[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                      STRENGTHENING OVERSIGHT AND


                      PREVENTING FRAUD IN FHA AND


                           OTHER HUD PROGRAMS

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



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 18, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-46



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES WILSON, Ohio                 KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                     DENNIS MOORE, Kansas, Chairman

STEPHEN F. LYNCH, Massachusetts      JUDY BIGGERT, Illinois
RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
JACKIE SPEIER, California            RON PAUL, Texas
GWEN MOORE, Wisconsin                MICHELE BACHMANN, Minnesota
JOHN ADLER, New Jersey               CHRISTOPHER LEE, New York
MARY JO KILROY, Ohio                 ERIK PAULSEN, Minnesota
STEVE DRIEHAUS, Ohio
ALAN GRAYSON, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 18, 2009................................................     1
Appendix:
    June 18, 2009................................................    17

                               WITNESSES
                        Thursday, June 18, 2009

Berenbaum, David, Executive Vice President, National Community 
  Reinvestment Coalition.........................................    11
Donohue, Kenneth M., Sr., Inspector General, U.S. Department of 
  Housing and Urban Development..................................     5
Kittle, David G., CMB, Chairman, Mortgage Bankers Association....     9
Nunnink, Kevin K., Chairman, IRR-Residential, LLC, and Chairman, 
  Integra Realty Resources.......................................     7
Pellegrini, Frank, President, Prairie Title, on behalf of the 
  American Land Title Association (ALTA).........................     8
Savitt, Marc, CRMS, President, National Association of Mortgage 
  Brokers........................................................    10

                                APPENDIX

Prepared statements:
    Moore, Hon. Dennis...........................................    18
    Berenbaum, David.............................................    20
    Donohue, Kenneth M., Sr......................................    39
    Kittle, David G..............................................    58
    Nunnink, Kevin K.............................................    67
    Pellegrini, Frank............................................    69
    Savitt, Marc.................................................    85

              Additional Material Submitted for the Record

Moore, Hon. Dennis:
    Written statement of the U.S. Department of Housing and Urban 
      Development................................................    95
    Written statement of the National Association of Realtors....   100


                      STRENGTHENING OVERSIGHT AND


                      PREVENTING FRAUD IN FHA AND


                           OTHER HUD PROGRAMS

                              ----------                              


                        Thursday, June 18, 2009

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Dennis Moore 
[chairman of the subcommittee] presiding.
    Members present: Representatives Moore, Lynch; and Biggert.
    Also present: Representative Posey.
    Chairman Moore of Kansas. Good morning. Welcome to the 
Committee on Financial Services, Subcommittee on Oversight and 
Investigations. This subcommittee will come to order.
    Our hearing this morning is entitled, ``Strengthening 
Oversight and Preventing Fraud in FHA and other HUD Programs.'' 
I would like to welcome my distinguished colleague and the 
ranking member, Judy Biggert, Congresswoman Biggert. And we 
might have some other people show up, but we just got word that 
there are going to be 28 votes in about 15 or 20 minutes. So I 
doubt that we can get all of this in, in the next few minutes, 
but we will move as quickly as we can here.
    I would like to start my opening statement if that is all 
right. And if there is time for Mrs. Biggert to complete her 
opening statement, then so be it.
    This hearing of the Subcommittee on Oversight and 
Investigations of the House Financial Services Committee will 
come to order. Our hearing this morning is entitled, 
``Strengthening Oversight and Preventing Fraud in FHA and other 
HUD Programs.''
    We will begin this morning's subcommittee hearing with 
members' opening statements, up to 10 minutes per side, and 
then we will hear testimony from our witnesses. After that, 
members will each have 5 minutes to question witnesses.
    Without objection, all members' opening statements will be 
made a part of the record.
    Without objection, I ask that written testimony from the 
Department of Housing and Urban Development and the National 
Association of Realtors be entered into the record.
    I now recognize myself for up to 5 minutes for an opening 
statement.
    On April 27th, I hosted a press conference at the Federal 
Courthouse in Kansas City, Kansas, with Missouri Attorney 
General Chris Koster, Kansas Attorney General Steve Six, as 
well as the local FBI Supervisory Special Agent and a Special 
Agent from the Office of the Inspector General from HUD. At 
that event, our goal was to raise public awareness of the 
mortgage fraud schemes that have been going on.
    In the current economic environment, too many homeowners 
are encountering significant difficulty in making their 
mortgage payments. Too many are at risk of losing their homes. 
There are a number of great people and resources out there to 
help homeowners work with their lenders so they can meet their 
mortgage obligations. Unfortunately, as a former district 
attorney, I know all too well there are also people out there 
who will exploit weakness and prey on the fear of others.
    Over the last few months, we have seen an increase in the 
number of fraudulent mortgage loan schemes that take advantage 
of those homeowners in desperate situations. Under the pretense 
of helping homeowners modify their mortgage obligations, these 
schemes result in the loss of money, equity, and in many cases 
the home itself. We often think of robbery as taking place with 
a knife or a gun, but these thieves instead come with a smile, 
a handshake, and a ballpoint pen, ultimately leaving a family 
in deeper trouble.
    Through my role as chairman of the Financial Services 
Oversight and Investigations Subcommittee, I am determined to 
ensure that local, State, and Federal law enforcement agencies 
have all the resources and tools they need to prosecute these 
horrible thieves. That is why I was a cosponsor of the Fight 
Fraud Act, which was renamed the Fraud Enforcement and Recovery 
Act by the Senate.
    No matter what you call it, this legislation is important. 
It strengthens the accountability standards for financial, 
mortgage lending, and securities agents and institutions, and 
authorizes additional funds for the Department of Justice, the 
FBI, HUD's Inspector General, and other Federal agencies so 
they can hire the investigators they need to examine and 
prosecute fraudulent activity.
    Ranking Member Judy Biggert was a lead sponsor of the bill 
as well, and I would like to commend her for all the work she 
has done over the years fighting mortgage fraud. I am sure she 
shares my sentiment that I was pleased when President Obama 
signed this important legislation into law.
    One of the issues we will be focusing on today as we 
consider strong oversight of HUD is the role of FHA and its 
rapid expansion of lending in the mortgage market. Even after 
the subprime market collapse, FHA has continued to provide 
mortgage credit to responsible borrowers. But we must be 
vigilant to ensure that the same bad actors who contributed to 
the housing crisis don't make their way into the FHA program.
    In addition to the Fraud Enforcement and Recovery Act, 
President Obama also signed into law the Helping Families Save 
Their Homes Act. These two new laws improve FHA requirements 
and give the FHA more authority to keep bad actors out of the 
FHA program and provide additional enforcement tools to police 
those lenders who employ false or misleading tactics. In fact, 
just last week HUD announced they suspended three lenders from 
the FHA based on evidence of serious violations under HUD's 
regulations.
    Another area of concern is the use of reverse mortgages 
that are primarily used by seniors. I agree with the 
Comptroller of the Currency, John Dugan, who recently raised a 
red flag on these reverse mortgages and noted that closer 
Federal oversight may be necessary to protect the FHA and 
homeowners.
    I am also interested in learning more about the need for 
accurate and independent appraisals, and the role appraisals 
currently play with respect to FHA-insured loans.
    If there is one lesson we have learned from the financial 
crisis, it is that we need to eliminate conflicts of interest 
and strengthen the integrity of any valuation process, 
everything from credit rating agencies to appraisals. I look 
forward to hearing from our witnesses on these and other 
important oversight issues.
    I will conclude my remarks by reminding everyone to be on 
high alert for mortgage fraud. If you or someone you know is 
suspicious of or unsure if someone is legitimately trying to 
help, please contact local law enforcement and let them know so 
they can investigate. It is imperative that we protect 
ourselves, our neighbors, and put those people preying on the 
victims of this housing crisis behind bars.
    I now recognize our distinguished ranking member of the 
subcommittee, my colleague and friend from Illinois, Mrs. 
Biggert.
    Mrs. Biggert. Thank you very much, Chairman Moore, and 
thank you for scheduling this hearing today on mortgage fraud. 
Some years ago, the Chicago Tribune published a series that 
revealed that gangs in the Chicago area were increasingly 
turning to mortgage fraud. They found it easier and more 
lucrative, believe it or not, than selling drugs. And it turns 
out that the gangs were not alone. Everyone, it seems, was in 
on the act.
    Earlier this year, a U.S. attorney in Chicago, Patrick 
Fitzgerald, brought mortgage fraud indictments against two 
dozen players. They are brokers, accountants, loan officers, 
and processors and attorneys. So mortgage fraud comes in all 
sizes and shapes. Scam artists inflate appraisals, flip 
properties, and lie about information, including income and 
identity on loan applications. Some use the identity of 
deceased persons to obtain mortgages. And other desperate 
thieves bilked the most vulnerable homeowners and seniors in 
dire financial straits out of their homes and home equity.
    Let's face it; I think this is just the tip of the iceberg. 
And as we in Congress work to get the economy back on track and 
credit flowing again, we have to address what was the root of 
the mortgage meltdown in the first place, and that was mortgage 
fraud. Mortgage fraud is at the root of the meltdown that has 
undermined our housing market and contributed to this economic 
downturn.
    To restore confidence in the home buying process, it is 
critical that we provide our investigators and prosecutors the 
tools and resources that they require to accomplish their 
mission and put bad actors behind bars.
    As a former real estate attorney, and a member of the House 
Committee on Financial Services, I have seen firsthand the 
devastating effect of mortgage fraud. It has plagued our 
financial system and economy. Most tragically, it has cost 
millions of American families their houses, and required 
taxpayers to commit trillions of their hard-earned dollars to 
prop up the financial industry. It is just not fair to the good 
actors in the industry and the 90 percent of homeowners who are 
paying their mortgages on time.
    According to the FBI, its mortgage fraud caseload increased 
by 237 percent in the last 5 years, and investigations more 
than doubled in 3 years. During a 12-month period ending in 
2008, mortgage fraud reports increased by 44 percent, reaching 
over 63,000 reports, with predictions of up to $25 billion in 
losses.
    That said, I am not surprised that, with FHA's significant 
increase in market share, that fraud has quickly followed. And 
I did introduce several bills, starting in 2007. Several passed 
the House, and then went over to the Senate, where somehow they 
got lost. And so we kept introducing and introducing, and 
finally went to the Judiciary Committee, and put the mortgage 
fraud into a bill that was introduced by Chairman Conyers and 
Chairman Moore and other members. And this was H.R. 1748, the 
Fight Fraud Act, which was the House version of Senate 386. And 
with that, we both had the ability to go to the White House 
while this bill was signed into law by the President.
    So as we work to pinhole loopholes and close them as we 
work to modernize the financial laws and regulations, it is 
also our duty to supply Federal law enforcement with the tools 
and resources that they need. And in addition, I think it is 
critical that we hold a hearing to learn more about the kinds 
of technology that can be used to increase transparency in the 
mortgage process to quickly flag illegal activity and apprehend 
the perpetrators.
    So, Chairman Moore, I would really like to request that we 
hold a hearing on technology, which I think would be helpful to 
this. By increasing the transparency in the process through 
technology, this would help.
    So with that, I would like to thank today's witnesses and 
my colleagues on the committee for their commitment to one of 
the most important issues today.
    Chairman Moore of Kansas. Thank you to my ranking member. 
And I really appreciate her service on the committee and the 
insight she brings to this.
    I want to say, very quickly here, we have received some 
unpleasant information, which is that at about 10:15, 28 votes 
are going to be called. I don't know, this was not planned, we 
certainly didn't know about this, but I want to introduce at 
least three of the witnesses who traveled here first. And we 
may have to take written testimony from the others. If we are 
going to be gone for 2 hours over there voting, which may be 
the case, seriously--I would love to say differently--but the 
problem is that Secretary Geithner is coming at 1 p.m., so we 
need to be ready for him.
    I want to introduce Mr. Kenneth Donohue, the Inspector 
General for the Department of Housing and Urban Development. 
During the savings and loan crisis, Mr. Donohue served as 
Assistant Director in the Office of Investigations in the RTC.
    And I am going to shorten the introductions right now, and 
I hope all the witnesses understand. I am not trying to slight 
anybody, but we have to move along here.
    Mr. Kevin Nunnink--I invited him--who is chairman of the 
IRR-Residential and chairman, Integra Realty Resources, is from 
Kansas, and he will be testifying as well.
    We are going to ask Mr. Pellegrini to testify. And would 
you like to introduce Mr. Pellegrini very quickly?
    Mrs. Biggert. Yes. I would like to welcome from Chicago a 
fellow lawyer, Mr. Frank Pellegrini. He is the founder, 
president, and chief executive officer of Prairie Title 
Services in Oak Park, and serves many of my constituents in the 
13th Congressional District. And he is a principal of the law 
firm of Pellegrini and Cristiano, a general practice firm that 
specializes in real property law, business formation and 
counseling, and estate planning. Welcome.
    Chairman Moore of Kansas. Thank you. I am not going to 
introduce the other witnesses right now, and I apologize for 
that. I am not trying to slight anybody, but I hope you 
understand. We want to get moving here so we can move as 
quickly as possible. Without objection, the written statements 
of all the witnesses will be made a part of the record. You 
will each be recognized for a 5-minute statement. We are going 
to start with you, Mr. Donohue.
    And please, I am not trying to slight the other witnesses 
by not introducing you, but I hope you understand why I am 
doing this.
    Mr. Donohue, please. You have 5 minutes, sir.

 STATEMENT OF KENNETH M. DONOHUE, SR., INSPECTOR GENERAL, U.S. 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Donohue. Thank you, Chairman Moore, Ranking Member 
Biggert, and members of the subcommittee. I appreciate the 
opportunity to testify on the role of FHA in addressing the 
housing crisis, as well as other HUD-related topics. Through 
our work in auditing and investigating many facets of the FHA 
program over the course of many years, we have had concerns 
regarding FHA's systems and infrastructure to adequately 
perform its current requirements. This was expressed by the OIG 
to the FHA prior to the current influx of loans and to the 
numerous proposals that expand its reach. We remain keenly 
interested in FHA's ability and capacity to oversee newly 
generated businesses.
    The past year-and-a-half have certainly produced a lot of 
changes. With the collapse of the subprime market, FHA has seen 
a dramatic increase in new businesses. The Housing and Economic 
Recovery Act created a program to enable FHA to refinance the 
mortgages of at-risk borrowers and authorize changes to the 
Home Equity Conversion Mortgage program that will enable more 
seniors to tap into their home equity. The volume of single-
family loans has increased by a tripling from $59 billion in 
2007 to over $180 billion in 2008. FHA's share of insured 
endorsements has increased from 24 percent to 63 percent, which 
includes home sales and refinances.
    Though HUD is hiring some new personnel, we believe there 
is a critical need for more resources for FHA to enhance its IT 
systems, to increase its personnel to deal with escalating and 
processing requirements, to increase its training to maintain 
the workforce with the necessary skills, to oversee the 
numerous contractors it maintains, and to increase its 
oversight of all critical front-end issues, including areas 
such as the appraisal and underwriting process.
    We are gratified the new penalty provision we helped craft 
was inserted into the HERA bill. The statute now creates a 
penalty for committing fraud against FHA programs, and it will 
be a useful tool for prosecutors and the law enforcement 
community to employ.
    We are also very pleased that many of the provisions we 
advocated to Congress to improve internal control process and 
enhance penalties were incorporated both in the Fraud 
Enforcement and Recovery Act and the Helping Families Save 
Their Home Act.
    The Secretary also announced a number of new 
transformations, initiatives designed to address some of the 
concerns we are raising. The results of the last actuarial 
study shows that HUD has sustained significant losses in its 
single family program, making a robust program's reserves 
smaller. As of September 30, 2008, the fund's economic value 
was an estimated $12.9 billion, an almost 40 percent drop from 
over $21 billion the year before. That represents 3 percent of 
the mortgages insured by the FHA. Although above the 2 percent 
ratio required by law, it is well below the 6.4 percent ratio 
at the same time last year.
    If more pessimistic assumptions are factored in, the ratio 
could dip below 2 percent in succeeding years, requiring an 
increase in premiums or congressional appropriations 
intervention to make up the shortfall.
    As the Department is in the process of reforming its annual 
actuarial reviews, it is critical that assumptions used to 
drive the current estimates of the health of the fund be 
supportable.
    Among many different areas we have reviewed, we have found 
the FHA needs to improve its internal control structure. Our 
audit over the FHA appraisal roster identified weaknesses in 
the quality control review and the monitoring of that roster. 
Results from a number of other audits have noted significant 
lender underwriting deficiencies and other operational 
irregularities.
    The tightening credit market has increased FHA's position 
as a loan insurer. And with that is coming increases in lender-
brokers seeking to do business with the Federal program, and a 
concern regarding some of these loan originators.
    For example, we currently have under investigation several 
FHA lenders who were also lenders in the subprime market. FHA 
lender approval increases 525 percent in the last 2-year 
period. Newly signed legislation mandates an enhanced 
eligibility approval process, and we look forward to its 
implementation.
    We recently completed inspection of the Mortgage Review 
Board enforcement action and its effectiveness in resolving 
cases of serious noncompliance with FHA regulations, 
particularly during this period of significant change in the 
housing market. Again, the new legislation contains some 
provisions to strengthen this board, an important 
recommendation from our inspection.
    Another area of concern is the growing HECM, or reverse 
mortgage program. We are aware that the larger loan limits can 
be attractive to exploiters of the elderly, whether it be by 
third parties, or even family members who seek to strip equity 
from seniors. Due to the vulnerability of the population this 
program serves, we are also concerned about evasion of 
statutory counseling requirements.
    Finally, since you are about to undertake financial 
regulatory reform shortly, I think it is important to raise a 
few issues. The fact that our nationwide mortgage lending 
system is fragmented, with separate players embracing different 
requirements, creates opportunities for waste, fraud, and abuse 
that a more unified approach could potentially mitigate. We 
think it would be beneficial for the FHA to come together more 
significantly, in a unified lender oversight consortium with 
Fannie Mae, Freddie Mac, the FDIC, and Ginnie Mae, in order to 
create standardized forms.
    Chairman Moore of Kansas. Excuse me, Mr. Donohue. I 
apologize. We are going to have to wind up, and your written 
statement will be made a part of the record. I am going to move 
on to the other two witnesses and then to the other three for a 
brief statement as well, if that is okay. And I apologize for 
this. This was not planned at all.
    [The prepared statement of Inspector General Donohue can be 
found on page 39 of the appendix.]
    Chairman Moore of Kansas. At this point, the Chair 
recognizes Mr. Nunnink. And everybody's statements will be made 
part of this record.

STATEMENT OF KEVIN K. NUNNINK, CHAIRMAN, IRR-RESIDENTIAL, LLC, 
             AND CHAIRMAN, INTEGRA REALTY RESOURCES

    Mr. Nunnink. Thank you. Chairman Moore, Ranking Member 
Biggert, and members of the subcommittee, thank you for 
inviting me to testify today.
    As a real estate appraiser for 30 years, I appreciate this 
opportunity to speak on an important topic critical to 
restoring the confidence in the real estate mortgage industry. 
I am chairman of both Integra Realty Resources and IRR-
Residential, and we have a thousand licensed appraisers working 
throughout the United States.
    Sound mortgage underwriting includes two separate but 
equally important components: First, a borrower's ability to 
pay as evidenced by their income and credit score; and second, 
sufficient value of the real estate to support the loan type, 
as evidenced by the appraised value. It should be noted that of 
all the professionals involved in the mortgage origination 
process, the appraiser is frequently the only professional who 
visits the property implicitly for the purpose of providing due 
diligence for their lender client. He inspects the property and 
makes sure the property has sufficient value to support the 
intended loan. Appraisers are licensed and professionally 
trained to value real estate, and must meet education and 
experience requirements.
    Appraiser separation is particularly important in today's 
mortgage industry, where virtually all mortgage originators 
sell their mortgage paper to the secondary market, and thereby 
hold minimal long-term risk.
    An independent appraiser makes it much more difficult to 
initiate mortgage fraud. An independent appraiser serves as the 
safeguard for the protection of the current and future parties 
to the loan transaction, including the borrower, the 
originating lender, the secondary market participant, and as we 
are now seeing, the taxpayer.
    Any effort to circumvent the independence of the appraised 
value heightens mortgage risk. Because of the housing slump and 
corresponding disruption in the credit markets over the past 
couple of years, there have been a number of initiatives, 
legislatively and by regulation, increasing the separation 
between the contingent fee real estate mortgage professional 
and the appraisal process. We support those efforts.
    Congress appropriately restricted this type of influence in 
FIRREA in 1989, but because mortgage bankers and brokers were 
not regulated by the FDIC, they did not have to provide 
separation between the appraisal process and the mortgage 
originator. The Fraud Enforcement and Recovery Act of 2009 
appropriately provided further regulation upon these 
nontraditional bank lenders.
    There have been two structural conflicts of interest in the 
appraisal process: one, loan originators selecting and 
regulating the volume of work to the appraiser; and two, real 
estate mortgage companies providing bundled services, including 
appraisal, whose primary goal is to drive EBITDA, is contingent 
upon a successful loan closing. In both cases emphasis is upon 
the loans, not protecting the independence of the appraisal 
process.
    We were disappointed when the final version of the Home 
Valuation Code of Conduct gave a pass to those companies, 
lender-owned or not, that also provide title insurance, loan 
closing services, etc. In those cases, the company's ability to 
receive the title and closing fees is contingent upon the loan 
going forward, which in part is conditioned upon the appraised 
value process they manage, and an inherent conflict of 
interest.
    Chairman Moore of Kansas. Excuse me, Mr. Nunnink. I 
apologize, but we are going to have to wind up with that. And 
we will receive your written statement in the record.
    Mr. Nunnink. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Nunnink can be found on page 
67 of the appendix.]
    Chairman Moore of Kansas. And I want to recognize the other 
witness who traveled to come here. Then we are going to take 2- 
or 3-minute statements from each of the other witnesses if we 
have time. Votes have not yet been called yet.
    Mr. Pellegrini, if you would please. And again, please 
forgive this. We did not plan it this way.

  STATEMENT OF FRANK PELLEGRINI, PRESIDENT, PRAIRIE TITLE, ON 
      BEHALF OF THE AMERICAN LAND TITLE ASSOCIATION (ALTA)

    Mr. Pellegrini. Thank you, Mr. Chairman. Good morning, 
Ranking Member Biggert, and distinguished subcommittee members. 
I am a member of the board of governors of the American Land 
Title Association, which I am here today to represent.
    ALTA is the national association for the title industry, 
representing nearly 3,000 member companies, with more than 
100,000 employees, including title insurers, title insurance 
agents, abstracters, and attorneys that operate in every State 
and county throughout the United States.
    In my hometown of Chicago, as in many large urban areas, 
the proliferation of mortgage fraud activities is particularly 
disturbing. As Mrs. Biggert pointed out, the profile of the 
typical Chicago gang leader has evolved into a picture of a 
graying, suburban technology-friendly convict overseeing 
operations as diverse as mortgage fraud and drug dealing.
    This form of criminal activity is spreading. Fraud, in 
fact, is the second leading cause of title claims, so we track 
it very closely. Our experience dictates that mortgage fraud 
schemes change with the economy. In a more robust economy, we 
witnessed that claims involve inflated values. As prices have 
fallen and equity has dried up, we now see loan-slamming 
claims. Additionally, with large numbers of mortgage defaults, 
short-sale mortgage fraud claims are becoming more prevalent.
    Title professionals enjoy a unique vantage point from which 
to observe, identify, and thwart instances of fraud. We are the 
independent third party to the transaction, whose only interest 
is to the integrity of the transaction and the protection of 
our customers. Through training and experience, we hone our 
ability to spot improper transactions every day. We look for a 
number of mortgage fraud indicators, including earnest money 
deposit that comes from someone other than the borrower, or 
lack of information about the source of the deposit; similar 
carry-back documents that are not being disclosed to the 
lender; payments to third parties that will not appear on the 
HUD settlement statement; wide swings in the mortgage amount; 
recent sales with increases in price, and checks to others at 
closing, which could be a sign of flipping; substitution of 
sales contract for a higher amount; the signing of blank 
documents, and changes or increases in the purchase price.
    As settlement service providers, we prevent fraud by 
carefully checking identification. In fact, we know of a case 
in which a caregiver stole the information of an elderly 
gentleman whom he worked for by merely acquiring the driver's 
license and replacing the picture on it. The caregiver then 
applied for a mortgage refinance and walked away with $65,000. 
In this case, a check of the birth date would have been a tip-
off that something was wrong. We also prevent fraud by knowing 
our customers.
    Chairman Moore of Kansas. Mr. Pellegrini, I apologize to 
you, too. If we can, we are going to give each of the other 
witnesses 2 minutes to try to summarize their testimony. Then 
we are going to start with some questions. All of your written 
statements will be received for the record.
    [The prepared statement of Mr. Pellegrini can be found on 
page 69 of the appendix.]
    Chairman Moore of Kansas. Mr. Kittle. And again, please 
accept our apologies. Mr. Kittle, if you would, please, sir.

 STATEMENT OF DAVID G. KITTLE, CMB, CHAIRMAN, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Kittle. Thank you, Mr. Chairman.
    FHA is a program that is vital to the American home buyers. 
It is one that is important to me personally, as I purchased my 
first home in 1978 with the FHA program. Currently, FHA is 
experiencing a rebirth, and I want to preface my remarks this 
morning with a direct appeal to Congress that if we don't take 
this opportunity to be proactive and get FHA the resources it 
needs, the recent reemergence of FHA won't last long. We have a 
chance to prevent future problems, and we must start today.
    First and foremost, we need to give FHA the resources it 
needs to operate in an increasingly nimble and high-tech real 
estate finance industry. Its market share has risen from 3 to 
30 percent virtually overnight, but it is still hampered by 
outdated technology, and its staff is stretched dangerously 
thin.
    The solution is fairly straightforward. Under HERA, 
Congress has already authorized $25 million per year for 
staffing and technology upgrades. We now need to work together 
to make sure this funding is appropriated.
    We also need to make sure Ginnie Mae has the resources it 
needs to keep pace with the spike in government lending. From 
2007 to 2008, its issuance has increased from $85 billion to 
$221 billion, with a staff of 65. That needs to be increased to 
at least 90. Currently, FHA requires mortgagees to have a 
minimum net worth of $250,000 in order to be qualified to 
underwrite FHA loans. Brokers must have a net worth of $63,000. 
MBA believes that both these standards should be increased to 
make these industries more accountable.
    Specifically, we recommend mortgage bankers should have a 
minimum corporate net worth of the greater of $500,000 or 1 
percent of FHA loans, up to a maximum of $1.5 million. Mortgage 
brokers should have a minimum corporate net worth of $150,000, 
with half of 1 percent of their loan volume, up to the minimum 
of the mortgage bankers.
    Finally, Congress needs to address FHA's loan limits which 
are scheduled to expire January 1st. The markets crave 
certainty, and this is not the time to be reducing loan limits. 
We support permanently raising FHA loan limits to $625,500, and 
allowing it to go to $729,750 in high-cost areas.
    Now is the time for Congress to improve resources for these 
agencies in order to prevent problems from occurring in the 
future. Thank you.
    Chairman Moore of Kansas. Thank you, Mr. Kittle, for 
summing up so quickly.
    [The prepared statement of Mr. Kittle can be found on page 
58 of the appendix.]
    Chairman Moore of Kansas. Mr. Savitt, if you would, please.

STATEMENT OF MARC SAVITT, CRMS, PRESIDENT, NATIONAL ASSOCIATION 
                      OF MORTGAGE BROKERS

    Mr. Savitt. Good morning, Mr. Chairman, Ranking Member 
Biggert. As a Main Street mortgage professional for the past 28 
years, I am here to inform you that our fragile housing market 
is once again on the verge of collapse. This time it has 
nothing to do with exotic programs or high interest rates, 
although it does involve serious acts of misconduct.
    The country's largest providers of mortgage financing, 
Fannie Mae and Freddie Mac, have seriously strayed from their 
chartered missions, aided by the New York Attorney General, 
Andrew Cuomo. At issue here is the Home Valuation Code of 
Conduct, known as the HVCC.
    In 2007, the Attorney General began an investigation of 
Washington Mutual and an unregulated appraisal management 
company known as eAppraiseIT. His investigation also warranted 
subpoenas of Fannie and Freddie, where certain information was 
discovered in that investigation which the Attorney General has 
refused to turn over. That investigation is now being 
concluded.
    As a result of that investigation, we now have the HVCC or 
the Home Valuation Code of Conduct. The same failed and flawed 
model that the Attorney General discovered all of this 
misconduct is now the solution, or the supposed solution, for 
the problem. And what we are seeing here is that the consumer 
is being seriously harmed by this code.
    We estimate that it is costing consumers conservatively 
$2.8 billion a year in extra charges. This code has created 
long delays in the mortgage financing process, which requires 
extended lock-in fees the consumer pays for. Appraisals have 
gone from anywhere from $150 to $300 more than their normal 
costs. So what is involved here is serious expenses for the 
consumer.
    It is also hurting small business. Appraisers are being 
paid approximately 60 percent of what they were being paid 
before May 1st, when this code first went into effect. Mortgage 
brokers do not have the ability to deal with the appraisers 
that they have been dealing with. Years of business 
relationships have been destroyed. And again, these are also 
causing long delays.
    We have several examples which we would like to submit for 
the record of what this is doing to the American consumer. And 
we see that if this code is not withdrawn shortly, we are going 
to see even more serious consequences. Thank you.
    Chairman Moore of Kansas. Thank you, Mr. Savitt.
    [The prepared statement of Mr. Savitt can be found on page 
85 of the appendix.]
    Chairman Moore of Kansas. Mr. Berenbaum, sir.

    STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, 
           NATIONAL COMMUNITY REINVESTMENT COALITION

    Mr. Berenbaum. Mr. Chairman, thank you. Ms. Biggert, thank 
you for having us here this morning.
    I would like to start by taking strong exception to Mr. 
Savitt's remarks with regard to the Home Valuation Code of 
Conduct. We believe a strong HVCC that should be expanded to 
reach FHA and VA loans is critical to protect the consumers' 
interests. Quite candidly, lender pressure brought about 
widescale overvaluation of properties. And today the opposite 
issue of, in fact, lower prices through broker price opinions 
are driving down values and impacting on the tax base around 
the Nation.
    Second, I would quickly like to make the point that we 
strongly believe there is a need for additional regulation and 
oversight in the FHA program and related government programs, 
particularly with regard to the HECM program and the 
proprietary products.
    As a national HUD-certified counseling agency, we are 
seeing widescale abuse of seniors at this moment in time who 
are being victimized, as the Comptroller of the Currency noted, 
by predatory practices in that area.
    Third, we are about to release a report where we tested 
over 200 providers of foreclosure prevention services. And we 
completely agree with your remarks that in fact it is the Wild 
West out there. What we are seeing is average fees of $2,900 
for a service you can get for free from your servicer or a HUD-
certified counseling agency, coupled with widescale 
misinformation.
    Last, I would like to speak to some of the issues that we 
are seeing right now with regard to fraud in the FHA program. 
We do believe there is a need for greater staffing and 
oversight within FHA, coupled with, in fact, the President's 
announcement yesterday that there was a need for a consumer 
financial protection agency. We know when there are CRA loans, 
we know when there is responsible lending. Both consumer 
protection and profit go hand-in-hand. And we hope that working 
with this committee and each of you in the coming year we can 
realize that environment. Thank you.
    Chairman Moore of Kansas. Thank you, sir.
    [The prepared statement of Mr. Berenbaum can be found on 
page 20 of the appendix.]
    Chairman Moore of Kansas. I thank the witnesses for their 
statements. Again, I apologize for this. We are going to move 
very quickly here. I am going to ask unanimous consent from 
members present that each member have 2 minutes to ask a 
question or ask questions. And we will alternate sides. We will 
get in as many questions as we can, and follow up with written 
questions.
    And each of your testimony will be received, the written 
statement, in the record, as well as what you have said here 
today.
    So we are going to start, I would like to ask the first 
question. Mine for 2 minutes is Mr. Donohue. Judging from your 
statements, your testimony, it sounds as if Congress has taken 
some good steps with the Fraud Enforcement and Recovery Act, 
but unless Congress provides the funding to follow through, 
some of this is going to be for naught. Is that a fair 
assessment of your testimony, sir?
    Mr. Donohue. I do believe that, sir. I think it is very 
important that the funding be addressed in this regard. And, in 
fact, most recently the Secretary testified to the fact as far 
as the need of additional IT funding for FHA as well as 
staffing. They do have a need for staffing programs.
    Chairman Moore of Kansas. Mr. Nunnink, do you have any 
comments on that, sir?
    Mr. Nunnink. I agree with that.
    Chairman Moore of Kansas. All right. Do any other witnesses 
have any other comments besides that they agree funding is 
necessary for this? Any other comments?
    Mr. Pellegrini. Mr. Chairman?
    Chairman Moore of Kansas. Mr. Pellegrini?
    Mr. Pellegrini. I would like to point out that--we believe 
that Congress should require borrowers to receive their key 
closing documents in advance of closing, a consumer protection 
measure which is strongly encouraged and supported by HUD. This 
would give the borrowers the early opportunity, and the closing 
agents, to review those documents. And that would be a strong 
way to thwart fraud.
    Mr. Berenbaum. Mr. Chairman, I would also like to add we 
would like to see HUD collaborating with the Federal Trade 
Commission in the future on issues that are relevant to 
marketing of products, misrepresentation, and fraud.
    Chairman Moore of Kansas. Mr. Savitt or Mr. Kittle, any 
comments, sir, either one of you?
    Mr. Kittle. Well, only to the money issue. The money has 
been authorized. We just want to make sure that it is 
appropriated.
    And I will give you a specific example. There are HUD 
systems over there right now that are on a system called COBOL, 
which is pre-DOS, which is pre-Windows 2003. And I think there 
is only--and I am not making this up--three or four people left 
alive who can work on the system if it breaks down. It is 
incredibly antiquated. We can't talk to them as lenders. And if 
you want to streamline it and save money, we have to 
appropriate the funds.
    Chairman Moore of Kansas. Thank you to the witnesses, and I 
apologize. My time is up. I am going to yield 2 minutes now to 
the ranking member, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Pellegrini, you mentioned in your testimony that for 
borrowers, and to root out fraud more effectively, it would be 
helpful for consumers to have their completed closing documents 
24 hours in advance of the closing.
    Congresswoman Bean, in one of our markups on mortgages, 
wanted to require that completed documents be presented to the 
consumers 2 days in advance of the closing. That amendment was 
withdrawn because there was some objection, but they are 
working on it. It appears that the 24-hour requirement may be 
more feasible. Would you just address that a little bit?
    Mr. Pellegrini. Well, Congresswoman, the more time that we 
can allow a borrower to examine documents and have them 
available at the closing, or prior to the closing, would be 
beneficial. We would support any bill that would allow a 
greater amount of time to examine and go over and educate the 
borrower on the loan process.
    Mrs. Biggert. Sometimes I just remember that at the 
closings everything was fine, but there might be something on 
the title policy that hadn't been cleared yet, and then that 
would mean that the closing took a little bit longer. Does that 
still happen a lot? Let's say a fence is over the line and how 
is that going to be resolved?
    Mr. Pellegrini. Of course, those issues always present 
themselves at the closing table. Often, the closing table is 
not the culmination of the transaction; sometimes it is merely 
the beginning of the transaction in some instances. But we find 
those title issues to be in place in many situations. But 
certainly the more preparation that can be done in advance 
would certainly expedite the closing.
    Mrs. Biggert. Thank you. And then I want to go to Mr. 
Donohue. I am concerned about the seniors being victims of 
fraud. How many actual complaints has your office received 
about the HUD programs? Do you have the data or can you get it 
for us?
    Mr. Donohue. I can get the data for you. We have seen an 
increase.
    Chairman Moore of Kansas. Your microphone, sir?
    Mr. Donohue. I don't have the numbers, Congresswoman, but I 
can certainly get them to you. We have seen an increase in 
volume with regard to cases. I have an active sampling of 
egregious cases to present to you if you would like.
    Mrs. Biggert. Good. I would like that very much.
    Chairman Moore of Kansas. Thank you. Your time is up. And 
Mr. Lynch, you are recognized for 2 minutes, sir.
    Mr. Lynch. Thank you, Mr. Chairman. I appreciate it. I 
apologize to the witnesses as well. We had no idea this was 
going to happen.
    Mr. Donohue, very quickly. We have concerns about the 
mutual insurance fund, whether we are below 2 percent. And I 
know FHA is only required to report once a year. I am very 
nervous about that, given that we were down 40 percent the last 
time we checked. Do you have any information for the committee 
with respect to whether or not we are below that 2 percent 
minimum?
    Mr. Donohue. Sir, they are currently doing--first of all, 
we have met with your office as well. We support your 
legislation.
    Mr. Lynch. Right. You are very good on that. I appreciate 
it.
    Mr. Donohue. I certainly support the idea of doing the 
actuarial study twice a year, as you have recommended. But the 
thing as far as the numbers are concerned, we are watching this 
closely. We have our own independent auditors that are watching 
the actual study itself. The one problem that is faced with, as 
you might be aware, is the recovery rates on foreclosure 
properties. They had estimated that last year at 60 percent. It 
is down more like 40 percent.
    Mr. Lynch. Right.
    Mr. Donohue. So the question has come back down as to what 
point it is. The Secretary made some comments last week, but we 
will watch this very closely.
    Mr. Lynch. All right. I am running out of time here, the 
little that I have.
    Now, you know, you were doing 3 percent of the market, now 
FHA is doing 30 percent of the market, and the market is 
tanking. I can't imagine how we are going to end up with a 
result where we are above our 2 percent. I think we are going 
to have problems.
    I would like to have an opportunity, if we can't have a 
hearing--and I know that the chairman is jammed because he has 
a certain set of schedules for hearings going into August, 
ending in August. Would you be willing to meet with me and my 
office? I would like to meet with FHA and also Ginnie Mae. I 
have problems over there as well. And it is just a shame that 
this has happened on this day, but some of this stuff is out of 
our control. But we are going to have to take a real hard look 
at this.
    Mr. Donohue. I am more than happy and more than willing, 
sir, to sit down with you and discuss this in detail.
    Mr. Lynch. Thank you. I yield back.
    Chairman Moore of Kansas. Thank you, Mr. Lynch.
    And I want to ask another question. We are going to have 
another round. I think we have time for 2 minutes each.
    Mr. Nunnink, one issue that concerns me is appraisal fraud 
and the role of appraisals in our mortgage systems. I think 
this is an important issue. The Inspector General suggested 
bringing back the FHA Appraiser Fee Panel.
    Can you talk about appraisal fraud? How much of an issue is 
it in our current system? And what can be done to correct it? 
In about 1 minute, 44 seconds.
    Mr. Nunnink. Yes. Very simply stated, that FIRREA has 
effectively dealt with eliminating appraisal fraud, and it was 
passed in 1989. It is entirely possible to have separation at a 
bank between those ordering the appraisal and those originating 
mortgages. So I don't think a panel like FHA is necessary. I 
think less government is better than more government.
    And so my conclusion is that the existing system, if you 
follow Home Valuation Code of Conduct, will suffice.
    Chairman Moore of Kansas. Do any other witnesses have 
comments on this?
    Mr. Berenbaum. I would like to comment on that, Mr. 
Chairman.
    Chairman Moore of Kansas. Yes, sir, Mr. Berenbaum.
    Mr. Berenbaum. I believe actually the valuation issue 
remains one of the outstanding issues that has not been 
addressed by either statute or regulatory reform discussions at 
this point. The Appraisal Foundation and other key players in 
this industry have not really done enough to ensure accuracy in 
valuation. We have been commenting on this issue for several 
years now. And again here we are today with broker price 
opinions being used that are depressing values across the 
country, and they are conflicted. So this is an issue that 
needs more attention.
    Chairman Moore of Kansas. Do any other witnesses have--we 
have 20 seconds? Yes, sir, Mr. Savitt?
    Mr. Savitt. Mr. Chairman, what we are looking at here with 
appraisals, we are looking for appraisal independence, and we 
don't have that with the Home Valuation Code of Conduct. The 
results of the Attorney General's Office was from an 
investigation of a federally chartered bank and an unregulated 
appraisal management company. That is the model they are using 
today. As a matter of fact, the banks and some of the lenders 
actually have joint ventures, where they own up to 20 percent 
of those appraisal management companies. It is the same failed, 
flawed model that created the investigation. So with that, how 
do we have appraisal independence? We don't.
    Chairman Moore of Kansas. Thank you. Again, I apologize. 
Ranking Member Biggert is recognized for 2 minutes.
    Mrs. Biggert. Thank you. Mr. Savitt, could you tell me how 
the implementation of the Home Valuation Code of Conduct has 
impacted your members and consumers? What type of cost 
increases have been to consumers as a result of the 
implementation? And how is the average consumer affected by 
that?
    Mr. Savitt. The average consumer is affected by it costing 
them substantially more money. We used data from HMDA and also 
from Wholesale Access, and we came up with a number of $2.8 
billion. And that is a very conservative number, because we 
knew that number might be attacked, so we wanted to go on the 
low side. That is additional lock-in fees because the 
appraisals are taking anywhere from 35 to 40 days longer than 
they used to. That results in longer lock-in fees which the 
consumer pays, usually a minimum of a quarter percent. And then 
appraisals that used to cost anywhere between $350 and $400 are 
now costing anywhere between $500 and $750. My own office, we 
used to pay $350. We are now paying $750 for appraisals. And 
this works, as I said, out to $2.8 billion. This is hurting 
mortgage brokers, it is hurting--by losing deals over this. It 
is destroying relationships, it is hurting the appraisers, who 
are being paid 60 percent less.
    Mrs. Biggert. Thanks. I have one more question I want to 
get in to Mr. Kittle. FHA may require taxpayer funding next 
year for the first time in its history. Is there anything that 
we can do today proactively to avert large losses in the years 
to come?
    Mr. Kittle. Well, you can appropriate the funds to make 
them--technologically bring them into the 20th Century. That is 
the first thing you could do. And to go back to Mr. Lynch's 
comment just a minute ago, or his issue, if they have the right 
computer systems and the right reporting systems, he can get 
the reports he needs not once a year or twice, but maybe 
monthly. We need to just bring them up technologically. It will 
help stop fraud. I mean fraud is rampant, but--
    Mrs. Biggert. Every year they say they are going to do 
this, and it never comes to fruition. Thanks.
    Mr. Kittle. We need to appropriate the money.
    Chairman Moore of Kansas. Again, my thanks to the panel 
members and my thanks to the witnesses who have testified here 
today. I look forward to working with our witnesses, and my 
Republican and Democratic colleagues, to ensure our 
constituents are protected to the greatest extent possible.
    The Chair notes that some members may have additional 
questions, and other members who are not present may have 
additional questions for this panel which they may wish to 
submit in writing.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Again I apologize for this. I thank the witnesses for 
traveling here and for your testimony. This hearing is 
adjourned.
    [Whereupon, at 10:47 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



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