[Senate Hearing 110-926]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-926
 
        MODERNIZATION OF FEDERAL HOUSING ADMINISTRATION PROGRAMS 

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

   A REVIEW OF PROCESSES AND PROPOSED STATUTORY CHANGES IN ORDER TO 
              MODERNIZE THE FEDERAL HOUSING ADMINISTRATION


                               __________

                        WEDNESDAY, JULY 18, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                  Jonathan Miller, Professional Staff
     Mark A. Calabria, Republican Senior Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor



















                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 18, 2007

                                                                   Page

Opening statement of Senator Carper..............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Menendez.............................................     3
    Senator Crapo................................................     4
    Senator Dole.................................................     5
    Senator Schumer..............................................     6

                               WITNESSES

Brian Montgomery, Assistant Secretary for Housing and Federal 
  Housing Commissioner, Department of Housing and Urban 
  Development
    Prepared statement...........................................    11
Kenneth M. Donohue, Inspector General, Department of Housing and 
  Urban Development
    Prepared statement...........................................    17
William Shear, Director of Financial Markets and Community 
  Investment, Government Accountability Office
    Prepared statement...........................................    27
John Anderson, Former Chair of the Federal Housing Policy 
  Committee, National Association of REALTORS
    Prepared statement...........................................    51
David Kittle, Vice Chairman, Mortgage Bankers Association
    Prepared statement...........................................    68
Kenneth Wade, Chief Executive Officer, NeighborWorks America
    Prepared statement...........................................    83
    Response to written questions of:
        Senator Bunning..........................................   124
David Crowe, Senior Staff Vice President of Regulatory and 
  Housing Policy, National Association of Homebuilders
    Prepared statement...........................................    87
    Response to written questions of:
        Senator Dodd.............................................   126
Basil Petrou, Managing Partner, Federal Financial Analytics
    Prepared statement...........................................    99
George Hanzimanolis, President, National Association of Mortgage 
  Brokers
    Prepared statement...........................................   114


        MODERNIZATION OF FEDERAL HOUSING ADMINISTRATION PROGRAMS

                              ----------                              


                        WEDNESDAY, JULY 18, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:33 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Thomas R. Carper presiding.

         OPENING STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Good morning, everyone. The hearing will 
come to order.
    I am pleased to be here with my friends, Senator Shelby, my 
ranking member, Senator Crapo, Senator Menendez. These guys 
look fresher than I would have believed possible after the 
night that they have been through. Delighted you are here with 
us and this will wake us up, if nothing else.
    Today's hearing, as you know, is to review the 
Administration's proposals for the modernization of the Federal 
Housing Administration's flagship program, and that's the 
Single-Family Mortgage Insurance Program.
    I want to thank Chairman Dodd for calling this important 
hearing, for the participation of my colleagues, and the many 
distinguished witnesses we have, two panels. We are delighted 
that you have joined us.
    I want to point out that the Chairman has made clear that 
he is working closely with the Administration and colleagues on 
both sides of the aisle, as well as all of the groups that are 
representing here today in an effort to move legislation on the 
FHA program through the Committee prior to the August recess.
    This is a timely hearing, as a result. A recent article in 
the News Journal, which is a local Delaware paper, reports that 
foreclosures in my own home State of Delaware have reached a 
record high of almost 3,000, a 29.5 percent increase over the 
previous year. To the extent that FHA can serve as an 
alternative to these homebuyers, it is not only important to 
Delaware but I think to the entire Nation.
    It can be fairly said that our modern mortgage market owes 
its beginning to the Federal Housing Administration. FHA set 
many of the standards that we now take for granted in the 
mortgage market. For example, the low down payment 30-year 
fixed prepayable amortizing mortgage became the standard 
mortgage product largely because of FHA. For many years, FHA 
was the tool by which working Americans, minorities and first-
time buyers achieved the dream of homeownership.
    In recent years, however, we have seen a drastic decline in 
the FHA's market share. Just 10 years ago, the FHA had about 19 
percent of the purchase market. By the end of 2005, however, 
that share had dropped 13 percentage points to about 6 percent 
of the purchase market and 4 percent of the overall market.
    This raises a serious concern because the business that 
seems to be migrating away from the FHA seems to be moving to 
the subprime market, with its myriad abuses that we have 
documented through numerous hearings both this year and last.
    In fact, a June 2007 GAO report indicates that the drop in 
the FHA program is mirrored almost exactly by an increase in 
the subprime market which increased its share by 13 percentage 
points, exactly what FHA lost, from 2 percent to 15 percent of 
the market. Unfortunately, this is a trade-off that is a very 
bad one for the homebuyers and homeowners of America, as has 
been made abundantly clear in recent months.
    Indeed, data shows that the FHA borrowers have credit 
scores very close to subprime borrowers and on average 
substantially lower than subprime borrowers. Yet FHA borrowers 
pay interest rates much closer to those paid by prime borrowers 
and substantially less than those paid by subprime borrowers.
    Moreover, FHA loans do not have the same abusive 
characteristics that most subprime loans have. For example, FHA 
loans have no prepayment penalties. They require escrows for 
taxes and insurance. FHA ARMs are all underwritten at the fully 
indexed rate, a practice that was just finally embraced by the 
Federal regulators. Furthermore, FHA has a good record of 
providing loss mitigation though substantial improvements can 
still be made. That is why though FHA serves a very similar 
clientele as the subprime market, its foreclosure rates are 
half or less than seen in subprime markets.
    The conclusion all of this leads me to reach is that we 
need to find a way to make FHA a more viable and effective 
program in the many communities in which it has been made 
irrelevant either by overly restrictive loan limits or other 
problems.
    I look forward to working with Chairman Dodd, with this man 
right here, our ranking member, Mr. Shelby, who I called Mr. 
Chairman for many years, and other members of the Committee to 
achieve his goal.
    With that having been said, I recognize our ranking member, 
Senator Shelby, for whatever comments he would like to make.
    Thank you.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman, for calling 
today's hearing on the Federal Housing Administration.
    Over the years, FHA loan guarantees have helped millions of 
Americans become homeowners. We all know that. Because the 
American taxpayer stands behind the FHA's guarantees, I believe 
this Committee should not only examine closely the status of 
the FHA programs but also any effort to expand it.
    According to the President's budget submission, the FHA, 
for the first time in its history, will lose money this fiscal 
year, becoming a net loss to the taxpayer, the first time. Mr. 
Chairman, before the taxpayers are faced with greater losses, I 
believe we must determine how the FHA got into this position 
and how it intends to get out. Some would suggest however, Mr. 
Chairman, that we allow the FHA to grow its way out of 
insolvency with new products and expanded powers. This is a 
road we have been down, right here in this Committee.
    For instance, as the S&L crisis was beginning the response 
right here was to allow S&Ls to offer new products and to 
expand their business. Because we failed to address the 
underlying fundamental weakness, the result of that expansion 
was a much larger bill for the American taxpayer.
    Over the last several months, this Committee has been 
watching the growing problems in the subprime mortgage market 
that you alluded to. According to GAO, part of the growth of 
the subprime market came at the expense of FHA. As liquidity in 
the subprime market declines, however, we can expect FHA 
activity to expand as more homeowners look to FHA-insured 
products to meet their needs.
    As this happens, Mr. Chairman, I think this Committee must 
make sure that the FHA expands in a responsible way.
    While the subprime market has witnessed considerable 
stress, the losses in that market are being borne by investors, 
and I hope will always be. Were these same losses, Mr. 
Chairman, to occur in FHA programs it is likely they would be 
borne by the taxpayer, something we should try to prevent.
    One lesson learned from the current pattern of defaults and 
delinquencies in the subprime market is that those borrowers 
with little or no activity in their home will be the most 
likely to fail. That is just plain common sense.
    As we are already witnessing delinquency rates in the FHA's 
portfolio that mirror the subprime market, I believe we must 
approach any attempt to expand the program or lower the 
program's standards with great caution.
    I want to welcome all of today's witnesses and look forward 
to the program here today.
    Thank you, Mr. Chairman.
    Senator Carper. Thank you, Senator Shelby. Senator 
Menendez, you are recognized.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman.
    Let me thank Chairman Dodd for calling the hearing, for you 
for presiding today and your interest in this, as well as our 
ranking member, for holding what I think is an incredibly 
important hearing today.
    I have been a long-time supporter of FHA reform and I 
believe the debate is especially important in the context of 
the current subprime crisis that we face.
    In March, when this Committee held its first hearing to 
address the subprime crisis, I spoke then about the need to 
raise the FHA loan limit in order to give borrowers more 
options. I knew then what I believe to be the case now, that 
raising the FHA loan limit is long overdue. I appreciate that 
the Administration seeks to do so, as well.
    If Congress had modernized the FHA years ago I do not think 
we would be in such a serious detrimental subprime crisis. 
Right now many borrowers have no alternatives to a subprime 
loan and the FHA has no tools with which to help these 
borrowers. Homebuyers need more options than just the subprime 
market. But if we do not raise the FHA loan limit, they do not 
have a real alternative.
    In my home State of New Jersey 13 out of the 21 counties 
are at the FHA ceiling of $362,790. In eight of these 13 
counties the median home price is over $40,000. These numbers 
simply do not add up. 75 percent of New Jerseyans live in those 
13 counties and they deserve better, more affordable options.
    By the way, in the context of New Jersey--and I am sure 
this exists in many housing markets across the country--this is 
not about luxury housing. This is about the housing you get to 
afford for the essence of trying to achieve homeownership and 
the beginning of a middle-class existence.
    Borrowers in New Jersey and across the country have largely 
nowhere to turn. Right now we are basically asking them to 
choose between either a zero down payment mortgage with all the 
risks that go with that or an adjustable rate mortgage that 
will possibly push them into foreclosure or an FHA loan for an 
insufficient amount. This is an unfair deal for borrowers in 
New Jersey and in America and I am glad that we are addressing 
these concerns today.
    I believe the housing situation in many parts of our 
country is in a crisis. And it is not just the subprime market. 
I believe the Administration is drastically underfunding 
programs. Congress has yet to provide alternative solutions and 
borrowers are simply crying out for help.
    In closing, Mr. Chairman, I also want to ask my colleagues 
to remember that many of the borrowers that we are talking 
about today are often minority, low income, first-time 
homebuyers who simply dream of owning a home. Our job is to do 
everything we can to make that dream come true. Unfortunately, 
FHA has had a dramatic downturn in covering that part of our 
American family. So I look forward to working with my 
colleagues on these issues, from hearing our witnesses today, 
and hopefully moving to an FHA reform bill, Mr. Chairman.
    Senator Carper. Senator Menendez, thank you for that 
statement.
    Let me recognize now Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    I appreciate your holding this hearing on the modernization 
of the Federal Housing Ministration programs.
    I look forward to learning more about HUD's proposed 
legislation and how it will affect the demand for FHA's loans, 
the cost and availability of insurance to borrowers and the 
risks to the insurance program and ultimately to the taxpayers.
    There is one program in particular that I hope we as a 
Committee can get a lot more information about and pay a lot 
more attention to, and that is the reverse mortgage program. I 
understand that HUD's proposal proposes eliminating the cap on 
reverse mortgages and I commend that aspect of the proposal. I 
am a strong supporter of HUD's reverse mortgage program, known 
as the HECM or Home Equity Conversion Program.
    This program is an important example of a successful 
public-private partnership. It allows our elderly citizens the 
opportunity to age in place by spending their own equity and 
retaining their own integrity. And predictions are being made 
that in the future HECMs will be a common financial planning 
tool for retirees.
    So it is this kind of new innovation and advanced thinking 
that I think we need to pay attention to as we move forward 
with FHA modernization.
    I also want to commend Commissioner Montgomery's 
administrative efforts that have led to significantly reduced 
processing times for FHA loans, reduced the cost of its FHA 
business, and shortened the time that it takes to close an FHA 
loan. These are very positive changes and I am hopeful that the 
process that we are now going through can also result in new 
improvements that can, as I indicated, not only be innovative 
and help us to move into new tools that will help those who--
particularly the elderly and others who need support in their 
homes, as well as new tools to improve the overall operation of 
the FHA.
    Thank you, Mr. Chairman.
    Senator Carper. Thank you very much.
    Senator Dole, you are recognized at this time.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman, ranking member 
Shelby, delighted that we are holding this hearing on the 
modernization of the Federal Housing Administration. And I want 
to thank our witnesses and look forward to hearing from you.
    Commissioner Montgomery, let me say what a privilege it was 
to have you in North Carolina last month as we hosted a 
workshop on making homeownership a reality. This event was 
designed to help potential homeowners maneuver through the 
often stressful home buying process and also to provide 
information to Realtors and to local organizations that do so 
much important work to help assist people in purchasing and 
renovating homes.
    We had great success with that workshop. We are already 
planning another across the state. So Commissioner Montgomery, 
heartfelt thanks for your continued efforts and those of your 
staff in helping us with these programs.
    Today approximately 70 percent of Americans own their own 
homes and minority homeownership has now eclipsed 50 percent. 
While this is very good news, we must continue to focus our 
efforts on further increasing homeownership, particularly for 
minorities.
    The FHA is critical in this regard as it assists many 
first-time homebuyers by providing affordable mortgage 
insurance. In fact, 79 percent of FHA-insured home purchase 
loans in 2006 went to first-time buyers, 31 percent of whom 
were minorities.
    According to a 2006 GAO report the FHA's share of the 
private mortgage insurance market is only 6 percent, down from 
19 percent a decade ago. In North Carolina, the number of FHA 
single-family purchase mortgage endorsements has fallen 33 
percent from the year 2000 to 2006. This signals that it is 
time to consider the responsible modernization of the 
organization so that the FHA can remain a positive force for 
the housing sector.
    As we examine FHA reform, this Committee must take into 
account today's real estate environment. In North Carolina and 
around the country a sharp rise in foreclosures is hurting 
homeowners and neighborhoods, as we have all heard and know.
    In recent years more Americans have turned to 
unconventional lending products such as interest only, balloon 
payment, and option adjustable rate mortgages. While these 
products have made it easier for people to get into homes, we 
are seeing the dangers associated with their usage as borrowers 
are pushed beyond their means. Any changes to the FHA should 
support the ability of buyers not only to get into homes but 
also to afford to remain in their homes.
    In addition, whatever authority Congress grants to the FHA, 
this Committee must be confident that the agency can both 
implement it and manage risks appropriately. In the past, FHA 
has not had a perfect track record. For example, FHA has not 
used pilot programs to test some products before they are 
marketed. As is the case with certain no down payment products, 
FHA does not plan to first test a program that will provide 
mortgage insurance for zero percent down loans which can pose 
significant risks.
    In addition, I am concerned about the so-called score-based 
pricing proposals and their impact on minorities. Among African 
Americans alone, 40 percent would pay more in mortgage premiums 
under this plan and 32 percent would be shut out of the market 
entirely. No question we should be promoting homeownership 
opportunities for these families, not shutting them out.
    Furthermore, I appreciate FHA's desire to improve its 
assessment of mortgage risk. That being said, in addition to 
relying on credit scores as the principal determinant of 
borrower loan eligibility I would encourage FHA to consider 
other factors, including the amount of the down payment or the 
type of loan such as fixed or adjustable interest rate.
    Mr. Chairman, ensuring to continued success of our Nation's 
housing programs will enable millions more families to own 
their own homes and achieve the American dream. I look forward 
to working with this Committee as FHA modernization efforts 
move forward.
    Thank you very much.
    Senator Carper. Senator Dole, thank you very much. Senator 
Schumer, you are recognized.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
you and ranking member Shelby for holding this hearing on 
modernization of FHA, which is needed so badly.
    The FHA provides an invaluable service to millions of 
Americans every year by giving them the resources and 
protections needed to purchase a new home and truly live out 
the American dream. To most of my constituents and most 
Americans, their home is their piece of the rock. It is their 
largest and most important asset that they work very hard to 
gain and maintain.
    However, as home prices continue to surge, those same 
resources and protections are needed now more than ever as the 
price of purchasing a single-family home moves farther out of 
reach for many average Americans.
    Nowhere is this problem more apparent than in my home State 
of New York, particularly in the suburbs surrounding New York 
City. The price of housing in Nassau, Suffolk, Westchester, 
Rockland Counties has soared in recent years. And while no one 
wants to wag a finger at rising property values, we need to 
make sure that first-time homebuyers still have access to 
quality homes for their family.
    Middle-class families are the fabric of these communities. 
But unfortunately they have been driven out of the market. Over 
the long term this can have a calamitous effect on these areas, 
not only in terms of housing but basic social services and the 
overall economy. Teachers, firefighters, nurses, librarians, 
small business owners must be able to live in the communities 
they serve, plain and simple. Suburbs cannot be havens only for 
the upper middle class and the very rich.
    One of the primary mechanisms for keeping middle-class 
families in the home-buying market and still be able to afford 
homes in suburban communities is the FHA loan guarantee. 
However, this mechanism is no longer available to homebuyers in 
high cost communities because of the FHA loan limits.
    For example, in Long Island the median home price, right in 
the middle and not even the average pulled up by those 
mansions, megamansions, the median home price is currently 
$479,000. That is almost $120,000 more than FHA loan limits 
currently allow. So unlike just about every other part of the 
country, fewer than half of all Long Islanders can get an FHA 
loan. It is as high as 80 or 90 percent in other parts of the 
country where home prices are lower.
    And this happens, I know my colleague, in New Jersey and 
California and Massachusetts and many other places. As we all 
know, FHA mortgage insurance protects the lender against 
default which allows the lender to offer a competitively priced 
prime loan to lower income, to minority, and to first-time 
homebuyers, three groups of homebuyers that are often unable to 
obtain prime loans in the market.
    In recent years, we have seen a sharp decline in the number 
of safe and affordable FHA-insured loans sold. Why? The answer 
is simple, according to FHA, the GAO, and other experts. It is 
because the FHA has not adapted to the realities of the 
changing real estate markets. Median housing prices in suburban 
communities throughout America far exceed the limits imposed 
under current FHA rules. This ideology is unfair.
    And so we are here today to discuss changes we can make in 
Congress, a long-overdue change. The most important change is 
one that was suggested by the FHA itself, raising the FHA loan 
limits to reflect the reality of rising home prices. We all 
know that home prices have dramatically increased but FHA loan 
limits have not been raised to reflect these increases. Because 
FHA loan limits have not been revised upward, FHA-insured 
mortgages are virtually nonexistent in higher cost communities. 
And in my home State of New York this is acute.
    That is why I am introducing the FHA Loan Limit Adjustment 
Act of 2007. I just introduced it late last night. My bill will 
raise the FHA limits so that more homebuyers, especially those 
living in high-cost areas, will have the opportunity to 
purchase safe and affordable FHA-insured prime mortgages. In 
high cost communities like Long Island the bill would raise the 
upper limit from $362,000 to $417,000.
    This is a needed change. I look forward to working with the 
Committee to improve FHA's ability to provide services to many 
more Americans. Raising the limits will have a positive effect 
on the growing crisis in our country, that of subprime 
mortgages, as well. I recently chaired a Housing Subcommittee 
hearing that focused on subprime and we found a whole lot of 
terrible practices. We have a large and growing body of data 
that suggests that the decline in FHA mortgages and the 
corresponding increase in subprime loans has been extremely 
detrimental and has helped cause--the inability to get FHA 
loans has helped cause or exacerbate the subprime crisis.
    I believe that access to FHA-insured loans provides a sound 
alternative for some borrowers in the subprime market. It has 
been estimated that about 40 percent of subprime borrowers 
could actually qualify for prime loans under an FHA guaranty. 
And so I look forward to hearing your opinions today on the 
issue of loan limit increases.
    And thank you, Mr. Chairman, for having this hearing and 
hope we can get support for the bill.
    One other thing, I have discussed this with Chairman Frank 
on our House side and he is supportive of this type of 
proposal.
    Senator Carper. Thank you, Senator Schumer.
    For our witnesses, let me just say there is a rule in the 
Senate that committees may not meet while the Senate is in 
session. That rule is routinely waived by unanimous consent, 
someone asks unanimous consent that committees be allowed to 
meet during the Senate's session. It is routinely agreed to so 
he can hold our committee meetings.
    I have just learned from Sean Maher, our Legislative Staff 
Director on the majority side, that there has been an objection 
by minority in the Senate to committees meeting today while the 
Senate is in session. As a result, we are in an awkward 
position where, under the Senate rules, we are not allowed to 
meet.
    I regret that and I apologize for the inconvenience this 
has probably caused for a number of our witnesses and, frankly, 
for many of us. But I am informed that we are not able to 
proceed to the rules of the Senate, at least at this time.
    I am going to ask our witnesses, if you will, just to take 
a few minutes and to meet immediately after we adjourn here in 
a moment, to meet with Sean Maher and his staff and our 
minority staff as well to talk about how we are going to 
proceed.
    This is the first time, I would say to my colleagues, the 
first time I have been privileged to chair a full Committee 
hearing. I have a feeling----
    [Laughter.]
    Senator Menendez. Mr. Chairman.
    Senator Carper. This is a bad omen.
    Senator Menendez. Mr. Chairman, I have a parliamentary 
inquiry.
    Senator Carper. Go ahead.
    Senator Menendez. Even though this meeting had been 
scheduled before the present debate, and had been noticed as 
such, with both sides of course agreeing to it, there is an 
ability to proceed now?
    Senator Carper. That is correct. I have talked on the side 
here with Senator Shelby who said there has been any number of 
times when he was Chairman and when Paul Sarbanes was Chairman 
of the Committee that they have had to adjourn in a similar 
situation. It is not just this Committee, I think probably all 
the committees in the Senate----
    Senator Menendez. Mr. Chairman, I was looking forward to 
your excellent leadership.
    Senator Carper. You know what I was looking forward to? I 
will say this with a little bit of humor here. The second 
panel, the first witness on the second panel is William Shear, 
William Shear. It is too bad Chuck Schumer has left because he 
and I are great music aficionados.
    I was listening this past week or so to NPR radio and they 
were doing an interview previously recorded with a guy named 
George Martin, who some of you will recall was the legendary 
producer of all of those Beatles' records for many, many years. 
One of which began with the words, ``It was 20 years ago today 
that Sergeant Pepper taught the band to play. It's been going 
in and out of style, but they are guaranteed to raise a smile. 
So let me introduce to you the one and only Bill Shear.''
    Bill Shear. Think about that one for a while, folks. Where 
is Mr. Shear? You are guaranteed to raise a smile. But 
unfortunately we are smiling through our tears today. We are 
just not going to be able to proceed.
    Senator Martinez, we are out of luck today. There has been 
an objection to our proceeding, and frankly to all committees 
proceeding. So we are going to break it off. Did you have 
something you would like to say before we call it----
    Senator Martinez. There is a lot I would like to say but 
not if it is not going to be a meeting. I will do it the next 
time.
    But I wanted to always welcome FHA Administrator, Mr. 
Montgomery, who does a terrific job and to express my strong 
support for an FHA modernization bill, which I think is so 
desperately necessary, given the current situation with 
subprime lending and foreclosures and so forth.
    So I look forward to an opportunity when we can meet and 
have a full discussion on this important legislation.
    Senator Carper. Again, to Secretary Montgomery and Mr. 
Donohue, to Billy Shear, and the full panel, second panel of 
witnesses, we regret this has happened. We hope that you will 
work with us so that we will have an opportunity to reschedule 
this promptly because we hope to mark up the bill before the 
beginning of the August recess.
    Senator Martinez. Mr. Chairman, if I may, because of the 
late night, I think I forgot to also include Mr. Donohue in my 
regards, having worked with him in the past. I consider him a 
great American and a great servant.
    Senator Carper. Do you want to say anything to Billy Shear 
out in the audience?
    [Laughter.]
    Senator Martinez. I do not know Billy Shear but I am sure 
he is also a fine American and I am glad he is here.
    Senator Carper. He is guaranteed to raise a smile.
    All right, ladies and gentlemen, let us get back together 
in a few days, I hope, and be able to get this show on the 
road.
    Thank you all.
    [Whereupon, at 10:02 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                       FROM KENNETH WADE

Q.1. Despite the decline in writing F.H.A. loans, has 
homeownership increased or decreased over the last few years? 
What about minority homeownership in particular?

A.1. Since 1994, the homeownership rate for all households in 
the United States has increased by nearly 5%, from 64% in 
1994--reaching a historic high of 69% in 2004, before falling 
slightly, to 68.8%, in 2005. As of the second quarter of 2007, 
the homeownership rate had slipped to 68.2 percent.
    The homeownership rate for White households has increased 
from 70% in 1994 to 75.8% in 2005.
    The homeownership rate for African-American households has 
increased from 42.3% in 1994 to 48.1% in 2005.
    During this same time frame, the homeownership rate for 
Hispanic/Latino households has increased from 41.2% in 1994 to 
49.5% in 2005.
    Homeownership rates have risen for all racial groups over 
the past decade, but a persistent homeownership gap between 
Whites and Minorities has remained.
    See chart below.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
Q.2. What borrowers should F.H.A. programs help?

A.2. FHA's purpose is to serve low to moderate income 
homebuyers, including those who have less-than-perfect credit 
and little savings for a downpayment. FHA's focus should be 
primarily on providing mortgage insurance for first-time 
homebuyers and on serving communities and/or populations that 
have been underserved by the conventional mortgage markets.

Q.3. What kind of profits do lenders and brokers make on F.H.A. 
insured loans? How does the taxpayer backstop affect market 
discipline?

A.3. I am not at all familiar with the profits that lenders and 
brokers make on FHA insured loans, other than to know that they 
are reportedly competitive with industry norms.
    In terms of whether the taxpayer backstop affects market 
discipline:
    Lenders are able to offer homebuyers an FHA-insured loan at 
a prime interest rate, knowing that the loan is backed by the 
full faith and credit of the U.S. government, thereby providing 
an affordable alternative to some of the subprime mortgage 
products that have contributed to the current rise in 
foreclosures. Since FHA underwriting is aimed at offering 
mortgage insurance only to qualifying borrowers that can repay 
both the mortgage itself and the FHA insurance premiums, the 
FHA program should operate entirely from self-generated 
income--at little or no cost to the taxpayer.

Q.4. Are there any mortgage products that FHA should not be 
allowed to insure?

A.4. FHA should not be allowed to insure ``teaser rate'' 
mortgages, or high-cost/predatory loans. They should also not 
insure mortgages for non-resident owners (meaning speculators, 
investors, or vacation homes), nor should they insure ``cash-
out'' mortgages.

Q.5. Are there better options other than a guarantee program to 
help appropriate borrowers who are unable to find financing?

A.5. I'm not sure. There are other/additional options that 
include things like direct subsidies, low-intrest loan 
programs, and tax credits, among others. Consumers and 
affordable housing practitioners have tended to use a range of 
approaches, depending on the specific needs of the borrower.

Q.6. If we were to increase the loan limits to G.S.E. levels, 
why do we need both GSE's and FHA? Will that make it harder for 
Fannie and Freddie to meet their affordable housing goals?

A.6. In my view, the roles of the GSEs and FHA are quite 
different, and aren't either duplicative or competitive. 
Lifting the FHA loan limits shouldn't make it harder for Fannie 
Mae and Freddie Mac to meet their affordable housing goals.
    But an increase in the FHA loan limits would enable FHA to 
serve as an important refinance vehicle--making it possible for 
homeowners who are facing high mortgage payments as their 
adjustable-rate mortgages reset, to refinance into a more 
affordable FHA mortgage. Also, because of current FHA loan 
limits soem deserving borrowers in high cost areas of the 
country are not currently being served by FHA and have had to 
get their financing from the subprime market.

Q.7. Will expanding FHA programs drive up housing prices?

A.7. I don't believe so. Although FHA its niche in serving 
homebuyers, its portion of the overall mortgage market, even in 
its high volume periods, has only been about 15 percent of the 
market.

Q.8. How can financial education for reverse mortgage borrowers 
be improved?

A.8. NeighborWorks America has minimal experience with reverse 
annuity mortgages, since we focus primarily on pre-purchase 
homebuyer education and counseling, and post-purchase 
counseling, including foreclosure intervention and counseling. 
But my understanding is that the reverse mortgage counseling 
that is provided is quite good.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 
                        FROM DAVID CROWE

Q.1. Despite the decline in writing FHA loans, has 
homeownership increased or decreased over the last few years? 
What about minority homeownership in particular?

A.1. According to information that has been compiled by the 
U.S. Department of Commerce, Bureau of the Census, since the 
beginning of the current decade, the national homeownership 
rate for the entire population has ranged from a low of 67.1 
percent during the first quarter of 2000 to a high of 69.2 
percent during the fourth quarter of 2004. In the second 
quarter of 2007, the latest period for which these data are 
available, the national homeownership rate stood at 68.2 
percent.
    During the same time frame, the homeownership rate for all 
minorities ranged from 47.6 percent during the second quarter 
of 2000 to a high of 51.7 percent during the third quarter of 
2006 and stood at 50.3 percent during the second quarter of 
2007. By comparison, the rate for white homeowners ranged from 
a low of 73.4 percent in the first quarter of 2000 to a high of 
76.2 in the fourth quarter of 2004 and presently stands at 75.4 
percent. NAHB views narrowing and, eventually, eliminating the 
gap in homeownership rates for minorities as a key mission of a 
revitalized FHA.

Q.2. What borrowers should FHA programs help?

A.2. The single family mortgage insurance programs of the 
Federal Housing Administration were created by Congress in 1934 
to help those who could not afford the short term, high 
downpayment loans that were the norm for home buyers at the 
time. For several decades after its creation, FHA was the 
driving force for innovations in residential mortgage lending. 
A few examples of such innovations are 30-year repayment terms, 
downpayments as low as three percent, and the 1-year adjustable 
rate mortgage loan, all of which have been adopted by 
conventional mortgage lenders and mortgage investors.
    Because of the private sector's successful adaptation of 
FHA's innovations, the majority of borrowers who are currently 
being served by FHA are those whose credit experiences are not 
as positive as those who would qualify for conventional 
mortgages. In addition, FHA borrowers, who are more typically 
first-time homebuyers, frequently lack the cash reserves 
necessary to make downpayments greater than three percent, 
which conventional mortgage programs require for borrowers with 
even the slightest tarnishes on their credit histories.
    Because FHA is a self-sustaining mutual mortgage insurance 
fund, it is important for FHA to insure better performing 
mortgages as well as higher-risk, low downpayment loans to more 
credit-challenged individuals. Allowing FHA to vary mortgage 
insurance premiums according to risk is an important tool in 
maintaining the financial health of FHA.

Q.3. What kind of profits do lenders and brokers make on FHA-
insured loans? How does the taxpayer backstop affect market 
discipline?

A.3. A specific assessment of profits received by lenders and 
brokers is beyond the purview of the National Association of 
Home Builders. In general, however, NAHB has found the mortgage 
marketplace to be a highly competitive arena, and such vigorous 
competition tends to enforce market discipline. In addition, 
FHA has implemented measures in recent years that hold loan 
servicers more accountable to ensure that FHA-insured loans are 
properly serviced. For example, FHA has implemented programs 
that track the early performance of FHA-insured loans. Lenders 
whose loans suffer excessively high early defaults are subject 
to revocation of their authority to submit loans for FHA 
insurance.

Q.4. Are there any mortgage products that FHA should not be 
allowed to insure?

A.4. Some of the mortgage products that have led to the current 
meltdown in the subprime markets, such as loans that have 
prepayment penalties, loans that reset to significantly higher 
interest rates after a brief fixed-rate period, and loans on 
which the loan originators receive compensation that far 
exceeds the norm should not be insured by the FHA or any other 
government-affiliated mortgage loan program. The FHA single 
family mortgage insurance program operates, and should remain, 
within the bounds of prudent mortgage lending standards 
established by the federal banking regulators.

Q.5. Are there better options other than a guarantee program to 
help borrowers who are unable to find financing?

A.5. For nearly eight decades, the FHA's single family mortgage 
insurance program has provided an efficient mechanism for 
insuring single family mortgage loans without a cost to the 
taxpayers. The 100 percent insurance coverage that is provided 
for FHA-insured mortgage loans ensures that borrowers who use 
this program pay interest rates that are comparable to prime 
quality borrowers who receive conventional financing.
    Other models exist for providing government guaranteed 
loans or loans made directly by government agencies to home 
buyers. However, these programs have carried a cost to 
taxpayers and have not functioned as well as FHA's.

Q.6. If we were to increase the loan limits to GSE levels, why 
do we need both GSEs and FHA? Will it make it harder for Fannie 
and Freddie to meet their affordable housing goals?

A.6. There is a key difference between the loan limits for 
Fannie Mae/Freddie Mac (the conforming loan limit) and the 
ceiling for FHA. The conforming loan limit is a national 
maximum that is the same in all areas of the country (with the 
exception of Alaska, Hawaii, Guam and the Virgin Islands where 
higher limits are allowed). FHA's ceilings are established 
based on the median home price in each locality. The FHA 
ceiling only applies in the very limited number of high-costs 
areas where the median home price approaches or exceeds the 
conforming loan limit. Even in the few markets where the 
proposed limit increase would bring FHA to the conforming loan 
level, FHA and the GSEs would serve distinctly different 
borrowers, with FHA focusing on the credit needs of those with 
less than outstanding credit backgrounds and other borrowing 
challenges. On that basis, increasing the FHA maximum to the 
conforming loan limit should not present a measurable 
impediment to the GSEs in meeting their affordable housing 
goals.

Q.7. Will expanding FHA programs drive up housing prices?

A.7. The expansion of FHA programs will have little, if any, 
impact on housing prices, but will significantly benefit home 
buyers. The key factors contributing to the rise in home prices 
during the 2003 2005 housing boom were extremely low interest 
rates, heightened demand by investors/speculators, lax mortgage 
underwriting and rising land prices. It is noteworthy that FHA 
experienced a sharp decline in market share during this period. 
All of these have largely been reversed during the current 
housing slump. In particular, it was the lax lending standards 
during the housing boom that lured some home buyers into the 
more risky mortgage products, taking customers away from FHA.
    As noted previously, FHA's more prudent lending standards, 
and the additional flexibilities Congress has proposed to grant 
the FHA, would make it possible for more families to purchase 
homes. FHA's ability to offer alternatives to conventional 
subprime loans that often carry onerous terms will greatly 
benefit home buyers during times when mortgage credit is tight. 
FHA's business is heavily weighted toward existing home 
transactions and a more vibrant FHA program, in addition to 
generating more demand for homes, will also boost the supply as 
more owners are incented to sell their homes. Moreover, the FHA 
program is restricted to only owner-occupied mortgages, which 
ameliorates any concerns about heavy investor use of FHA 
mortgages putting upward pressure on home prices.

Q.8. How can financial education for reverse mortgage borrowers 
be improved?

A.8. I have not surveyed the educational programs that are 
currently offered for seniors who are considering a reverse 
mortgage. However, it stands to reason that each potential 
borrower should fully understand the costs and terms of the 
loan being contemplated. In addition, there should be sincere 
efforts to determine that the reverse mortgage is the best 
means of addressing the financial needs of the borrower. NAHB 
supports reasonable requirements for mortgage disclosures and 
counseling for reverse mortgage borrowers.
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