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



 
                       FY09 FHA ACTUARIAL REPORT

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


                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 2, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-91


                  U.S. GOVERNMENT PRINTING OFFICE
56-234                    WASHINGTON : 2009
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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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 2, 2009.............................................     1
Appendix:
    December 2, 2009.............................................    43

                               WITNESSES
                      Wednesday, December 2, 2009

Bowdler, Janis, Deputy Director, Wealth-Building Policy Project, 
  National Council of La Raza (NCLR).............................    32
Donovan, Hon. Shaun, Secretary, U.S. Department of Housing and 
  Urban Development, accompanied by Hon. David Stevens, Assistant 
  Secretary for Housing/FHA Commissioner.........................     4
Golder, Vicki Cox, President, National Association of Realtors...    34
Schnare, Ann B., Partner, Empiris LLC............................    30
Story, Robert E., Jr., CMB, Chairman, Mortgage Bankers 
  Association (MBA)..............................................    36

                                APPENDIX

Prepared statements:
    Marchant, Hon. Kenny.........................................    44
    Bowdler, Janis...............................................    45
    Donovan, Hon. Shaun..........................................    51
    Golder, Vicki Cox............................................    64
    Schnare, Ann B...............................................    76
    Story, Robert E., Jr.........................................    82

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Article from Amherst Securities Group LP entitled, ``Negative 
      Equity Trumps Unemployment in Predicting Defaults,'' dated 
      November 23, 2009..........................................    94
    Editorial from The Wall Street Journal by Robert Pozen 
      entitled, ``Homebuyer Tax Credits Threaten the FHA,'' dated 
      November 24, 2009..........................................   103


                       FY09 FHA ACTUARIAL REPORT

                              ----------                              


                      Wednesday, December 2, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 1 p.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Watt, 
Sherman, Moore of Kansas, McCarthy of New York, Lynch, Green, 
Adler, Himes, Peters; Bachus, Miller of California, Capito, 
Hensarling, Garrett, Neugebauer, Posey, and Jenkins.
    The Chairman. The hearing will come to order.
    Today's hearing has been called to look into the status of 
the FHA. We are pleased to have the Secretary of HUD, Secretary 
Donovan, and we appreciate his accommodating us. We have 
changed the schedule a couple of times, and I thank him for 
doing that. And then we had some votes. But we will, I think, 
be able to get through the votes and to question the Secretary 
so he will be able to leave on time. And he is accompanied by 
Commissioner Stevens of the FHA.
    Because we are delayed, I am not going to take a lot of 
time in my opening statement, just to say that I think there is 
a common interest in having an FHA that is financially sound 
and socially useful. And this is a collaborative effort to 
improve it.
    This committee, during this period between the election and 
the assumption of office of the new Administration, had a 
hearing with FHA officials, and out of that, in fact, came some 
legislation that we adopted to increase the ability of the FHA 
to deal with problems.
    This committee has adopted legislation as well that banned 
seller-financed downpayments. Some members thought it went too 
far, but at the very least, it gave them that tool. We also 
gave them debarment authority, which they didn't previously 
have.
    Obviously, no one can expect, in an agency dealing with 
housing, to be totally free of problems in this area of 
housing, given where we are today. And we are talking about a 
new Administration, and we are talking about some problems 
which they inherited.
    And the question we have now is: What can we do going 
forward to fully strengthen the hands of the Commission or the 
Secretary so that they can, as I said, have this agency perform 
its very important social and economic mission in a fiscally 
responsible way.
    And this being a hearing with the Secretary, we have two 5-
minute statements and two 3-minute statements. I now recognize 
the gentleman from Alabama for his statement.
    Mr. Bachus. Thank you, Mr. Chairman, for granting the 
request that Housing Subcommittee Ranking Member Capito and I 
made last month to hold a hearing on the FHA's recently 
released actuarial report.
    I would also like to welcome Secretary Donovan. I had the 
opportunity to observe Secretary Donovan on a trip to Alabama, 
and I was most impressed, and I believe that you are doing a 
good job at the FHA.
    In the interest of time, I am just going to read my 
statement.
    The deteriorating financial position of the FHA's Capital 
Reserve Fund has raised concerns that, like Fannie Mae and 
Freddie Mac, the FHA may soon require its own taxpayer bailout.
    Along with Oversight Committee Ranking Member Issa, I sent 
a letter to Secretary Donovan on November 2nd requesting 
detailed information on the FHA's business practices, including 
how the agency is working to prevent a taxpayer bailout. And 
again, I would like to thank the Secretary for his cooperation 
in gathering that information.
    The findings of the actuarial report released on November 
6th reveal that FHA's Capital Reserve ratio had dropped below 
the congressionally-mandated threshold of 2 percent to a less 
than expected .053 percent. The independent actuarial review 
also indicated that the economic value of the Mutual Mortgage 
Insurance Fund declined over 75 percent from last year to $2.73 
billion. If home prices do not recover, the economic value of 
the fund could drop below zero, which could in turn prompt HUD 
to request an appropriation from Congress.
    Mr. Chairman, I am encouraged by the announcements that 
Secretary Donovan and Commissioner Stevens--and I am glad that 
you have joined us to answer questions--have made regarding the 
implementation of reforms to shore-up the FHA's reserves and 
reduce risk, including the hiring of a chief risk officer. But 
unanswered questions remain.
    Fraud continues to plague the FHA program, and I continue 
to be concerned that the agency lacks the technology and 
management capacity to perform proper oversight. What steps has 
the agency taken to improve technology and to adequately 
attract new staff to manage the growing FHA program? I know 
there are great challenges there. And what exactly is the 
agency doing to prevent unscrupulous lenders from dumping risky 
loans into the FHA portfolio?
    Secretary Donovan, I would also like to know what steps the 
FHA is taking to limit taxpayer exposure to a potential FHA 
bailout. As the private mortgage market falters, lenders flock 
to the FHA program, drawn by the 100 percent government 
guarantee.
    Some policy analysts have suggested FHA impose credit risk 
retention requirements for its originators. Others have 
suggested FHA provide less than 100 percent insurance coverage 
on loans. Some members of this committee have recommended that 
FHA increase premiums and the downpayment requirement. The 
gentleman from New Jersey, Mr. Garrett, has introduced 
legislation to raise the minimum FHA downpayment from 3.5 to 5 
percent. I would like to know if the FHA is considering 
implementing any of these measures.
    In closing, Mr. Chairman, the FHA's insured mortgages 
provide millions of low- and moderate-income Americans, as well 
as first-time home buyers, the opportunity to own a home. This 
committee must continue to provide effective oversight of FHA 
to ensure the program will remain viable for years to come.
    As the housing market recovers, Congress must also see to 
it that the agency does not displace the private mortgage 
market, and that FHA's central mission is not undermined by the 
expansion to more high-cost areas.
    Secretary Donovan and Commissioner Stevens, I look forward 
to your testimony and answers to questions, and promise you my 
cooperation in working with you on these critically important 
issues. I know it is not something you caused, it is something 
you inherited, and I promise you my cooperation. I yield back 
the balance of my time.
    The Chairman. The gentlewoman from West Virginia for 3 
minutes.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you for holding 
this important hearing this afternoon on the financial health 
of FHA. As has been said, the ranking member and I wrote a 
letter to the chairman about the importance of having this 
hearing, and I appreciate him accommodating our request.
    On November 6, 2009, we received the annual independent 
actuarial review of the FHA's Mutual Mortgage Insurance Fund. 
We had been warned by the Commissioner that it was going to 
fall below the congressionally-mandated ratio of 2 percent. The 
report says that it has fallen well below that level, and it 
now stands at .53 percent.
    As we are all aware, FHA has reemerged as a major market 
participant, insuring almost 30 percent of home purchases and 
20 percent of refinances. FHA has a critical role to play in 
our housing market, and if it is going to maintain this level 
of participation, we must work together to ensure that the 
program remains self-sustaining and returns to a solid 
financial footing.
    I am encouraged by many of the steps that Secretary Donovan 
and Commissioner Stevens have taken so far to shore-up the FHA. 
But there is more to be done. I think we could agree on that. I 
look forward to a vibrant discussion on whether or not FHA has 
the resources to upgrade technology, and also compete for 
experienced personnel to streamline their operations and 
improve efficiencies.
    Secretary Donovan mentions in his testimony that FHA may be 
exploring raising premiums for new borrowers. In late 2007, FHA 
issued regulations to implement a risk-based pricing program, 
but Congress put a year-long moratorium on that, which 
essentially ran through October 31, 2009.
    One of my questions will be: Does HUD intend to implement a 
risk-based pricing program once the moratorium is expired, 
which it has? And if the need to raise premiums on all 
borrowers is clear, why should we not have FHA price their 
premiums based on risk?
    I would also like to hear more from the Secretary on 
stories of FHA borrowers who are not able to make that first 
payment. I understand that is becoming a bit of a problem. It 
would be helpful to know the statistics on first payment 
default rates, and I know that the Secretary is indicating that 
he will be seeking greater recourse with lenders, and I look 
forward to hearing more details on that.
    I want to welcome Secretary Donovan back to the committee 
today. The FHA program is an important component to the housing 
market. Congress and HUD need to do everything that is 
necessary to make sure this program is run in a manner that 
does not expose the taxpayer to yet another bailout. I look 
forward to hearing from you, and I want to thank, again, the 
chairman for having this hearing. Thank you.
    The Chairman. Mr. Secretary?

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

    Secretary Donovan. Thank you, Chairman Frank, and Ranking 
Member Bachus, for this opportunity to testify on behalf of the 
Administration regarding the Federal Housing Administration and 
the steps we are taking to protect its loan portfolio as it 
helps to get the economy back on track at this historic moment.
    We want to ensure that we are able to continue to support 
the housing market in the short term and provide access to 
homeownership over the long term while minimizing the risk to 
the American taxpayer. Created by President Franklin Roosevelt 
at a time when 2 million construction workers were out of work 
and housing prices had collapsed, the FHA was designed to 
provide affordable homeownership options to underserved 
American families and keep our mortgage markets afloat during 
tough times.
    And by insuring almost 30 percent of purchases and 20 
percent of refinances in the housing market, FHA is certainly 
doing so today, though I would caution that we are by no means 
out of the woods. As the National Association of Realtors 
reported last week, home sales have rebounded to levels not 
seen since February 2007. And the S&P Case-Shiller Home Price 
Indices find that home prices have now risen for 2 quarters in 
a row.
    While there is considerable uncertainty about what these 
numbers mean going forward, what is not in doubt is that the 
FHA has been central to much of this improvement. We know the 
critical role first-time home buyers are playing in the market. 
More than three-quarters of FHA's purchase loan borrowers in 
2009 are first-time home buyers, and nearly half of first-time 
buyers in the housing market in the second quarter used FHA 
loans.
    Unfortunately, FHA has not been immune to the hard times 
for the housing sector. With the actuarial study I cited 
earlier, we recently reported to Congress that FHA's secondary 
reserves have fallen below the required 2 percent level, to .53 
percent of the total insurance in force.
    However, when combined with reserves held in the financing 
account, FHA holds more than 4.5 percent of total insurance in 
force in reserves today. Indeed, with $31 billion set aside 
specifically to cover losses over the next 30 years, the 
actuary concluded that FHA's reserves will remain positive 
under all but the most severe economic scenarios.
    Further, while its secondary reserve account has been 
significantly depleted, FHA is not the next subprime, as some 
have suggested. Subprime delinquencies are 240 percent higher 
than FHA's, for a reason. FHA stuck to the basics during the 
housing boom, 30-year fixed-rate traditional loan products with 
standard underwriting requirements. Unlike some prime lenders, 
FHA requires that borrowers demonstrate they can pay their 
mortgage by verifying their income and employment.
    Still, we have learned from recent history that the market 
is fragile, and we have to plan for the unexpected. That 
uncertainty is complicated by an organization we inherited 
that, to be honest, was not properly managing or monitoring its 
risk. Credit and risk controls were antiquated, enforcement was 
weak, and our resources and IT systems were inadequate.
    Little of this may have been obvious when FHA's market 
share was 3 percent as recently as 2006. But when our mortgage 
markets collapsed last fall, and home buyers increasingly 
turned to the FHA for help, the potential consequences of these 
lapses in risk management became clear.
    In 2008, Congress put an end to the practices that led to 
the most troubled loans in FHA's portfolio, so-called seller-
financed downpayment assistance loans. This year, we have taken 
several additional steps, many of which we announced on 
September 18th. We have steeply increased enforcement efforts, 
having suspended 7 lenders and withdrawn FHA approval for 270 
others, including Lend America just this week.
    We have strengthened credit and risk controls, toughening 
requirements on our streamlined refinance program, making 
several improvements to the appraisal process, and proposing a 
rule to increase net worth requirements for all FHA lenders. 
And we have hired a permanent chief risk officer to provide the 
most comprehensive and thorough risk assessment in the 
organization's history, and delivered FHA's first comprehensive 
technology transformation plan to Congress in September.
    As significant as these reforms are, Mr. Chairman, as 
Senator Bond recently wrote in the Washington Post, these 
management and resource challenges are longstanding challenges 
that should have been addressed a long time ago. That is why we 
are drafting several new policies in FHA to address the quality 
of the existing portfolio, improve the performance of future 
books, and return the capital reserve to above the legislated 2 
percent level, while also ensuring that FHA continues to 
contribute to the Nation's housing recovery.
    The actuary projects that even with growing volumes, more 
than 71 percent of FHA's losses over the next 5 years will come 
from loans already on our existing books. That is why an 
important step we can take to minimize losses to Capital 
Reserves in the near term is to increase enforcement and make 
lenders more accountable.
    As such, we will step up efforts to ensure lenders assume 
responsibility for any losses associated with loans not 
underwritten to FHA standards. We will hold lenders accountable 
for their origination quality and compliance with FHA policies, 
increasing our review of mortgagee compliance with FHA program 
requirements.
    And we intend to expand enforcement of new loans as well. 
That includes requiring lenders to indemnify the FHA fund for 
their own failures to meet FHA requirements, and holding 
lenders accountable nationally for any improper activities, as 
we are presently limited to sanctioning individual branches. We 
will also develop a lender scorecard posted on our Web site 
that will summarize the performance of lenders who do business 
with FHA.
    In addition to stepping up enforcement and accountability, 
which will improve the performance of both the existing and 
future books of business, we are committed to making additional 
steps to increase the quality of our business going forward.
    First, an initial measure is to reduce the maximum 
permissible seller concession from its current 6 percent level 
to 3 percent, which is in line with industry norms. And we will 
continue to consider additional reductions.
    Second, to protect the fund from the riskiest loans, we 
will for the time being also raise the minimum FICO score for 
new FHA borrowers. We are currently analyzing what this floor 
should be, including the relationship between FICO scores and 
downpayments, to determine whether we should increase FICO 
minimums in combination with changes to other underwriting 
criteria for lower downpayment loans.
    Third, we have made the decision to exercise our authority 
to increase the up-front cash that a borrower has to bring to 
the table in an FHA-backed loan, to make sure that FHA 
borrowers have more skin in the game and a stronger equity 
position in their loans.
    Finally, we are examining our mortgage insurance premium 
structure to determine whether an increase is needed, and if 
so, whether it should be the up-front premium, the annual 
premium, or both. To protect against future uncertainty in 
market conditions, we are requesting authority from Congress to 
raise annual premiums, as this is one of the most effective 
means of raising capital for the fund with the least impact per 
borrower.
    Indeed, while most of these changes I have just described 
we can make on our own with no additional authority, and we 
expect to provide detailed and public guidance for these 
changes by the end of January, in some cases, we will need 
Congress' help.
    In addition to asking Congress to increase the current cap 
on the annual mortgage insurance premium for new borrowers, we 
are asking for additional authority for our proposals to hold 
all FHA lenders responsible for their fraud or 
misrepresentations by indemnifying the FHA fund.
    We will also be asking Congress to expand FHA's ability to 
hold lenders accountable nationally for their performance, as I 
mentioned earlier. Each will require statutory support, and of 
course we look forward to working with Congress closely on all 
these issues.
    Mr. Chairman, Ranking Member Bachus, shoring-up the FHA 
won't solve all our housing challenges, which is one reason the 
Administration is working to produce a more balanced, 
comprehensive national housing policy that supports 
homeownership and rental housing alike, providing people with 
the options they need to make good choices for their families.
    Further, as important as the FHA is at this moment, I want 
to emphasize that the elevated role it is playing is temporary, 
a bridge to economic recovery, helping to ensure that mortgage 
finance remains available until privilege capital returns.
    That means that while we must remain mindful that 
qualified, responsible families need the continued ability to 
purchase a home, the changes I have announced today and will 
detail in the coming weeks will be crafted to ensure FHA steps 
back, and will facilitate the return of the private sector as 
soon as possible.
    But the bottom line is this: While FHA must remain a key 
source of safe mortgage financing at a critical moment in our 
country's history, we recognize the risks that we face and the 
challenges of this temporary role that we play in today's 
market. And the bottom line is this: The loans FHA insures must 
be safe and self-sustaining for the taxpayer over the long 
term. With these reforms and others we will be considering, the 
Administration is committed to ensuring that they are today and 
into the future.
    Thank you very much.
    [The prepared statement of Secretary Donovan can be found 
on page 51 of the appendix.]
    The Chairman. Thank you, Mr. Secretary. We will obviously 
consider your request for the premium increase. I am reminded 
by staff that the Congress did give an increase in the up-front 
premium in the recent legislation. And the House had proposed a 
small increase--not as much as President Bush asked for, in the 
annual fee, and the Senate objected. So there was no increase 
in the annual fee. But we are certainly open to that.
    Let me just say, with regard to fees and risk-based, I 
agree that we should do that. But I have this one concern: I 
don't want a situation in which a woman making $50,000 a year 
and working very hard and getting a loan and paying it off has 
to pay a higher premium at the end than somebody making 3 times 
that amount of money because she was in the risk-based 
category.
    That is, I want to do risk-based, but there has to be some 
way that those people who are in what is considered a risky 
category, who make their payments, get some compensation 
because otherwise, you have the situation in which we make 
people in lower-income brackets or lower-middle-income brackets 
the insurers of each other, while those of us who are wealthier 
don't have to bear that.
    If there is going to be some cross-subsidy, I mean, a risk-
based premium is a form of cross-subsidy. It is taking the 
overwhelming majority who pay off and making them put in a 
little extra to take care of those who don't pay off. I am for 
that principle, but it can't be done on an income basis.
    I had raised this issue with Mr. Stevens' predecessor, Mr. 
Montgomery, and he said, well, they didn't find a correlation 
between income level and risk level. If that is the case, I may 
feel better.
    But it does seem to me that there needs to be some care 
taken here to make sure we are all talking about wanting to 
expand homeownership, not to people who can't afford it. We 
have made that mistake in the past. But working people at lower 
incomes who are still eligible who conscientiously make their 
payments shouldn't have to pay extra, and I would look to that.
    The other issue I want to address is the astonishing 
misinformation that appears to have taken over so many 
journalists about the higher-cost loans. It frankly began with 
an article in the New York Times, and the Washington Post 
picked it up.
    If you read the articles, they appear to believe that what 
we did was to set--the gentleman from California, Mr. Miller, 
is here--a national limit of $729,000 on loans. In fact, the 
operative limit on FHA loans in the country is not that dollar 
number but the median house price. The FHA lends according to 
the median house price.
    Now, house prices are the most geographically, not 
surprisingly, varying price in America. And we have agreed that 
you should not have the FHA paying for luxury housing, 
guaranteeing luxury housing. A limit was set of $417,000 a few 
years ago.
    That meant that there could be no luxury housing in 
Nebraska, as I look at the numbers, or in Alabama, or in much 
of Michigan. It meant there could be no luxury housing in 
northern California or in Massachusetts and in New York City. 
It also meant that there couldn't be any middle-income housing 
in those latter categories. That is, when you say the median, 
but then you cut it off at $417,000, you effectively say that 
the program can't work in certain States.
    Indeed, the Times article said, well, they used to not make 
any loans in California and now they are making them. Yes, that 
is what we wanted to do. We didn't think it was fair for 
California to be frozen out of a program which is supported as 
much by California taxes as any other. So what we have said is, 
we will continue to say that the FHA should lend to the median 
and below. But if you set too unrealistically low a price, many 
areas of the country will not get the benefit of the FHA.
    Now, even with that, the average amount is still much lower 
than that. The journalists have been talking about $729,000. 
One article, again in the New York Times, said, well, everybody 
ought to be able to get this, somebody said, and the reporter 
said, everybody can. Yes, if she lives in San Francisco or in 
50-some-odd other counties. But there is only a small number of 
counties in the country that have that. In 23 States, the 
increase made no impact at all.
    Finally, I would note that according to the auditor of the 
FHA and the CBO, going to the genuine median in those other 
parts of the country that are above $417,000 and still hit the 
median house price are not any more risky than other loans. The 
CBO gives you a zero negative score. There is no cost to the 
FHA from allowing the program to be operative in northern 
California or southern California or Massachusetts, as opposed 
to saying it can't operate there at all. The auditor says that 
those things are pretty safe.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Secretary Donovan, I have read your written testimony, and 
I am very impressed with your game plan, the things that you 
are addressing. And I want to compliment you. Obviously, I 
think enforcement is essential. We pass all the regulations, 
but without enforcement, they mean little.
    Holding lenders accountable is critical. And improving the 
quality and sustainability of new loans, you have outlined 
that, and increasing FHA capital. So I commend you and 
Commissioner Stevens. I have been impressed with your knowledge 
of the markets. You understand the markets. So I am optimistic 
that there are going to be changes made for the better. And 
there already have been, so I compliment you on that.
    One of the things you mentioned in your testimony was 
asking Congress to raise the cap on annual premiums is under 
consideration. What level do you think would be appropriate for 
an annual premium? Have you given that any consideration?
    HUD already has the authority to increase the up-front 
premium up to 3 percent. I would be interested to hear any 
testimony that either one of you would like--or any response 
that you would like to give, why you think the increase in the 
annual premium is necessary.
    Secretary Donovan. There are two things I would say. One 
is, as I mentioned in my testimony, we are still looking at 
precisely the balance of pricing that is necessary. And perhaps 
it goes without saying, but to be clear, the balance we are 
trying to strike is ensuring that the early signs of housing 
recovery that we have seen continue.
    And the concern would be that if we overprice, we have the 
potential to hurt ourselves as well as the broader economy in 
doing so, by making capital more expensive in a way that would 
hurt the market. So we are looking carefully at that balance.
    However, one of the things that has become clear, the 
annual premium is, as you say, at the statutory maximum at this 
moment. And our analysis shows that the annual premium can be a 
more effective way to increase the balance of the reserves 
within the fund over the long term with the least impact on the 
market.
    And that is why we think it is important, not that--I am 
not announcing today that we have made a decision to increase 
those annual premiums. But we would like--today we couldn't if 
we wanted to because we don't have that authority. So that is 
quite important.
    We have not made any determination about what increased 
level we would want Congress to raise it to. I think certainly 
providing as much flexibility as possible, but I would say we 
would like to work with you to determine what level you might 
be comfortable with above the current level of .55 percent that 
we do charge for most loans.
    Mr. Bachus. Okay. And Commissioner Stevens, I don't know if 
you have any other comments you would like to make?
    Mr. Stevens. I would relate it back to the thoughts about 
risk-based pricing. If you think about a risk-based pricing 
grid, you can only do so much with up-front premium because 
that would hit its cap fairly early on. And when you have the 
annual capped at .55 where it is today, a risk-based pricing 
program could actually worsen the capital for FHA over time 
trying to build up the capital reserves if you can't address 
the annual.
    So that flexibility needs to absolutely be there to be able 
to trade those two off together to come up with a program that 
works best for the market.
    Mr. Bachus. Right. I understand we are caught in a 
situation where the markets are in distress. And that is a 
delicate balancing act. I do acknowledge that.
    I would like to yield the balance of my time to Ms. Capito.
    Mrs. Capito. Thank you. I would like to thank the ranking 
member. I will just jump right in with a couple of questions.
    Mr. Secretary, in my opening statement, I spoke about the 
risk-based pricing, that the moratorium was supposed to end on 
October 31, 2009. And obviously, we are beyond that date. Are 
you implementing that, or what is your plan? Are you looking at 
that? What is HUD's position at this point?
    Secretary Donovan. There are a couple of comments I would 
make about risk-based pricing. There is the concern that the 
chairman raised about it. There is also another concern that I 
would raise that I think is a very important one. We take very 
seriously this issue of our increased role in the market being 
a temporary one. And one of the concerns I have, is if we were 
to lower pricing for the least risky borrowers, that has the 
effect of potentially crowding out the return of the private 
market, or at least delaying it beyond what we might see 
otherwise.
    I think we have to think carefully about risk-based pricing 
both in terms of whether we are pricing risk correctly for the 
riskiest borrowers, but also whether we have the effect of 
stopping the private market from returning as quickly as 
possible.
    One of the things that we are examining is the potential 
for combining, for example, FICO scores, loan-to-values, and 
other underwriting criteria in a way that we would limit the 
entry of the riskiest borrowers into the fund without 
discouraging private capital; so rather than a form of risk-
based pricing, looking at risk-based underwriting, if you will, 
and adjusting our standards, adjusting loan-to-value and other 
criteria.
    Because ultimately, what we find, and we would be happy to 
share more detailed data with you, is that there is no single 
characteristic--loan-to-value, FICO score--that is a good 
predictor of performance. It is the combination of those that 
really has the effect.
    The second thing I would say is that it is important to 
remember--something I said in my testimony which I think bears 
repeating: 71 percent of our projected losses in the actuarial 
study come from loans that are already on the books, and even 
though our loan volumes were very, very low over the last few 
years, what had been the most troubled loans.
    So in fact, I also think we have to be careful of, in some 
ways, overcharging. The actuarial study said our loans that we 
are making today are quite profitable under just about any 
potential scenario. I think we have to be careful about 
overpricing risk in a situation where what we really have is 
something that can be solved by greater enforcement and some of 
the other backward-looking steps that we are talking about. So 
that is a very important balance.
    In sum, I think what you will see is when we announce the 
final details of the changes I talked about today is that we 
will have some risk-based criteria that we apply, but it won't 
clearly be the risk-based pricing. That is one option. But it 
is quite possible that it might be focused on other ways of 
underwriting risk and varying our underwriting, depending on 
the risk criteria.
    Mr. Moore of Kansas. [presiding] Thank you. The Chair 
recognizes himself for 5 minutes.
    Mr. Secretary, does FHA have the tools it needs to manage 
its growing portfolio? Your market share has gone from 3 to 30 
percent, yet you essentially have the same amount of staff and 
the same computer systems that you have had. This is what we 
heard from HUD's Inspector General in an Oversight and 
Investigations Subcommittee hearing that I chaired earlier this 
year.
    Is Congress doing enough to get you the resources you need 
right away? Would you like for FHA to have the ability to use 
some of the premiums it collects to upgrade staffing and 
technology, as is the practice at every private sector firm?
    Secretary Donovan. First of all, I want to thank Congress 
for a number of steps that you have taken this year that have 
been very, very helpful to us. We were provided in our last 
appropriations bill with funding to develop the very first 
comprehensive technology plan for FHA. We delivered that plan 
in September, and we are moving forward on implementing that 
plan.
    Based on our latest discussions about the 2010 
appropriations with both the House and the Senate, we do 
believe that we will have adequate funding to get that plan 
under way in terms of technology. It also provides, along with 
appropriations from this year, the ability for increased 
staffing at FHA, although I think we do need to go farther on 
that front.
    I will turn to Commissioner Stevens for any more detail he 
may want to provide on the number of new heads we have brought 
on board and what the future plans are. But clearly, staffing 
is an issue that we continue to focus on.
    Mr. Stevens. Thank you. We can talk about what we have 
brought on. We have certainly added to staff. Under our risk 
management area, not only have we brought on a chief risk 
officer, we brought in seven new individuals in our evaluations 
group, five of whom are Ph.D. economists to help us better 
evaluate the portfolio.
    I would refer back to the Secretary's comments that we 
clearly need an increase in personnel. There is an allocation 
for that in the appropriation. And once that is passed, we will 
begin to be able to add new resources.
    I would just add the one point that many of the changes we 
are announcing here today really don't require any additional 
staffing. They are purely logical moves to control risk that 
aren't dependent upon new technologies to implement.
    And so to that extent, I think we can actually protect much 
of the risk coming into the portfolio and improve the returns 
without this immediate up-front increase in staffing. However, 
that is absolutely needed over time.
    Mr. Moore of Kansas. Thank you.
    Mr. Secretary, the previous leadership at HUD and FHA 
promulgated rules to ban seller-funded downpayment assistance, 
and Congress under HERA statutorily banned this practice. The 
actuarial report found these loans to be the leading cause of 
why FHA is on the brink of insolvency, and said that without 
them, FHA's reserves would be above the statutory minimum of 2 
percent.
    What are your views on this seller-funded downpayment 
assistance practice, and would you support efforts to 
circumvent FHA's minimum downpayment requirement?
    Secretary Donovan. As you rightly said, one of the things 
that the actuarial report made crystal clear is that--
    Mr. Moore of Kansas. Thanks for saying that right.
    Secretary Donovan. Don't ask me to say it again, though--is 
that without those loans, we would have been above the 2 
percent congressionally-required minimum. They have had a 
significant drain on our portfolio, roughly a loss going 
forward beyond existing losses we have already taken of about 
$10 billion, just on that portfolio. So I do think Congress 
took the right step.
    We are very focused not only on ensuring that the 3\1/2\ 
percent downpayment remains, but in fact, as I said today, 
finding ways to increase the cash up-front that needs to come 
in on FHA loans. And I would also point out that there are a 
number of ways to do that.
    Downpayment is one of them. We have an up-front premium; 
how that is treated is important. Seller concessions is another 
way that we can ensure that there is a minimum of cash up-
front. So there is a range of steps that we can take. And we 
are looking at the broad group of those.
    But I also think it is important, as I stated just a moment 
ago, that we make sure we understand the combination of risk 
factors that are there. In fact, we have loans that have a 3\1/
2\ percent downpayment that perform extremely well where you 
have high FICO scores or other high-quality indicators in the 
underwriting.
    So I think we need to take a nuanced approach in terms of 
really isolating those loans that are the riskiest based on 
multiple factors, while at the same time ensuring that we 
continue to make homeownership available for those who can be 
successful homeowners. And I think that is exactly the approach 
that we are trying to take.
    Mr. Moore of Kansas. Thank you, sir. My time is expired. 
And the Chair next recognizes the gentlelady from West 
Virginia.
    Mrs. Capito. Thank you.
    Mr. Secretary, let me ask you--well, let me just make a 
quick comment. You know, in light of the fact that the 
Commissioner, when we heard about the pre-report of the audit, 
said that he thought it was going to go below the 2 percent, 
and then I think the audit showed that it is significantly 
below the 2 percent, maybe more than what was originally 
anticipated, that I might make a suggestion.
    And I think our next panel might have made the suggestion 
in their comments as well, that we don't wait another whole 
year before we do another audit, that we maybe do a flash audit 
or something in a 6-month period of time so we can see what 
direction we are going so that we don't keep falling down a 
cliff here.
    So I offer that as a suggestion. I think it would be a 
smart thing to do. And if you have a comment on that, that 
would be fine.
    The other question I had was in your comment--and you were 
just alluding to this; you were talking about more skin in the 
game for the borrower, talking about maybe premiums or 
downpayment--I read a scenario in our briefing materials where 
some people who could possibly take the first-time home buyer 
credit could borrow the money, get the money back off the 
credit, and then actually that $8,000 could actually cover what 
would have been their downpayment. And there they are back into 
basically not really, you know, feeling it maybe as much as a 
lot of other people who have a full--who don't have access to 
that or try to make a downpayment.
    Is that the kind of thing you are talking about here, the 
skin in the game? And I am going to tie that in to one of the 
other questions I had in the beginning, which is: Has there 
been an increase in the number of people who are not making 
that first-time payment? I mentioned it. Is that a problem? How 
do you monitor that? And what are you doing with the lenders 
that go forward with those loans?
    Secretary Donovan. On this question, first of all, the 
audit, let me say right up-front--and we probably have a few 
bleary-eyed people sitting behind me, and Commissioner 
Stevens--rest assured that we have been in constant touch with 
the actuary, have been using those models, and we will be 
running scenarios.
    One of the reasons why it was so important--and Dave 
brought on a very, very high-quality, experienced person as our 
chief risk officer--we want to know almost daily what is 
happening with the portfolio. We haven't had the tools to do 
that in the past, and we are now constantly re-looking at 
scenarios based on the latest economic data: where home prices 
are going, where sales volumes are going, and on a realtime 
basis updating our view of the fund.
    So I think even--
    Mrs. Capito. We would probably appreciate maybe a little 
bit of a midterm kind of--
    Secretary Donovan. Absolutely. In fact, we do now a 6-month 
re-estimate under the fund. We would be happy to make that more 
publicly available. But we would also be very open to coming 
and sitting down more regularly with the committee, sharing 
information.
    Mrs. Capito. Okay. Thank you.
    Secretary Donovan. Rest assured, we will be looking at that 
data on a very, very frequent basis.
    Second of all, on this issue of the first-time buyer tax 
credit, I am glad you raised this because I think there is some 
confusion about this. We made a very clear policy which we felt 
was important, in fact, not just for FHA loans, but to set a 
standard in the market, is that the credit itself could not be 
used towards the 3\1/2\ percent downpayment. It could be used 
for downpayment above and beyond it. It could be used for other 
costs, like closing or others. But we had a clear policy that 
it could not be used to pay for the 3\1/2\ percent downpayment.
    In addition to that, there is the risk that you talk about 
where somebody might go and borrow that money, unbeknownst to 
FHA, and pretend that it was cash that they had in-house. One 
of the important things that Congress did in extending the 
credit was to institute a range of fraud protection measures, 
and we have also put into our system ways to flag the use of 
the credit so that we can go back and check and make sure that 
we do oversight to ensure that practice is in fact not 
happening.
    So we have put in place a number of steps to do that. But I 
want to just clarify that we have a very clear policy that you 
cannot use the $8,000 credit, or now even the $6,500 credit, 
towards that 3\1/2\ percent downpayment.
    Finally, just on the first-payment defaults, I think 
consistent with the broader improvement in the quality of our 
portfolio that we have seen over the last year, the statistics 
have declined substantially in terms of those first-payment 
defaults. They have been cut more than in half over the last 
roughly year-and-a-half, almost 2 years. So we have seen 
significant improvement there.
    Mrs. Capito. Thank you.
    Mr. Moore of Kansas. The Chair next recognizes the 
gentlewoman from New York, Ms. McCarthy.
    Mrs. McCarthy of New York. Thank you. And I appreciate, 
Secretary Donovan, what you have been doing. A number of things 
that you had talked about, and I just want to kind of go back 
on them.
    When I see the TV advertisements on these loans--no credit 
checks, nothing--and I know that you had already mentioned in 
your testimony and speaking today about how that you are 
cracking down on these predatory lenders, I think that it would 
be interesting--because, actually, people do watch these 
hearings--if you could go in a little bit deeper on how you are 
actually finding these predatory lenders from the false 
advertising, which I think they are doing an awful lot of on 
TV, how you are actually looking at the new standards that you 
have put in place to make sure that they are not in the FHA 
system.
    The second part is, which is a little off to the side but 
it is a great concern to me, with everything going on, do you 
see in the future that you are going to be able to actually do 
a little bit more improvements on the Section 8 housing? I can 
say for Long Island that we have almost--certainly we don't 
have anywhere near the kind of housing that we need.
    On Monday, I visited with a constituent who is in a Section 
8 apartment, if you want to call it that. This is unfortunately 
someone who is very ill. It is someone who basically has some 
neurological muscular problems. And they keep putting him on 
the second and third floor walk-up, which means that to get him 
out to go to the doctors and everything else, it has really 
become difficult for these particular constituents and 
patients. In my former life, I was a nurse before I got here.
    We are looking at how we are going to have more Section 8 
housing for those with disabilities, which I think is 
important. Thank you.
    Secretary Donovan. Thank you. To start with, on this 
question of fraud, I will turn it over to Commissioner Stevens 
to talk a little bit more in detail about what we are doing 
within FHA. But let me just mention that one of the most 
important things we can do, because many of these lenders are 
not FHA lenders or they have other types of loan products 
besides FHA, one of the things that we do is participate very 
closely in a fraud task force that has been led by Attorney 
General Holder.
    And what we have seen is Chairman Leibowitz at the Trade 
Commission has been very, very aggressive, as well as our own 
Inspector General, as well as the Department of Justice, in 
stepping up enforcement efforts against those lenders. 
Oftentimes, we don't need any violation within FHA to go after 
them for false advertising for a range of other problems that 
we see.
    We also have been coordinating very closely with the State 
attorneys general to crack down through their enforcement 
powers as well. I would be happy to get you some briefing 
material or more about what we are doing there. And if you have 
particular lenders that you are concerned about, we may have a 
multitude of options in terms of the ways that we go after them 
through that task force.
    Mr. Stevens. Just to highlight the focus on this particular 
area, it has been paramount in our new Administration to focus 
on fraudulent lenders. I am looking here at a narrow report 
that we now review monthly on lender compliance. We scrutinize 
institution by institution based on a variety of performance 
characteristics.
    And we take action--in fact, the Secretary referred to 
seven institutions. We have already terminated their approvals 
this year. That doesn't include a number of them which we just 
did yesterday, in our significantly stepped-up meeting schedule 
in the Mortgagee Review Board where we take action.
    I am also working very closely with the Inspector General 
at HUD to increase enforcement and investigations into 
institutions. And we actively encourage everybody in the 
industry to please send us examples of violations of marketing 
so we can go after institutions at an institutional level. I 
have two examples today alone where we took action against 
those institutions.
    So I think you are raising a most critical element. And 
this is where we can most effectively ensure that the 
participants in the FHA system follow the rules that are 
required to protect the taxpayer and protect the homeowner.
    Secretary Donovan. I would also just call attention to a 
point I made in my testimony, that there are authorities we 
don't currently have that we would like to have, and I want to 
work with you on the committee to be able to expand our 
authority.
    One of those is that our authority currently is limited in 
terms of being able to suspend lenders effectively by branch, 
only in a limited area, not nationwide. One of the things that 
Dave is doing on a regular basis now is monitoring lenders and 
scrutinizing them more closely where they have performance 
claim and default performance that is well above the average, 
more than double what we see is the average. And yet we need 
expanded powers to be able to take more aggressive action 
against some of those lenders. And we look forward to working 
with you on that.
    Just finally, on the Section 8 question, having a balanced 
housing policy that includes both rental and homeownership is 
one of, I think, the most important lessons of the crisis that 
we have seen. It is one of the reasons why, in the President's 
budget this year, we asked for a $1.8 billion increase for 
Section 8 voucher funding.
    But it is also why, particularly for people with 
disabilities, a Section 8 voucher may be the perfect solution 
for them. On the other hand, for many in the disabled 
community, housing in a Section 811 unit, which is part of a 
program that is specifically targeted for the disabled may be 
the solution, or supportive housing, which we have grown our 
support for also substantially.
    And I am very encouraged by the response that we have 
gotten to the budget in Congress. I look forward to having the 
2010 budget completed as soon as possible to be able to use 
that funding going forward.
    The Chairman. The gentleman from California, Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Chairman.
    Mr. Secretary, I want to congratulate you on reforms you 
have made to FHA. I think you are doing a really good job, and 
I am really glad to see them.
    In September, we passed a bill associated with elevatored 
multifamily buildings. Now, I don't know what the state of the 
multifamily program is today, if it is in financial trouble or 
if it is doing well. But we are underserving the buildings that 
are higher-cost buildings in elevatored areas.
    Would you like to comment on that?
    Secretary Donovan. Sure. First of all, I would just 
generally say--and I don't know if Dave has any further details 
he would want to provide--but we are effectively seeing a 
similar situation in the multifamily portfolio as we are seeing 
in the single family; in other words, given the retreat of 
private capital, the lack of private capital, given the 
undercapitalization of many financial institutions, we have 
seen a growing importance of FHA in that market.
    And as well, we are looking at a range of risk management 
and other strategies that we have already stepped-up, and 
additional steps that we are taking in the future. So it is 
analogous in many ways.
    I think on your particular point, similar to the way that, 
on the single-family side, a temporary increase in the loan 
limits has been important, similarly, on the multifamily side, 
we were already effectively shut out of markets in California 
and in other places. And with the recent retreat of private 
capital, it has become only more important, I think, that we do 
increase the loan limits. We are very supportive of that on the 
multifamily side.
    I do want to go back to a point that the chairman raised as 
well on the single-family side. It is amazing what can get 
reported, and the idea that just a few loans somehow we are 
shifting to going up-market. Let me try and put some facts 
around what is happening there.
    This year, less than 2 percent of our loans have been over 
$417,000. However, in important markets like California, where 
there are high-cost needs there and where capital has 
retreated, we have done a significant amount of loans. But 
still, even in California, for example, less than 10 percent of 
all of our loans in the State are above $417,000.
    So it is very important to remember--let's look at the 
facts here. There may be--
    Mr. Miller of California. But in California, FHA and GSEs 
represent 92 percent of the loans. If it weren't for you there, 
we would have no market at all. And I want to associate myself 
with the comments the chairman made on the high-cost areas. I 
think it has done tremendous benefit to this country, and as I 
understand it, those loans are performing very well.
    The Chairman. Will the gentleman yield?
    Mr. Miller of California. I would be happy to, Mr. 
Chairman.
    The Chairman. Apparently, if you read the press, it is 
astonishing to note that there are no middle-income people 
living in California. But the argument was that by raising the 
loan limits, we are lending in the luxury market. Previously, 
as some of the journalists have noted, there were no loans made 
in California. So California has apparently become the first 
middle-class-free State.
    Mr. Miller of California. Well, reclaiming my time, you are 
doing a very good job representing people who never knew you 
were there in the past.
    You talked about the DPA program. And I totally agree with 
you. The previous Downpayment Assistance Program was awful. It 
didn't work. There were too many bad players in the 
marketplace. And it is sad, because in 2003, one of the large 
DPA groups wrote HUD, asking them to deal with increased FICO 
scores, improved appraisals, improving the premiums required, 
and it went nowhere. They wrote again in 2007.
    We met in recent weeks to discuss that issue in Mr. Green's 
office. And I really want to thank you for that. I think there 
is a place for the program if it meets your new standards. And 
the bill that Mr. Green and I were talking to you about, it 
does a lot of those things. It takes and increases FICO scores 
for individuals to meet the same standard other FHA borrowers 
would be. Improves appraisal standards. Increases mortgage 
premiums.
    You have to make sure that these are legitimate charities 
involved in DPA. You need to make sure that these are absolute 
gifts that can never be repaid. You have to deal with 
creditworthy home buyers. You can't just give a payment to 
anybody who wants the money, and then you are required to go 
make them a loan to put the taxpayer at risk. We don't want to 
do that, and we need to require mandatory counseling in these 
areas.
    But I think there is a way that we can say, the old program 
was awful. How do we look at FHA standards as they apply to 
everybody, and how do we apply those even a little more 
stringently to the DPA system we have? Do you have any comments 
on how that might work in the future?
    Secretary Donovan. Well, we look forward to discussing it 
further with you. But fundamentally, I think, the issues that 
we have seen are that where there is what I would call an 
interested party in the transaction, there is the potential for 
that kind of--
    Mr. Miller of California. And we have to eliminate that.
    Secretary Donovan. Right. And--
    Mr. Miller of California. I am with you 100 percent on 
that.
    Secretary Donovan. So we do allow, for example, families to 
help a buyer. I certainly, when I bought my first home, help 
from my family, and that is something that we see broadly.
    So I do think that there are ways that downpayment 
assistance, done in the right way, can be an effective tool. I 
think the issue has been many of the criteria, but most 
importantly, that there not be an interested party in the 
transaction there--
    Mr. Miller of California. I am with you 100 percent.
    Secretary Donovan. --that participates in that. That is 
where the--
    Mr. Miller of California. Thank you. I look forward to 
working with you on that. Thank you, sir.
    The Chairman. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    News reports have suggested that the higher loan limits in 
high-cost areas have put a greater risk on the FHA fund. But as 
I believe the chairman has pointed out, on an actuarial basis, 
it has actually, as I understand it, added to your reserves.
    Mr. Secretary, can you comment on that? And is there a way 
to quantify the reserve increase that is provided by loans in 
high-cost areas up to $729,000?
    Secretary Donovan. What I would say is it is too early, 
given the relatively recent increase in the loan limits, to 
make any definitive conclusions about the performance of those 
loans. We just haven't seen enough seasoning in that portfolio 
relative to more historical data.
    What I will say is that historically, there is some 
evidence that they do perform, as the chairman said, better 
than the smaller size loans. So I think it is certainly 
reasonable to expect that they would, but we don't have 
definitive data at this point.
    But again, I would also emphasize, first of all, that this 
is a temporary measure, from our point of view. I think we all 
share an interest that as soon as possible, we step back. And 
again, only 2 percent of our loans so far this year have been 
over that $417,000 limit.
    So it is very important in specific high-cost markets, and 
I have data on that. But frankly, it is simply not correct to 
say that it represents a wholesale shift from where FHA has 
been.
    Mr. Sherman. And so it probably has a positive effect, but 
that effect is very, very small. It is some slight positive or 
modest positive on 2 percent of your portfolio.
    Now, you talk about pulling back. I would point out that 
the people in my district who are buying a home and borrowing 
$500,000 or $600,000 are no better off--in fact, they are 
getting a smaller home--than somebody in Columbus, Ohio, buying 
a home and borrowing $400,000.
    Now, the FHA comprises nearly 40 percent of the mortgage 
market today. Is this appropriate? And, put another way, what 
would happen to housing prices if the FHA wasn't a major part 
of the mortgage market today?
    Secretary Donovan. I think it is fair to say that if FHA 
were not active today, that we would not have seen the early 
signs of recovery that we have. FHA, particularly if you think 
about our serving nearly half of all the first-time buyers, the 
fact that in 2008 half of African Americans who bought a home, 
about 45 percent of Latinos who bought a home, used an FHA 
loan, it has been absolutely critical, particularly to those 
buyers who have really made the difference this year in terms 
of helping to get the market back on recovery.
    And I think, most importantly, this is exactly what FHA was 
created to do. We were created during the Depression to help 
ensure that mortgage capital was available, on good terms, in a 
self-sustaining way for the taxpayer, but that it was available 
during difficult times, and that we step back when the market 
returned.
    Mr. Sherman. I would point out that this near deposition 
was triggered as much as anything by a rapid decline in home 
prices. And I want to thank you for what your agency has done 
to stabilize home prices in many parts of the country; had you 
not acted and had you not had that result, I think we would be 
dealing with a much, much worse recession than the terrible 
recession we have now.
    What do you think the FHA should do to increase its 
reserves?
    Secretary Donovan. I will ask Commissioner Stevens to 
provide some more thoughts. But certainly the three key areas 
that I outlined in the testimony--stepping up enforcement on 
existing loans, given that they represent such a large share of 
expected future losses; and that has no impact on borrowers 
going forward, that is a key strategy for us to help ensure the 
reserves stay as close as possible to where they are, and 
increase going forward.
    Second of all, that we can step up the share of cash that 
is brought up-front in a transaction; and, third, to look at 
our pricing through our premium structure.
    Mr. Stevens. The one thing I would continue to draw 
attention to is the comment the Secretary made earlier, which 
is that 70 percent of the losses that are impacting our capital 
are on the existing book of business. And my greatest concern 
in the existing book of business is whether the loans that were 
originated by the institutions that insured those under the FHA 
program originated those within our guidelines.
    And that is why the Secretary emphasized the need for us to 
be able to enhance our ability to go after institutions that 
originated outside the rules. If we can make institutions pay 
for those losses instead of FHA picking up that burden, we 
affect that 70 percent.
    The actuary predicts that the future books are actually 
going to be profitable, assuming their scenario. So what we 
have to be protective of going forward, outside of 
institutional control, is to make sure we do enough adjustments 
in the program to cover a worse scenario than the actuary 
predicted.
    Mr. Sherman. Thank you. And with the indulgence of the 
chairwoman, I would point out that in my own State, where you 
buy a home for $200,000, the central valley, that is where you 
have all the foreclosures. In my district, you are making a 
profit on the $500,000 loans, and that higher conforming loan 
limit is helpful.
    I yield back.
    Mrs. McCarthy of New York. [presiding] Mr. Neugebauer.
    Mr. Neugebauer. Thank you. Mr. Secretary and Commissioner, 
thank you for being here.
    I want to go back to--and I am sorry I had to step out, but 
I want to go back to the risk-based pricing for just a minute 
because I think I have some disagreement here. But the current 
minimum downpayment is 3\1/2\ percent. Is that correct?
    Secretary Donovan. That is correct.
    Mr. Neugebauer. And so the pricing on that is--if I go to 
counseling, I get a little better deal, and let's just say I 
didn't go to counseling. So if I have a 3\1/2\ percent 
downpayment, no-counseling loan, you are going to charge me 3 
points up-front for insurance coverage. Is that correct?
    Secretary Donovan. Actually, that is the statutory cap. But 
the current level is 1.75 percent up-front, plus .55 over time. 
That is for most of the loans. There is some variation in that.
    Mr. Neugebauer. So you are charging 1.75 percent right now, 
plus the 55 basis points. Now, if I make a 20 percent 
downpayment, what is the charge for that?
    Secretary Donovan. The pricing is the same.
    Mr. Neugebauer. Yes. And is the risk the same?
    Secretary Donovan. Depending on other variables, the risk 
may or may not be the same.
    Mr. Neugebauer. Now, you are saying--I want to be sure, Mr. 
Secretary. You are on the record telling me that you think a 
loan that has a 3\1/2\ percent downpayment is on parity with 
the same risk as someone who puts 20 percent down?
    Secretary Donovan. I did not say that. What I said is you 
can't just look at the downpayment in order to be able to 
understand the riskiness of that loan. Let me just provide some 
details here.
    For a 97 percent or 96\1/2\ percent loan-to-value with a 
high FICO score, we have very, very low default rates; whereas, 
on the other hand, you could have a high downpayment, a 
significantly higher downpayment with a lower FICO score, and 
in fact the performance is significantly worse. So I--
    Mr. Neugebauer. I understand that part. But I--
    Secretary Donovan. I will agree--let me just agree with you 
that there is no question that the higher the downpayment, the 
less risk there is. But my only point I wanted to make is that 
it is important to look at the range of factors, not just at 
that one factor.
    Mr. Neugebauer. And I understand that. I mean, one of the 
things that got us in this situation is we were, across the 
country, loaning money to people who couldn't pay it back, 
whether it was car loans, house loans, all kinds of--and so one 
of the things we don't want to do is perpetuate that.
    Secretary Donovan. Absolutely.
    Mr. Neugebauer. And so I am sensitive to the fact that, you 
know, we want everybody who can afford to buy a house to have 
the capacity to do that. We don't want the taxpayers, though, 
actually to have to somehow maybe subsidize that at some point 
in time.
    But I don't understand the resistance. And I think, 
Commissioner Stevens, you said when you testified to this 
committee that you did not intend to implement risk-based 
pricing. So I still don't get that, because as Chairman Frank 
said a little while ago, there may be that $50,000- or $60,000-
a-year individual, that single mom raising a couple of kids, 
and she may have made a 5 or 10 percent downpayment. She may 
have a better FICO score than someone with higher income. And 
we are not rewarding that behavior. We keep rewarding bad 
behavior because we are treating everybody the same.
    That is what got us into this mess that we are in today. 
And so I am disappointed. A lot of us worked very hard to make 
sure that this risk-based pricing was on the table so that we 
could reward good behavior, and those people who have lower 
FICO scores because they have not demonstrated good behavior 
with their credit, that we are allowing them to get a free ride 
on those people who are actually out--when they buy a car, they 
pay for their car. They go buy a hot tub, they pay for their 
hot tub, or whatever it is they are buying.
    And so you are going to have to explain to me why that is 
good policy.
    Secretary Donovan. First of all, let me agree with you very 
clearly that we do not want to reward bad behavior, quite the 
opposite. Let me just take that example of someone who may have 
a very high--or want a very high LTV loan, have a poor credit 
score, a poor borrowing history.
    First of all, as I said earlier today, we are going to 
impose a higher FICO limit. We are going to take other steps to 
ensure that kind of bad behavior isn't rewarded. But I want 
submit that allowing that person to get a loan and simply 
charging them more isn't necessarily going to lead to a better 
outcome. It might actually put them at greater risk of default 
than it would otherwise.
    And I would submit that there are other ways to approach 
that same problem. For example, we might say that we would 
raise the minimum downpayment for low FICO score borrowers so 
that they couldn't get that high downpayment loan--that high 
LTV loan to begin with.
    And so I think there are other ways of approaching risk and 
risk-based underwriting that aren't necessarily risk-based 
pricing. It is not to say risk-based pricing isn't an 
appropriate tool. I think the question is, is it the right tool 
for an organization like FHA to use relative to a private 
market player?
    And again, I will reiterate, I do have some concerns that 
by raising pricing for certain borrowers and lowering it for 
others, we may actually be getting into a territory of 
competing against private capital coming back. And what I don't 
want to do is impede in any way the private sector returning as 
quickly as possible.
    I think private sector risk-based pricing makes sense in a 
lot of cases. But I think we have to look at it somewhat 
differently for FHA, but to get to the same result that you are 
trying to get to, which is not to reward risky or bad behavior, 
but to reward good behavior.
    Mr. Neugebauer. Yes. And I agree that it has to be all of 
the above. I just hate to see you take risk-based pricing--what 
I hear you saying, I agree with the higher downpayment 
requirements for lower FICO scores, all of those things, 
looking at the total. But I hate to see you taking the risk-
based pricing off because, you know, your fund isn't going in 
the right direction right now.
    Mrs. McCarthy of New York. Gentlemen, the time has expired.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Madam Chairwoman.
    Welcome, Mr. Secretary. Frankly, much of what I heard in 
your testimony I agree with. And frankly, I rarely say those 
words to a member of the Administration.
    Having said that, I am far more impressed by actions than 
words. But I am hopeful that what I heard in your testimony, 
see in your testimony, that there will certainly be follow-
through. I have a great concern about the actuarial soundness 
of the MMIF.
    The first question I have, I guess, is maybe help me with a 
little bit of historical context. I wasn't able to complete the 
study on my own. But just how often in the history of the fund 
have the FHA's secondary reserves been at this level? We know 
they are below the 2 percent statutory level. But how often has 
the reserve fund dipped to, I believe it is 0.53 percent?
    Secretary Donovan. Well, the 2 percent requirement was 
actually created in the wake of the mid-1980's--
    Mr. Hensarling. Right. I understand that.
    Secretary Donovan. --collapse that we had. And at that 
point when it was created, in fact, the reserve level was far 
below the 2 percent minimum. It took a number of years of 
growing the capital after it was established to get it above 2 
percent. So it has been below the 2 percent.
    This is the first time that it has dropped below the 2 
percent since it went above that first time. But it has been 
below the 2 percent--
    Mr. Hensarling. I am sorry. Since the 1980's? After it--
    Secretary Donovan. I don't have the exact date in front of 
me. I don't remember whether--I believe it was the early 1990's 
where it actually went above.
    Mr. Hensarling. Okay. Regardless, when one looks at the 
entire history of the fund--
    Secretary Donovan. I am sorry.
    Mr. Hensarling. Yes?
    Secretary Donovan. It was 1995 where the 2 percent was 
achieved. Between 1990 and 1995, it was below the 2 percent.
    Mr. Hensarling. In your testimony, Mr. Secretary, you say 
that, ``As such, the actuary concluded that the FHA's reserves 
will remain positive under all but highly severe economic 
scenarios.'' I know you believe that. I hope that to be true.
    You may have had come to your attention an editorial in the 
Wall Street Journal yesterday where now-OMB Director Dr. Peter 
Orszag back in 2002 wrote a paper, and I quote from it, ``On 
the basis of historical experience, the risk to the government 
from a potential default on GSE debt is effectively zero.'' In 
that same paper, now-OMB Director Orszag--apparently they 
tested Fannie and Freddie ``against the financial and economic 
conditions of the Great Depression.''
    I just say that, Mr. Secretary, again, some of us are 
skeptical, particularly when we look at what has happened to 
the unfunded liabilities of Social Security that weren't 
supposed to need taxpayer infusions; the Pension Benefit 
Guarantee Corporation; the National Flood Insurance Program; 
and now we know what the status of the FDIC fund is. It could 
be a matter of time before Chairman Bair is knocking on the 
Treasury's door for a line of credit there.
    So I am concerned ultimately, notwithstanding your fairly 
sanguine posture, that we still have the fund in harm's way. 
And that concerns me greatly on a number of different fronts.
    Number one, I believe everything that we do ought to be 
viewed through the prism of, what does it do for jobs? And I 
think the number one job of this Congress ought to be jobs. And 
unfortunately, since this Administration has come into power, 
we have had an additional 3\1/2\ million of our fellow 
countrymen lose their jobs. The only thing I see that the 
stimulus has brought us is the highest deficit in the Nation's 
history, the first trillion dollar deficit, and rising 
unemployment.
    I believe, frankly, that a lot of that is tied to the debt 
overhang, and the actuarial soundness of the MMIF, frankly, 
could be one more shoe to drop. And I don't know--at least when 
I talk to people in the 5th Congressional District of Texas, 
when they are looking at the possible monetizing of the debt, 
if they are looking at huge tax increases, when they are 
looking at further bailouts by this Administration, nobody 
wants to hire anybody. Nobody wants to launch a new enterprise.
    And so I am just hopeful, and I see my time is running out, 
that what you said in your testimony you will do to ensure that 
the insurance fund does not need a taxpayer bailout, I hope you 
follow through. And particularly, I hope that you pay very 
careful attention to the legislation by the gentleman who is 
sitting to the left of me, the gentleman from New Jersey, who 
has legislation to increase the required downpayment for these 
FHA loans.
    And in the conversation you were having with the other 
gentleman from Texas, certainly statistically and anecdotally 
the correlation between, as you put it in your own testimony, 
skin in the game--and default rates cannot be denied, and I 
hope that you will pay very serious attention to the 
gentleman's legislation--I see I am out of time.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Secretary Donovan. If I could just--one comment. I do think 
if we look at the broader economic picture, first of all, the 
actions that we--I have talked about in my testimony, the 
actions that we have already taken are very much focused on 
exactly what you said, Congressman, which is ensuring the 
health of the fund. We are very, very focused on that, and it 
is a critical piece of our commitment to the taxpayer that FHA 
should be self-sustaining.
    I would also add, though, that housing, as you know, is a 
critical part of economic recovery, and that without the 
important role that FHA is playing today in that economic 
recovery, I would submit that we would have lost many more 
jobs, and in fact, that the early signs of recovery that we 
have seen have begun to contribute to broader recovery in the 
economy overall.
    So we shouldn't lose sight of the important job-generating 
role that FHA can play in supporting the broader housing 
market.
    Mrs. McCarthy of New York. Mr. Garrett?
    Mr. Garrett. Thank you. And I thank you, Mr. Secretary.
    I think members on both sides of the aisle will agree with 
your last point, that we all want to make sure that the economy 
starts actually growing again. And to your point that housing 
can and will and should play a significant part of trying to 
get back on track, and we would like to see the housing market 
get back on track.
    A caveat to that is, or the other element of that is, if 
FHA's situation continues to decline, if we get a worst-case or 
a bad scenario, and it deteriorates and we need to get to that 
bailout situation, that would be a horrendous situation for us 
to be in. And that would--I question whether we would be able 
to do that bailout again, in the light of the political 
realities.
    And obviously, the situation then on the overall economy, 
if we get to the situation that FHA can't be there as it has 
been in the past to be the backstop, would be something that 
none of us would want to get to.
    So how do we avoid that? And I think that is what we are 
talking about doing. You raised the point, and we have a chart 
over here and I think you will agree with what the point of 
this chart is, is that is the point of the correlation of 
default rate to the risk that is there.
    And what we are looking at--and this is why I dropped in my 
legislation, because I have been concerned with this for 
several months; and this comes out of not just my thinking on 
it, it is also your own actuarial reports that says, ``Based on 
previous economic studies and mortgage behavior, a borrower's 
equity position in a mortgaged house is one of the most 
important drivers of default behavior''--and I emphasize that 
point--``and the larger the equity position a borrower has, the 
greater the incentive to avoid default on the loan.''
    That is from your own reports, and I think you would agree 
with that as well because I know you said during your testimony 
that there is no single characteristic that is a driver. But 
your report states that this is probably the most important 
driver that is out there.
    And as you see--and let me just give you a little 
information on the numbers that are here--this is like plain--
these are plain vanilla numbers here, basically, purchase 
price; primary house; single family; very high, good FICO score 
over 700; full documentation; full amortization; and as we said 
in the bottom, enclose the volume or the sales from the sand 
States, or the States where you are having problems.
    So this is the good stuff. And these show that those 
borrowers who put zero down are more than twice as likely to 
default as opposed to who put a downpayment of 5 percent. Twice 
as much. I mean, that is--I think that is significant.
    And to take a page out of Mr. Hensarling's comment, we were 
here also when the GSE discussions were made several years ago, 
and some of us were arguing that it could be a systemic risk. 
And we were told not to worry about it, for the quotes that Mr. 
Hensarling made, and also from the chairman as well.
    But now we are down $120 billion out of taxpayers' money. 
So some of us are, arguably or realistically, a little 
skeptical when we hear, ``don't worry.'' And that is why I put 
in the legislation.
    So let me just throw the question to you: What do you think 
of the legislation to simply say that we should have skin in 
the game; we are at 3\1/2\ percent right now, to go up to 5 
percent; balancing everything out, trying to get the housing 
market to go again, would actually be beneficial to going 
forward?
    Secretary Donovan. Well, first of all, Congressman, I would 
just like to clarify. I don't think anybody here today has 
said, ``don't worry.''
    Mr. Garrett. Okay.
    Secretary Donovan. I don't think we have said we shouldn't 
take action. In fact, we have detailed actions today, and also 
talked about further actions that we will take. And on one of 
those, I think we agree: Increasing skin in the game for 
borrowers, as I said, is an important step.
    What I want to make sure that we do is to do it in the 
right way based on the facts, and not to exclude borrowers who 
can be successful homeowners at very high rates, but to make 
sure that we target our actions on those who are most likely to 
default.
    So what I would suggest, I would love to be able to come 
and sit down with you to go through detailed performance data 
as we are finalizing these changes, and to be able to give you 
a sense of our thinking on that, and get some feedback from you 
about the best way to implement this. I think all we are saying 
today is without the full facts on what those criteria should 
be, it isn't enough just to look at downpayment as the single 
factor, or even the single most important factor.
    Mr. Garrett. Well, reclaiming my time--I see we are coming 
to the end here--I think these facts are pretty substantial, 
when you see the default rate twice as much for just simply 
between 5 percent and zero percent. So really, even with all 
the other factors in consideration, I find that hard to argue. 
But I will be glad to sit down with you.
    Secretary Donovan. I think it is--just one point I would 
make is the difference in performance between 97 percent and 
100 percent is dramatic. And you don't have the 97 percent. I 
think what you are reflecting there is the performance of the 
downpayment assistance loans, which we no longer make.
    Mr. Garrett. Right.
    Secretary Donovan. And so, again, I think it is important 
to get to the details of this so that we can show exactly what 
that performance looks like.
    Mr. Garrett. Right. And may I enter into the record, since 
the time has expired, two documents. One is from the Wall 
Street Journal, an article by Robert Pozen--which goes to the 
point Ms. Capito raised and I would have liked to have gone 
into--entitled, ``The Homebuyer Tax Credits Threaten the FHA;'' 
and another report by Amherst Securities Group, dated November 
23rd, ``Negative Equity Trumps Unemployment in Predicting 
Defaults,'' which basically goes to the point of the importance 
of having skin in the game as far as unemployment and other 
factors. So if I may enter those in the record as well.
    Mrs. McCarthy of New York. Certainly. I guess the question 
would be also--
    Mr. Garrett. If unanimous consent?
    Mrs. McCarthy of New York. Unanimous consent to put those 
into the record.
    Mr. Garrett. Thank you.
    Mrs. McCarthy of New York. I guess the question would be, 
and it would be interesting, how many of those that had the 
``zero-down'' downpayments on some of their second homes 
because they had excellent scores at that particular time. That 
is something maybe we could look into for the future.
    Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman, and thank you, Mr. 
Secretary and Mr. Commissioner.
    Mr. Secretary, I heard some of your comments just a moment 
ago, and perhaps they were addressing a concern that you and I 
have been talking about with reference to downpayment 
assistance, seller-assisted. My thinking is you indicated that 
there are details that we need to take a closer look at as we 
explore the possibility of working with such programs, as I 
came in, as you were speaking. I am not sure what the entirety 
of your comments were, so I would like for you, if you would, 
to simply reiterate. I heard the comment about ``skin-in-the-
game,'' but reiterate if you would some of what you said about 
the downpayment assistance so that I might get some clarity. 
And I apologize to you for my late arrival. I have truly been 
engaged in some housing business in another sense. But thank 
you so much, and if you would?
    Secretary Donovan. I think you probably heard the entirety 
of them. I was simply focusing on the details of the 
performance that was there and pointing out that the 100 
percent loan to value performance there would have included the 
downpayment assistance loans, which no longer are an option 
within the FHA portfolio. So that was--I am guessing that you 
heard the entirety of my comments.
    Mr. Green. Well, in that case, let us just for a moment 
talk about the seller-assisted program that we have been 
dialoguing on. Having looked at some of the statistical 
information, I understand why there can be a great deal of 
consternation. My hope is that the program, while it has had 
some concerns that have to be addressed, there may be a means 
by which we can continue to work to see if there is a way to 
have some program, not the program that we had before, but 
start anew and let us develop a program that can be successful 
for persons who can pay for a home but who are without the 
necessary downpayment.
    Secretary Donovan. Congressman Miller, who was here 
earlier, talked a little bit about this. As I said at that 
point, I think the biggest concern and issue is about having an 
interested party in the transaction providing a downpayment. 
Certainly under our rules, we allow a family member to provide 
it. There are certain State housing agencies or others that can 
provide it effectively. I have seen that in my own experience. 
But the most significant issue has been that you have an 
interested party, the seller, providing that downpayment, and 
that has been I think what has led to the incentives that drove 
the program in the wrong direction.
    Mr. Green. I understand, and there are ways to deal with 
the interests that you have called to our attention. We have 
talked about the blind pool appraisal process. There are other 
ways that it can be dealt with. So my concern is that we 
continue to look at means by which we can accomplish this so 
that we do not find ourselves with persons who truly cannot 
afford to pay for homes and just lock them out because they do 
not have that downpayment assistance. And I greatly appreciate 
family-supported downpayments, and there are municipalities 
that are into this, as I understand it, and other agencies as 
well. But there are some people who but for that downpayment 
could afford to make a mortgage payment. In fact, I am sure you 
can cite examples, as can I, of persons who are paying more in 
rent than they would pay for a mortgage if given the 
opportunity to have one. That is where we are.
    And I do not think that we are that far apart. I think that 
we just need to continue the dialogue. I appreciate the way you 
have embraced this in terms of working with us to help us move 
forward and hopefully come up with something that will assure 
us that we will not have a flawed program but rather a program 
that benefits the intended parties in such a way as not to 
allow some of the things that occurred prior to this moment to 
occur again.
    With that, Madam Chairwoman, I will yield back.
    Mrs. McCarthy of New York. Thank you. Mr. Posey?
    Mr. Posey. Thank you, Madam Chairwoman. Mr. Secretary, I 
wonder if you could take just about 30 seconds and summarize 
with me your focus on manufactured housing?
    Secretary Donovan. Is there any particular aspect of it 
that you are--
    Mr. Posey. No, just what your focus is on it right now?
    Secretary Donovan. I would turn to Commissioner Stevens for 
further details on it. I think there are effectively two major 
areas that we are focused on. One is the implementation of our 
regulatory oversight responsibilities around it. And the second 
is obviously the significant lack of financing in the market 
that exists today and whether there are ways that we can 
effectively ensure better financing options for manufactured 
housing.
    So those are I think the two most significant areas of 
regulatory responsibility and other responsibility that we have 
to sort of guide our involvement, if you will.
    Mr. Posey. Do you consider it a priority?
    Secretary Donovan. I do consider it a priority. I would say 
that given the nature of the foreclosure crisis and the current 
condition of the fund, I think our primary focus has been, as 
we have talked about today, stepping up the quality of the 
lending that we are making as well as the important return of 
the capital fund above 2 percent. So I would say that that has 
been my primary focus within FHA.
    Mr. Posey. As you are aware, the position of the appointed 
non-career administrator for the HUD manufactured housing 
program as authorized by Congress in the Manufactured Housing 
Improvement Act of 2000 still remains vacant to this day, I 
understand. And obviously, this affects everything relating to 
federally-regulated manufactured housing, including financing. 
And I just wonder if you ever plan to appoint anybody?
    Mr. Stevens. First of all, I appreciate the question, and 
the manufactured housing issue is an area that we have spent a 
great deal amount of time talking about. I have met with Mr. 
Ghorbani several times. It is a difficult subject in terms of 
the Schedule C request that Mr. Ghorbani is asking for as it 
relates specifically to the manufactured housing piece.
    Mr. Posey. Who is asking for it?
    Mr. Stevens. The representative of the manufactured housing 
trade organization.
    Mr. Posey. I have never talked to them.
    Mr. Stevens. Okay. But just to put it in perspective, of 
the roughly 2 million transactions done in the single-family 
business in Fiscal Year 2009, 46,000 of those were manufactured 
housing transactions. Our regulatory group, we have a 
regulatory team that focuses in a significant way on the 
manufactured housing issues from inspectors to requirements, 
both from the manufacturers and the property owners who lease 
out land for manufactured housing properties to reside on. So 
we do focus on the issue quite a bit. The question is whether a 
specific political appointee is needed to run that 
organization, which is the one issue that we have been 
discussing with the industry, and that is the area that we are 
continuing to discuss with them.
    Mr. Posey. Well, it was authorized by Congress in 2000. You 
have studies for 8 years. Do you have an opinion yet?
    Mr. Stevens. Quite frankly, I would say that I am not 
confident that having a political appointee, Schedule C, given 
the limited number of those positions that are allocated to the 
Department is warranted by the manufactured housing industry.
    Mr. Posey. Okay.
    Mr. Stevens. But I will tell you this, I am agnostic, I am 
very open, and I continue to listen to it. I have spoken about 
it briefly with the Secretary. We continue to look at the 
issue. The question is, would creating a Schedule C position 
have a measurable impact that would improve the outcome for the 
manufactured housing considering the vast number of resources 
and time that we all spend focused on this?
    Mr. Posey. So you think Congress is wrong in authorizing 
the position then; you think it was stupid of Congress to do 
that?
    Mr. Stevens. No, I think it was--I greatly appreciate the 
opportunity which says we may appoint, the Secretary may 
appoint, and we clearly would absolutely take advantage of that 
if the need was prevalent. And based on when the legislation 
was passed versus the state of the manufactured housing 
industry today and the vast number of resources we have working 
on the subject, from the General Counsel--in fact, the General 
Counsel and I have had discussions on this particular issue as 
recently as this morning. It is a question of whether that is 
warranted given the limited number of Schedule C's allocated 
for the Department.
    Mr. Posey. Four to 6,000 is not a small number.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Mr. Posey. To most people really.
    Secretary Donovan. If I could just add one other thing. 
First of all, to be fair to Commissioner Stevens, he has been 
on the job just a few months, so this is not something that he 
had a significant amount of time to consider. But also I would 
say one of our primary focuses has been that we were given new 
authority under HERA to be able to make a substantial number of 
improvements in our approach to manufactured housing, which we 
have gone ahead and implemented. And I think have made a real 
difference. So that has been the primary focus of the work that 
we have done on manufactured housing this year, and I do think 
we were able to accelerate substantially the implementation of 
those provisions compared to what the prior Administration had 
been doing. So, thank you.
    Mrs. McCarthy of New York. Ms. Waters?
    Ms. Waters. Thank you very much, Madam Chairwoman. I would 
like to thank Secretary Donovan and Commissioner Stevens for 
being here today. It is so busy. People are running all over 
the place, and we are committed to several committees at a 
time. But, as you know, I am extremely supportive of FHA. And I 
am concerned.
    And I think, Commissioner, when you testified before, we 
did know that FHA's capital ratio was going to be what it is. 
We thought it was going to be a little bit stronger than that, 
and so we really do have to take whatever steps are necessary 
in order to make sure that we have the capital ratios that we 
should have. But let me ask you this: I understand that you 
have the authority and the ability to determine the credit 
scores that would be eligible for FHA financing, is that 
correct?
    I suppose that as you consider what restructuring you are 
going to do or what changes you are going to do, you will take 
that into consideration. But given all of this, I would like to 
just share with you a part of the testimony that I had 
prepared, which says, ``Given FHA's historical success at 
bringing homeownership to millions of households, I do not 
believe that strong oversight should be confused with the need 
to curtail the role of FHA to the point where a housing 
recovery becomes impossible and only the most affluent 
households have access to homeownership. We need to be careful 
that any changes we propose would actually improve FHA's 
solvency rather than simply drive away qualified borrowers.''
    I read you this part of my statement because in essence, 
that sums it up. And we think that in this economic crisis that 
we are in, where we have an unprecedented number of people 
whose jobs are being downsized or are losing jobs, we could 
easily get confused and think, oh, we cannot do anything much 
anymore. But I think that FHA's history is much stronger than 
that, and we should use every opportunity to figure out how to 
keep FHA going and going strong and making it available to all 
of these people who deserve it at the same time managing in 
ways that will not drive us deeper into capital ratio problems, 
okay.
    Thank you very much. I yield back.
    Secretary Donovan. Madam Chairwoman, it is great to see 
you, and thank you for being here. If I could make just two 
brief comments on that?
    Ms. Waters. Yes.
    Secretary Donovan. First of all, I think you highlight the 
very, very important point that homeownership should be 
available to responsible buyers who can be successful at doing 
it, and that we have to, as I said in my testimony, keep an eye 
on FHA's historic role in doing that.
    One of the reasons why we have focused so heavily on 
enforcement is that what it allows us to do is to very clearly 
target those loans that will be most likely to cause problems 
for the strength of the FHA fund without disqualifying any 
deserving borrowers. So that is a first important step.
    Second of all, as you may not have heard in some of my 
earlier discussion, we have to be very careful about using just 
a blunt instrument in terms of the way that we set our 
policies. We have to look at the combination of factors that 
lead to high risk and not just whether it be on loan to value 
or on some single characteristic, like a FICO score, that is 
the only criteria that we are taking into account. And so that 
is why we are looking very carefully at the combination of 
factors. I think it would be important that we come and sit 
down with you and talk in more detail about our thinking on 
that so that you can get a clear picture of our thinking, and 
we can get your input on that as we go forward on these 
changes.
    Ms. Waters. Thank you very much.
    Mrs. McCarthy of New York. Thank you. I want to thank 
Secretary Donovan and Commissioner Stevens for your testimony 
today. I happen to agree with you, Secretary Donovan, that 
there are a lot of people out there who could actually buy a 
house who probably have not gone forward because they are 
afraid they cannot buy a house. I have to remember when I first 
bought my first home, it was my parent's home, and I think the 
price of it when they bought it was $12,000. When I bought it, 
I think it was $85,000. Right now, so they tell me, it is worth 
about $525,000. I am sure that has gone down. Unfortunately, my 
taxes have not gone down on that.
    But I think when you look at people who actually work hard, 
their dream is to have a home. Those who have been living in 
apartments, paying their bills, utilities and everything else 
that goes with it, actually usually end up being good customers 
even when they are buying a house. These are unusual times. 
People are losing their jobs. And for the first time, they are 
finding themselves in financial problems, so hopefully we can 
work that out and get this economy going. Get the jobs back. 
And I think then we will see the housing turn around.
    Thank you for your testimony. We appreciate it.
    If the second panel would come forward. 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 want to thank the second panel for your patience. I know 
Ms. Waters touched upon it. There are many, many hearings going 
on throughout the House. There is also a caucus meeting going 
on where a lot of members are. So I thank you for your patience 
as we go through that.
    I would first like to introduce Ms. Ann B. Schnare. Am I 
pronouncing that correctly, ``Schnare?'' Ms. Janis Bowdler, Ms. 
Vicki Golder, and Mr. Robert Story. You will see members coming 
in and out, as you probably have noticed, as they get free 
time.
    With that, if you would start, Ms. Schnare?

       STATEMENT OF ANN B. SCHNARE, PARTNER, EMPIRIS LLC

    Ms. Schnare. Thank you, and good afternoon. I would like to 
thank the chairman and the ranking member for inviting me here 
today. My name is Ann Schnare. I am a Ph.D. economist who 
specializes in housing and mortgage finance.
    Last year, I co-authored a study that predicted that FHA 
would fall below its 2 percent capital requirement by the end 
of Fiscal Year 2009.
    Let me begin by emphasizing the critical role that FHA is 
playing today. I fully agree with what the Secretary said about 
FHA's continued presence in the market and how it is essential 
to housing recovery. At the same time, there are clear 
indications that FHA is under stress. Delinquencies continue to 
rise, the share of loans in troubled housing markets continues 
to grow, and many FHA mortgages continue to be originated at 
loan-to-value ratios that are close to 100 percent. While 
credit scores are rising, this may not be enough to protect the 
fund.
    The recently released audit found that the fund has 
basically run through most of its capital reserves and no 
longer meets its mandatory 2 percent threshold. Under the base 
case scenario, the capital ratio is about 0.53 percent, which 
from a statistical point of view, is not much different than 
zero. Although I have not attempted to replicate this year's 
audit, I believe that the base case projections are probably 
optimistic and that the fund is most likely facing a 
significant capital shortfall.
    One of the major shortcomings of the audit is that it did 
not consider the current delinquency status of FHA loans. The 
audit projects that roughly 116,000 loans will default in 
Fiscal Year 2010. Yet, 108,000 loans are already in the 
foreclosure process and new foreclosure starts have been 
averaging about 11,000 loans per month. Unless one assumes that 
a higher percentage of these loans will cure, which seems 
highly unlikely, the claim rates projected in the baseline 
projections appear to be too low.
    In addition, the audit projects future house price trends 
at the national level, not the regional level, and as a result, 
might not be capturing the impact of the changing geographic 
distribution of funds. In the audit that we did last year, we 
found that further increased the projected losses of the fund.
    And last but not least, the economic assumptions that 
underpin the audit may prove to be optimistic, particularly as 
they relate to house price trends in 2011 and beyond. For all 
of these factors, I think that FHA is at best running on empty 
and probably is facing a negative capital situation.
    I applaud the Secretary for his announcements that he made 
today, and I believe that HUD is moving in the right direction.
    I would like to use my remaining time to reiterate some of 
the recommendations that are presented in my written report. 
The first is to make FHA's financial condition more 
transparent. Waiting another year for the next financial audit 
is unacceptable in the current environment. FHA also needs to 
provide more meaningful reports on its risk exposure on the 
ongoing performance of its loans. This should become a priority 
at HUD and it should be disclosed to the public.
    Second, FHA should increase its downpayment requirements. 
While FHA borrowers are required to put 3.5 percent down today, 
they are allowed to finance the up-front premium and a portion 
of their closing cost. As a result, many FHA borrowers go into 
their homes with little, if any, equity. HUD's announcement 
that it will begin to require more skin-in-game will be good 
for borrowers and neighborhoods alike.
    Third, FHA should begin to recapitalize the fund by 
enacting a modest increase in its insurance premium. In my 
view, increasing the annual premium is the way to go. When we 
looked at this issue last year, we estimated that a roughly 20 
to 25 basis point increase would have enabled the fund to 
remain in compliance with this capital requirement. Something 
along these lines would probably be appropriate today.
    Fourth, FHA needs to audit every loan that defaults within 
its first 12 months. Early payment defaults typically stem from 
shoddy underwriting practices or outright fraud. Rather than 
routinely paying claims, FHA should take steps to ensure that 
applicable guidelines have been met and crack down on offending 
lenders. The provisions contained in H.R. 3146 are an important 
step as are the announcements that the Secretary made today.
    Finally, the role and structure of FHA needs to be 
reconsidered. FHA has long been plagued by resource 
constraints, an inability to attract and maintain qualified 
staff, and a lack of autonomy. Going forward, it is critical to 
give FHA the resources, flexibility, and oversight it needs to 
serve its public purposes and maintain the integrity of the 
fund.
    When I prepared my comments for this hearing, HUD had 
already taken important steps to improve its risk management 
controls and return to quality underwriting. The announcements 
made today provide further support for these basic objectives.
    In closing, I would like to thank you again for giving me 
the opportunity to express my views. I am a long-time supporter 
of both FHA and affordable lending. I hope my comments can make 
a contribution.
    [The prepared statement of Ms. Schnare can be found on page 
76 of the appendix.]
    Mrs. McCarthy of New York. Thank you very much.
    Ms. Bowdler?

 STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR, WEALTH-BUILDING 
       POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA (NCLR)

    Ms. Bowdler. Good afternoon. My name is Janis Bowdler. I am 
the deputy director of the Wealth-Building Policy Project at 
the National Council of La Raza.
    NCLR is committed to strengthening America by promoting the 
advancement of Latino families. I would like to thank the 
chairman and ranking member for inviting me here today.
    FHA has a critical role to play in helping our Nation's 
economy recover, which has been discussed at length today. We 
have done a lot for the lending industry, but unfortunately, we 
really have not done enough to help average everyday Americans 
get back on their feet. We are seriously concerned about the 
lack of progress in stabilizing Latino communities. Our 
families continue to be hit hard by foreclosures and 
unemployment.
    We know that middle- and working-class families will not 
recover until jobs return to their neighborhoods and the 
housing market is stable. On this last point, there is much 
that FHA can do.
    In my testimony today, I will discuss the role of FHA in 
improving housing conditions for all families. And I will close 
with recommendations on how we can strengthen the program.
    FHA is a critical government tool that is mission-driven to 
open homeownership opportunities and protect families from 
foreclosure. The program has seen its share of challenges over 
the course of its history. Still, FHA has been a standard 
bearer for affordable lending to low-income families. By 
providing mortgage insurance, it has reduced downpayments and 
standardized the 30-year fixed-rate mortgage. Perhaps its 
greatest success is teaching the private market how to lend 
sustainability to those of modest means.
    During the subprime boom, FHA's share of the market dropped 
dramatically. While the reasons for this may up for debate, the 
impact is clear: Millions of families who could have qualified 
for an FHA loan ended up with a toxic mortgage. Arguably, many 
would not be facing foreclosure today had they been steered 
towards a FHA loan instead of a predatory one.
    This year alone, 700,000 Latino and African-American 
households will lose their primary source of financial 
security, their home, to foreclosure. This is unacceptable. We 
need a robust FHA program that can offer a competitive 
alternative to predatory loans.
    And, of course, the silver lining of the housing bubble is 
that many are finding homes in their price range for the first 
time. Unfortunately, at the same time, credit is drying up and 
many qualified families cannot get a loan.
    I am sure you can imagine the frustration in our 
communities and working-class neighborhoods across the country 
who are facing high foreclosure rates, record job loss, and 
skyrocketing debt, and now families who are otherwise qualified 
cannot take advantage of the affordable market. Neighborhoods 
in this position are really looking at defeat. Distressed 
communities are seeing ownership opportunities slip away and 
investors and speculators are moving in to take advantage. This 
is where FHA can help.
    NCLR is pleased with the progress they have made so far and 
with many of the recommendations that have been announced. They 
moved quickly to lend where the market would not and, as the 
Secretary mentioned, 45 percent of Latino borrowers used an FHA 
loan last year.
    The importance of this cannot be understated. We understand 
concerns around the increased claims rates, but FHA cannot let 
tough economic times jeopardize its mission to serve first-time 
home buyers. This is not to say that there is not room for 
improvement. We are outlining three areas of the FHA program 
that can be strengthened to better serve borrowers and 
taxpayers. The first has been discussed at great lengths and 
that is looking at how we can crack down on fraud and predatory 
lenders that have moved out of the subprime market, which does 
not exist, and into the FHA system. Most of the claims are due 
to economic conditions and to some bad lender behavior, not 
necessarily the product itself. We should really focus on 
cleaning up the originator eligibility list.
    Second, is the product design. FHA's success has largely 
been due to the product's flexibility. And the low downpayment 
requirements, for example, have made FHA accessible to millions 
of Latino and borrowers of all backgrounds. Such aspects of the 
program should be maintained. However, several years ago, FHA 
removed an important risk deterrent, the requirement for first-
time home buyers to attend homeownership counseling. Buyers 
that attend counseling are far less likely to default. NCLR 
recommends creating incentive in the form of a premium discount 
for those who attend pre-purchase housing counseling with a 
HUD-approved agency.
    And, finally, something that has not been talked a lot 
about is their loss mitigation strategy. FHA has some of the 
best tools to prevent foreclosures, but unfortunately, not all 
FHA borrowers are able to take advantage of them. While FHA 
servicers are required to make these available, there is little 
monitoring to make sure it happens and even less enforcement. 
NCLR recommends that servicers be required to prove to FHA that 
all foreclosure prevention options have been exhausted before 
they are able to file a claim.
    Thank you, and I will be happy to answer any questions.
    [The prepared statement of Ms. Bowdler can be found on page 
45 of the appendix.]
    Mrs. McCarthy of New York. Thank you very much.
    Ms. Golder?

STATEMENT OF VICKI COX GOLDER, PRESIDENT, NATIONAL ASSOCIATION 
                          OF REALTORS

    Ms. Golder. Thank you, Madam Chairwoman, and members of the 
committee.
    Mrs. McCarthy of New York. Would you put the microphone on?
    Ms. Golder. There we go, it is on. Thank you, Madam 
Chairwoman, and members of the committee. My name is Vicki Cox 
Golder, and I am the 2010 president of the National Association 
of Realtors. I own Vicki Cox and Associates in Tucson, Arizona, 
and I am here to testify on behalf of 1.2 million members of 
the National Association of Realtors regarding the audit that 
the Federal Housing Administration mortgage insurance program 
just had.
    I am going to summarize three main points of my written 
testimony: One, FHA is a critical part of American housing 
markets; two, FHA is fiscally sound with responsible 
underwriting; and three, FHA needs enhancements, not radical 
reform.
    With the collapse of the private mortgage market, the 
importance of FHA has never been more apparent. Thus far in 
2009, nearly 80 percent of the FHA purchasers were first-time 
home buyers. In 2008, more than 60 percent of home purchase 
loans and almost 40 percent of refinanced loans were to 
African-American home buyers and were from either the FHA or 
the VA financing system. Nearly 50 percent of non-white, 
Hispanic borrowers used FHA or VA for home purchase loans and 
21 percent used FHA or VA to finance a home loan.
    If you take a closer look at the numbers, you will see that 
the FHA is doing exactly what they were designed to do, which 
is to serve the underserved. FHA is perfectly serving its role 
to fill the gap during this current crisis that we heard so 
much about by Mr. Donovan. And, of course, the mortgage 
insurance is so important and available to all qualified people 
and in all economic times, so it is important in good times and 
in bad.
    In my home State of Arizona, you all know that we were hit 
very hard by the foreclosure crisis. FHA sales have grown more 
than 600 percent. If it were not for FHA, we probably would not 
have any market in Arizona right now. Without FHA mortgage 
insurance, we just would not be able to recover in our State.
    Much has been made recently of the fact that the FHA's 
Capital Reserve Fund has fallen below the congressionally-
mandated 2 percent ratio. While this is a sobering fact, it 
must be evaluated in its proper context. The decrease in 
reserves is not tied to excessive increases in defaults or 
unsound underwriting practices. Quite the opposite, FHA 
borrowers have higher FICO scores and lower loan-to-value 
ratios than ever. The overall decline in reserves is simply a 
reflection of the projected change in home price values. 
According to the audit, if FHA makes no changes to the way they 
do business today, the reserves will actually exceed 2 percent 
in the next several years. FHA has sufficient reserves. The 
cash reserves and capital reserves give the agency combined 
assets of $30.4 billion, enough to pay all claims over a 30 
year period with excess above that. By comparison, the 
Financial Accounting Standards Board only requires financial 
institutions to hold reserves for losses over the next 12 
months. In short, FHA has 30 times the level required by the 
FASB.
    Realtors strongly believe that FHA is taking necessary 
steps to assure its financial solvency. Specifically, we 
applaud the hiring of an experienced chief risk officer to 
oversee FHA's efforts to mitigate risk. Realtors also support 
FHA's net benefit requirement to ensure consumers are 
refinancing without receiving any benefit. We also support 
FHA's aggressive stance against abusive lending.
    We urge Congress and the Administration to tread lightly 
before making changes to a program that has such a profound 
impact on our economic recovery and serves such a critical role 
to our Nation's families. We strongly oppose H.R. 3706, the FHA 
Taxpayer Protection Act of 2009, which proposes increasing 
FHA's downpayment requirement. Such action would not add a 
penny to FHA's reserves, yet it would certainly put 
homeownership out of the reach of many creditworthy borrowers.
    Realtors believe that the best way to ensure FHA's success 
is to strengthen it. A special thanks to Chairman Frank and 
other members of this committee for passing legislation to 
extend the loan limits through 2010. But, as the chairman 
understands, these need to be made permanent. Realtors strongly 
support legislation by committee members Sherman and Miller, 
H.R. 2483, which would do just that.
    While some have argued that higher loan limits put the fund 
at further risk, in fact the opposite is true, and we heard 
that from Secretary Donovan today. FHA's audit demonstrated 
that higher balance loans perform better than lower balance 
loans. And despite long-held beliefs, higher loan limits are 
not just for California, New York, and a few other States. 
There are currently 246 counties in 28 States that have high 
cost limits. So this is truly a national issue. I know in my 
own State of Arizona, we have one county that would be 
considered a high-cost county.
    In conclusion, I want to thank officials at HUD and FHA for 
the tremendous leadership and strength they have shown during 
the current housing crisis. I especially want to thank Congress 
for the recent law to extend and expand the home buyer tax 
credit. Without it, our housing recovery would have stalled, as 
all of you know.
    Realtors know that they can trust FHA to help serve the 
needs of hard-working American families who wish to purchase a 
home. And I want to thank you all for allowing me this 
opportunity to testify. Thank you.
    [The prepared statement of Ms. Golder can be found on page 
64 of the appendix.]
    Mrs. McCarthy of New York. Thank you very much.
    Mr. Story?

  STATEMENT OF ROBERT E. STORY, JR., CMB, CHAIRMAN, MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Story. Thank you, Madam Chairwoman. My name is Robert 
Story. I am the chairman of the Mortgage Bankers Association 
and also the CEO and president of Seattle Financial Group.
    Given the heightened role FHA is playing in our country's 
housing market, today's hearing is both timely and vitally 
important. Last month's report on FHA's financial situation was 
a wake-up call to all of us. It raised the urgency for 
strengthening the important agency so they can continue to 
serve borrowers and provide liquidity to our struggling 
economy.
    At MBA, we have set forth a plan that we believe will help 
to strengthen and modernize FHA. And, today, I will provide 
some brief points on our proposal.
    The report issued by FHA in November revealed that FHA's 
capital ratio has fallen well below the required 2 percent. But 
given the state of the economy, this should not surprise 
anyone. FHA is not immune from the problems that have hit the 
entire housing sector from small mortgage firms to giants like 
Fannie Mae and Freddie Mac.
    Additionally, rising unemployment has led more FHA 
borrowers to fall behind on their mortgages. Falling home 
prices have resulted in more foreclosures and greater losses on 
each property. Add to that FHA's mission of helping underserved 
borrowers, and you can understand why the agency's reserves are 
being affected.
    While an analysis of the report raises serious concerns 
with FHA, there are also reasons to be optimistic. FHA has 
taken a number of proactive steps to improve its risk 
management. And I want to commend Secretary Donovan and 
Commissioner Stevens for their aggressive approach. 
Improvements to FHA's appraisal procedures, the streamlined 
refinance program and lender approvals are all intended to put 
FHA on a sounder financial footing. We also look forward to 
reviewing the proposals Secretary Donovan laid out this 
afternoon.
    I would also note that FHA no longer insures loans with 
seller-funded downpayment assistance. The report found these 
loans bear primary responsibility for FHA's decline in 
reserves. If we are to remove these loans entirely from the 
analysis, FHA's capital reserves would be above the required 2 
percent.
    Even with stronger underwriting and a ban on seller-funded 
downpayments, it is clear that more needs to be done. In 
recognition of this, MBA has put forward a proposal that will 
help bring FHA into the 21st Century, and we are working on 
additional recommendations.
    First, Congress needs to appropriate the funding it 
authorized under HERA for FHA staffing and technology needs. 
Also, allowing FHA to hire additional staff to keep up with is 
growing loan volume and good management. FHA makes money for 
the Federal Government. It should be allowed to use some of its 
money for its own staffing and technology needs. FHA should 
also be permitted to compensate its staff at the same pay 
scales used by other Federal financial regulators.
    I want to commend this committee for supporting H.R. 3146, 
the 21st Century FHA Housing Act, which authorizes an 
additional $72 million annually for FHA. Now, we need to 
redouble our efforts to make certain this money is 
appropriated.
    Second, we need to improve the quality of FHA originations. 
One way to protect the soundness of FHA is to ensure that FHA 
mortgage lenders and brokers are equipped to protect consumers 
and taxpayers from undue loss. At MBA, we strongly believe that 
rigorous licensing and registration requirements, as well as 
increased net worth and minimum bonding requirements, are 
essential components of any framework.
    Madam Chairwoman, my company has been making FHA loans 
since the 1950's. In all of our experience, I cannot think of a 
more important time in FHA's history than now. MBA appreciates 
all that FHA is doing to provide stability, liquidity, and 
affordability during this difficult economic downturn. I would 
not want to envision a mortgage market without it. Were it not 
for FHA, many Americans would not have access to record low 
interest rates, tax credits, and other measures intended to 
preserve homeownership and jump-start lending.
    I want to close by urging this committee to be proactive 
and to take the steps necessary to make sure FHA is there now 
and in the future serving potential homeowners and supporting 
our mortgage market.
    Thank you.
    [The prepared statement of Mr. Story can be found on page 
82 of the appendix.]
    Mrs. McCarthy of New York. Thank you very much for your 
testimony. Thank you all for your testimony. It is interesting 
sitting here in this chair because you have to basically stay 
on your toes and listen to every word that is being said. But I 
think it is interesting--on a number of things that a lot of 
you said. When we look at the foreclosures that we have 
unfortunately seen in the last year or so, and we talk about 
the predatory lenders, Ms. Golder, you are representing the 
real estate people, Mr. Story, you are representing the 
mortgage bankers. And I guess the curious question that I have 
from listening to you, being that so many bad loans were made 
over these years, new products as they call them, I am 
wondering if being that a real estate person usually has to 
basically bring the buyer to the house, I would take it that a 
lot of your real estate people probably saw some of these 
people being led down the garden path on, yes, you can afford 
this house with this kind of a mortgage. Have you heard any 
stories where the real estate people really wanted to kind of 
warn the consumer at that particular point that there were 
better loans out there for them?
    Ms. Golder. Quite frankly, I have not. I am mostly in the 
land business, but you have to realize that Realtors are 
basically successful based on our reputation. So the skin-in-
the-game that we have is our reputation within the communities, 
our involvement within the communities. It is not our job also 
to recognize whether someone is qualified. We normally send 
them to a mortgage lender.
    Mrs. McCarthy of New York. Right.
    Ms. Golder. And it is between them and the lender as far as 
what they are qualified for, and then they tell us what they 
are qualified for and what price to--what house that they want 
to see. And then it is up to once they go into escrow, all of 
that usually--in Arizona at least--is taken care of in an 
escrow account. I know in other States, it is between lawyers, 
that addresses it. But we do not see nor do we ask for that 
kind of information as far as wanting to--
    Mrs. McCarthy of New York. No, no.
    Ms. Golder. And we also, as the National Association of 
Realtors, I want you to know we have produced predatory lending 
brochures. We did that clear back in 2005. So we try to educate 
our members as to exactly what predatory lending is.
    Mrs. McCarthy of New York. Well, that is basically--I am 
not putting any of this on your shoulders.
    Ms. Golder. Yes.
    Mrs. McCarthy of New York. It is just that I know that I 
had heard from real estate people that they would basically 
look at some of what their consumers were buying, and they 
would say, how are they going to pay for this? I know it is not 
your--but I am just wondering in my own mind that it should not 
just be one person, whether it is the mortgage banker or 
whoever is looking at this, that maybe for the future we need 
more eyes.
    Ms. Bowdler?
    Ms. Bowdler. NCLR is a large housing counseling 
intermediary funded by HUD.
    Mrs. McCarthy of New York. Could you bring your microphone 
a little bit closer?
    Ms. Bowdler. Sure. NCLR supports housing counseling 
agencies. We are a HUD housing counseling intermediary. Housing 
counseling agencies across the country really work primarily 
with the same demographic of FHA borrowers. And it was 
certainly the feeling of counselors that they were in the 
position of, if you could say it this way, making the borrower 
``eat their veggies,'' and say--you know, give them the hard 
news of here is what you are going to have to do in order to 
qualify for a loan. And there were certainly plenty of other 
good actors out there who were doing that. And the problem 
really was, I think what we saw in the market, is bad practices 
really drove out good. So for every housing counselor, real 
estate agent or lender out there who said, this is a bad idea, 
you had five more brokers who said, ``Why wait? I can get you 
into a house today.'' And there were no protections in place to 
prevent that.
    And a lot of times the consumers, it came down to a battle 
of experts. You have an expert across the table saying, ``Yes, 
you can do this. I can help you do this.'' They took advice 
from the wrong people. But there were certainly those out there 
who were giving advice to the contrary, counselors, Realtors, 
brokers, but we could not be heard above the roar of the 
predatory folks.
    Mrs. McCarthy of New York. And part of the legislation that 
hopefully we will see on the Floor in the next couple of weeks, 
there is going to be a very large part on consumer educational 
programs, financial literacy. I am a great believer in being 
educated because a lot of us, when we bought our first home, 
did it the old-fashioned way. You had to show you could afford 
the taxes, you could pay your insurance, and all the other 
issues that it takes to basically run a house. It is not just 
paying the mortgage. There is a lot more responsibility, so I 
certainly support that.
    Mr. Story, this committee has just approved a systemic risk 
bill that would require lenders and securitizers to retain 5 
percent of the credit risk of any mortgage they sell. Given the 
importance of FHA to the housing market, should we consider 
exempting certain qualified mortgages, like FHA loans, from 
risk retention?
    Mr. Story. Yes, I think that should be a consideration for 
a number of factors. One is that we heard earlier today that 
the FHA is going to do a more stringent underwriting process as 
well as they are going to spend more time evaluating lenders 
who sell them loans and have a list of lenders and their 
percentage of success I would suggest. The outcome of getting a 
loan put back to the lender is certainly skin-in-the-game if 
they are asked to repurchase a loan in a timely manner. So I 
think that is sufficient.
    Mrs. McCarthy of New York. My time is up. Thank you. Mrs. 
Capito?
    Mrs. Capito. Yes, thank you. Ms. Schnare, thank you for the 
suggestion, it was your suggestion to have rather than just an 
annual audit, to have something--and you heard the Secretary's 
response. Are you satisfied that--I mean he said they were 
looking at this daily. I asked for maybe a twice-a-year kind of 
assessment. You are in this business. Do you think that is not 
just a step in the right direction but is sufficient to be able 
to detect what direction we are going and if improvements are 
being made?
    Ms. Schnare. There are a number of things that should be 
done, which I heard them saying they intended to do. And one is 
more regular updates of the audit. That is a fairly formal 
process. But there are other things that do not now exist at 
HUD that I understand they are in the process of developing, 
which are targeted risk management reports to give key 
indicators. Looking at how loans are performing by the age of 
the loans, which I could not get the data on. Looking at mark-
to-market LTV distributions. I think given their backgrounds 
and experience in the industry, they are going to produce 
monthly reports, weekly reports that give a lot more 
information than they give today, and I think they really are--
if they do what they said they would, there is going to be a 
huge difference because those kind of reports have not existed 
at HUD.
    Mrs. Capito. Well, I will say that the fact that I think 
they said that 70 percent of the non-performing loans now are 
the older loans or that are already on the books or 70 percent 
of the ones that are predicted to default are already there. So 
I think they are maybe looking at certain factors and 
indicators there.
    The question that I am concerned about, and anybody can 
answer this, although I think Ms. Golder probably might have 
the better handle on it, is the term of the still-falling real 
estate prices. So if HUD is out there making a $250,000 
guarantee--loan on a guarantee, and they are in a region of the 
country where the prices are still falling, that to me would 
further endanger the fund. So what kind of comment do you have 
in terms of how we are looking out for this still constantly 
falling value in our real estate market?
    Ms. Golder. Probably the best answer would be to ask 
Lawrence Yun, who is our economist who would know whether or 
not they are falling. But, as we have said, in the last 7 
months, we have seen prices stabilize and the market starting 
to improve. And I think we are seeing most markets across the 
country are stabilizing and rebounding, even California where 
they usually take the dive first. The East Coast, where you are 
familiar, Long Beach and up in the Connecticut area, prices 
have stabilized. So I do not believe you have to worry about 
prices dropping much more. They do appear to be stabilizing 
clear across the country.
    Mrs. Capito. Does anybody else have a comment on that?
    Ms. Schnare. I think it varies by market. And one of my 
concerns is whether or not FHA is increasing its share in 
markets that continue to decline, and I think that is the 
concern about very high LTV loans. If you basically have no 
money down and the market declines, and you lose your job, the 
only choice you have is really to default.
    Mrs. Capito. Right.
    Mr. Story. Yes, I would just say that as an economic 
consideration it is probably more of a concern given the fact 
that interest rates are at historic lows and most people are 
being underwritten very stringently and going with 30-year 
fixed-rate mortgages, which given the stringent underwriting 
standards, as long as they stay employed they should be able to 
continue to make their payments.
    Mrs. Capito. Could I ask you a question, Mr. Story, then on 
the loans that you have closed over the last, let's go back to 
2005, of 100 loans, how many of those would have been FHA? And 
then if you look at the end of 2009, where we are now, what 
percentage of that?
    Mr. Story. For my company? Or in the industry?
    Mrs. Capito. Your company, yes.
    Mr. Story. I think FHA was 2 to 5 percent in 2005, and it 
is anywhere now between 30 and 45 percent.
    Mrs. Capito. And what do you attribute that mostly to?
    Mr. Story. I think a lot of the purchases now are first-
time home buyers and they are new construction, and those are 
typically for that type of borrower goes into a FHA loan. There 
are not a lot of--terrible amount of products like there once 
was. There is a limited amount of types of loans you can get. 
And the people who are professionals in our business, a lot of 
them have been in the business for a number of years, do know 
how to do FHA financing and it has become a better option for 
some people.
    Mrs. Capito. I think my time is up. Thank you.
    Mrs. McCarthy of New York. I am just curious, Mr. Story. 
When you say that you do an awful lot of the FHA loans, we also 
see an awful lot of the banks that are not making any loans. We 
see more certainly, and probably, Ms. Golder, you probably want 
to jump into this too, I know a lot of the community bankers, 
which usually work in the community, the smaller bankers, and 
they usually know their customers a little bit better, so 
between the two or any of you who are seeing this, are you 
seeing where it is easier for the average person who wants to 
get into buying a home because the prices have dropped, which 
is probably evening the market a little bit. I look at my house 
in Mineola. I could not believe that somebody would want to pay 
$525,000 for it. It is a tiny little home. It was my parents'. 
It was built in 1948. But yet, they were telling me at one 
point, it was worth $575,000. Now, certainly I would love to 
take that, but I do not think that is going to happen. Are you 
seeing with local community bankers are opening up for loans or 
are they still holding back?
    Mr. Story. Well, my company also has a small community 
bank. Those that are in lending for purchases of homes, I do 
not see any significant holdback other than the standards to 
qualify are similar to what they were prior to some of the 
issues we have run into. So you are required to show that you 
are employed and you have money in the bank and that sort of 
thing. So that is going back to probably when we all got our 
first loans or whatever.
    Whether or not banks are lending money has a lot to do with 
whether or not they are in a position that they can due to 
regulatory concerns perhaps, but I think from just the mortgage 
lending aspect, there is plenty of credit available for those 
people who are qualified.
    Ms. Golder. I would agree that the community banks are 
lending. That they are in the community, they are invested in 
the community, they want to see that money stay in the 
community. Each home that is sold adds $63,000 to the economy 
within a community. Bankers understand that. And it seems the 
further away a bank or savings and loan gets from the 
community, the less likely that they are going to be involved. 
So the community banks, at least where I am from, are lending.
    Mrs. McCarthy of New York. I want to thank everybody for 
their testimony. We certainly are going to look at and 
hopefully get this economy turned around. The housing issue is 
a big issue. Unfortunately, from those economists who are 
there, they are talking about unemployment will probably still 
continue to go up through 2010. That is something hopefully we 
can all work on here to stop because that will also stop in my 
opinion many of the foreclosures that we are seeing now, that a 
lot of people just do not realize they are one paycheck away 
from, unfortunately, being unemployed.
    So with that, I thank you for all of your testimony and 
your patience on being here with us. Without objection, your 
written statements will be made a part of the record.
    This hearing is now adjourned.
    [Whereupon, at 3:45 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            December 2, 2009


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