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





                   THE FUTURE OF THE FEDERAL HOUSING
                   ADMINISTRATION'S CAPITAL RESERVES:
                       ASSUMPTIONS, PREDICTIONS,
                    AND IMPLICATIONS FOR HOMEBUYERS

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 8, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-87





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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 A. 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 Housing and Community Opportunity

                 MAXINE WATERS, California, Chairwoman

NYDIA M. VELAZQUEZ, New York         SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
EMANUEL CLEAVER, Missouri            THADDEUS G. McCOTTER, Michigan
AL GREEN, Texas                      JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              GARY G. MILLER, California
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
JOE DONNELLY, Indiana                WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
PAUL E. KANJORSKI, Pennsylvania      ADAM PUTNAM, Florida
LUIS V. GUTIERREZ, Illinois          KENNY MARCHANT, Texas
STEVE DRIEHAUS, Ohio                 LYNN JENKINS, Kansas
MARY JO KILROY, Ohio                 CHRISTOPHER LEE, New York
JIM HIMES, Connecticut
DAN MAFFEI, New York










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 8, 2009..............................................     1
Appendix:
    October 8, 2009..............................................    37

                               WITNESSES
                       Thursday, October 8, 2009

Bell, Peter H., President, National Reverse Mortgage Lenders 
  Association (NRMLA)............................................    27
Bryce, Teresa, President, Radian Guaranty Inc., on behalf of the 
  Mortgage Insurance Companies of America (MICA).................    29
Campbell, Boyd J., member, Executive Committee of the Maryland 
  Association of Realtors; member, GSE Presidential Advisory 
  Group, National Association of Realtors (NAR)..................    22
Councilman, John L., CMC, CRMS, FHA Committee Chair, National 
  Association of Mortgage Brokers (NAMB).........................    25
Kittle, David G., CMB, Chairman, Mortgage Bankers Association 
  (MBA)..........................................................    23
Newport, Patrick, U.S. Economist, Director of Macroeconomic 
  Forecasting, IHS Global Insight................................    19
Pinto, Edward J., Real Estate Financial Services Consultant......    20
Stevens, Hon. David H., Assistant Secretary for Housing/FHA 
  Commissioner, U.S. Department of Housing and Urban Development.     6

                                APPENDIX

Prepared statements:
    Bell, Peter..................................................    38
    Bryce, Teresa................................................    45
    Campbell, Boyd J.............................................    54
    Councilman, John L...........................................    69
    Kittle, David G..............................................    85
    Newport, Patrick.............................................    95
    Pinto, Edward J..............................................    99
    Stevens, Hon. David H........................................   192

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Responses to questions submitted to Peter Bell...............   204
    Responses to questions submitted to Teresa Bryce.............   208
    Responses to questions submitted to Boyd Campbell............   210
    Responses to questions submitted to David Kittle.............   212
    Responses to questions submitted to Edward Pinto.............   214
    Written statement of NID Housing Counseling Agency...........   218
Capito, Hon. Shelley Moore:
    Written statement of Dr. Andrew Caplin, New York University..   220

 
                   THE FUTURE OF THE FEDERAL HOUSING
                   ADMINISTRATION'S CAPITAL RESERVES:
                       ASSUMPTIONS, PREDICTIONS,
                    AND IMPLICATIONS FOR HOMEBUYERS

                              ----------                              


                       Thursday, October 8, 2009

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Waters, Green; Capito, 
Miller of California, and Lee.
    Also present: Representative Garrett.
    Chairwoman Waters. This hearing of the Subcommittee on 
Housing and Community Opportunity will come to order.
    Good afternoon, ladies and gentlemen. I would like to thank 
the ranking member and other members of the Subcommittee on 
Housing and Community Opportunity for joining me today for this 
hearing on, ``The Future of the Federal Housing 
Administration's Capital Reserves: Assumptions, Predictions, 
and Implications for Homebuyers.''
    Before I begin, I would like to note that, without 
objection, Representative Scott Garrett will be considered a 
member of the subcommittee for the duration of this hearing. 
Without objection, it is so ordered.
    The Federal Housing Administration was created during our 
last major housing crisis, the Great Depression. At that time, 
50 percent of mortgages were in default or foreclosure. Today, 
we face a housing crisis that is perhaps less severe, but still 
considerably grave for millions of American families facing 
foreclosure or trying to buy a home.
    Markets have contracted, and homebuyers have limited 
options when trying to get a mortgage. As a result, FHA has 
stepped into the void left by the private market. Today FHA is 
increasingly the only option for most potential American 
homebuyers, those who don't have 20 percent for a downpayment. 
While FHA market share was around 3 percent of lending activity 
dollar volume as of 2006, it has increased to nearly 30 percent 
of all mortgages originated today. With this drastic increase 
in market share, we must continue to maintain the integrity of 
FHA mortgage insurance programs.
    I have long been committed to ensuring that FHA remains an 
available, affordable, and safe option for all families. I 
wrote legislation ensuring that FHA could provide an 
alternative to subprime lenders, the Expanding American 
Homeownership Act of 2007, which was ultimately included in the 
Housing and Economic Recovery Act of 2008. Also, in May, the 
President signed the Helping Families Save Their Homes Act of 
2009, which included a provision I authored to ensure that FHA 
programs remained out of bounds for the worst predatory lenders 
who created our mortgage crisis.
    It is a myth that the FHA is the new subprime and has 
adopted lower underwriting standards and other worse abuses of 
the subprime market; in fact, just the opposite is true. A 
recent Federal Reserve report indicates that over 60 percent of 
the increase in FHA purchase activity between 2007 and 2008 was 
to borrowers with prime-quality FICO scores. Additionally, the 
percentage of loans in FHA's portfolio with loan-to-value 
ratios above 95 percent has fallen from 72 percent in 2007 to 
67 percent in 2008. And unlike the subprime market, all of 
FHA's mortgages require full documentation and verification of 
the borrower's income and assets.
    Let us be clear: Without FHA, there would be no mortgage 
market right now. Private mortgage insurance companies have 
raised prices and tightened standards to a level that leaves 
out many potential homebuyers. With 30 percent of the overall 
market and nearly 80 percent of the first-time homebuyer 
market, the FHA is a crucial tool for ensuring a housing 
recovery.
    I am eager to hear from Commissioner Stevens about the 
steps he has taken to ensure the long-term future of the FHA. I 
understand the concerns that have been raised regarding reports 
that the FHA's capital reserve ratio will fall below the 2 
percent threshold mandated by Congress. Though we do not know 
yet the exact level of the capital reserve ratio for Fiscal 
Year 2009, we know that the economic downturn has affected FHA. 
I am also interested to hear our witnesses comment on how 
overall economic conditions will continue to affect FHA, and 
how industry groups are responding to FHA's increased market 
share.
    I look forward to hearing the testimony of today's 
witnesses.
    And now, I would like to recognize our subcommittee's 
ranking member to make an opening statement. Mrs. Capito.
    Mrs. Capito. Thank you, Madam Chairwoman. Thank you for 
holding this hearing today on recent reports considering the 
financial health of the Federal Housing Administration.
    The financial stability of the FHA program is a key factor 
to reviving the housing market and to our economic recovery. 
Since the subprime collapse, the FHA has emerged as the major 
mortgage market participant. In fact, as the chairwoman has 
stated, FHA insures 23 percent of all new single-family 
mortgage loans this year and currently backs a total of 5.2 
million home loans.
    As we wait for the private securitization market to 
recover, prospective homeowners and specifically first-time 
homebuyers have come to relay on the FHA program as a source of 
mortgage credit.
    Last month, on September 18th, FHA Commissioner David 
Stevens, our witness here, announced that an upcoming actuarial 
study of the health of the FHA would show the Mutual Mortgage 
Insurance Fund's capital reserve ratio will drop below the 
congressionally mandated threshold of 2 percent. At the same 
time, Commissioner Stevens was quick to assure us that the FHA 
Insurance Fund has ample reserves to cover future losses and 
will not require a taxpayer bailout. And I am certain we will 
hear more about that as we move through the hearing.
    I am encouraged that HUD has announced several key changes 
designed to enhance its ability to manage risk, and 
specifically the decision to hire a chief risk officer--
probably way overdue, in your opinion.
    While these recently announced measures are important 
steps, I continue to be concerned about the FHA's viability and 
its ability to administer the program in a safe and sound 
manner. Much has been said and written about the need for the 
FHA to upgrade its technology and staff. With the significant 
increase in the FHA's book of business, modern technology and 
highly skilled staff are fundamental to the future viability of 
the program, and I look forward to hearing today about the 
steps being taken to bring FHA into the 21st Century.
    I would like to commend Congressmen Lee and Adler on their 
bill, H.R. 3146, the 21st Century FHA Housing Act of 2009, 
designed to provide the HUD Secretary with the flexibility to 
hire new employees necessary to ensure the FHA is run in a 
manner that ensures its financial stability. This legislation 
also includes provisions designed to target fraud and abuse 
within the FHA system.
    As FHA's market share has grown, more bad actors have 
attempted to gain entry into the program. Originators with poor 
underwriting standards or who have engaged in mortgage fraud 
should not be FHA-approved mortgagees. The FHA must improve its 
monitoring of mortgagees to make sure that all FHA-approved 
lenders are conforming to the program's underwriting standards.
    I am anxious to hear from Commissioner Stevens what steps 
the Department is taking to root out fraud and abuse in the 
system. Are the current FHA matrix appropriate for the current 
markets?
    We have all heard about these mortgages where not even the 
first payment has been made. Does FHA monitor first payment 
default rates? If so, what statistics do you have on these 
defaults? And what recourse do you have with the lender that 
makes such a loan?
    In late 2007, FHA issued regulations to implement a risk-
based pricing program, yet Congress implemented a moratorium 
through the HERA legislation, which initially prevents HUD from 
implementing any risk-based pricing through October 31, 2009. 
Does HUD intend to implement a risk-based pricing program once 
the moratorium expires? If not, then why not?
    Finally, perhaps the Commissioner could give us an update 
on the seller-funded downpayment book of business. These loans 
have been banned at HUD's request because HUD said that these 
loans were problematic and causing a drain on the fund. How 
much of a drain on the fund have these loans been, and when 
will their impact begin to diminish?
    I want to welcome Commissioner Stevens back to our 
subcommittee. The FHA program is important, and Congress and 
HUD need to do whatever is necessary to make sure these 
programs run in a manner that does not expose the taxpayer to 
yet another bailout. I look forward to hearing from all of our 
witnesses today on how best to ensure the future viability of 
the FHA program.
    Again, I would like to thank the chairwoman for holding 
this hearing, and I look forward to hearing from our panels. 
Thank you.
    Chairwoman Waters. Thank you very much.
    Mr. Green is recognized for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman. And, Madam 
Chairwoman, I thank you for the work that you have done to not 
only help people acquire affordable housing, but also to 
maintain the affordable housing that they may acquire. It has 
been a labor of love for you, and you have worked to make sure 
that people are qualified for the housing that they ultimately 
acquire. And that, I think, speaks well for your work in 
Congress.
    Commissioner, I thank you for being here today. I am eager 
to hear your testimony as well. If I don't hear it all here, I 
will hear it from someplace. I will have to leave at some 
point.
    I, too, as was indicated by the Chair, am appreciative of 
what the FHA has done because it has been an alternative to the 
subprime market, which means that it has been an alternative to 
teaser rates, it has been an alternative to prepayment 
penalties, it has been an alternative to 3/27s and 2/28s. It 
has been a means by which persons did not have to subject 
themselves to yield-spread premiums that they were not aware 
of. FHA has been a straightforward, fair process.
    I was saddened to see that the ratio may drop below the 2 
percent threshold mandated, but by the same token, I have read 
where you have indicated that we still have $30 billion in 
reserves, and that $30 billion will take us through the next 
several years wherein the crisis that we are having to cope 
with may at some point bottom, and we may find ourselves on an 
upswing.
    But I do look forward to your testimony, and I am a fan and 
supporter of FHA. It has been an option for some, but for many 
it was the only fair option alternative, if you will, to the 
subprime market that was so devastating to so many people who 
actually qualified for better loans than they received.
    I yield back the balance of my time.
    Chairwoman Waters. Thank you very much.
    Mr. Miller is recognized for 5 minutes.
    Mr. Miller of California. Commissioner Stevens, welcome. It 
is good to see you again today; we talked yesterday.
    I will say what a difference a day makes. I look back, and 
between 2000 and 2005 in my district, FHA loans dropped by 99 
percent. They were just worse than finding hens' teeth at that 
point in time. Nobody had them. The reason was the rates that 
you could loan were so low that you couldn't be active in a 
high-cost area. And in about 2000, I started working to raise 
conforming loan limits in high-cost areas and FHA loan limits, 
because it seemed like high-cost areas were discriminated 
against. We only had one type of loan available. The GSEs 
really couldn't compete. FHA was just nonexistent.
    I know we have gone through turmoil in recent years, FHA 
went through some problems, but not unlike the reverse mortgage 
industry did. The GSE loans had trouble, home equity loans had 
trouble. And you have made a real gallant effort to revamp 
these areas and take the problems out that existed, such as 
subprime. Defining subprime versus predatory was something that 
was talked about for the last 8 or 9 years; we could never get 
any traction in doing that. Recently, people realized that has 
to be dealt with, and I think you have done an effective job 
dealing with that.
    And it seems like you have restructured FHA. You have 
looked at the appraisal problems you had in the past. You have 
looked at the underwriting problems, default codes. You have 
gone through it, and I think you have done an excellent job 
determining how to make FHA profitable and viable in the 
future, and I think you are probably going to explain that 
today. But I think many people don't realize what you have made 
changes on, the problem areas, and that FHA is probably going 
to be profitable in the last year's loans you have made, which 
would put you in a different situation than many think you are 
in.
    But we have had tremendous problems in this country in the 
housing industry, and if it weren't for GSEs and FHA--for 
example, you are making about 95 percent of all the loans in 
the marketplace. I don't think many people who are buying 
houses and selling houses today, when they go through Bank of 
America or Wells Fargo, realize that their loan is ending up 
with Freddie Mac and Fannie Mae, and the FHA is involved in so 
many areas that people think it is what it used to be, and it 
is not. If it wasn't for FHA and GSEs, there would be no 
housing market today, in my opinion.
    People are in a very difficult situation. People who own 
homes have lost tremendous amounts of equity. People who want 
to buy homes are at a point where they can finally afford to 
buy a home. But if it wasn't for the work you are doing in the 
marketplace and the GSEs, those opportunities would never be 
available. I can't imagine what level housing prices would be 
today if you weren't serving the people you are serving, 
because when you have far too many homes on the market, and 
there are just no loans available, the value of homes just 
continues to drop.
    I have never seen a time in the years I have been in the 
development industry--over 35 years--where banks didn't want to 
lend money and banks didn't want deposits. For a bank to take a 
private deposit from an individual, if it is a large amount of 
money, it is a liability. It seems like banks today are just 
holding on to liquidity, concerned about what is going to 
happen in the future in further foreclosures and what is going 
to happen in the commercial industrial foreclosure sector.
    So I applaud you for being aggressive in the marketplace. I 
think you are being very prudent in what you are doing. When I 
say aggressive, I don't mean aggressive in a risky fashion; I 
think you have been very cautious. You have looked at the 
situation and you say, what were our problems in the past, and 
let us look to the future.
    I think the $8,000 tax credit helped tremendously. And we 
talked yesterday about looking at the Down Payment Assistance 
Program that the private sector has had in the past and saying 
let us find the problems that have existed in the past in that 
area, and let us rectify those, get the bad players out. And 
let us look to the future; how can we do this in a way to 
create more opportunity and continued opportunity for people 
who need the assistance of a downpayment, yet knowing that we 
are making loans to people who can repay those loans, that 
underwriting standards are consistent with what FHA does. And I 
applaud you in your willingness to look in that direction.
    When you met with us, none of us wanted to do anything that 
was inappropriate, nor anything that would put the government 
and the FHA at risk. I think we all understood that. And I 
think, working together, we can come up with some guidelines 
and parameters that will work and be viable. I look forward to 
doing that, and I look forward to your testimony.
    Thank you, and I yield back.
    Chairwoman Waters. Thank you very much, Mr. Miller.
    I am pleased to welcome our first distinguished guest for 
our first panel. Our first witness will be the Honorable David 
Stevens, Assistant Secretary for Housing, and Federal Housing 
Administration Commissioner, U.S. Department of Housing and 
Urban Development.

    STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT 
  SECRETARY FOR HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF 
                 HOUSING AND URBAN DEVELOPMENT

    Mr. Stevens. Thank you, Chairwoman Waters, Ranking Member 
Capito, and members of the subcommittee. Thank you for the 
opportunity to testify on behalf of the Federal Housing 
Administration to talk about the capital reserve ratio.
    As you know, the FHA is playing a critical role in the 
housing market and our economy right now, insuring one-third of 
all home-purchase mortgages, and 80 percent of its purchase 
loans are for first-home homebuyers. But as you know, FHA 
recently announced that our independent, nongovernmental 
actuarial review is expected to predict that FHA's capital 
reserve will fall below 2 percent.
    There has been considerable confusion about what this 
announcement means for FHA's overall health, whether this means 
the taxpayer will bear any responsibility going forward. And so 
I welcome this opportunity to clarify our situation and discuss 
the proactive steps being taken to ensure that FHA remains 
financially sound so that we can continue to support and revive 
our housing market.
    Let me simply state at the outset that based on current 
projections, absent any catastrophic further home price 
decline, FHA will not need to ask Congress and the American 
taxpayer for extraordinary assistance. We will not need a 
bailout.
    FHA has two reserve accounts, which combined currently hold 
a record level of more than $30 billion in cash reserves, which 
is more than 4.4 percent of our insurance in force. FHA holds 
reserves for projected losses over the next 30 years. This is 
far more conservative than international standards for banks or 
other financial institutions.
    The capital reserve account is a surplus reserve account 
that holds cash reserves in excess of the cash reserves held in 
our financing account, FHA's primary reserve account. The FHA 
financing account is required to hold reserves for losses 
projected over a full 30-year period. Excess funds above and 
beyond that are held in a capital reserve account. This is 
somewhat analogous to a checking and savings account scenario. 
The financing account, or checking account, holds reserves to 
pay default claims and losses and receives any payments from 
premiums, while the capital reserve, the savings account, holds 
surplus cash.
    So why is the capital reserve ratio predicted to fall below 
2 percent? That is because the capital reserve ratio only 
measures how much capital is in that secondary reserve account. 
In light of the severe decline in home prices, overall 
performance of the economy, and future housing price 
projections, FHA expects higher net losses than previously 
estimated on outstanding loan guarantees over the next 30 
years. As a result, surplus funds will be transferred from the 
capital reserve account to the financing account. That change 
will drive that secondary account ratio down below 2 percent. 
However, there will still be substantial funds remaining in the 
capital reserve account over and above the necessary reserves 
held in the financing account to meet future expected losses.
    This is not a semantic point. While these funds were 
transferred from the capital reserve account to the financing 
account, they have not been spent. In fact, even as we 
experience historically low exceptional conditions in the 
housing market, FHA still has current reserves of more than $30 
billion in its combined financing and capital reserve accounts.
    I hope this visual helps, but if you look at the capital 
reserve, the combined accounts, as of September 30th, the 
capital reserve portion was well above the 2 percent threshold 
as of the last report. The financing account held the amount of 
funds needed to pay forecasted losses based on that independent 
actuarial review. Now that there has been an updated forecast 
with future home price declines expected, changes in the 
discount rate, loss severity differences, etc., money will 
transfer from the capital reserve account into the financing 
account, thus putting more money in the financing account to 
pay expected losses. Less money will remain in the capital 
reserve account, putting it below that 2 percent threshold 
requirement. Yet overall the combination of our capital reserve 
will be higher than it has ever been.
    While private mortgage insurers, lenders, Wall Street 
firms, and the GSEs participated in both owner-occupied and 
investor-owned markets, they were exposed to exotic mortgages, 
such as option ARMs, interest-only loans, and some tolerated 
lax underwriting standards, FHA stuck to the basics during the 
housing boom: 30-year, fixed-rate, traditional loan programs 
with standard underwriting.
    Indeed, while some have compared FHA's practices to those 
of Fannie Mae and Freddie Mac, FHA covers a much narrower, more 
conservative segment of the market. It only insures owner-
occupied residences, and has never insured exotic, subprime, 
Alt-A or ``no doc loans.'' FHA has never wavered from requiring 
full documentation of employment and income when underwriting 
for home purchases. This responsible approach has allowed us to 
limit losses during the economic crisis and fulfill our mission 
of providing safe opportunities for homeownership to those who 
can afford a home.
    Still, I am committed to ensuring that the agency takes 
every step possible to provide a clear direction for FHA to 
address this mortgage crisis. In support of the President and 
Secretary Donovan's policy and vision to remain financially 
healthy for the long term, I have already begun to improve 
portfolio analysis and risk management, tighten our risk 
controls, and overhaul our targeting and monitoring practices.
    We have made more significant credit policy changes in my 
first 2 months here than FHA has made in decades. We have 
brought on new leadership with broader and deeper knowledge of 
skills and a tighter set of risk controls for the agency, 
recently hiring a new Deputy Assistant Secretary for Single-
Family Housing, who started this week, and we are in the 
process of hiring a Chief Risk Officer to oversee the single-
family division that we want devoted solely to managing and 
mitigating risk to the insurance fund.
    With Congress' help, we are working to modernize our 
information technology systems so that we can develop a set of 
commonly used fraud-detection tools and fully automated 
underwriting systems to help us focus our attention on the loan 
files that are most likely to contain serious deficiencies. I 
have included more detail on each of these topics in my written 
testimony, and I would be glad to answer any of those today.
    So even as FHA is once again playing a critical 
countercyclical role in the economy, stepping up to ensure 
housing markets function where the private sector cannot on its 
own, as it did during the Great Depression and during the Oil 
Patch crisis of the 1980's, we are taking nothing for granted. 
FHA is working aggressively to make sure our reserves reach 
congressionally mandated levels over projected future losses, 
and to ensure that we keep affordable, responsible loans 
flowing, our housing market viable, and our economy on the road 
to recovery.
    Once again, I would like to thank you for the opportunity 
to participate in today's hearing and for your continued 
leadership. And with that, I am happy to answer any questions.
    [The prepared statement of Assistant Secretary Stevens can 
be found on page 192 of the appendix.]
    Chairwoman Waters. Well, thank you very much.
    I am very pleased that you are here today, and your 
statement is very clear. And I think that should allay a lot of 
the fears that seem to have been generated after the initial 
announcement was made about the level of the capital reserve 
fund, I believe it is.
    I think those of us who have watched FHA and its 
performance for quite some time now and understand very well 
that FHA was undermined basically by a lot of the subprime 
lenders who put those exotic products out into the marketplace 
that you alluded to, the ``no doc'' loans, the Alt-A loans, all 
those exotic products. And people fell into getting into those 
mortgages, many of whom did not understand what they were 
doing, and it really undermined the work of FHA. However, since 
the meltdown, we find that FHA is not only providing those 
mortgages, but we are all depending on FHA to keep this 
mortgage market going. And we think that so far a good job is 
being done, and, as you can see, just judging from the 
testimony of Mr. Miller, that there is bipartisan support for 
FHA. And so we are delighted that you are here today.
    I don't have any real questions about whether or not you 
are viable. You said very clearly that you are not coming here 
asking us for any extraordinary bailout, and that should be 
made clear. But I do want to ask you about one area that I was 
interested in and try to correct the problem, and that is this: 
I discovered some time ago that there were those bad actors out 
there who, in my estimation, were trying to take advantage of 
FHA and whom we knew had committed certain atrocities, who 
continued to come back time and time again. I hope that the 
amendment that I was able to put forward will stop them and 
give you the support that is needed at FHA to keep you from 
having to do business with them. Have you paid attention to 
this, and what is happening with the bad actors?
    Mr. Stevens. I do appreciate the question. And I very much 
appreciate your support, particularly our ability to hopefully 
invest the dollars needed to create fraud-protection tools and 
have the personnel to support that effort.
    Let me just try to articulate what happened as a result of 
the housing crisis in the mortgage finance system, and how it 
affected FHA, and how that has transitioned since then.
    In the fall of 2007, starting around August, with the 
beginning of American Home, which ultimately led to the 
collapses of Lehman and AIG and others in the industry that 
were engaged in the subprime marketplace particularly, the 
sudden collapse in the industry affected this loan officer pool 
which was prevalent across the country originating those kinds 
of mortgages. And what I saw when I was in the outside world 
running large financial institutions was a sudden migration 
almost overnight of what I would describe as rogue players on 
the margin, who went to the industry to originate any loans 
that they could originate, many of whom migrated to the FHA 
program to originate loans that were in the manually 
underwritten band of the product, which allowed them to do 
subjective decisionmaking to do those loans. That clearly 
impacted the books of business in 2007 and 2008, and that 
performance data is showing up very clearly in today's balance 
sheet and has a direct impact on this capital environment that 
we are in today.
    A lot has changed since then. First and foremost, most 
financial institutions started by putting credit score floors 
onto their book of business. But FHA, as well, saw other things 
that they were doing to improve that book of business. Most 
importantly are the changes that we have put into place in 
recent weeks. In my first 2 weeks on the job, we suspended 
Taylor, Bean & Whitaker, which had a much lower credit 
portfolio profile compared to other institutions in our 
portfolio.
    That was an institution I had watched on the outside. And 
when I came in, we immediately began a deeper investigation, 
only to find that they had not submitted timely financials and 
that their behavior was not acceptable to the FHA standards. We 
suspended them within 24 hours. They had to close their doors, 
which shows the weakness of that institution.
    The changes that I made around capital that we are 
proposing by rulemaking now that will change the capital 
standards for the industry will do two things. One, it will 
eliminate thinly capitalized mortgage participants who should 
not be in the business and cannot back up representations and 
warranties. The second thing that changing the capital will do 
is it will allow our team, which is very qualified but has 
resource limitations, to focus on the remaining sector of the 
industry to make sure that their manufacturing loans according 
to the quality expected of the FHA.
    Chairwoman Waters. I thank you very much. Basically what 
you are telling us is that the quality of the loans that you 
are making gives you the confidence that we don't have to worry 
about extraordinary requests anytime soon.
    Mr. Stevens. Yes. Let me just be very clear. The quality of 
the 2009 book is very different than the quality of previous 
books. That is not just in our data or the actuarial data. It 
is in the HMDA data, it is on the Federal Reserve Board side. 
Our average credit score is up significantly over previous 
years, bordering near 690 from about 630. The percentage of our 
business below 620 FICOs, which are the worst performing loans 
in the book, has dropped from approximately 50 percent down to 
about 10 percent. So we are not getting that kind of ``tail 
risk'' in the business, as we would call it in the credit risk 
management world. And the overall data portfolio is very 
different.
    I do want to articulate, however, that I am making certain 
that we take every step necessary to get the capital level to 
where it needs to be. These steps that I announced just in the 
past few weeks, in my opinion, were very clear immediate steps 
that needed to be taken to make sure that we do things above 
and beyond what FHA's product quality would naturally do to get 
the credit characteristics improved. If that is not enough, we 
will make additional changes.
    Chairwoman Waters. Thank you very much. Mrs. Capito?
    Mrs. Capito. Thank you. And I applaud you for the changes 
that you have been making and look forward to more in reaction 
to the changing market.
    I had a couple of questions in my opening statement. I am 
going to go to the first one. I asked about the risk-based 
pricing program which is on a moratorium through the end of 
this month. And I wanted to know what your intentions were to--
do you intend to implement the risk-based pricing after the 
moratorium expires, and why or why not would you be doing that?
    Mr. Stevens. I am going to answer your question this way. 
First of all, I am well aware of the risk-based pricing, and in 
my professional opinion, looking at the role that FHA plays in 
the market, our primary focus and the Secretary's primary focus 
is to ensure that the housing market gets back on track.
    Today as we look at the portfolio, the need for risk-based 
pricing is not clear and, in our professional view, looking at 
the credit characteristics and the demographic characteristics 
of those who need and obtain FHA insurance for their mortgages 
to buy their home, we believe there could be adverse selection 
and adverse impact to those who most need FHA the greatest.
    So currently I am not planning to implement the risk-based 
pricing, although we will look at it as we will look at every 
characteristic associated with risk in the portfolio. And we 
will address those items as we go forward.
    Mrs. Capito. So the answer to that is you are going to keep 
the moratorium on. Do you anticipate that having a hiring of 
the overall risk officer would have some relationship to 
whether you move in this direction or not?
    Mr. Stevens. It will absolutely. The risk officer who we 
are hoping will join FHA is an extremely strong, well-known 
risk manager in the industry. And this individual will play a 
role to help be an arbiter, an independent objective advisor, 
solely focused on credit risk management. When this individual 
comes in, we will take that data review, how he builds his 
team, and take that into judgment, without question, in terms 
of decisions that are made going forward.
    Mrs. Capito. Let me ask you about the two reserve accounts 
that you have. You have indicated that FHA has $30 billion in 
reserves in the capital reserve account. Can you pull your 
little chart up there? So that is the green part, right?
    Mr. Stevens. Let me just cover them both. The green is the 
financing account. And it is this account that the 2 percent 
capital reserve does not apply to on both sides. The capital 
reserve is measured off of the secondary account, which is 
really by law stated to be excess reserves above and beyond the 
reserves that need to be held to pay for forecasted claims.
    Mrs. Capito. But it is mandated by Congress to stay at the 
2 percent or above level, correct?
    Mr. Stevens. That is correct.
    Mrs. Capito. And the second one, it falls below that 
because you are scraping the money off to meet what you 
anticipate future losses may be?
    Mr. Stevens. That is correct.
    Mrs. Capito. Let me ask you: Where is this money? Is it 
actually in an account somewhere where you can draw down on it, 
or is it like the Social Security Trust Fund, just sort of out 
there?
    Mr. Stevens. The money is held in the Treasury. Is it held 
in a special account designed solely for this capital reserve?
    Mrs. Capito. Yes.
    Mr. Stevens. We would have to ask the Treasury how they 
hold those funds. Here is what I would tell you, and I think it 
is critical and I have talked about this with other 
interagencies within the government. This is true excess 
capital that was generated through the MMI collections at FHA 
that are held--that are not being applied to losses. Those 
funds in any financial services standard would be real capital.
    So how the Treasury deploys capital: just like a bank. A 
bank will hold capital reserves. If every individual went to 
withdraw tomorrow their money from the bank, would the bank 
have that money in the balance sheet? I cannot answer that 
question nor can I attest to what the Treasury holds in its 
reserves today related to obligated funds. But I will tell you 
that it is real capital and it is real excess reserves, and it 
is tracked specifically. And in fact, the moves that we take 
shift money from the capital reserve account to the financing 
account.
    Mrs. Capito. So we are still not really sure where it is, 
though. Let me ask you, then--pull your chart back up there. I 
want to make sure I understand this. So you are over on the 
second area right now where it is anticipated you are going to 
be. How do you anticipate moving that blue line up to the 2 
percent if you are anticipating that the losses--that the 
possible losses that you could incur--we are looking at a 
market here now where we have rising unemployment, we have 
people who are defaulting on their mortgages, and I am certain 
that your default rate and your delinquency rate is up higher, 
I believe, than it has been.
    Mr. Stevens. Yes.
    Mrs. Capito. And certainly that is a reflection, I don't 
think of FHA, but it is just a reflection of the economy in 
general. How do you anticipate moving that blue line up and at 
what point--is that years into the future? And how long can 
that point stay below 2 percent with a congressionally mandated 
level of 2 percent?
    Mr. Stevens. Right. So the remedy--and we can talk about 
that maybe secondarily under Cranston-Gonzalez--gives the role 
of the Secretary to get it back above 2 percent.
    But before I go there, let me just answer the real core to 
your question. The independent actuarial review, although it is 
not complete because it doesn't have the final fiscal year 
close September numbers in it, we don't expect it to vary 
significantly. But the independent actuarial review is going to 
show that the FHA MMI fund will get back above 2 percent on its 
own, above 2 percent within the next 2 to 3 years. And the 
reason for that is the way that the capital will grow is that 
it will grow because new insurance is coming into the balance 
sheet at record levels, with credit characteristics that are 
significantly different than past book years, particularly 2007 
and 2008.
    And let me just share with you a couple of factors that the 
actuarial audit took into account when they were coming up with 
this--when they were looking at the forecast of the fund. They 
assumed several key dynamics, but I want to share a couple of 
dynamics. They assumed that claims on the 2007 book of 
business, ultimate 30-year lifetime claims, would run at 24 
percent, more than double the worst year in history, almost. 
And that the 2004--
    Mrs. Capito. Claims on full mortgages that are defaulted; 
am I understanding that correctly?
    Mr. Stevens. That lifetime claims on the 2007 book in total 
would be 24 percent.
    Mrs. Capito. So one in every four?
    Mr. Stevens. That is right. Correct. And that its claims on 
the 2008 book would run at about 20 percent. We will see those 
numbers may vary slightly based on their final forecast. But it 
is going to be close to that level that we expect to be in the 
review.
    The second thing it is going to use, it is going to use a 
forecast received from Global Insight--who I believe is on the 
next panel--that did a home price appreciation forecast. They 
will revise--
    Mrs. Capito. Appreciation?
    Mr. Stevens. Home price forecast.
    Mrs. Capito. Depreciation or appreciation?
    Mr. Stevens. In this case it is a depreciation forecast. 
Thank you. This was a significant change over the previous 
forecast.
    A year ago when the audit was completed and provided to 
Congress, it used Global Insight's forecast, which forecasted 
that the home price market would bottom out towards the end of 
this calendar year. In the forecast that is being used for this 
upcoming audit by our independent auditor, the forecast is 
based on information from about a month ago which shows that 
home prices will not bottom out until somewhere in the end of 
the first quarter of 2009. And home prices will--
    Mrs. Capito. 2010?
    Mr. Stevens. Home prices will continue to decline 
approximately--
    Mrs. Capito. You said 2009.
    Mr. Stevens. Excuse me, 2010. Thank you.
    And that home prices will continue to drop approximately 
8\1/2\ percent from now until then. And so that revision in 
that home price forecast, which is somewhat conservative based 
on many other forecasts we are hearing as of late, which I 
think is a well-founded way to look and evaluate the strength 
of the fund, that additional forecast is overlaid onto that on 
top of our claim rate.
    The third item that I just want to highlight is what we 
call recovery rates, or we call it loss severity rates; in 
other words, the amount you recover when homes go into 
foreclosure. And the actuarial study is assuming that the 
recovery rates after foreclosure will also be significantly 
lower.
    So even with that 24 percent claim rate on 2007, 20 percent 
on 2008, worst home price appreciation and worst recovery 
rates, it is still forecasted that the capital ratio--it is 
that number that the audit will say needs to be transferred 
into the financing account to cover losses.
    Mrs. Capito. Well, my next question--which I don't have 
time for another question--was going to be what are you 
modeling this on, but you already answered that. So thank you 
very much. Thank you.
    Chairwoman Waters. Thank you very much. Mr. Green.
    Mr. Green. Thank you, Madam Chairwoman.
    Let me start by complimenting you on the risk mitigation 
efforts that you are endeavoring to put in place. If you would, 
as briefly as you can, because I have another area that I would 
like to go into, tell me how this will function with the risk 
mitigation officer. How will that person function in your 
scheme of things, the type of access a person will have? And I 
compliment you because you are taking an affirmative step to do 
what we are having to mandate in some other areas.
    Mr. Stevens. Thank you. And I appreciate your support of 
the moves we are making.
    I have worked in a variety of financial institutions. I was 
a senior vice president at Freddie Mac. I was an executive vice 
president at Wells Fargo. I have never been in a financial 
institution that hasn't had a chief risk officer. That was the 
first move I promoted in coming into FHA. And the chief risk 
officer in FHA will function at an equal level to any direct 
report I have at the Deputy Assistant Secretary level, and will 
also be directly involved in risk management discussions with 
the Secretary and other senior leaders within HUD and any 
interadministration discussions as we talk about risk 
management. So this individual will be coming in at a direct 
report position to me.
    This individual will also act as a completely independent 
organization within FHA. And I will be coming back with 
requests to create a broader organization under this individual 
over time to ensure that this organization is resourced to the 
level needed to appropriately analyze and impact risk 
management with policy recommendations over time.
    Mr. Green. Thank you. That may be a vote. If it is, I would 
like to be fair to my colleagues, so I will be brief with my 
next question.
    The net worth requirements for the mortgagees, I see that 
you are seeking to make sure that they are properly 
capitalized. Would you give just a brief explanation of how you 
plan to perfect this, please?
    Mr. Stevens. Congressman, I appreciate the question. As you 
know, this is in--this is a rulemaking procedure, so it will go 
out for public comment. What we have proposed is as follows: 
that the minimum capital requirements for mortgage lenders will 
increase to $1 million. That is consistent with how other 
industry players, including Freddie Mac and Fannie Mae, set 
capital levels. There is a capital breakdown of tangible versus 
nontangible capital, which I would be glad to talk about in 
further discussions.
    But we have analyzed the ability to back up representations 
and warranties made by an institution. In my estimation, a 
million dollars should be the minimum in today's mortgage 
industry market with the loan sizes that we experience today in 
the marketplace. That amount of capital is needed just to back 
up a limited number of claims that an institution may have to 
support should they manufacture a loan incorrectly.
    Mr. Green. You also are moving to do something with the 
loan correspondence to make sure that they are properly, shall 
we say, within the system. Can you please explain?
    Mr. Stevens. Correct. Yes. A loan correspondent by 
definition at FHA is a mortgage broker. Mortgage brokers do not 
underwrite their loans or fund their loans, particularly do not 
fund their own mortgages. Those loans are sold on a wholesale 
basis and underwritten and funded by a wholesale lender, albeit 
Wells Fargo or Bank of America or whomever is ultimately 
funding those loans for them. Mortgage brokers act essentially 
as an extension of a lender. And to that extent, for FHA to be 
in the position of monitoring institutions that are clients of 
banks is not a position we should play in a quasi-secondary 
marketplace in the industry.
    Just to put it in perspective, Freddie Mac and Fannie Mae 
never monitor or approve mortgage brokers. They only approve 
direct sellers, and it really comes down to resource capacity, 
and the ability to have those resources be able to inspect that 
level of institution in the marketplace. There are tens of 
thousands of mortgage brokerage companies in America. If they 
had to all be approved by FHA, we would have to come to 
Congress and ask for a staff of thousands to be able to monitor 
an industry of this size.
    We believe that the net effect will be that well-run, well-
managed mortgage brokers, more of them will have access to the 
FHA program through their sponsoring lender. But it will remove 
the obligation and risk to the taxpayer and the government to 
have to monitor these tens of thousands of mortgage brokers who 
do not actually underwrite or fund their mortgages. So we 
believe it will be expansive to the marketplace as a net 
effect. But at the same time, it will control risk and fraud by 
putting that responsibility on the backs of the institutions 
that have the capital to back up representations and 
warranties.
    Mr. Green. Thank you, Madam Chairwoman. I yield back.
    Chairwoman Waters. Thank you very much. Mr. Miller, before 
we go to vote, we will hear from you.
    Mr. Miller of California. I appreciate your explanation on 
how your real capital reserves are handled and where they are 
at. The problem I have is not you, it is us. We have on-line 
budgeting, which is general fund monies. And we have off-line, 
which is Social Security, which we can't spend. Then we send it 
to Treasury, and it becomes a unified budget and we spend it 
all. So we have probably already spent your reserves. 
Therefore, if you needed more, we would just write you a check, 
you would give it back to us, and we would spend it too. So I 
don't think it matters where we go. In the end, it is the same.
    But you talked about increasing capital reserves for loan 
originators. Is that banks, mortgage brokers and such? How much 
have you increased? Is that the 5 percent we have talked about?
    Mr. Stevens. In terms of capital reserves, the current 
standard for FHA is lenders can get an FHA Eagle with as little 
as $250,000 in capital, of which only 20 percent has to be 
tangible. So for roughly--
    Mr. Miller of California. Even if 5 percent of my loan is--
    Mr. Stevens. We are taking it from $250,000 to a million 
dollars.
    Mr. Miller of California. Okay. We have talked about in the 
past the $8,000. I kind of consider that a downpayment 
assistance program, through the government, of giving people 
$8,000 for first-time home buyers. How successful has that been 
in the marketplace today?
    Mr. Stevens. The downpayment assistance--excuse me, the 
tax, not the downpayment assistance.
    Mr. Miller of California. Same thing.
    Mr. Stevens. I think it is important to distinguish. The 
one rule that FHA made as it relates to the tax credit, is this 
tax credit could not be used for the 3.5 percent minimum 
downpayment requirement. It can be used for additional funds 
outside of that.
    We think it has had some impact on first-time home buyer 
access to the market place. I think the exact impact is being 
measured right now by the Administration and we will see, as we 
reflect back, the ultimate impact on that program.
    Mr. Miller of California. Now, we have increased loan 
limits in high-cost areas. Has that had any impact on your 
capital reserves?
    Mr. Stevens. Interestingly, the high-cost limits have not 
had an impact on capital reserves, but they have had an impact 
on certain markets. So just to give you a perspective on that, 
at FHA in our total portfolio, loans over $417,000 are about 2 
percent of our portfolio. So very little use of the high-dollar 
limits has been used.
    However in California, for example, 13 percent of the loans 
are FHA that we are seeing right now. So in high-cost markets, 
I believe FHA is having a profound impact.
    Mr. Miller of California. A positive impact?
    Mr. Stevens. Positive impact.
    And to use an example from your State, if you are looking 
at a $500,000 sales price today, and you are a family who wants 
to buy a home, they are qualified, they have income, they have 
good credit. But for lack of a $50,000 downpayment--which would 
be 10 percent--or a $100,000 downpayment--which would be 20 
percent--they can't buy a home and that could retard the 
recovery of communities. So with about a $20,000 downpayment, 
they can buy that home through FHA.
    And remember, these are fully documented borrowers with 
jobs and good credit. There is no stated income, nothing but a 
30-year fixed rate mortgage in the program.
    So we believe that the program in markets such as 
California and other high-cost markets is having a direct 
impact. But it is not having a big impact on our portfolio.
    Mr. Miller of California. There are some of us who fought 
on that issue for 8 years to get that to occur, because we 
really felt there would be a true benefit in these high-cost 
areas.
    What is your opinion on making that permanent? And also the 
home buyer tax credit, extending it to anybody who wants to 
buy, rather than just first-time home buyers, but anybody who 
is buying a home in this marketplace. On those two issues, what 
would be the current opinion?
    Mr. Stevens. Let me separate them both. And first, the 
Administration is looking very closely at both of them, and we 
are working very closely with the data and we talk about it and 
look at the impact on the markets very carefully, and others 
who are testifying here today will have their own opinion. We 
believe that the higher limits have had a direct impact.
    And with the absence of capital, on nonconforming loans, we 
believe there could be an impact if private market capital is 
not readily available on loan amounts over the traditional 
conforming loan limits. So we do think at this point it has had 
an impact and we will look to see what the results are of that 
extension.
    As it relates to the first-time home buyer tax credit, 
there is a variety of data that we have been looking at, both 
in our own data, and the National Association of Realtors has 
published a great deal of data about it. We do know there has 
been a large number of first-time home buyers. We do know that 
80 percent of our purchase transactions within FHA this year 
are first-time home buyers. So FHA is having a large impact on 
the first-time home buyer market.
    As it relates to specifically the impact of the tax credit 
and how that would impact the market going forward, that has 
not been measured to my satisfaction yet.
    Mr. Miller of California. My last question is, the changes 
you made in appraisal standards and underwriting standards, 
what benefit in the long run do you think those are going to 
have on the FHA system and GSEs and whatever throughout the 
marketplace?
    Mr. Stevens. I think it will have a profound impact. I 
think it is going to be very important. We have the Home 
Evaluation Code of Conduct, which is a highly contentious rule 
that has been put out in the industry, primarily by Freddie Mac 
and Fannie Mae, has done--the most important thing that it did 
to help the industry was it separated influence in the 
transaction from a commission earning salesperson to the 
individual examining that collateral. And to that extent, 
having that arm's length separation, I will tell you from my 
professional experience of almost 3 decades in this industry, 
was a very important move.
    Our announcement takes away some of the impacts that people 
have been most concerned with. One, it clearly states that the 
use of an AMC, an appraisal management company, is not 
required. It doesn't prohibit, nor does it require, but it 
encourages the use and payment to appraisers that is common to 
the industry and it encourages that--
    Mr. Miller of California. I do think we need some 
clarification, So we need to talk about that. But I thank you 
for your time.
    Chairwoman Waters. You are certainly welcome. We are going 
to hear from Mr. Lee. We will be able to finish this panel and 
we will go take our vote and we will come back and take the 
second panel. Mr. Lee?
    Mr. Lee. I will be very brief, and I appreciate the chance 
to ask a quick question.
    I come from western New York, where we never really had a 
housing boom to bust, and it is a very conservative area where 
people are careful with how they spend their money. One of the 
concerns I hear over and over again is fraud and abuse and what 
we are trying to do to rein that in. I believe Mrs. Capito had 
mentioned the fact that myself and John Adler had gone together 
on a bill, H.R. 3146, to help provide some needed flexibility 
and support for you to amend some of this or ferret out some of 
the fraud and abuse. Unfortunately, right now this is 
languishing in the Senate.
    Specifically, what procedures do you currently have in 
place at the FHA to help identify fraudulent FHA lenders?
    Mr. Stevens. Let me first respond by saying, again, we very 
much appreciate the support for building fraud tools. And at 
FHA--what I would strongly articulate for everybody who has 
concerns about this housing finance system is that without a 
strong FHA and well-managed FHA, this housing recovery would 
not be occurring, or any signs of recovery would not be 
occurring. And first-time home buyers would be literally, I 
believe, locked out of the market in a broad way, and 
minorities would be locked out of the market in a broad way. In 
order for it to remain strong, it must have risk management and 
fraud tools in place that are state-of-the-art. And today, we 
have an exceptional group that does counter party risk 
management. Our Inspector General, as well, does audits.
    We work very closely in communicating information back and 
forth. We review institutions based on data that comes in on a 
monthly basis through our system, and we act on those 
institutions. I do believe that support for expanding our 
technology, our systems, and our personnel is critical to the 
long-term performance of FHA and particularly critical to 
ensuring that we have enough resource capacity to weed out 
fraud in the marketplace.
    Mr. Lee. Let me just briefly--because I know we are running 
out of time. But through that analysis--and you have found now, 
through analysis, that you have a lender that is less than 
scrupulous, and we want to remove them, what specific steps are 
taken, then, to get them out of this program?
    Mr. Stevens. It will depend on the nature of what we 
uncover with these companies.
    I would just like to back up. I think the SAFE Act in 
tandem with fraud tools is going to be a valuable tool; because 
what happens is often it is a rogue loan officer working for an 
institution who may perpetuate the fraud. And when we go after 
the institution, which we often do, that loan officer can 
simply walk across the street and start working for another 
company, without any monitoring.
    The SAFE Act, which goes into effect over the next year, 
will have a direct impact on monitoring those loan officers. I 
think to that extent it is critical. What we do is we have a 
mortgagee review board, which I chair. It includes the 
Inspector General, it includes the General Counsel, and it 
includes some of the key business participants. And we review 
those institutions on a frequent basis and we take action 
against those institutions.
    We have done a series of those in my first couple of months 
here. Taylor, Bean & Whitaker was obviously the big headline 
news, but there have been many others that we have taken action 
against.
    Mr. Lee. Thank you. With that, I will yield back.
    Chairwoman Waters. Thank you very much. Thank you very 
much, Commissioner Stevens, for being here today.
    As Chair of the Subcommittee on Housing and Community 
Opportunity, I want you to know I am extremely pleased with 
what you have done in the short period of time that you have 
been there. We look forward to working with you. We believe, 
most of us, that FHA is extremely important for creating 
opportunities for people who could not otherwise get into the 
mortgage market, and we know that you will continue to do a 
good job.
    Thank you very much, and we are going to go and take a vote 
now and we will call on the next panel when we come back. Thank 
you.
    Mr. Stevens. Thank you.
    [recess]
    Chairwoman Waters. We will resume our hearing in this 
Subcommittee on Housing and Community Opportunity. And we will 
call up our second panel. I would like to welcome our 
distinguished second panel.
    Our first witness will be Mr. Patrick Newport, U.S. 
economist, IHS Global Insight.
    Our second witness will be Mr. Edward Pinto, real estate 
financial services consultant.
    Our third witness will be Mr. Boyd Campbell, member of the 
executive committee of the Maryland Association of Realtors, on 
behalf of the National Association of Realtors.
    Our fourth witness will be Mr. David Kittle, chairman, 
Mortgage Bankers Association.
    Our fifth witness will be Mr. John L. Councilman, Federal 
Housing Committee chair, National Association of Mortgage 
Brokers.
    Our sixth witness will be Mr. Peter Bell, president of 
National Reverse Mortgage Lenders Association.
    And our seventh witness will be Ms. Teresa Bryce, 
president, Radian Guaranty, Incorporated, on behalf of the 
Mortgage Insurance Companies of America.
    Without objection, your written statements will be made a 
part of the record. You will now be recognized for a 5-minute 
summary of your testimony, starting with our first witness, Mr. 
Patrick Newport.

   STATEMENT OF PATRICK NEWPORT, U.S. ECONOMIST, DIRECTOR OF 
         MACROECONOMIC FORECASTING, IHS GLOBAL INSIGHT

    Mr. Newport. Thank you. My presentation includes charts 
that are on the last page of the handout.
    My name is Patrick Newport, and I am the director of long-
term forecasting at IHS Global Insight, an economic forecasting 
and consulting company based in Lexington, Massachusetts. I 
have been with IHS Global Insight since 1998 and am part of the 
U.S. Macroeconomic Service where I cover the national housing 
market. I have a Ph.D. in economics from Harvard University and 
an undergraduate degree from Louisiana State University. Thank 
you for inviting to us this hearing.
    I have been asked to discuss IHS Global Insight's U.S. 
housing outlook with a focus on housing crisis and the tax 
credit for first-time home buyers.
    I want to start by discussing housing prices. According to 
a number of measures, housing prices are stabilizing. They are 
stabilizing nationally and across most large cities. They are 
stabilizing across the world. You can see this in the first 
chart which tracks the Federal Housing Finance Agency's 
seasonally adjusted, Purchase-Only House Price Index at a 
monthly interval.
    Over the period from 2000 through 2006, inflation-adjusted 
house prices rose about 33 percent, peaking in March 2006. 
Since then, real prices have dropped 14 percent and are now 13 
percent above their average value in 2000. Nominal housing 
prices, which are not adjusted for inflation, rose 63 percent 
over the same period of 2006 and have dropped about 11 percent 
from their peak. The FHFA House Price Index bottomed out in 
April 2009 and has risen now for 3 straight months.
    A second measure of house prices, the Case-Shiller House 
Price Index, is showing a similar pattern. In July, seasonally-
adjusted prices increased in 17 of the 20 cities that Case-
Shiller covers. Nine cities saw prices rise for the third 
straight month. Las Vegas was the only city reporting a steep 
decline. The key reason for this recent stabilization, which I 
would characterize as occurring much sooner than expected, is 
the decline in long-term interest rates.
    My third chart plots the yield on the 10-year Treasury 
note, which, as you can see, is near its lowest level since 
1960.
    The fourth chart tracks long-term fixed mortgage rates, 
which are also near historical lows. There are more reasons 
that prices are stabilizing. One is that prices have fallen so 
far that, by some yardsticks, they are below their long-run 
equilibrium value.
    A third reason is a tax credit for first-time home buyers 
which has stimulated demand. I would like to briefly discuss 
this factor because it plays an important role in IHS Global 
Insight's housing outlook for 2009 and 2010.
    According to recent surveys of real estate agents by 
Campbell surveys, about 1.6 million of the 3.9 million homes 
sold through mid-September went to first-time home buyers. If 
one extrapolates these numbers, first-time home buyers will 
total about 2 million in 2009 and about 400,000 of these, 
according to the survey's methodology, will be incremental 
buyers; that is, buyers who would not have bought a home this 
year without the tax credit. The impact of the tax credit thus 
is not trivial.
    The main effect of the tax credit is to shift demand from 
2010 into 2009; therefore, once the tax credit expires, demand 
will take a hit, home sales will drop, and house prices will 
resume their downward course, depressed by the weight of rising 
foreclosures and rising unemployment rates. Our view is that 
home prices will drop another 5 percent from current levels, 
hitting bottom in 2010.
    My fifth chart is the forecast for home sales. As you can 
see, the pace has accelerated since bottoming out in the first 
quarter of this year, and we expect it to reach about a 6 
million unit pace in the fourth quarter of 2009. The drop that 
you see in 2010 is a result of the tax credit expiring. We 
expect sales to tail off to about 5.5 million in 2010.
    Although we don't see bond yields heading substantially 
higher over the long run, it is too early for a bear market to 
begin, since we judge the economy as too weak, inflation too 
distant a threat. Markets appear to have taken this view, and 
yields are now below 3.5 percent. And we expect them to remain 
below 4 percent in 2010 and most of 2011.
    [The prepared statement of Mr. Newport can be found on page 
95 of the appendix.]
    Chairwoman Waters. Thank you. Your time has expired. And we 
will get back to you with questions.
    We will now move to our second witness. That is Mr. Edward 
pinto, real estate financial services consultant.

 STATEMENT OF EDWARD J. PINTO, REAL ESTATE FINANCIAL SERVICES 
                           CONSULTANT

    Mr. Pinto. Thank you, Chairwoman Waters, Ranking Member 
Capito. Thank you for the opportunity to testify today.
    I have 35 years experience in all facets of housing 
finance. I am here to advise you of the growing crisis at FHA 
so that this subcommittee will not be able to say that no one 
told them.
    FHA's annual rate of new foreclosure starts increased from 
0.15 percent in 1951, to 2.36 percent in 1998, to an estimated 
4.4 percent in 2009. This is a 30-fold increase, an increase 
that would have been much greater but for the massive recent 
growth of FHA. This trend will continue as millions of recently 
insured high-risk loans start foreclosing in greater numbers.
    FHA's lending practices negatively impact each and every 
neighborhood in all of your districts. The reduction in 
downpayments over the past decades has helped fuel the rising 
foreclosure rates that have plagued FHA and conventional 
lending.
    Why does FHA appear destined for a taxpayer bailout? Number 
one, the FHA and the VA now account for over 90 percent of all 
low-down-payment loans. I have seen dozens of cases where 
market share expanded into a vacuum created by exiting players, 
and all ended badly. Two, FHA's dollar volume has exploded and 
is running 4 times its volume in 2006. Three, FHA's top dollar 
limit is now $729,000, double last year's limit, and it just 
was raised in time as the high end of the home market comes 
under increasing stress.
    Yes, FHA's average FICO score has increased from 631 to 672 
in the last 2 years, and in August it was even higher at 692. 
Two notes of caution. August rates of 692 FICO about equals 
Fannie and Freddie's FICO average of 695 on their combined $400 
billion portfolio of low, low-down-payment fixed-rate loans 
that were owner-occupied, generally full-doc, many of the 
characteristics that FHA has. This portfolio is performing 
extremely poorly. Fair Isaac Corporation, producer of FICO 
scores, reports that a 690 FICO on mortgages originated in 
October 2008 performs like a 630 FICO in 2005-2007. On a FICO 
basis, FHA's risk has not improved.
    FHA's early warning database shows loan performance is 
deteriorating. Its early warning default rate has increased by 
57 percent since 3 years ago. If volume hadn't grown so 
rapidly, it would have gone up even more. Its cure rate has 
dropped from 50 percent 3 years ago to 19 percent today. Last 
month's changes, such as an increase in lender net worth, are 
little more than Band-Aids. The issue has moved beyond net 
worth to FHA's business being concentrated among four ``too-
big-to-fail'' lenders. In August of 2009, Wells Fargo, Bank of 
America, Chase Home Finance, and Citi Mortgage were responsible 
for 85 percent of all FHA loans added.
    FHA has two reserve funds. You have heard that reported 
earlier. I estimate that the losses embedded in FHA's $725 
billion in single-family risk-in-force at $70 billion. 
Interestingly, Commissioner Stevens had some of the same 
numbers I came up with, about a 20 percent loss rate or default 
rate, and I used a 50 percent loss rate on those, yielding a 10 
percent total loss yielding the $70 billion. The premiums 
charged on FHA loans are something under 5 percent. Therefore, 
there is a big shortfall.
    I don't expect the audit to project the losses I am 
showing. I believe their assumptions will be overly optimistic 
both as to the loss mitigation benefits of loan modifications 
and recent and proposed underwriting changes. In my prepared 
remarks, I talk about the problems that the loan modification 
problems that FHA has had, are having, and continue to have, 
and I believe they are worth your study.
    There are four positive changes that would provide more 
consumer protection, police FHA lenders, and end FHA's 
nightmare of foreclosures. First, set a minimum downpayment of 
10 percent. Second, limit FHA's volume to 5 to 10 percent 
market share. Third, reduce the dollar limit to a level 
consistent with the FHA's low- and moderate-income housing 
mission. And, fourth, require FHA lenders to have skin in the 
game.
    I have also outlined in my prepared remarks a specific 
program on how to help homebuyers save the requisite 10 percent 
downpayment over a 5-year plan, and I would ask that you look 
at that also. Thank you very much.
    [The prepared statement of Mr. Pinto can be found on page 
99 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Campbell?

   STATEMENT OF BOYD CAMPBELL, MEMBER, EXECUTIVE COMMITTEE, 
  MARYLAND ASSOCIATION OF REALTORS; MEMBER, GSE PRESIDENTIAL 
     ADVISORY GROUP, NATIONAL ASSOCIATION OF REALTORS (NAR)

    Mr. Campbell. Madam Chairwoman, Ranking Member Capito, and 
members of the subcommittee, thank you for the opportunity to 
share our views of the importance of FHA mortgage insurance. My 
name is Boyd Campbell, and I am a managing partner and 
associate broker for Century 21 Home Center in Lanham, 
Maryland. I serve on the Maryland Association of Realtors 
Executive Committee and as a member of the National Association 
of Realtors Presidential Advisory Board on Government-Sponsored 
Enterprises. I have worked extensively with FHA and consumers 
who would not be able to purchase a home without it. I testify 
today on behalf of 1.2 million members of the National 
Association of Realtors.
    The Federal Housing Administration is more important than 
ever to homebuyers. In the wake of a collapsing private 
mortgage market, FHA has played a critical role removing 
inventory from the market and stabilizing home prices. For this 
reason and many more, the strength and solvency of the FHA is a 
top priority for Realtors who work every day building our 
Nation's communities. We continue to believe in the financial 
stability of FHA and think their solid underwriting and prudent 
policies have helped them withstand the housing collapse.
    Although FHA's capital reserves have fallen, it is 
important to remember that this is not the result of 
irresponsible lending or high default rates. Instead, it is 
simply the result of falling housing prices for the loans in 
their portfolios. The overall reserves of FHA have never been 
stronger, and their borrowers have higher credit scores and 
higher equity than ever before.
    We support what FHA is doing to make appropriate changes to 
ensure its continuedviability. Under the leadership of Dave 
Stevens, FHA is well poised to continue to meet its mission of 
making available safe, affordable mortgage financing to 
American families without risk to the taxpayer.
    NAR supports several enhancements to the FHA program to 
ensure that more homeowners can take advantage of their program 
to purchase affordable properties. First, NAR strongly supports 
increased funding for FHA to upgrade their technology and the 
flexibility to hire appropriate staff and expert consultants to 
work on specific program areas within FHA's operations.
    The House recently passed H.R. 3146, the 21st Century FHA 
Housing Act of 2009, which would upgrade outdated systems and 
allow flexibility for hiring. We also understand funding for 
technology has been included in the appropriations bill for 
HUD. We urge that funding be included in the final version of 
the fiscal year 2010 appropriation for HUD.
    NAR also recommends several changes to FHA's requirements 
related to condominium purchases, which are the most affordable 
housing option for purchasers. Specifically we ask that FHA 
eliminate their owner occupancy requirements, increase or 
suspend the FHA concentration limit, eliminate the presale 
requirement, clarify the condo reserve study, and eliminate the 
spot loan approval process. All of these changes would help 
consumers with more affordable choices when purchasing a home, 
would help strengthen our communities, and reduce inventory and 
stabilize home prices.
    Finally, Realtors strongly support making permanent the FHA 
loan limits that are currently in effect. The current loan 
limits are set to expire in just a few months, on December 31, 
2009. We believe lowering the loan limits will further restrict 
liquidity and make mortgages more expensive for households 
nationwide. Committee members Brad Sherman and Gary Miller have 
introduced a bill, H.R. 2483, that would make the current loan 
limits permanent. We urge the subcommittee to quickly consider 
this important legislation.
    In addition to strengthening FHA, NAR asks that Congress 
consider two other courses of action to ensure the housing 
market recovers. First, Realtors ask that you extend the $8,000 
first-time homebuyer tax credit through 2010. NAR's research 
shows that 350,000 sales this year can be directly attributed 
to the availability of the credit. Retaining the tax credit 
will sustain our economic turnaround and build a stronger 
recovery.
    Second, we ask Congress to urge the Obama Administration to 
quickly implement the new Foreclosure Alternative Program, 
which would help to promote and improve short sales, giving 
more families a viable alternative to foreclosure.
    The National Association of Realtors believe in the 
importance of FHA and think it has shown tremendous leadership 
and strength during the current crises. We believe Congress and 
the Administration are taking the right steps to facilitate the 
economic recovery. Now is not the time to pull back. Additional 
resources are needed to ensure the housing market and our 
national economy recovers.
    Thank you for this opportunity to testify. We stand ready 
to work with you to accomplish our recommended proposals.
    [The prepared statement of Mr. Campbell can be found on 
page 54 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Our fourth witness will be Mr. David Kittle.

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

    Mr. Kittle. Thank you, Chairwoman Waters and Ranking Member 
Capito. MBA greatly appreciates the continued attention this 
subcommittee has focused on FHA. We are here today because 
after withering on the vine for so much of this decade, the FHA 
is back, and is now insuring upwards of a third of the mortgage 
market. FHA is serving as a vital source of liquidity during 
the current downturn, and it was this committee working on a 
truly bipartisan basis that helped pave the way for FHA's 
resurgence with the passage of last year's landmark Housing and 
Economic Recovery Act.
    Today, amidst much good news about FHA's renaissance, there 
is also cause for concern, which is what brings us here this 
afternoon. FHA's capital reserve ratio has dropped to a 
dangerous new low, and some are starting to wonder whether 
taxpayers will be required to step in and, dare I say, bail out 
FHA. So I think it would be beneficial to first examine why FHA 
is at a crossroads.
    Like the rest of the mortgage finance industry, FHA has not 
been immune from the economic disruptions that have roiled the 
entire housing sector. A rapidly rising unemployment rate has 
led more FHA borrowers to fall behind on their mortgages, while 
plummeting home prices have resulted in more foreclosures and 
greater losses on each property. Add to that FHA's mission, 
which is to help borrowers who are underserved by the markets, 
those with lower incomes, less than stellar credit, or 
insufficient downpayments. The result is that 13.7 percent of 
FHA loans are past due with a foreclosure rate of just under 3 
percent. As more loans mature, and if this current trend in 
employment and home prices are not quickly reversed, we 
anticipate both of those figures to increase, placing FHA in 
even greater peril.
    So what do we do about it? We can sit back and hope for the 
best, or we can be proactive and take the necessary steps to 
build a more solid foundation so FHA can continue to fulfill 
its important mission of opening doors to affordable 
homeownership.
    MBA has put forward a comprehensive agenda that will build 
on the important reforms contained in HERA. First, Congress 
needs to appropriate the funding it authorized under HERA for 
FHA staffing and technology needs. Allowing FHA to hire 
additional staff to keep up with its growing loan volume is 
good management, and it is a step we can take right away. FHA 
makes money for the Federal Government. It should be allowed to 
use some of it for staffing and technology needs. And FHA 
should be permitted to compensate its staff at the same pay 
scales used by other Federal financial regulators like the FDIC 
and the SEC.
    I want to commend this committee for shepherding through 
the full House H.R. 3146, the 21st Century FHA Housing Act, 
which authorizes up to $72 million annually for FHA. We need to 
redouble our efforts to make certain this money is 
appropriated. We need to improve the quality of FHA 
originations. One way to protect the soundness of the FHA is to 
ensure that the mortgage lenders and mortgage brokers who 
participate in the program and originate FHA-insured mortgages 
have the competence and wherewithal to protect consumers and 
taxpayers from undue loss.
    We believe that rigorous licensing and registration 
requirements as well as net worth minimum bonding requirements 
are essential components of any protective framework. We 
continue to support increased net worth and bonding 
requirements for mortgage bankers and brokers. Net worth 
requirements serve to assure that an originator has a stake in 
the industry.
    Third, Congress needs to make permanent higher loan limits 
that would otherwise expire in December. While it may seem 
counterintuitive at first, higher loan balances actually 
perform better than those at the lower end of the spectrum. 
They require higher downpayments and bring in higher premiums, 
and they are essential to ensuring the availability of 
financing in many areas of the country where there are no other 
options.
    Chairwoman Waters, I would like to close on a personal 
note. I have been in the mortgage business and working with 
FHA-insured loans since 1978. I bought my first house with an 
FHA mortgage. I have seen the highs, and I have seen the lows, 
and I have never given up on FHA. MBA members understand the 
value of FHA, and we are committed to making sure the agency 
weathers the current downturn. We stand ready to work with this 
committee as well as the very capable leadership at HUD to take 
the necessary steps to protect and strengthen its important 
programs. Thank you.
    [The prepared statement of Mr. Kittle can be found on page 
85 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Councilman.

   STATEMENT OF JOHN L. COUNCILMAN, CMC, CRMS, FHA COMMITTEE 
     CHAIR, NATIONAL ASSOCIATION OF MORTGAGE BROKERS (NAMB)

    Mr. Councilman. Good afternoon, Chairwoman Waters, Ranking 
Member Capito, and members of the subcommittee. I am John 
Councilman, the FHA Committee Chair of the National Association 
of Mortgage Brokers. I am a certified mortgage consultant and 
certified residential mortgage specialist with over 26 years of 
experience as a mortgage broker. I would like to thank you for 
the opportunity to testify today with regard to the future of 
the Federal Housing Administration's capital reserves.
    Before I address our overall concerns, I must first 
extinguish some false allegations targeted at mortgage brokers. 
Brokers do not create loan products. We do not underwrite the 
loan or approve the loan or the borrower. We provide a consumer 
with a variety of choices, then permit them to choose the loan 
and loan payments that fit their particular needs. A mortgage 
broker is an independent origination channel helping consumers 
purchase or refinance their home in communities large and 
small, urban and rural, in all 50 States. Mortgage brokers are 
defined by FHA as correspondents. Typically, mortgage brokers 
transfer FHA-insured mortgages to sponsoring lenders who 
underwrite the loan, and then the correspondent and the 
underwriting lender are responsible for adhering to all FHA 
regulations and guidelines.
    NAMB was the first to call for heightened professional 
standards and licensing for all mortgage originators. In July 
2008, the Safe Act established the very standards we sought. 
Under the SAFE Act, all State-licensed originators are required 
to undergo criminal background investigations, submit 
fingerprints, and meet minimum education and testing standards. 
This ensures that mortgage originators remain competent, and 
prevents unqualified individuals from entering or working in 
the mortgage industry.
    We believe FHA rules and policies and recent reforms across 
the entire mortgage industry will prevent the problems leading 
to the collapse of the subprime market from creeping into FHA. 
The new SAFE Act standards, coupled with FHA's monitoring and 
approval requirements, insulate against that happening. FHA set 
higher standards than the subprime market. FHA does not permit 
features such as prepayment penalties, no income verification, 
sharp payment rises that were prevalent in so many subprime 
loans, creating higher risk. As a result, FHA loans have 
performed better than subprime or even Alt-A loans.
    Now, FHA Commissioner Stevens has proposed sweeping policy 
changes to the FHA loan program that greatly impact mortgage 
brokers. NAMB applauds the Commissioner for the work he has 
done; however, we do believe there are some issues to be 
remedied. My written testimony will provide the committee with 
more detail.
    We do recommend updating the Neighborhood Watch Early 
Warning System, improving the Mortgagee Review Board process, 
increased funding, permanently establishing increased FHA loan 
limits at their current levels, and flexible mortgage insurance 
premiums.
    There are two areas of particular concern to NAMB members. 
A recent mortgagee letter will force FHA lenders to adopt most 
of the Home Valuation Code of Conduct, the HVCC adopted by 
Fannie Mae and Freddie Mac. It would prohibit mortgage brokers 
from ordering appraisals. The HVCC purports to enhance the 
independence and accuracy of appraisals by effectively turning 
the appraisal process over to appraisal management companies, 
AMCs; however, what the HVCC truly accomplishes is a dramatic 
increase in consumer costs and a decline in appraisal quality, 
missed closing deadlines, and the virtual extinction of 
independent appraisers, causing a decline in home values and 
resulting in a loss of local tax revenue.
    We find it unconscionable that consumers are paying more 
for inaccurate appraisals. Many of the AMCs are owned by major 
lenders, making appraisals an excellent source of revenue for 
them whether a loan closes or not. Appraisers are reportedly 
getting greater pressure from these AMCs than they experienced 
previously. We urge Congress to quickly pass H.R. 3044, which 
has 108 cosponsors. That would put the HVCC on hold while 
developing a better plan. FHA's implementation of the core HVCC 
by January 1st should be immediately reversed.
    Our second area of immediate concern is the plan to 
eliminate correspondent mortgagees. Originators of FHA loans 
would no longer be supervised, approved, or monitored by HUD. 
NAMB agrees that an audit for these mortgagees is not needed; 
however, originators need full access to the FHA connection, 
total scorecard, and FHA's industry outreach. NAMB would 
welcome the opportunity to work with FHA on this process.
    Studies show that mortgage brokers are the most efficient 
mortgage distribution channel. They are vital to the health of 
FHA, and our members have proposed many of the changes enacted 
by FHA in recent years.
    NAMB appreciates the opportunity to appear before this 
committee, and we look forward to continuing to work with you 
and other regulators to craft solutions that face the industry. 
Thank you. I will be happy to answer any questions you may 
have.
    [The prepared statement of Mr. Councilman can be found on 
page 69 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Bell?

    STATEMENT OF PETER H. BELL, PRESIDENT, NATIONAL REVERSE 
              MORTGAGE LENDERS ASSOCIATION (NRMLA)

    Mr. Bell. Madam Chairwoman, and members of the committee, 
thank you for the opportunity to appear at this hearing to 
discuss the often misunderstood topic of reverse mortgages.
    Today, the reverse mortgage market is comprised almost 
exclusively of the FHA home equity conversion mortgage, 
commonly known as the HECM.
    The FHA insurance provides important protections and 
benefits to homeowners. This insurance enables a lender to 
advance a significantly higher percentage of a home's value 
than would be available in an uninsured reverse mortgage. 
Furthermore, the insurance provides an ironclad guarantee that 
the homeowner will have uninterrupted access to the reverse 
mortgage funds if anything should occur to disrupt their 
lender's operations.
    Many have questions about the risks that the various 
parties--borrowers, lenders, and the FHA--are exposed to under 
the HECM program. For borrowers, risks include primarily taking 
a HECM loan, but ultimately finding out that they cannot 
sustain the costs associated with living in the home, 
particularly taxes and insurance, and then being forced to move 
out. These risks can be mitigated by having an effective 
network of competent counselors, and HUD has been working to 
enhance the counseling that is available to reverse mortgage 
borrowers.
    Risks to lenders exist in a few areas. If a HECM loan is 
not properly originated, FHA can deny an insurance certificate, 
leaving the lender with a loan that it is obligated to fund, 
but which does not have insurance.
    The risk to FHA can arise from essentially three factors: 
loans remaining outstanding beyond their actuarial expectation; 
higher interest accrual; or a decline of property values.
    To manage the program with greater caution, HUD has taken 
steps to mitigate risk by reducing the funds available to 
seniors through a reverse mortgage. HUD recently implemented a 
reduction in what is known as the program's principal limit 
factors, and this has negated the need for credit subsidy, 
returning the program to operating on a net-neutral basis.
    The HECM program has operated on a self-sustaining basis 
throughout its duration, requiring no taxpayer subsidy. Income 
from mortgage insurance premiums has exceeded payouts or 
claims. In fact, according to a recent Congressional Budget 
Office presentation on its 2009 credit reestimate, the HECM 
program has generated a cumulative net gain for FHA of nearly 
$7 billion since its inception. Accordingly, the HECM program 
has not played a role in FHA's recent capital reserve account 
losses.
    The question of whether the program will require a positive 
or negative credit subsidy after 2010 has been raised. With the 
changes HUD has made, NRMLA believes that the HECM program in 
years ahead will operate on a break-even-or-better basis. Risk 
has been mitigated by reducing principal limits. However, it 
should be noted that this adjustment comes at great cost to 
some seniors. In some cases the end result is that seniors will 
not be able to utilize HECM to preserve their ability to 
continue living in their homes, forcing them to move out.
    HUD is also implementing more sophisticated information 
systems to better monitor HECM program performance and reduce 
operating costs. If such systems had been in place previously, 
we believe analysis of the HECM program would have revealed 
that the $798 million in credit subsidy in OMB's initial 
projection might not have been warranted. Based on our 
financial modeling of the program, and consistent with home 
price appreciation assumptions and reports put out by Global 
Insights and other key observers, NRMLA feels that to project 
that subsidy need, one would have to make assumptions about 
home values in the future that are far more pessimistic than 
any of the major forecasters.
    It is also possible that the anticipated duration of loans 
could be overstated in OMB's calculations. HECM loan duration 
averages fewer than 7 years, with very few loans lasting 
longer. Loans to younger borrowers have durations similar to 
loans to older borrowers, a counterintuitive outcome. Payoff 
rates for borrowers who take out loans at age 65 are the same 
as for borrowers at 75: 65-year-olds tend to terminate their 
loans when they sell and move out; 75-year-olds tend to 
terminate their loans after a mortality event.
    If expected loan durations are adjusted to reflect actual 
experience, and future home price assumptions are in line with 
most of the major forecasters, the program could, in our 
opinion, continue to be allowed to operate without the 
principal limit reductions and still not require credit 
subsidy.
    NRMLA supports efforts to keep the program operating on a 
self-sustaining basis. However, we also believe that there are 
other options for achieving this objective, changes that would 
have a less detrimental impact on senior homeowners than 
reducing the amount of money they get. What we have found in 
looking at the impact of the principal limit reductions is that 
over 20 percent of the borrowers in the past year, 
approximately 23,000 homeowners, would have received loan 
proceeds that were less than their existing indebtedness as a 
result of the principal limit reductions. This means that they 
would not receive enough money from their reverse mortgage to 
pay off the existing loan on the property, thus they would not 
be eligible for the HECM, forcing them to sell and move or 
possibly face foreclosure. An alternative we recommend would be 
to adjust the mortgage insurance premiums.
    [The prepared statement of Mr. Bell can be found on page 38 
of the appendix.]
    Chairwoman Waters. Ms. Bryce?

STATEMENT OF TERESA BRYCE, PRESIDENT, RADIAN GUARANTY INC., ON 
  BEHALF OF THE MORTGAGE INSURANCE COMPANIES OF AMERICA (MICA)

    Ms. Bryce. Thank you, Chairwoman Waters and Ranking Member 
Capito. Also, Congressman Green, it is good to see you again. I 
enjoyed our recent discussion on the housing industry and 
mortgage insurance.
    I appreciate the opportunity to testify on behalf of the 
Mortgage Insurance Companies of America. This afternoon, I 
would like to make three points. First, private mortgage 
insurance, or MI, plays an important role in stabilizing the 
current housing market and will play a key role in the market's 
recovery. MI enables responsible borrowers to buy homes with 
less than a 20 percent downpayment. Many of these are first-
time or lower-income home buyers.
    Since 1957, mortgage insurance has helped over 25 million 
families buy homes throughout the country. Today, about 9 
percent of all mortgages held by financial institutions have 
mortgage insurance. Mortgage insurance is important to the 
housing recovery. With today's low housing prices and mortgage 
rates, there is a real opportunity for mortgage insurers to 
help first-time homebuyers and help homeowners attempting to 
refinance, and by doing so, we also enable existing homeowners 
to trade up to purchase a larger home.
    I would also note that because mortgage insurance companies 
have their own capital at risk, we have very clear incentives 
to mitigate our losses by taking action to help borrowers avoid 
foreclosure if at all possible. We understand that one of the 
worst challenges that a family can experience is the loss of 
their home through foreclosure.
    In addition to implementing the government modification 
programs in the requested timeframes, mortgage insurance 
companies have implemented a number of programs such as free 
counseling services and advanced partial claim payments to 
assist borrowers. Over the last 18 months, mortgage insurers 
were able to save almost 200,000 people from losing their 
homes.
    My second point is that the industry has the resources to 
pay claims on existing loans and insure new loans because of 
the rigorous State-imposed capital and reserve requirements. 
These requirements have been in place since the industry's 
inception over 50 years ago and mirror the recommendations made 
at the recent G-20 summit to reform the mortgage securitization 
market.
    In 2007 and 2008, private mortgage insurers paid over $15 
billion in losses and have continued to pay billions of dollars 
more in 2009. The backbone of the industry's financial strength 
is its State-Imposed reserve requirements, and specifically the 
contingency reserve. Half of each premium dollar earned goes 
into the contingency reserve and generally cannot be touched by 
the mortgage insurer for 10 years. This ensures that 
significant reserves are accumulated during good times to 
handle claims in bad times. This reserve structure has proven 
its ability to absorb significant risk. In the regional 
recessions in the 1980's and 1990's, mortgage insurers paid out 
over $14 billion in claims. After each recession, we built up 
capital, and were able to meet the next stress period.
    Mortgage insurers and the banks that make the loans face 
similar mortgage default risk, but only mortgage insurers raise 
capital in this countercyclical manner. In fact, only now are 
Federal bank regulators working to construct a similar system 
for banks.
    My third and final point is that several of the features of 
private mortgage insurance and the way mortgage insurers manage 
their risk differ from FHA. Congress might want to consider 
these differences as they consider ways to strengthen FHA. With 
private mortgage insurance, there is private capital at risk. 
In a foreclosure situation, mortgage insurers take the first 
dollar of loss and typically cover 20 to 25 percent of the loan 
amount. But this does not always cover the entire loss, so 
lenders and investors are on the hook as well. We continually 
improve our risk analytics and update our underwriting 
guidelines to respond to market conditions.
    In conclusion, it is important to be clear that, like FHA, 
mortgage insurance was largely avoided during the boom market 
when 50 percent or more of loan originations were done with 
piggyback loans.
    I also want to assure this committee that mortgage insures 
continue to insure new loans, that we have the capital to pay 
claims on existing loans, and that we are committed to insuring 
new loans that are both affordable for the borrower at closing 
and sustainable over the life of the mortgage. Thank you.
    [The prepared statement of Ms. Bryce can be found on page 
45 of the appendix.]
    Chairwoman Waters. Thank you very much.
    I will use another 5 minutes to ask a few questions of our 
panelists. I really wanted to get to Mr. Pinto. But before I do 
that, Ms. Bryce, let me ask you if it is true that private 
mortgage insurers are requiring different downpayments 
depending on locations? Is this happening?
    Ms. Bryce. That has happened in the past. The focus has 
been on making sure that loans were sustainable for borrowers. 
We have moved away from that at this point.
    Chairwoman Waters. Thank you very much.
    Mr. Pinto, in your testimony you make the case that FHA 
loans are tremendously risky, and that the FHA will require a 
$54 billion bailout. To support your argument, you note that 
FHA will perform like Fannie Mae's 2006 high loan-to-value 
book; and in testimony before the Committee on Oversight and 
Government Reform in December of 2008, you described Fannie 
Mae's book of business as invested with subprime stated income 
option, adjustable rates, ARMs, and piggyback loans. But isn't 
Fannie Mae's high loan-to-value 2000 book of business quite 
different from the FHA's current book of business?
    In contrast to Fannie Mae, FHA insures primarily 30-year 
fixed-rate loans, all of which are amortizing. FHA requires 
full documentation in all of its purchase and new refinance 
transaction. FHA does not allow ``no downpayment'' or piggyback 
loans.
    So we will just stop with that. How then can you compare 
the two?
    Mr. Pinto. Madam Chairwoman, thank you for the opportunity 
to clarify that question.
    The $400 billion that I used as the proxy excludes all the 
loans listed by Fannie and Freddie as Alt-A. It excludes loans 
listed by Fannie and Freddie as the other characteristics, 
negative amortization, etc. It only included the loans that 
they list as low-down-payment loans. Ninety-three percent, I 
believe, are fixed rate. They are all virtually at the regular 
rate, much like FHA. They were not at super high rates. I 
believe 94 or 95 percent of them are owner-occupied. I believe 
that in many respects they are identical to the FHA book of 
business. In fact, as I pointed out, the average FICO score on 
this group was 695.
    And it was interesting that Commissioner Stevens--and I 
believe that the subcommittee should really think about what he 
said. He said that, in 2007, FHA's book is--the actuaries are 
estimating that 24 percent, or 1 in 4, of their loans that had 
all these positive characteristics that everyone is talking 
about will go to default. And he then said in 2008, 20 percent 
of all of FHA's loans originated in that year will go to 
default. He didn't talk about 2006. I would estimate it would 
be somewhere between 16 and 18 percent. You will note that it 
is coming pretty close to my 20 percent estimate, which is what 
I got using the Fannie Mae, Freddie Mac numbers.
    Chairwoman Waters. You indicated that the FHA will require 
$54 billion in a bailout. How did you get to that number?
    Mr. Pinto. I got to it basically by computing what I 
believe the losses will be on their book of business, which as 
of September 30th of this year, was $725 billion in loans. And 
then I froze that book of business, which is what the actuaries 
would be doing, and then I looked for a good proxy for it, 
which I have described in my testimony and just explained 
further how it appears to be a good proxy, which has a default 
rate of 20 percent. That yields $140 billion of loans that 
would go bad.
    I then assumed a 50 percent loss. Commissioner Stevens 
didn't mention a loss rate, but he did mention it has been 
going up quite rapidly, and I believe 50 percent is a 
reasonable number. You have to remember that unlike the private 
mortgage insurance bids where the loss is broken up into two 
pieces, the private mortgage insurance piece is usually to the 
20 percent or so. And the investor percentage, FHA is 
responsible for 100 percent of the loss, and that is on loans 
that have an average LTV again, as I think the chairman 
mentioned, that is in the 96 percent range, something on that 
order. And, therefore, a 50 percent loss is reasonable. That 
yields a $70 billion loss on the book.
    I then looked at the premiums that they would be 
collecting. I generously use 5 percent. I don't believe their 
premiums on a life-alone basis add up to 5 percent, but I used 
that. And that would yield a loss something in the order of $35 
billion or $40 billion. And then I added on top of that the 
need for a 2 percent congressionally-mandated capital 
requirement. And, I might add that the way that the private 
mortgage insurers do their capital is actually more 
conservative, I believe, than the way FHA does theirs. So I 
would also take issue with that.
    Chairwoman Waters. Very interesting. Obviously your 
testimony is directly opposite of that of our Commissioner.
    So, with that, I am going to go to our ranking member, Mrs. 
Capito.
    Mrs. Capito. Thank you, Madam Chairwoman.
    Your first statement, Mr. Pinto, or at the beginning of 
your statement you wanted to reassure us that we couldn't say 
we didn't know if this, in fact, happens. There are a couple of 
things that have come before this committee about which I wish 
we could have said the same thing; I wish we hadn't known or 
had been quicker to act.
    I would like to ask the other members of the panel who are 
working with FHA financing instruments and in the mortgage 
business if you share the alarm that Mr. Pinto has expressed 
with us today in terms of the FHA and the financing at the FHA? 
Does anybody want to make a comment directly on that?
    Mr. Kittle?
    Mr. Kittle. I don't have Mr. Pinto's numbers and access to 
his data. I would only say in my testimony, I will read it 
again, that we have concern for the book of businesses out 
there, including what has been originated so far in 2009 and 
was not tested. And the variable that sits out there now is the 
continued--I think which we all addressed and mentioned today--
the rising unemployment that continues to rise that will affect 
it and make it much worse. So we do have concerns about what is 
out there and what is coming.
    Mrs. Capito. Mr. Newport, in your modeling, do you take in 
unemployment, rising unemployment as part of your factors when 
you are coming to your graphics?
    Mr. Newport. Definitely. Our view is that the unemployment 
rate is still rising, but the economy is starting to recover. 
We had a very strong third quarter. We are still losing jobs. 
We think the job losses are going to end early next year, and 
the unemployment rate is going to peak somewhere around 10, 
10.1 percent in early 2010. So we are near the worst part of 
the labor market downturn.
    Mrs. Capito. So that is incorporated in the numbers that 
you reflected with us?
    Mr. Newport. Yes.
    Mrs. Capito. Because you mentioned that we are in a 
recovery. I certainly hope that is the case. But a jobless 
recovery is not going to help somebody who is trying to pay 
their mortgage. If they are unemployed, these problems are 
going to be exacerbated.
    Mr. Newport. It will take time for the labor market to get 
back on track, but the overall economy is starting to grow, 
and, in fact, the residential construction sector is going to 
grow at a 20 to 30 percent rate in the third quarter and 
continue to grow. So the housing is starting to contribute to 
growth. But the good news is that the recession is behind us, 
the economy is starting to grow. We are still losing jobs, but 
eventually growth will help us start adding to job growth.
    Mrs. Capito. Mr. Kittle, your organization has testified 
before this committee that the MBA is concerned with the less 
scrupulous lenders who once specialized in the lucrative 
subprime market. This is kind of a theme we have had going 
through our testimony on our committee and turning our 
attention now to FHA lending, and we are extremely concerned. I 
know Mr. Lee has a bill out there. But we are extremely 
concerned about fraud and abuse and unscrupulous lending 
behaviors.
    The FHA--our Commissioner mentioned that he had moved in 
certain directions to have higher capital requirements for 
mortgagees who are using FHA. Do you share this concern? Do you 
see any specific evidence of any mortgage bankers or brokers 
who want to exploit FHA's market and take advantage of 
borrowers who they may feel their choices are limited? And do 
you think that the improvements that he mentioned in his 
statement will--what kind of desired effect do you think that 
will have?
    Mr. Kittle. To answer one part of your question, in my 
testimony we certainly support higher net worth requirements 
for mortgage bankers and mortgage brokers, licensing 
requirements. We would like to see preemption, which would 
really help lower the cost, and have one set of licensing 
requirements for everybody instead of State by State. We think 
education requirements are necessary. Clearly when you have, 
what the term is now out there is ``skin in the game,'' then 
you take a higher sense of duty to originate the loans 
properly. So we fully support Mr. Stevens on that effect.
    I don't know, to answer specifically to your question, of 
any specific mortgage bankers or brokers that are manipulating 
borrowers today, but we do know that mortgage fraud is rampant 
and has been rampant for years. And MBA has supported a stop 
mortgage fraud bill for the last 5 or 6 years.
    Mrs. Capito. And finally, I would like to ask unanimous 
consent to put the testimony of Dr. Andrew Caplin, a professor 
of economics at New York University, into the record.
    Chairwoman Waters. Without objection, it is so ordered.
    Mrs. Capito. Thank you.
    Chairwoman Waters. Mr. Green?
    Mr. Green. Yes. Thank you. And I thank the witnesses for 
appearing.
    Ms. Bryce, do you have some product that you would like to 
share with us that might be of help with FHA in terms of 
mortgage insurance?
    Ms. Bryce. I don't think there is a particular product that 
we could offer at this time. I think that we have looked at 
whether there is some help that we could give in terms of the 
risk analytics. As you heard Commissioner Stevens say, they are 
starting to focus more of the risk that they are taking and 
making sure that they have the right underwriting guidelines 
and credit criteria. And I think in that regard, the mortgage 
insurers would be more than happy to give our assistance as 
they evaluate those issues.
    Mr. Green. And, Mr. Pinto, thank you for your testimony as 
well. Because your testimony is so far afield from some of the 
other testimony we have heard, out of fairness to you, I am 
trying to ascertain whether you are the canary in the coal mine 
or the person who believes the sky is falling because something 
falls out of the tree. And that is not to demean you, but in a 
metaphorical sense, that is what we are trying to ascertain. So 
how much credence do you give unemployment and falling prices 
to the foreclosures that we have at FHA?
    Mr. Pinto. I appreciate those comments, Mr. Green, and the 
opportunity to answer your question.
    I start from a little different perspective, and I start 
from the perspective that 25 million loans out of approximately 
52 million loans in the United States are nonprime. And prime 
is a large misnomer in the United States, because Fannie and 
Freddie define themselves as prime, and so everything they did 
they basically said was prime. And we now know that 10 million 
of their 25 million loans were not.
    And so I start with the fact that 25 million loans are out 
there that are nonprime. A small minority, about 25 percent, 30 
percent, are what you call subprime, what I call self-
denominated subprime. The rest are these high LTV loans, these 
other loans. So you start with that. And then if you layer 
unemployment--
    Mr. Green. Let me just intercede. You start with that, but 
how much of that are you attributing to FHA?
    Mr. Pinto. FHA is a quarter of that. FHA is a quarter of 
that 25 million. Fannie and Freddie have 10 million.
    Mr. Green. Let me use other language. You are indicating 
that 25 percent of the 25 million would be what we will call 
bad to poor loans that FHA has on its books?
    Mr. Pinto. FHA--again, based on the statements by the 
Commissioner. When you have a 25 percent default rate on the 
2007 book and 20 percent in the 2008, that is a bad book of 
business. It is hard to define it into good and bad; it is just 
bad, because that is an extraordinarily high default rate. That 
is up there with subprime fixed rate.
    Mr. Green. But now how do you conclude that it is just 
because the loans are bad, when we have prime loans that are 
defaulting because of the unemployment and because of the 
decline in house prices? How do you separate that?
    Mr. Pinto. Again, I have looked at these 25 million loans 
which I call nonprime, many of which were subprime, and 80 
percent--80 percent of all the losses are in that group.
    Mr. Green. But it seems to me that you need some empirical 
evidence with reference to job losses so that you can correlate 
that to the foreclosures. If you don't add the job losses and 
know whether it was a job loss or whether it was just a bad 
loan, how do you distinguish between the two? Then you have to 
also factor in the declining values, because the declining 
values also impact whether or not persons stay with their 
homes.
    Mr. Pinto. FHA, as in any mortgage lending, is partly an 
actuarial business, which is why they do an actuarial study. 
And higher-risk loans are more susceptible to the impacts of 
job losses and housing price declines, and that is why the 80-
plus percent of all of the foreclosures that are occurring 
today are within this subgroup of loans that I call nonprime. 
They have characteristics that make them nonprime. They are 
high loan to value, impaired credit, etc., and then all the 
crazy stuff that was done in addition to what I just described. 
And so that is what makes them susceptible. And so even if you 
go back to 1998 and you look at how high LTV loans performed 
then in a very strong market, they were 6 to 7 times more 
likely to go into default than a traditionally underwritten 
lower LTV loan.
    When everybody is going up in value, yes, a rising tide 
raises all ships. The problem this country has ended up with is 
we have 25 million high-risk loans out of 52 million loans. We 
have never had that situation before. And 80-plus percent of 
all of the foreclosures are in that high-risk group, and that 
high-risk group is most susceptible to the impact of job loss 
and housing price declines. So there is a direct connection, 
and that is why this is an actuarial business.
    Mr. Green. Thank you. I yield back.
    Chairwoman Waters. Without objection, I would like to enter 
into the record a communication from NID Housing Counseling 
Agency, Oakland, California.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    I would like to thank all of our panelists for being here 
and participating today. We certainly appreciated your 
testimony.
    This panel is now dismissed. The meeting is adjourned.
    [Whereupon, at 4:30 p.m., the hearing was adjourned.]



                            A P P E N D I X



                            October 8, 2009


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