private sector. During 2004 and 2005, over 1.5 
million paper loan files were mailed back and forth between FHA and its 
approved lenders and manually reviewed during the endorsement process. 
Despite the fact FHA published regulations in 1997 authorizing 
electronic endorsement of loans, FHA was not able to implement this 
regulation until January 2006. This delay occurred despite the fact 
that over the same 8 years, FHA's operations generated billions of 
dollars in excess of program costs which was transferred to the U.S. 
Treasury.
    MBA believes FHA cannot create and implement technological 
improvements because it lacks sufficient authority to use the revenues 
it generates to invest in technology. Improvements to FHA's technology 
will allow it to improve management of its portfolio, garner 
efficiencies and lower operational costs, which will allow it to reach 
farther down the risk spectrum to borrowers currently unable to achieve 
homeownership. MBA believes such an investment would yield cost savings 
to FHA operations far in excess of the investment amount.
    In fact, some members of the Senate have taken action to address 
this issue by introducing and co-sponsoring S. 947, the ``21st Century 
Housing Act,'' which would authorize funding to pay for much needed 
technology improvements. We were also pleased to support the compromise 
legislation introduced by Senators Dodd and Shelby last week, which 
included a provision to allow FHA to spend up to $25 million per year 
from its surpluses to pay for these improvements.
Greater Control in Managing Human Resources
    FHA is restricted in its ability to effectively manage its human 
resources at a time when the sophistication of the mortgage markets 
demands market participants to be experienced, knowledgeable, flexible 
and innovative. To fulfill its mission, FHA needs to be able to attract 
the best and brightest. Other Federal agencies, such as the Federal 
Deposit Insurance Corporation (FDIC), that interface with and oversee 
the financial services sector are given greater authority to manage and 
incentivize their human resources. MBA believes FHA should have similar 
authority if it is to remain relevant in providing homeownership 
opportunities to those families underserved by the private markets. FHA 
should have more flexibility in its personnel structure than is 
provided under the regular Federal civil service rules. With greater 
freedom, FHA could operate more efficiently and effectively at a lower 
cost. Further, improvements to FHA's ability to manage its human 
capital will allow FHA to attract and manage the talent necessary to 
develop and implement the strategies that will provide opportunities 
for homeownership to underserved segments of the market.
    In addition to increasing funding for technological improvements to 
FHA, S. 947 would call on the HUD Secretary to consult with, and 
maintain comparability with, the compensation of officers and employees 
of the Federal Deposit Insurance Corporation, thereby giving FHA tools 
to retain qualified and capable staff.
    MBA believes the above three changes will allow FHA to effectively 
manage risk and self-adapt to shifting mortgage market conditions while 
meeting the housing needs of American families.
               mba supported fha modernization principals
    MBA has offered strong support for many pieces of FHA legislation 
pending before the Senate.
Raising Maximum Mortgage Limits for High Cost Areas
    There is a strong need for FHA financing to be relevant in areas 
with high home prices. Although loan limits for 2008 were temporarily 
raised under the Economic Stimulus Act of 2008 (``Economic Stimulus 
Act''),\3\ MBA supports raising the FHA's maximum mortgage limits to 
100 percent of an area's median home price (except for 2008, pegged at 
95 percent) and raising the ceiling to 100 percent of the GSEs' 
conforming loan limits (except for 2008, limited to 87 percent) and the 
floor to 65 percent (except for 2008, set at 48 percent). Raising the 
limits to the GSEs' conforming limits in these areas strikes a good 
balance between serving a greater number of borrowers and taking on 
additional risk.
---------------------------------------------------------------------------
    \3\ Public Law No: 110-185.
---------------------------------------------------------------------------
    Additionally, in many low-cost areas, FHA's loan limits are not 
sufficient to cover the costs of new construction. New construction 
targeted to first-time homebuyers has historically been a part of the 
market in which FHA has had a large presence. MBA believes raising the 
floor will improve the ability of first-time homebuyers to purchase 
modest, newly constructed homes in low-cost areas since they will be 
able to use FHA-insured financing.
Downpayment Requirements
    MBA supports the elimination of the complicated formula currently 
detailed in statute for determining the downpayment. The calculation is 
outdated and unnecessarily complex. The calculation of the downpayment 
alone is often cited by loan officers as a reason for not offering the 
FHA product.
    MBA also supports improving FHA's products with downpayment 
flexibility. Independent studies have demonstrated two important facts: 
first, the downpayment is one of the primary obstacles for first-time 
homebuyers, minorities, and low- and moderate-income homebuyers. 
Second, the downpayment itself, in many cases, is not as important a 
factor in determining risk as are other factors. Many borrowers will be 
in a better financial position if they keep the funds they would have 
expended for a large downpayment as a cash reserve for unexpected 
homeownership costs or life events.
    MBA believes FHA should be empowered to establish policies to allow 
borrowers to qualify for FHA insurance with flexible downpayment 
requirements and decide the amount of the cash investment they would 
like to make in purchasing a home. To this end, the Secretary of HUD 
should be authorized to determine the appropriate level of downpayment 
requirements. Further, we have concerns that statutory increases in the 
FHA's minimum downpayment may inhibit it from performing its mission of 
assisting low- and moderate-income homebuyers. MBA is ready to work 
with Congress to ensure that such flexibility maximizes homeownership 
opportunities for underserved communities without compromising the 
safety and soundness of FHA.
Adjusting Mortgage Insurance Premiums for Loan Level Risk
    MBA believes FHA would be able to serve more borrowers, and do so 
with lower risk to the MMIF, if it is able to adjust premiums based on 
the risk of each mortgage insured. A flexible premium structure could 
also give borrowers greater choice in how they utilize the FHA program.
    Some borrowers and loans will pose a greater risk to FHA than 
others. At a certain level, FHA should have the authority to adjust 
premiums based on borrower or loan factors that add risk. Such 
adjustment for risk need not be a complicated formula. MBA believes FHA 
could significantly mitigate risk to the MMIF by selecting a small 
number of risk factors to adjust from a base mortgage insurance premium 
(MIP).
    Creating a risk-based premium structure will only be beneficial to 
consumers, though, if FHA considers lowering current premiums for less 
risky loans. We would not support simply raising current premiums for 
higher risk borrowers.
Lengthening Mortgage Term
    MBA supports FHA's ability to develop products with mortgage terms 
up to 40 years. Currently, FHA is generally limited to products with 
terms of no more than 30 years. Stretching out the term will lower the 
monthly mortgage payment and allow more borrowers to qualify for a loan 
while remaining in a product that continues to amortize. MBA supports 
lengthening the mortgage terms and believes FHA should have the ability 
to test products with these features and, based on performance and 
homebuyer needs, to improve or remove such products.
Improvements to the Reverse Mortgage Program
    Senate FHA modernization legislation should include changes to the 
FHA's Home Equity Conversion Mortgage (HECM) program, such as: the 
permanent removal of the current 250,000 loan cap and the creation of a 
single, national loan limit for the HECM program. The HECM program has 
proven to be an important financing product for this country's senior 
homeowners, allowing them to access the equity in their homes without 
having to worry about making mortgage payments. The program has given 
tens of thousands of senior homeowners greater freedom, allowing them 
to pay for such items as improvements to their homes that have allowed 
them to age in place, or to meet monthly living expenses without having 
to move out of the family home.
    MBA believes it is time to remove the program's cap because the cap 
threatens to limit the HECM program at a time when more and more 
seniors are turning to reverse mortgages as a means to provide 
necessary funds for their daily lives. MBA further believes the HECM 
program has earned the right to be on par with other FHA programs 
subject only to FHA's overall insurance fund caps. Additionally, 
removing the program cap will serve to lower costs as more lenders will 
be encouraged to enter the reverse mortgage market.
    Additionally, authorizing the HECM program for home purchase will 
improve housing options for seniors. In a HECM for purchase 
transaction, a senior homeowner might sell a property they own to move 
to be near family. The proceeds of the sale could be combined with a 
reverse mortgage, originated at closing and paid in a lump sum, to 
allow a senior to purchase the home without the future responsibility 
of monthly mortgage payments. Alternatively, a senior homeowner may 
wish to take out a reverse mortgage on a property that is less than 1 
year old, defined as ``new construction'' by FHA.
    Finally, the HECM program should have a single, national loan limit 
equal to the limit of FHA's forward programs. Currently, the HECM 
program is subject to county-by-county loan limits that are exempt from 
the higher loan limits implemented under the Economic Stimulus Act.\4\ 
HECM borrowers are disadvantaged under this system because they are not 
able to access the full value of the equity they have built up over the 
years by making their mortgage payments. Currently, a senior homeowner 
living in a high-cost area is able to access more equity than a senior 
living in a lower cost area, despite the fact that their homes may be 
worth the same and they have the same amount of equity built up. 
Reverse mortgages are different than forward mortgages and the reasons 
for loan limits are different, too. FHA needs the flexibility to 
implement different policies, especially concerning loan limits.
---------------------------------------------------------------------------
    \4\ Public Law No: 110-185.
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                           additional issues
Treatment of FHA Non-Conveyable Properties
    FHA provides credit insurance against the risk of foreclosure 
losses associated with loans originated according to FHA standards. FHA 
generally pays an insurance claim when it takes title (conveyance) to a 
property as a result of foreclosure. To convey a property and receive 
insurance benefits, however, FHA requires the property be in 
``conveyance condition'' (i.e., saleable condition). Properties that 
have sustained damage attributable to fire, flood, earthquake, tornado, 
hurricane, boiler explosion (for condominiums), or the lender's failure 
to preserve and protect are not eligible for insurance benefits unless 
they are repaired prior to conveyance of the property to the FHA. While 
HUD has in the past accepted properties in ``as is'' (damaged) 
condition on a case-by-case basis, this is rarely done. Moreover, HUD 
will deduct from the ``as is'' claim the estimated cost of repair. HUD 
should accept conveyance of damaged properties and not adjust the claim 
for the cost of repair when there was no failure on the part of the 
servicer to obtain hazard or flood insurance pursuant to Federal law or 
if a borrower is eligible to apply for CDBG grant funds, but fails to 
do so. In addition, to the extent that a property is not conveyable 
(i.e., condemned, demolished by local, State, or Federal Government or 
deemed to be a Superfund site, etc.), HUD should be permitted to pay 
the full claim without taking conveyance of the property. We do not 
believe HUD currently has the statutory authority to manage claims in 
this manner.
    Last year, the House passed H.R. 1227, the ``Gulf Coast Hurricane 
Housing Recovery Act of 2007,'' which includes a provision dealing with 
this issue. Following that action, Chairman Dodd introduced S. 1668, 
the Gulf Coast Housing Recovery Act of 2007, which also includes a fix 
to this serious problem. MBA applauds Congress' attention to this 
issue, especially in light of HUD's and Louisiana's actions to revamp 
the Road Home grant program in a manner that no longer promotes 
rebuilding. This decision exacerbates servicers' losses. These are 
losses FHA lenders never thought they could incur, and that represent a 
significant cost for FHA financing.
Mortgage Broker Supervision
    FHA must approve all mortgage lenders and loan correspondents who 
wish to originate or underwrite FHA-insured loans. Non-supervised 
mortgagees (e.g. mortgage brokers) and loan correspondents outside of 
the Federal regulatory regime must establish an ability to meet both 
FHA's financial and legal standards in order to be approved. This is 
currently satisfied through a minimum net worth requirement and the 
submission of a yearly financial audit demonstrating the mortgagee or 
loan correspondent not only has a certain level of financial solvency, 
but also employs necessary controls to provide reasonable assurance FHA 
products are offered in compliance with all applicable regulations, 
such as laws governing fair housing and nondiscrimination.
    Although MBA supported passage of comprehensive FHA reform (H.R. 
1852) which passed in the House of Representatives last year, we oppose 
a provision contained in the bill which would alter this approval 
process by allowing mortgage brokers to substitute a surety bond in 
lieu of the existing annual net worth auditing requirements. It is 
important to note the annual financial statement (AFS) is the Federal 
Government's only opportunity to ensure that the 7,500 non-supervised 
mortgagees, loan correspondents, and brokers who offer FHA-insured 
loans are doing so in accordance with all applicable laws and 
regulations. Kenneth Donohue, HUD's Inspector General, stated ``[t]he 
AFS is an integral part of FHA's monitoring of its approved mortgagees, 
and [the Inspector General] does not believe that its minimal cost . . 
. is sufficient cause to increase the risk of loss to the taxpayer that 
may result from its elimination.'' MBA believes in the current climate 
of rising FHA defaults, this is not the appropriate time to loosen the 
supervision of entities offering products backed by FHA and the 
American taxpayer.
FHA Multifamily Programs
    While the thrust of recent modernization efforts focus on FHA's 
single-family programs, it is very important to underscore the critical 
role of FHA's multifamily programs in providing decent, affordable 
rental housing for many Americans. Approximately 30 percent of families 
and elderly citizens either prefer to rent or cannot afford to own 
their own homes. FHA's insurance of multifamily mortgages provides a 
cost-effective means of generating new construction or rehabilitation 
of rental housing across the Nation. FHA is also one of the primary 
generators of capital for healthcare facilities, particularly nursing 
homes.
    Congress has moved decisively over the past year on a number of 
issues affecting the FHA multifamily programs. Last fall, Congress 
passed legislation to raise the mortgage limits in high-cost areas in 
response to rapidly rising building costs in many of the Nation's 
cities. And HUD responded quickly with regulations implementing those 
higher limits, allowing lenders and developers to continue to provide 
affordable housing in those areas that need it the most.
    Congress also was instrumental in convincing the administration to 
abandon their planned increase in the Mortgage Insurance Premium (MIP) 
for FHA multifamily mortgages. The proposal, if implemented, would have 
increased prices on multifamily development precisely at the time when 
the production and preservation of affordable rental housing is under 
stress from the same capital market crisis that is affecting the single 
family housing markets. To assure future administrations do not try to 
use the FHA multifamily programs to raise money for other priorities, 
we urge Congress to pass legislative language, included in both House 
and Senate FHA reform bills. The provisions would prohibit HUD from 
increasing multifamily mortgage insurance premiums unless the increase 
is necessary to cover the costs of the program, though we prefer the 
House version which extends for a longer period of time.
    It should also be noted the FHA multifamily programs need funds for 
technology improvements similar to the single family programs. HUD 
currently has a number of systems to automate important processes (e.g. 
the previous participation process and multifamily property 
inspections) that simply do not work effectively because funds are 
needed to update and streamline the processes. Without technology 
funds, processes that should be automated--to save HUD staffing costs 
and improve oversight of the programs--will remain overburdened with 
paper and less effective than needed. Additional technology funds 
should thus be allocated to the multifamily programs, as well as the 
single family programs.
                               conclusion
    Finally, as Senators on this subcommittee are well aware, recent 
unrest in the mortgage industry has led to a number of lenders either 
significantly tightening underwriting standards or leaving the business 
altogether. MBA believes the individuals who will be most directly 
impacted by these events are the consumers FHA was created to serve: 
first-time homebuyers, low-income families, and those with less than 
perfect credit histories. It is in light of these realities that MBA 
urges Congress to move quickly and empower FHA with the authority it 
needs to provide these consumers with affordable, viable lending 
options needed to help them achieve homeownership.
    MBA would like to thank this subcommittee for the opportunity to 
present its views on FHA. MBA looks forward to continuing to work with 
Congress and HUD to improve FHA's long-standing mission and ability to 
serve aspiring homeowners and those seeking affordable rental housing.

                               FHASECURE

    Senator Murray. Thank you very much to all of you for your 
testimony.
    Mr. Montgomery, I am going to start with you. The 
administration has undertaken two initiatives targeting the 
subprime crisis. You talked a little bit about them, the 
FHASecure program and the HOPE NOW Alliance, and you announced 
yesterday that you are planning to expand the FHASecure 
program. You are proposing to allow riskier borrowers to 
participate in the program, the borrowers that may have more 
troubled credit history, and you are planning to guarantee 
loans to these borrowers at 90 percent instead of 100 percent 
of their home's appraised value. I wanted to ask you, do you 
really think that this new initiative will bring in a 
meaningful number of borrowers?
    Mr. Montgomery. Thank you for your question. We estimated 
that on top of the 300,000 we believe that we will do with 
FHASecure, by the end of the fiscal year, and the 400,000 that 
we will--add 100,000 to that number, to the end of the calendar 
year and add another 100,000 we think through the expansion we 
announced yesterday, for a total of 500,000. So in between 
moving the fence line out, if you will, about delinquencies 
and/or the write-down of principal to 90 percent, yes, we think 
we will help about 100,000.
    I want to add, as you know, we announced FHASecure August 
31, of last year, and while we have helped 153,000 folks 
refinance, the number that were delinquent has been very 
little, around 2,500. The reason we heard from applicants--
because we have had 330,000 apply--is that they might have had 
one or two delinquencies. So we think this is a measured way to 
take into consideration some folks that hit an economic rough 
patch, they had an illness, or whatever, and that it is a good 
measured approach to expand FHASecure.
    Senator Murray. Mr. Kittle, do you expect the lending 
community to participate in this new program even though it 
will only guarantee 90 percent instead of 100 percent of the 
home's current value?
    Mr. Kittle. Referring to the proposal that he just made 
last night?
    Senator Murray. Yes.
    Mr. Kittle. We would like to evaluate it further since we 
have not had time to look at it. But I would anticipate that we 
will look at it quickly and come out with a comment on it very 
quickly.
    Senator Murray. Well, one of the things I am concerned 
about is that lenders will require homeowners to borrow 
additional amounts outside of the FHA to make up for the 
amounts that the FHA is not willing to guarantee. If that 
occurs, which is likely, how do we make sure these secondary 
loans are not the same type of risky loans that got the 
borrower into trouble in the first place?
    Mr. Kittle. Is that to me?
    Senator Murray. Mr. Kittle or Mr. Montgomery. Mr. Kittle, I 
will start with you.
    Mr. Kittle. Well, are we talking about subordinate 
financing, outside the down payment?
    Senator Murray. Right.
    Mr. Kittle. If this is done and enacted, then those 
subordinate loans should be included in the underwriting 
guidelines. FHA has prudent underwriting guidelines, and if 
they are adhered to, then we should be making good loans. 
Historically they have made very good loans under the FHA 
program. So if they are underwritten properly, then they should 
be okay.

                           SUBORDINATE LOANS

    Senator Murray. Mr. Montgomery?
    Mr. Montgomery. What we envision is again through the 90 
percent LTV, the lender, the service writes it down--and this 
is largely for borrowers who are underwater. They write it down 
to the amount that we will only insure 90 percent of. That 10 
percent--let me just give you an example.
    The original mortgage was $120,000. The home is now worth 
$100,000. FHA says, okay, we will insure 90 percent of that. 
Right now, we do 97 percent. Ninety percent LTV loans perform 
very well in the FHA portfolio. So the existing servicer or 
lender can write it down to $100,000 and put the 10 percent in 
a second lien. They can write it down all the way to $90,000.
    Senator Murray. Is this written so we will only cover 
underwater mortgages?
    Mr. Montgomery. Well, if you are delinquent--and a lot of 
the borrowers who are that delinquent are underwater--we are 
just saying FHA--going forward, we will only insure 90 percent 
of that. So the Government's role is 90 percent. This is a big 
departure from our normal 97 percent.
    Senator Murray. I understand that, and that is what I am 
concerned about, that people will get secondary loans to cover 
that extra 10 percent.
    Mr. Montgomery. We do not envision that happening.
    Senator Murray. Right. And the FHA guidelines will not 
apply to any secondary loans, should that occur?
    Mr. Montgomery. That is correct. FHA is always in a first 
position.
    Senator Murray. Mr. Wade, are you concerned about these 
secondary loans?
    Mr. Wade. Well, clearly that could be an area of challenge 
with the program, not having seen the specifics, but I think as 
Mr. Kittle mentioned, many lenders allow secondary financing 
and they typically have rules that govern what is allowed in 
the context of that transaction. So I would assume the FHA 
would do a similar thing with their program.
    In addition to that, there are increasing resources 
available at the State and local level that are called a 
variety of things, but rescue funds are kind of the generic 
category. I know in many cases local organizations have been 
able to tap rescue funds to make up the gap when the loan-to-
value is not sufficient to be able to get a refinance done.
    So we think there are ways that you can guard against that 
through rules that the FHA can develop and adopt.
    Senator Murray. And you are developing those, Mr. 
Montgomery?
    Mr. Montgomery. Yes, we are developing the mortgagee letter 
right now. As I mentioned in yesterday's hearing, it will take 
about 60 to 70 days to stand this program up.
    Senator Murray. My time is short and we have votes here 
shortly. I know my colleagues have questions.
    Mr. Wade, I did want to thank you for bringing up the scam 
issue. That is what we are seeing in neighborhoods across the 
country, these signs on telephone poles, call 1-800, or through 
the Internet, and hearing stories of families that send a check 
for $450 thinking somebody is going to save their life. It is a 
real problem out there.
    Senator Bond.
    Senator Bond. Thanks very much, Madam Chair.
    Following up on that, if you write a 90 percent loan--if 
you cut it back, you said you do not expect. Would you allow or 
disallow a lender from taking a soft second on that? And if 
they take a soft second, would that be one that runs only to 
the property or would it be a personal liability?
    Mr. Montgomery. It would be a non-recourse. It would be a 
soft second with a note due on the----

                               APPRAISALS

    Senator Bond. Totally non-recourse. So the lender would 
have to agree that he would take his risk on 90 percent and 
hope maybe if the sun shines right and the flowers grow, that 
he might get the rest back. If it works, that sounds good.
    Appraisals. Another thing a number of people have raised 
with me that appraisals have been faulty, and there are some 
who point fingers at appraisers. What does HUD do to ensure the 
appraisals are accurate?
    Mr. Montgomery. Are you talking about just in general or 
for our new programs or?
    Senator Bond. Well, what are you doing and what do you 
propose to do? You are going to be doing 90 percent.
    Mr. Montgomery. Yes, sir.

                          FHASECURE EXPANSION

    Senator Bond. You are going to have to guard very carefully 
against phoney appraisals. And we hear that a lot of phoney 
appraisals may have sneaked into the system and been part of 
the cause.
    Mr. Montgomery. Well, for one, on the loan limit increase 
done under the economic stimulus; we in fact just put out a 
mortgagee letter requiring two appraisals, new appraisals, 
especially given the high level of some of the limits.
    We are, again, still putting together the mortgagee letter 
on the expansion of FHASecure, and one of the things that we 
have discussed internally is should we require two appraisals 
for that regardless of what the loan limit is. Again, we are 
still putting the finishing touches on that policy as well.
    We have instituted some risk algorithms because all the 
appraisers have to be registered with FHA. We constantly look 
at their performance, those that have high defaults, those that 
do a lot of high-risk loans in certain areas. In fact, we have 
had various levels of sanctions, some very minor, some major. 
Since 2004 when we instituted the program, about 1,100 
appraisers have been sanctioned in some way. So it is something 
we continue to watch and want to be ever-vigilant on.

                           PREDATORY LENDING

    Senator Bond. One of the things I read about in the 
newspapers and I have heard about back home are FBI 
investigations of outright fraud. There may be a small handful 
of people who have helped spread this toxic paper who are 
criminally responsible, and I hope that HUD and FHA would make 
appropriate referrals in those instances.
    I mentioned in my opening comments about predatory lending, 
what Senator Mikulski and I tried to do about it. Are you doing 
anything about predatory lending?
    Mr. Montgomery. Well, we continue to raise the bar. There 
has been a lot of effort by some groups for us to stop 
requiring audited financial statements, things of that nature. 
We want to make sure that if we approve a lender, they are 
working under the highest ethical and financial standards, so 
that we will never take off the table.
    Lenders and brokers know if they are going to participate 
in FHA, we do have a punitive side. We have a quality assurance 
division that constantly does on-site monitoring. We obviously 
have our Inspector General who is very aggressive, as he should 
be, in this area. Can we eliminate all predatory lending and 
fraud? Unfortunately, no, but we are doing a lot----
    Senator Bond. Well, there is nothing like a few high-class 
prosecutions and maybe one of those little signs that they have 
every time I check out at the supermarket. They say if you 
write a bad check, you are going to get prosecuted. I do not 
hand them any checks, but it always gets my attention in the 
supermarket.
    Mr. Montgomery. Yes, sir.
    Senator Bond. You might include something like that.
    Mr. Montgomery. Yes, sir.
    Senator Bond. Have you been actually recommending through 
the IG any criminal prosecutions?
    Mr. Montgomery. Well, our Quality Assurance Division--that 
is all they do, are monitor lenders.
    Senator Bond. But how many have they turned over? Do you 
have an idea?
    Mr. Montgomery. I would not know right off the top of my 
head how many.
    Senator Bond. I would be interested in that. I think that 
is important.
    Mr. Montgomery. There are a substantial number of abuses 
that do not rise to the level of criminal. People just got 
sloppy.
    Senator Bond. Oh, agreed. Yes.
    Mr. Montgomery. And it is really the IG who takes over at 
that point. As you know, he is very aggressive, as he should 
be, in that area.
    Senator Bond. Madam Chair, I am going to hand in the rest 
of my questions for the record because there are many things I 
want to hear from Mr. Kittle and Mr. Wade, as well as Mr. 
Montgomery. I thank you for being here, and I apologize for the 
Senate schedule.
    Senator Murray. I agree with you. We have so many hearings 
going on and a number of votes that are going to be called 
shortly. And we do have critical questions for all of you. We 
will all be submitting questions and hope that we can get 
answers back from you, because these are critical issues, in a 
timely manner.
    Senator Allard.

                            HUD'S WORKFORCE

    Senator Allard. Thank you, Madam Chairman.
    I would like to get to the bottom line on some of this. We 
have the Dodd-Frank proposal which is trying to help out 
distressed borrowers. If that were to become law and move 
forward, do you have any idea how many additional staff people 
would be required for that type of program?
    Mr. Montgomery. Within HUD?
    Senator Allard. Yes.
    Mr. Montgomery. I could not give you an exact number. I 
will say that we have a very experienced workforce at HUD. That 
is the good news. The bad news is a lot of them are within 
retirement ages. I will give you an example. Last year, we 
hired 376 people, and we still finished seven below where we 
started the previous year. We are on track to hire another 400 
this year, but again, we will more than likely finish below 
where we were.
    Senator Allard. This is 400 in addition to the 360-some 
that you hired?
    Mr. Montgomery. Yes.
    Senator Allard. So you are coming to somewhere around 760 
employees.
    Mr. Montgomery. Yes, and 80 percent of those, give or take, 
are out in the field. Those are not all in single family 
housing. Probably about a third of them are.
    Senator Allard. So how many do you have now in single 
family housing?
    Mr. Montgomery. Single family housing is around 800 total 
around the country. About half of those are in----
    Senator Allard. So when you get finished, you are still 
going to have fewer employees than you have now.
    Mr. Montgomery. What I am describing has been a problem at 
HUD for some time. A lot of experienced people are just 
retiring.
    Senator Allard. So if we have a new program that is 
initiated, it is going to call for more FTE's, is it not?
    Mr. Montgomery. I have made it well known--and I appreciate 
Mr. Kittle's remarks--that we have concerns in personnel and in 
IT systems as well.
    Senator Allard. Do you have a plan as to how you are going 
to make up for that employee shortfall?
    Mr. Montgomery. Yes, we are. We are very aggressively 
hiring more folks. While there have been extensive layoffs in 
the lending industry, which is bad news, the good news is we 
have gotten a lot of high quality applicants who want to come 
work at HUD. That has been good news for us.

                              PART PROGRAM

    Senator Allard. Well, in the past, HUD has struggled with 
being able to meet the requirements of the PART program, which 
is an accountability program by the President. So I am 
concerned as to whether we load you up with another program, 
how you are going to respond to that and whether you are going 
to be able to maintain your PART score now which is effective, 
I believe. That is better than where you were. So I want to 
compliment you for improving it, but I am concerned about 
loading you up and then you fall back and cannot accomplish 
your goals and objectives.
    Mr. Montgomery. As are we, Senator.
    Senator Allard. Mr. Kittle, the Banking Committee is also 
holding a hearing on FHA today. Looking over the observation of 
one of the witnesses--and I planned on asking this question in 
that committee but with the change, we decided to spend our 
full time here because of the vote coming up.
    And there was a quote that said in more cases, foreclosures 
will occur because falling prices push home values below 
mortgage amounts, and people struggling to make their mortgage 
payments decide to stop struggling. I think this is a 
significant change. Previously I think borrowers felt a moral 
obligation to make payments and that there was a stigma with 
that default in their obligation. It was a promise; so to 
speak, broken that happened if they did not keep up with their 
loan payments. And it was rare for families, in a sense, to 
choose foreclosure.
    How much has the attitude shift factor into the foreclosure 
rates we are seeing today?
    And then the second question is how do we prevent rewarding 
those who may simply decide to stop paying as compared to those 
who have made very difficult choices to honor their 
obligations?
    Mr. Kittle. The first part of your question. I think it is 
probably pockets of the country where you may see this type of 
attitude taking place, probably in six or seven States, 
Arizona, Nevada, California, Florida, Michigan, places like 
that. The Midwest and the heartland of the country--we still 
see flat or appreciating home prices in many areas. So as the 
media professes what is going on, sometimes it becomes a self-
fulfilling prophecy. We do not see a blanket of people walking 
away from their homes. It is in pockets.
    The second part of your question, we do not need to make it 
easy for people to file bankruptcy. We do not need, just as an 
example, cram-down legislation which will let people include 
their homes in bankruptcy. It makes it too easy for them to do 
that. We need to get back to personal responsibility in this 
country. And that is what we stand for and we will stand 
against that particular provision going forward. And I hope 
that answers your question.
    Senator Allard. I think we need to deal with those that are 
struggling and we need to be concerned about increased 
liabilities on FHA. So I am concerned about how you are going 
to filter out those who are borrowers who did misdeeds and if 
we are looking at a program such as the Dodd-Frank program 
where we are focusing on--there are the lenders and the 
borrowers. They are focusing on the borrowers. How do we 
separate those that are being responsible in their action and 
those that are not being responsible? That is my concern.
    Mr. Montgomery. Do you want me to respond to that?
    Senator Allard. Please.
    Mr. Montgomery. One thing that we are not changing is our 
rigorous payment-to-income ratios, our debt-to-income ratios. 
We are keeping those rigid. The Frank proposal--I assume the 
Dodd is the same way. They come at it with a much higher DTI 
ratio on the front end.
    Senator Allard. DTI?
    Mr. Montgomery. I am sorry, debt-to-income ratio.
    They come at it a little differently. We are coming at it 
from the way of delinquencies, meaning the borrower missed a 
couple payments. They made up those payments. That shows us 
that they are serious about trying to stay in that home. And as 
you know, we verify income. We verify how long you have been on 
your job. Those corners we are not cutting. This, again, tells 
us these borrowers are serious about trying to stay in their 
homes as opposed to some who just give up and just walk away.
    Senator Allard. Thank you.

                              RISK TO FHA

    Senator Murray. Thank you very much.
    Mr. Montgomery, the current FHASecure program requires a 
borrower to have made all of their mortgage payments for 6 
months prior to their interest rate resetting upward. The new 
proposal that you have to expand FHASecure would allow 
borrowers that already missed some payments before their 
interest rate went up to now participate in that program.
    Do you think that someone who has been delinquent on their 
mortgage payments before their interest rates went up 
represents an appropriate risk for FHA?
    Mr. Montgomery. Well, there are some that said that we 
should go even more than that, and I want to stress they were 
late making the payments, but they did make the payments, which 
again shows us they do want to stay in their house.
    Senator Murray. So it is not just that they missed the 
payments, they have made those payments?
    Mr. Montgomery. They did make them. They just made them 
late up into the point of the reset. Now, after the reset, they 
may have missed some payments, but again, once they refinanced, 
especially if they are doing a write-down of principal, those 
payments could be written into the new loan or the lender, 
whoever is holding the note now, may now just extinguish those.
    Senator Murray. Can you tell us what protections you are 
putting in place so that you are not taking on a greater risk?
    Mr. Montgomery. Well, again, some of what I articulated 
with Senator Allard. We have very vigorous underwriting. This 
is not something we are proud of, but historically there is a 
reason people come to FHA. And if you look at our default ratio 
through the years, it has been high, although I will say it is 
lower now, because borrowers historically who use FHA do miss 
payments. They ultimately make them, but these are lower income 
borrowers with an average income of $50,000 a year, an average 
mortgage amount on the purchase side of about $150,000. And 
that historically is what FHA borrowers have done. We do have 
experience in dealing with borrowers who are late on payments.
    Senator Murray. Mr. Kittle, you wanted to make a comment?
    Mr. Kittle. Yes, Senator Murray.
    I am a DE underwriter, although I have not practiced it a 
lot in the past few years, but I can tell you one of the 
strengths of the FHA program is that it required documentation. 
It required verification. So if somebody comes and the loan is 
presented to the underwriter and they have been delinquent, 
there are reasons we ask and verify. They may have had a 
temporary job loss or a temporary layoff. Unemployment benefits 
ran out. And if that can be verified and they have 
reestablished a job, then that is every reason to give them a 
chance to go forward.
    And if I may respond to Senator Bond just for a second on 
the appraisal issue, I can assure you right now on the 
conventional and the FHA and the VA side, because of what has 
happened in the mortgage market, appraisals are being 
scrutinized like they have never been before.

                  MUTUAL MORTGAGE INSURANCE (MMI) FUND

    Senator Murray. Well, let me go back to you, Mr. 
Montgomery. HUD's budget assumes that there are going to be 
three major reforms to the FHA single family housing program. I 
am told that if these reforms are not enacted this year, the 
Mutual Mortgage Insurance (MMI) fund could potentially face a 
$1.4 billion shortfall in 2009. In fact, I have been told that 
if it were not for the large premiums that the FHA currently 
enjoys from the Home Equity Conversion Mortgages (HECM) program 
that the MMI fund could be running in the red right now.
    So can you tell us what the principal factors are that are 
driving that MMI fund into the red in 2009?
    Mr. Montgomery. It would be the proliferation of the 
seller-funded down payment program.
    Let me just quickly say, by the way, the Credit Reform Act 
requires us to put a book of business on budget every year. 
That is a good requirement. But our long-term financial 
solvency, our capital reserve is about $21 billion. But this 
year, again because of the ongoing proliferation of these 
loans, we are facing a shortfall, something that we have been 
telling Senate staff, House staff for some time now.

                      SELLER DOWN PAYMENT PROGRAM

    Senator Murray. Let me go back to the seller down payment 
program. In the past, you have told us you support that. You 
now oppose it. Is that correct?
    Mr. Montgomery. Well, when you peel back the onion and when 
you look at what they do, you can easily see that they, at 
first blush, are doing good things, helping home ownership, but 
when you really dig deep--and you have to really dig deep into 
this--and look at some of the arcane actuarial performance 
claim rates and all that--I will not bore you with that. But 
point of fact is these loans have unacceptably high rates of 
claim and many of them are just destined to fail to begin with.
    I have to say since that time, in the last 1\1/2\, 2 years, 
we have moved pretty aggressively to try to ban that sort of 
assistance, even going as far as a proposed rule that the 
courts did not rule in our favor. But we are coming back at it 
again.
    Senator Murray. Mr. Kittle, do you have any comments on 
that program?
    Mr. Kittle. I do. I will say that when I bought my first 
home FHA, one thing that I do not want to be eliminated is the 
gift provision from a family member. My father--it required 10 
percent down on the program that I chose back then, but my dad 
gave me 5 percent of the 10 percent. It was a gift. We went 
through the appropriate verifications. And I would like to see 
that left in place.
    Senator Bond. We are talking about gifts from the sellers.
    Mr. Kittle. I understand.
    Senator Bond. If daddy helps you with the down payment, if 
the roof starts to leak or the furnace goes out, you can go 
back to daddy.
    Mr. Kittle. Yes, sir.
    Senator Bond. You cannot go back to the seller.
    Mr. Kittle. I just wanted to make the two distinctions that 
we are talking about. But as far as that, I agree with what 
Secretary Montgomery is saying.
    Mr. Montgomery. If I could just quickly add--I am sorry--we 
are not moving to outlaw that type of real gift assistance or 
from State housing finance agencies.
    Senator Murray. Mr. Wade?
    Mr. Wade. I was just going to chime in and say that there 
are many down payment closing assistance programs out there run 
by local jurisdictions, States. They perform quite well. And I 
think the challenge is when you do not have the arm's length 
distance between the persons and the transaction where there 
are problems.

                           HOUSING COUNSELING

    Senator Murray. And, Mr. Wade, can I ask you? The housing 
counseling money--as you heard, Senator Bond and I added $180 
million to the package that we are going to vote on shortly. Is 
there capacity out there for that money?
    Mr. Wade. Absolutely. We had over $350 million worth of 
requests for a program that we rolled out that had a very short 
time frame and a targeted group of eligible applicants. So we 
know the demand is out there. We know that there are many other 
groups who were not able to participate in the program because 
of the short turnaround time and existing organizations who 
have received funding who applied for much more than we could 
award.
    Senator Murray. Very good.
    Senator Bond, I have been called back to the Energy and 
Water Committee. Because I trust you so much, I am going to 
turn over the gavel to you. I know we have a vote coming up 
shortly, and if you and Senator Allard want to ask your 
questions and adjourn the subcommittee.
    And I would say again we have a number of questions. This 
is a critical topic. We will be submitting them to you and hope 
to get your replies fairly quickly. But thank you to all of 
you.
    Senator Bond. Do you think you can straighten out Senator 
Dorgan on the Missouri River?
    Senator Murray. Now, I am not going to take on Missouri's 
issues.
    Senator Bond [presiding]. I said to the chair when she is 
up there she can put in a good word for the Missouri River 
because the chairman, I have just been advised, was attacking 
me when I was gone.
    But I will ask a couple of questions and then turn it over 
to Senator Allard because I have another appointment as well.
    An important thing, Mr. Montgomery, we are getting all 
these reforms, new opportunities. Do you have enough in the 
budget now to get the staff and the necessary resources? That 
is something this committee is very much concerned about 
because I believe the budget submissions were prepared long 
before anybody saw this coming and saw the role that the FHA 
would have to play. I would like to know if the budget 
submission before us actually takes into account this expanded 
role. Obviously, you cannot say you need more without getting 
fired, but did the budget submission come in time to factor in 
these new activities of FHA?
    Mr. Montgomery. I would say the only silver lining in the 
fact that it has taken 2 years to get FHA modernization, which 
we still do not have, is we have had a lot of time to plan for 
a victory party that may or may not come.
    Now, having said that, the average age of our IT systems 
within housing is about 18 years, our oldest legacy system is 
29 years. I often kid that we do hire Fortran and COBOL 
programmers.
    So we will be ready with FHA reform and modernization. Do 
we need more funds for IT? Certainly and I am sure a lot of 
cabinet agencies would tell you the same thing.

                               ARM RESETS

    Senator Bond. They often do.
    I am going to ask one last question. With 1.4 million 
mortgages facing interest rate resets--and I hate the term 
``ARM resets.'' That is a little too personal for me.
    But some 300,000 to 400,000 homeowners would face 
foreclosure. And this 25 percent foreclosure could climb as 
high as 40 percent. I would ask Mr. Kittle, Mr. Wade, and then 
Mr. Montgomery for a quick comment on what impact this would 
have on the housing market and on the overall economy. Mr. 
Kittle?
    Mr. Kittle. Fortunately right now, rates are down and they 
have fallen. A lot of these ARM's are tied to the LIBOR. The 
rates were attractive to some of the resets. Many of these 
ARM's have already refinanced, up to 50 percent of them. So the 
impact--excuse me--the loan reset. I am sorry about the ARM 
reset comment. So we hope and pray that the impact will be 
minimal going forward.
    Senator Bond. Good.
    Mr. Wade?
    Mr. Wade. Sure. I would say one of the challenges we are 
concerned about is the increasing foreclosed properties that 
end up on the market, and they end up disproportionately being 
concentrated in certain communities. That has the tendency to 
create kind of a self-reinforcing downward spiral in those 
communities, further depressing prices and leading to 
additional distress and costs for local communities.
    Senator Bond. That is one thing that Senator Isakson 
proposed and I included in the SAFE bill that I offered. I 
believe it is on the floor now, a 2-year tax credit, a total of 
$7,000 for families who will buy and move into a foreclosed 
home or a home facing foreclosure. I understand that the 
statements of the administration were very negative about that, 
but next to counseling, one of the most popular things I 
discussed with all of the housing people back in Missouri was 
getting people into those foreclosed homes.
    Do you think this could have an impact?
    Mr. Wade. Well, I think anything we can do to help get 
people back into these foreclosed properties--they end up being 
a drain on the community. They end up being havens for crime 
and drug activity. They end up costing local government 
hundreds of thousands of dollars of increased police 
protection. Oftentimes cities have to board the properties up 
successively. So I think clearly we have to address the REO 
challenge.
    Senator Bond. I believe that is correct.
    Mr. Montgomery, any comment on that?
    Mr. Montgomery. I agree with the comments of Mr. Kittle on 
the market, and I would say for our part with the FHA REO, we 
have asset control areas, other tools that we do to work with 
local governments to get homes rehabilitated and back on the 
market.
    Senator Bond. Thank you very much.
    I will turn this over to Senator Allard.

                    TEMPORARY OR PERMANENT PROGRAMS

    Senator Allard [presiding]. Thank you, Senator Bond.
    I have just a couple of quick questions. Then we will 
adjourn.
    Should we think of our programs in terms of temporary or 
permanent? I am reminded of somebody who said if something 
should be temporary, how do we keep it that way. I think one of 
the sayings that floats around here is there is nothing more 
permanent than a temporary program, so I am kind of wondering 
what your thoughts are on a temporary program.
    Mr. Montgomery. Well, for FHASecure's part, even with these 
modifications, right now they would expire at the end of this 
calendar year. The proposals that we want to do through the 
risk-based pricing, though, would be permanent.
    Senator Allard. I think the way our budget program and the 
way we analyze our spending through the Budget Committee--if 
you establish a spending program, the assumption by the Budget 
Committee frequently is that it continues on even though it 
expires. So it gives a great opportunity to keep adding onto 
that program, and I think that is what happens.
    But how do we keep it temporary then?
    Mr. Montgomery. Well, these changes are being done 
administratively, which I do through what are called mortgagee 
letters, and the mortgagee letter states it will expire at the 
end of the year. Certainly looking at my crystal ball, we could 
reassess at that point whether or not we should continue it or 
not.

                           HOMEOWNER BENEFIT

    Senator Allard. Now, let me move on to another subject 
quickly. In some of these proposals, there is sort of a profit 
sharing provision where you give special loan considerations 
with a home, for example, that has decreased in value. But then 
you establish that decreased value base, and then you go back 
10-15 years later and it has increased. And there is a 
provision in there that then if you sell that home, then that 
sharing is divided between the agency and the homeowner. How do 
you enforce something like that?
    Mr. Montgomery. Well, we come at it from a little different 
way. I will say this. If someone uses FHA today on the purchase 
side and the home increases in value over 5 years, 10 years, 
certainly that is a benefit that the homeowner gets. We do not 
share in that. Obviously, with these improvements with 
FHASecure, it is a little different. But again, we are asking 
the lender to make a significant write-down in principal and 
perhaps put some of it in a second lien.
    Going forward, may some benefit from that? Sure, but we 
look more globally that for the few that may profit, if you 
will, look at the long-term good by keeping people who really 
want to stay in their home avoid the ripple effect of 
foreclosure as a good thing.
    Now, to keep them in their homes, the Dodd-Frank proposal 
proposes an exit premium, a cash reserve, if you will that if 
the borrower moves out the first year or second year, that you 
forfeit part of this. You pay what is called an exit fee. Right 
now we envision coming at that a little differently either with 
a resell restriction, you know, some recapture provision, again 
that a lot of State HFA's use, so that the person stays in the 
home. We do not think FHA should be holding funds in escrow 
over a borrower's head. At least again, this is how we envision 
going forward.
    Senator Allard. Thank you for clarifying that.

                     ADDITIONAL SUBMITTED STATEMENT

    The following statement from the National Association of 
REALTORS was submitted for inclusion in the record.
    [The statement follows:]
           Statement of the National Association of REALTORS
 ``the federal housing administration's role in addressing the housing 
                                crisis''
    The mortgage crisis continues to grow--homeowners continue to face 
foreclosure, and housing markets are in turmoil. For all these reasons, 
I and the 1.3 million members of the National Association of REALTORS 
thank you for holding this hearing on ``The Federal Housing 
Administration's Role in Addressing the Housing Crisis''.
    In 1934 the Federal Housing Administration was established to 
provide consumers an alternative during a similar lending crisis. FHA 
served as the foundation for our housing market, which has served our 
citizens and our economy well for more than 70 years.
    However, as private mortgage markets evolved, FHA remained 
stagnant. Because FHA was unable to serve its core constituency, other 
mortgage providers stepped in to fill the gap. Without another 
alternative, many homebuyers were lured into these more exotic mortgage 
options, which fueled our current crisis. Even after all of this 
evidence, the need for a viable FHA remains unmet. Despite the best 
efforts of you and others, FHA reform has yet to be achieved.
    We urge you and your colleagues in the Senate to continue to work 
towards FHA reform. Permanent, realistic increases in the FHA loan 
limits; lowered FHA downpayment requirements; and new opportunities for 
condominium purchases are needed to create safe and affordable mortgage 
options for homebuyers and those wishing to refinance. These changes 
will also provide much needed stability to our local housing markets 
and economies.
    We also believe that the FHASecure program has been, and can 
continue to be a valuable tool for homeowners in crisis. This program, 
introduced in September 2007, gives credit-worthy homeowners who were 
making timely mortgage payments but are now in default, a second chance 
with a FHA insured loan product. We believe enhancements to this 
program can help an even greater number of borrowers without negatively 
impacting the sovereignty of the FHA insurance fund.
    As you know, through FHASecure, lenders and homeowners may 
refinance mortgages that, due to the increased mortgage payment 
following the interest rate reset have become delinquent. However, in 
many cases, subprime borrowers are becoming delinquent for reasons 
other than an interest rate reset meaning a rate reduction alone will 
not help borrowers avoid default or foreclosure.
    Specifically, we believe that where prudent, FHA should modify 
underwriting criteria in return for a lower loan-to-value ratio thereby 
assuring the lenders share risk. Changes include:
  --Permit late payments on fixed-rate and on conventional adjustable-
        rate mortgages without regard to interest rate reset or higher 
        DTI ratios.
  --Create a sliding scale whereby the number of late payments allowed 
        for qualification is dependent on the LTV ratio. For example, 
        LTV = 90 percent, with several late payments = 80 percent LTV.
  --Permit second mortgage with CLTV treatment like FHASecure.
    A borrower would only be permitted to utilize one of the program 
changes mentioned above for their mortgage. Loans that qualify for 
FHASecure under these changes could be placed into a special risk 
insurance fund to further protect FHA.
    We submitted these recommendations to HUD on February 15 for their 
consideration. Based upon testimony given by the FHA Commissioner on 
April 9, 2008 before the House Financial Services Committee, we are 
hopeful that these changes will be implemented. The enhancements 
proposed will allow a greater number of borrowers to avoid foreclosure 
and reduce their burden of debt. Risk to FHA will continue to be 
mitigated by traditional FHA underwriting standards beyond the 
recommended enhancements to the FHASecure Program.
    The National Association of REALTORS thanks you for your efforts 
to help stem the housing crisis. Congress must act expeditiously to 
help our Nation's homeowners, communities, and local economies recover. 
We applaud you efforts and stand ready to work with you on solutions.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Allard. At this time, if any member has additional 
questions, please submit them for inclusion in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
            Questions Submitted to Hon. Brian D. Montgomery
              Questions Submitted by Senator Patty Murray
                               fhasecure
    Question. The current FHA Secure program requires a borrower to 
have made all their mortgage payments for the 6 months prior to their 
interest rate resetting upward. Your new proposal to expand FHA Secure 
would allow borrowers that already missed some payments before their 
interest rate went up to participate in this program.
    Can you tell us anything about the performance or the delinquency 
rate of the 150,000 loans that you have already taken in under your 
initial FHA Secure initiative?
    Answer. While it is early to assess the performance of FHASecure 
loans, the loans endorsed in the period October 2007 to May 2008 have 
slightly lower ever-defaulted rates than purchase and FHA-to-FHA 
refinance loans. This is an early indicator that they are performing 
slightly better. Ever-defaulted rates are calculated as the number of 
loans that ever experienced a 90-day delinquency divided by the total 
number endorsed.
    Question. Do you think that someone who has been delinquent on 
their mortgage payments before their interest rates went up represents 
an appropriate risk for the FHA? What protections do you have in your 
program to ensure that the FHA is not taking on greater defaults and 
claims under this initiative?
    Answer. FHA expects that the borrowers refinancing under the 
FHASecure expansion will be similar to current and historical 
conventional-to-FHA refinance borrowers. Conventional-to-FHA borrowers 
generally perform better than FHA purchase borrowers, in part, because 
they have more experience making loan payments than FHA's typical 
first-time homebuyer and because they tend to have more equity in their 
property. By extending eligibility to borrowers who had two 30-day or 
one 60-day delinquency prior to reset, FHA expects no significant 
increase in risk because FHA borrowers include experience with short 
periods of default without going to claim. With regard to borrowers who 
have had more delinquencies and elect the 90 percent LTV option, FHA 
expects these borrowers to find their mortgages more affordable than 
they were in the past and clearly, FHA will have the additional 10 
percent equity cushion to mitigate any losses. With a properly 
underwritten FHA loan, where capacity to repay has been carefully 
evaluated and documented, they should perform like typical FHA 
borrowers.
                           troubled borrowers
    Question. Under your proposal, troubled borrowers would be allowed 
to refinance their loan with an FHA loan at 90 percent of the current 
appraised value of the home. We also understand that the only role that 
FHA will play is in securing the loan. That is to say, that the 
borrower and the lender could establish a package containing a soft-
second loan or another financial instrument allowing the lender to 
recapture the full cost of the original loan and any possible 
appreciation. What specific protections would FHA provide directly to 
these troubled borrowers?
    Answer. FHA believes that it is more appropriate to allow lenders 
and borrowers to make their own arrangements regarding subordinate 
financing, which could include equity sharing. However, whatever terms 
are agreed to by the borrower and lender must not trigger a default on 
the FHA-insured first mortgage. Therefore, FHA has established the 
following conditions which we believe will protect the borrower as well 
as FHA:
  --the terms of the subordinate financing must not provide for a 
        balloon payment before 10 years unless the property is sold or 
        refinanced;
  --the terms must permit prepayment by the borrower without penalty, 
        after giving 30 days advance notice;
  --the required monthly payment under both the new FHA-insured 
        mortgage and the subordinate liens plus other housing expenses 
        and all recurring charges must not exceed the borrower's 
        reasonable ability to pay; and
  --any periodic payments due on the subordinate lien are due monthly 
        and are essentially the same in dollar amount.
    Question. Isn't there a danger that this type of structure could 
once again strap borrowers with unexpected debt at the time the house 
is sold or refinanced in the future?
    Answer. As indicated previously, FHA has provided conditions under 
which subordinate financing can be offered, which protects the borrower 
from balloon payments and prepayment penalties while promoting 
affordability and the borrower's reasonable ability to repay on all 
their debts, not just the new mortgage. FHA has made it clear to its 
lender partners that FHASecure should not be used to delay the 
inevitable and that when subordinate financing is offered it should not 
trigger a default on the new FHA-insured mortgage.
                          dodd/frank proposals
    Question. We understand that under the Dodd/Frank proposals, in 
exchange for the Government assistance to both the lenders/investors 
and borrowers, there would be a shared equity agreement. This was 
designed to eliminate any perceived bailout for the lender/investor and 
prevent the homeowner from receiving a windfall from the sale of a 
house with a reduced mortgage. This approach would also allow the 
Government to realize some benefit from taking on this additional risk. 
Does your proposal include any sort of shared equity arrangement?
    Answer. FHA is an insurance company that relies solely on 
appropriately priced premiums and prudent underwriting in determining 
the level of risk it is willing to accept. FHA does not believe that it 
should be entitled to a sharing of equity since FHA did not provide any 
equity or write-down originally. FHA certainly does not object to those 
entities that actually wrote-down a portion of the outstanding 
indebtedness from attempting to capture a share of equity growth to 
prevent windfall profits, but FHA is providing only insurance coverage, 
not the actual write-down of the debt.
    Question. Without this arrangement, how does your proposal avoid 
being a bailout or a windfall?
    Answer. The entity providing the write-down, whether on the 
original first mortgage or on a second, or both, should be the ones 
that prevent a ``windfall'' being enjoyed by the borrower. FHA would 
permit existing lien holders to negotiate the terms of any write-down 
with the borrower, which could include the creation of new subordinate 
or modification of existing subordinate liens, either of which would be 
due upon sale of the property. Such an arrangement appropriately 
provides the lien holders with an opportunity to recover some amount 
and prevents any windfall to the borrower. FHA believes that it is only 
fair that the existing investors and note holders should be permitted 
to protect themselves by being entitled to a share of any net 
appreciation.
    Question. Would you consider requiring a portion of the write down 
of the original loan to go to FHA to help offset the risk to the 
solvency of the FHA insurance fund?
    Answer. No, FHA does not believe it should be entitled to the 
recovery of money it did not provide. FHA was not a party to the 
previous loan, sustained no losses from the principal write-down, and 
furthermore, has no infrastructure to implement an equity-sharing 
arrangement.
                            fha underwriting
    Question. Last year, we heard testimony from GAO and the HUD 
Inspector General that FHA doesn't have sufficient standards or 
controls to manage risk and conduct rigorous underwriting. FHA's share 
of the market at that time was 3 percent. Now FHA's market share is 
approaching 9 percent, and that share would get even larger under your 
new proposals.
    If you were struggling with these quality control issues last year 
when you were only serving 3 percent of the market, how can you 
adequately conduct the underwriting that you now must do at almost 9 
percent of the market?
    Answer. FHA's claim and default rates are considerably below those 
in the subprime market because it does properly underwrite its 
mortgages and demands full documentation. But, FHA has stated that the 
agency needs more human resources, as well as additional funding for 
information technology, to better manage the increased volume of 
business and any changes that may result from enactment of reform 
legislation.
                              fha staffing
    Question. The 2008 Appropriations Act fully funded the President's 
request for staffing within the FHA. But I'm still concerned over 
whether your agency has the support it needs to handle the additional 
workload it may be facing.
    How have you been able to handle the expanded activity within the 
FHA? Is inadequate staffing proving to be an impediment to expanding 
activity at the FHA?
    Answer. At the time that the fiscal year 2008 budget was sent to 
Congress, we were not aware of the full impact and extent that the 
national mortgage crisis would have on FHA. Single family applications 
have quadrupled since that time (first quarter of fiscal year 2007), 
increasing from approximately 55,000 per month to over 200,000 per 
month in April and May 2008. Despite this increase, we are using all 
the tools available to us, including making use of available 
technology, to handle this workload in as efficient a manner as 
possible. But, again, FHA needs additional human resources and 
additional funding for information technology to better manage the 
increased volume of business and any changes that may result from 
enactment of reform legislation.
    Question. Are there any corners that you're cutting currently that 
you shouldn't be cutting due to inadequate staffing?
    Answer. No, we are not cutting any corners. FHA has continued to 
operate using its normal procedures.
                           risk-based pricing
    Question. In 2007, you indicated to the committee that you were 
going to establish a risk-based pricing system for all of FHA by the 
beginning of 2008. You didn't go ahead with that plan because there was 
legislation pending in Congress to prohibit it. Now, under your new 
initiative to expand the FHA Secure program, you intend to use risk-
based pricing even though the Foreclosure Prevention bill that the 
Senate will pass in the next few hours prohibits its use. Why is risk-
based pricing such an essential part of this new initiative?
    Answer. FHA intends to implement risk-based premiums along with the 
expansion of FHASecure because the two initiatives together create a 
negative weighted average credit rate. Even with a 2.25 percent upfront 
premium and 0.55 percent annual premium, the delinquent FHASecure loans 
have a positive credit subsidy, but, with the implementation of risk-
based premiums, these loans are cross-subsidized by other FHA 
borrowers; and consequently, the program can be implemented at no cost 
to the taxpayer.
    Question. Will this initiative really involve varying rates for 
different borrowers or are all the new borrowers in the FHA Secure 
program likely to be charged the maximum rate because of their credit 
histories?
    Answer. Under the expansion of FHASecure, all of the borrowers who 
are delinquent on their current mortgage will be charged an upfront 
premium of 2.25 percent; those who have loan-to-value ratios above 95 
percent will pay annual premiums of 55 basis points. FHASecure 
borrowers who are not delinquent will pay risk-based premiums that vary 
with their credit scores and loan-to-value ratios. Many of these 
borrowers have lower loan-to-value ratios than the typical FHA purchase 
borrower and will consequently pay lower premiums than their credit 
scores alone might suggest.
    Question. What will the impact be on the solvency of the FHA 
insurance fund if you are prohibited from establishing a risk-based 
pricing system?
    Answer. The FHA insurance fund will continue to be solvent. 
Regrettably, FHA will be unable to implement the expansion of FHASecure 
as planned if it is unable to implement risk-based premiums. This is 
because the FHASecure expansion alone generates a positive credit 
subsidy rate. Without risk-based premiums for offset, FHA would need to 
establish an across-the-board premium that would generate an overall 
negative credit subsidy rate or receive an appropriation. Ironically, 
this would have the effect of raising premiums on lower risk purchase 
and refinance borrowers and lowering them on the higher risk delinquent 
FHASecure borrowers.
                            fha foreclosures
    Question. As we all know, foreclosures can have a devastating 
impact on not just the families in the homes, but on entire 
communities. To date, the administration has only offered initiatives 
that address the individual homeowners.
    What is HUD doing to help cities and communities that are taking on 
record numbers of abandoned homes, many of which are the direct result 
of lenders and investors walking away?
    Answer. The Office of Housing is taking an important step in 
addressing the problem by working aggressively to reduce the number of 
loans that terminate in foreclosure. Use of FHA loss mitigation this 
fiscal year has increased significantly over 2007 levels. The vast 
majority of borrowers are being offered loan modifications that provide 
permanent changes in loan terms to make payments more affordable. With 
respect to Real Estate-Owned (REO) properties, housing only has 
jurisdiction over HUD-owned homes. HUD closely monitors its private 
sector contractors to ensure that HUD homes are clean, safe and 
sanitary, and that yards are professionally maintained to reflect 
neighborhood standards. In the hardest hit communities, HUD staff and 
contractors have established close working relationships with local 
governments, law enforcement and code enforcement officials. 
Additionally, HUD operated a number of special sales programs to sell 
properties at a discount to officers, teachers, firefighters and non-
profit housing developers.
    In addition, the Department's HOME and CDBG funds are being used by 
many cities to fund the purchase and rehabilitation of REO properties.
                       asset control area program
    Question. HUD currently has a program within FHA, the Asset Control 
Area Program, which gives you the authority to sell FHA foreclosed 
homes to non-profits and local governments at a significant discount. 
This program was designed to assist communities in designated areas 
eliminate blight and stabilize neighborhoods.
    Are you using this authority to assist communities that have 
suffered as a direct result of this housing crisis?
    Answer. HUD currently has 13 active Asset Control Area (ACA) 
partners and is working with other communities to determine if this 
program would be viable for them. HOC and HQ staff recently met with 
representatives from the city of Detroit and Wayne County, MI to 
discuss ACA and other discount programs and will continue this 
discussion. HUD is also setting up national training for potential ACA 
applicants. As indicated in our response to the previous question, 
other HUD programs, particularly the Community Development Block Grant 
(CDBG) program, are deeply involved in efforts to eliminate blight and 
stabilize neighborhoods.
                            fha downpayment
    Question. The administration's initial FHA reform legislation 
eliminated the downpayment requirement to allow HUD the flexibility to 
offer products better tailored to individual borrowers. Since that 
time, you have publicly stated that some downpayment is necessary and a 
requirement of as much as one percent may be needed. The recently 
passed Foreclosure Prevention Act of 2008 requires a 3.5 percent 
downpayment. Where is the administration now on the appropriate 
downpayment requirement for FHA?
    Answer. FHA's original proposal for a zero downpayment product was 
intended to offer a safer, less-expensive alternative to seller-funded 
downpayment assistance which, in reality, is paid for by the homebuyer 
in an inflated sales price, as well as to provide an affordable 
alternative to the subprime products previously available. Although the 
administration has agreed to compromise on a minimal cash investment of 
3 percent or less, the rationale for a 100 percent financing product 
remains. As demonstrated by the Veterans Administration and Rural 
Development programs, a 100 percent financing product that is offered 
in conjunction with appropriate underwriting standards can perform very 
well and certainly benefits first-time homebuyers who lack the cash for 
a downpayment.
    Question. What is the current trend with downpayment requirements 
for conventional loans and what do you anticipate in the future?
    Answer. There are still a number of no-downpayment programs 
available, some through portfolio lenders, others through the GSEs (in 
addition to those offered with VA or RD guarantees). Unfortunately, the 
conventional products are only available to borrowers with 
exceptionally good credit bureau scores who can also meet other 
stringent underwriting criteria. While the immediate trend in the 
industry, in the midst of the market contraction, is to require higher 
down payments, it is highly likely that there will be a movement back 
towards the higher loan-to-value loans in the future, provided there is 
appropriate underwriting.
    Question. If the FHA is frozen with a mandatory 3.5 percent 
downpayment requirement, and the markets change again requiring less 
downpayment with more focus on credit scores and repayment ability, 
would FHA once again be unable to adapt to changing markets?
    Answer. Yes, FHA would be unable to keep pace with product changes 
in the marketplace. FHA has learned, as have the GSEs and others, that 
the downpayment is but one element in determining the risk on a loan. 
FHA asked for the flexibility to offer a range of downpayment options, 
and to use what it has learned about credit and application variables 
in developing its TOTAL mortgage scorecard to determine if a borrower 
is a likely candidate to repay the mortgage based on income rather than 
future house price appreciation.
                      private market down payments
    Question. The private market has responded to the housing crisis 
and many are now increasing downpayment requirements. How will this 
impact homeownership opportunities for low and moderate income 
Americans?
    Answer. We know that the most significant burden to homeownership 
is acquiring the cash for the downpayment, and anything that demands an 
even greater downpayment--despite sales prices falling throughout most 
of the country--will negatively affect homeownership opportunities.
                            fha loan limits
    Question. A temporary increase in the FHA loan limit was included 
as part of the economic stimulus package passed by Congress in 
February. I supported that increase so that FHA would be able to serve 
high cost areas. The testimony that Commissioner Montgomery has offered 
today states that FHA anticipates being able to refinance 100,000 new 
loans for troubled borrowers in high cost areas as a direct result of 
this increased loan limit. However, the Foreclosure Prevention Act that 
passed the Senate yesterday reduces the loan limit from the level 
included in the Stimulus package. Can you comment on the response that 
you have seen from the lending community to the higher loans limits 
that were in the Stimulus package?
    Answer. The lending community, as you might guess, was quite 
delighted to see the new loan limits, especially the rise in the floor 
for FHA to $271,050. While the $729,750 loan limit does provide some 
possible relief in high-cost areas, mostly along the two coasts, those 
limits affect only about 75 counties total. All in all, FHA can still 
be a major stabilizing force in the housing market even with the lower 
loan limits proposed in the Senate's Foreclosure Prevention Act.
    Question. Will lenders that have come into the fold as a direct 
result to these higher limits walk away if they are reduced, and what 
will be the impact in high cost areas?
    Answer. It is never a good thing in the marketplace to have a 
product offering more responsive higher loan limits taken away. The 
uncertainty of the availability of high mortgage limits will likely 
result in many lenders stop making such loans several months before the 
loan limits expire.
                                mmi fund
    Question. HUD's budget assumes that there will be three major 
reforms to the FHA single-family housing program. I am told that, if 
these reforms are not enacted this year, the Mutual Mortgage Insurance 
(MMI) fund could potentially face a $1.4 billion shortfall in 2009. In 
fact, I am told that if it weren't for the large premiums that the FHA 
currently enjoys from the popular Home Equity Conversion Mortgage--or 
``heck-um''--program, the MMI fund would be running in the red right 
now. What are the principal factors that are driving the MMI fund into 
the red in 2009?
    Answer. Currently, HECM loan guarantee transactions are financed in 
the General Insurance Fund of FHA, not MMI, and have no effect on the 
financial position of the latter Fund. There are two principal reasons 
for the potential adverse subsidy rate for the MMI Fund. First, the 
continued and large proportion of seller-financed downpayment 
assistance loans have a much higher claim rate than other loans. The 
second factor is the general distress in the housing market that is 
reversing appreciation in house prices and making it more difficult for 
our borrowers to sell or refinance their homes and pay-off the full 
outstanding indebtedness, thereby increasing the claim rate. The 
decline in house prices has also made the net loss on claims larger 
since FHA recovers less on the sale of the foreclosed asset.
                       seller downpayment program
    Question. In the past, you have supported the continuation of the 
seller downpayment program. You now want to shut it down. Why do you 
now oppose the program?
    Answer. Although HUD describes the reasons for its actions in 
detail in the Federal Register notice (73 Fed. Reg. 33,941 (June 16, 
2008)), in summary, HUD has always had concerns about the loans coming 
to FHA with seller-funded downpayment assistance. As early as 1999, HUD 
issued a proposed rule that would prohibit the practice of charitable 
organizations creating downpayment assistance from ``donations'' given 
by property sellers that have a direct interest in the property sale 
transaction. Due to comments received on that proposed rule, and the 
lack of sufficient long-term loan-performance data, HUD withdrew the 
rule. Instead, HUD then began to monitor this subportfolio more 
closely. Since 1999, many things have changed. First, this type of 
downpayment assistance has grown from under 2 percent of purchase 
endorsements in 1999 to over 35 percent in 2007 and 2008. Second, the 
credit risk of these loans has proved to be well outside the bounds of 
what is prudent and what can be supported by FHA insurance premiums. 
Third, in both 2004 and 2005, HUD supported legislative initiatives 
designed to give FHA the authority to insure zero-downpayment loans, 
which would provide a safer alternative to wealth-constrained 
households. Zero-downpayment would be safer because the home buyer 
would have the ability to negotiate with any seller, and not just those 
willing to work with a downpayment provider. There also would be no 
pressure for the seller to demand a higher price from this buyer than 
from other buyers, to cover the cost of the downpayment assistance. 
Finally, in November 2005 the GAO issued a research report to the 
Congress that explicitly stated that the risk of these loans is such 
that they should be banned from the FHA insurance program. In response 
to that GAO report, HUD pointed to FHA's pursuit of a zero-downpayment 
insurance product and higher insurance premiums as better alternatives 
to achieve those goals than banning seller-funded downpayment 
assistance would be. Because of the growing financial problems 
associated with seller-funded downpayment assistance and because the 
legislative initiatives never materialized, HUD determined that the 
most prudent option was, and remains, to prohibit seller-funded 
downpayment assistance. In addition, this new rule brings HUD in line 
with GAO and IRS, who after analyzing the structure and effects of the 
seller-funded downpayment assistance practice have determined, in the 
case of GAO, that the practice is detrimental to FHA and the homebuyers 
it serves and should be prohibited, and in the case of IRS, that it 
involves no charitable gift.
    Banning seller-funded downpayment assistance will restore the 
financial soundness of the FHA insurance funds. FHA is currently in a 
position of losing money on new single-family insurance endorsements, 
principally because of seller-funded downpayment-assisted loans. Such 
loans have default and claim rates that are two to three times higher 
than those for other loans. Under the current statutory scheme, FHA 
cannot charge high enough premiums to pay for such high rates of 
foreclosure. Indeed, having such high foreclosure rates is a disservice 
to the households who purchase homes with FHA insurance, and it is 
potentially destabilizing to neighborhoods.
                            contract funding
    Question. The President's budget request does include a significant 
increase over the fiscal year 2008 level, but according to HUD 
officials this level of funding would still leave the account short by 
approximately $2.4 billion. Short-funding these contracts has been an 
issue since HUD came under this subcommittee's jurisdiction. Now, these 
funding needs have been pushed to the breaking point and it appears 
that your budget would just dump this massive funding problem onto the 
next President. What is the total cost to renew all expiring contracts 
for a full 12 month term when they expire?
    Answer. The President's fiscal year 2009 budget request ($6.763 
billion) for section 8 project-based contract renewals will allow HUD 
to fund all contracts into the first quarter of fiscal year 2010, thus 
ensuring continuity of payments until fiscal year 2010 appropriations 
are in place.
    For fiscal year 2009, we estimate that a total of $8.4 billion is 
needed to fully forward-fund all renewal contracts for a period of 12 
months. Additionally, approximately $700 million would be required to 
amend existing long-term contracts for the same period, bringing the 
grand total to about $9.1 billion.
    Question. Your budget documents state that your request will only 
be sufficient to fund contracts ``into the first part of fiscal year 
2010.'' Don't you believe the uncertainty with owners--not receiving 
payments for months at time, having to dip into their reserves to make 
mortgage or utility payments--has disrupted the good faith of the 
Government with the private sector for this program?
    Answer. The Department has expressed its regret over the disruption 
in payments that occurred in fiscal year 2007, and has modified its 
standard renewal contract language, thus addressing the legal issues 
that caused the problem. The practice of partially funding section 8 
contracts was begun more than a decade ago, and we believe that owners 
and investors have adapted to that practice. While funding contracts 
for a full 12 months would reduce administrative workload, it would 
also require large increases in Budget Authority in fiscal year 2009.
    Question. Do you believe as a result of these activities owners 
will begin to leave the program thus displacing tenants and if so what 
are you doing to rectify this problem?
    Answer. A recent study by the GAO found that opt-outs are primarily 
determined by market factors such as demand for condominium conversions 
or luxury rentals, rather than by dissatisfaction with HUD. While HUD 
regrets the disruptions that occurred last year, and is doing 
everything possible to avoid a recurrence of the problem, we are 
currently experiencing very few opt-outs, and do not expect to see many 
in the future given the present real estate market.
                                 ______
                                 
            Questions Submitted by Senator Dianne Feinstein
                               fha loans
    Question. Assistant Secretary Montgomery, in California, the number 
of FHA loans is expected to grow by as much as 90,000 under the new 
temporary increased loan limit of $729,500. This is a huge increase 
from the 6,000 loans FHA made in 2006. What steps is FHA taking to 
handle the expected increased loan volume in States like California and 
ensure that these loans are processed as quickly as possible?
    Answer. Initial processing of loans is performed by the mortgage 
lender with the lender responsible for originating, underwriting, and 
closing the mortgage. Since the advent of FHA's Lender Insurance 
program, which permits high-performing lenders to self-insure, nearly 
75 percent of mortgages are insured without the need for FHA to review 
the loan prior to granting the insurance. For the other 25 percent of 
business that is submitted to FHA's Homeownership Centers for insuring, 
the agency has contractors in place to handle the reviews. Therefore, 
while FHA does need additional human resources in general to support 
the increase in business nationwide, the agency will be able to handle 
the increased loan volume from California.
                      national licensing standards
    Question. It is imperative that loan products are offered by well-
trained, ethical, and licensed professionals. According to the FBI, 
mortgage-related fraud reports in California have increased ten-fold 
over the last 5 years--from 1,143 in 2002 to 12,472 in 2007. 
Unscrupulous brokers and lenders, combined with weak underwriting 
standards, have played a major contributing role in the housing crisis. 
Do you support efforts to establish minimum national licensing 
standards, to be enforced at the State level, for all mortgage brokers 
and lenders?
    Answer. It is important that mortgage brokers and lenders are 
regulated and held to certain standards to ensure they are responsible 
and worthy of the public trust. Purchasing a home is an important 
financial and emotional commitment, and consumers rely on mortgage 
professionals for knowledgeable and sound guidance. It should be noted 
that because of our gate-keeping and safe guards, FHA's programs have 
not been subject to the widespread fraud that has plagued the 
conventional marketplace. FHA approves and annually recertifies all 
mortgage brokers and lenders participating in its programs, and our 
underwriting standards have remained rigorous. Minimum national 
licensing standards, to be enforced at the State level, for all 
mortgage brokers and lenders, is a major proposal and hence, deserves a 
full national discussion by all interested parties. The Department 
would then address the issues that derive from such a full policy 
debate.
                               fhasecure
    Question. The FHA Secure program, created in August 2007, was 
designed to help homeowners facing significant increases in their 
mortgage payments to refinance into a Government-insured, fixed-rate 
loan. Specifically, homeowners who have some equity in their homes and 
have kept up with their mortgage payments. Reports indicate that so far 
fewer than 2,500 borrowers have been helped to date, much lower than 
the 240,000 first projected. Furthermore, the President's new plan to 
expand the FHA Secure program is estimated to help 100,000 more 
homeowners. What measures will be taken to ensure that the new 
expansion of the FHA Secure program will help more struggling 
homeowners?
    Answer. As of June 15, 2008, FHA has helped over 239,000 families 
refinance into a safer and more affordable FHA-insured loan, pumping 
over $36 billion of much-needed mortgage activity into the housing 
market through FHASecure, as well as exceeding our initial projections 
of 240,000 for all of fiscal year 2008. More than 90 percent of FHA-
backed loans are 30-year fixed rate mortgages and homeowners using 
FHASecure are saving $400 a month on average compared to their previous 
subprime loans. By expanding this initiative, FHA is poised to insure 
even more mortgages, now including those for borrowers who were late on 
a few payments in the previous 12 months and/or received a voluntary 
mortgage principal write-down from their lender. With these new 
eligibility criteria, the expanded FHASecure initiative can help 
additional homeowners access a more viable refinancing option and will 
offer lenders an alternative to foreclosing on these individuals. Along 
with principal writedowns, FHA will also encourage lenders to make 
other arrangements, such as subordinate financing, to ``fill the gap'' 
between the existing loan balances and the FHA-insurable loan amount. 
With the expansion of FHASecure we now expect to help 500,000 families 
by the end of the year.

                         CONCLUSION OF HEARING

    Senator Allard. The subcommittee stands in recess until 
Thursday, April 17, when we will take testimony on the FAA's 
efforts to ensure aviation safety.
    I thank the panel for their testimony.
    [Whereupon, at 11:06 a.m., Thursday, April 10, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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