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




 
                 IMPLEMENTATION OF HIGHER FHA LOAN FEES
                  AND PENDING LEGISLATIVE PROPOSALS TO
                    STRENGTHEN THE FHA MMIF FUND AND
                        IMPROVE LENDER OVERSIGHT

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 22, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-156




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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:
    September 22, 2010...........................................     1
Appendix:
    September 22, 2010...........................................    31

                               WITNESSES
                     Wednesday, September 22, 2010

Stevens, Hon. David H., Assistant Secretary for Housing/FHA 
  Commissioner U.S. Department of Housing and Urban Development..     6

                                APPENDIX

Prepared statements:
    Towns, Hon. Edolphus.........................................    32
    Stevens, Hon. David H........................................    36

              Additional Material Submitted for the Record

Stevens, Hon. David H.:
    Written responses to questions submitted by Representative 
      Miller.....................................................    44


                   IMPLEMENTATION OF HIGHER FHA LOAN
                      FEES AND PENDING LEGISLATIVE
                      PROPOSALS TO STRENGTHEN THE
                       FHA MMIF FUND AND IMPROVE
                            LENDER OVERSIGHT

                              ----------                              


                     Wednesday, September 22, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Sherman, 
Moore of Kansas, Scott, Green, Klein, Carson, Adler; Bachus, 
Royce, Capito, Hensarling, Garrett, Posey, Paulsen, and Lance.
    The Chairman. The hearing will come to order. I want to 
apologize to the absent members. We originally scheduled this 
hearing at the request of the gentlewoman from West Virginia, 
Mrs. Capito, when the House acted, and the Senate followed our 
lead and accommodated some requests from the Administration to 
give them some of the tools. And I am pleased that those things 
have happened. There is a better and broader set of provisions 
still over there.
    The gentlewoman from West Virginia at the time asked quite 
appropriately for there to be a hearing. Obviously, when we set 
the hearing, we did not--we thought it was going to be on a day 
when there had been votes the night before. So I apologize for 
the fact that we are scheduling this at a time when there 
aren't a lot of members around.
    I said, I apologize to the members. I was going to 
apologize to Mr. Stevens, but let's be honest, very few 
witnesses testifying miss members. I was once out in Hollywood 
at a tour they give you at the studios, and they were making 
some movie with panthers. I think Nastassja Kinski was in it. 
And when we got to this one place, they apologized to me 
because the panthers were at lunch. And I said, you never have 
to apologize to me for the absence of panthers. I have never 
missed them. And I suspect that may be somewhat the way the 
witness feels.
    But it is an important subject.
    Mr. Bachus. Some of the panthers are filing in.
    The Chairman. Okay. We will proceed with this.
    Let me just say--and I am not going to take a lot of time--
that I have found the Commissioner to be responsive and 
effective. The FHA plays a very important role. I think we all 
agree, including the Commissioner, and I know Secretary 
Donovan, that it is playing a bigger role now than we would 
like it to be. The percentage that the FHA has right now is not 
what it ought to be for the longer term. It is good that it is 
there for now.
    Examining how housing finance should be structured, what 
happens after the demise of the GSEs, what is the role of the 
FHA and the home loan banks and the private entities that will 
deal with this are the number one set of topics for this 
committee. We will be dealing with the question of what does 
the world look like after the GSEs next week. But the FHA's 
role is a part of it. So this is a very important hearing from 
that standpoint, and I welcome the Commissioner.
    The gentleman from Alabama is now recognized for how long?
    Mr. Bachus. Does anyone else wish to speak on our side? And 
how much time do we have?
    The Chairman. Ten minutes.
    Mr. Bachus. Ten minutes. I will take 3 minutes.
    The Chairman. The gentleman from Alabama is recognized for 
3 minutes. Well, just talk as long as you want.
    Mr. Bachus. Thank you, Chairman Frank, and thank, you 
Commissioner Stevens, for appearing before us this morning to 
provide us an update on the fiscal and management performance 
of the FHA.
    I also want to thank Mrs. Capito for her leadership on FHA 
issues and for requesting this hearing.
    The release of last year's annual independent audit of the 
FHA Insurance Fund and continued weakness in the housing market 
have sparked a lot of anxiety on Capitol Hill and in the 
financial markets as to whether the FHA program is viable, and 
whether it can meet the many management and market challenges 
that lie ahead. Last November's annual independent audit 
indicated that the FHA fund had dropped to less than--to a 
less-than-expected .53 percent capital ratio substantially 
below the statutory 2 percent requirement.
    The report also stated that the economic value of the fund 
declined over 75 percent from the previous year to 
approximately $2.73 billion. A new audit of the fund is 
expected in less than 2 months, and given the many statutory 
and regulatory changes that have been implemented over the past 
year, it should serve as a useful barometer of whether the 
policies are working.
    Beyond the health of the fund, however, there are other 
policy questions this committee needs to address. For example, 
there are current estimates that the Federal Government is 
responsible for more than 95 percent of all new mortgages, with 
FHA carrying a 30 percent market share. This undeniably strong 
presence in the market coupled with government guarantees for 
loans up to $729,750 raises serious questions regarding the 
impact of Federal policies and how we can assure that the 
private sector reenters the market to decrease taxpayers' 
exposure.
    In assisting struggling homeowners, FHA has implemented 
several new programs to assist families facing foreclosures and 
borrowers whose mortgage principal exceeds the value of their 
home. My understanding is that TARP and Neighborhood 
Stabilization Program funds have been used; however, I am not 
clear how these initiatives have helped a substantial number of 
families and whether the assistance offered was cost-effective 
to the taxpayer or fair to the homeowner.
    And regarding efforts to dispose of real estate owned by 
the FHA, there are concerns the agency is marketing programs 
that encourage the same types of fraud, abuse and poor 
underwriting standards that led to the current housing crisis, 
which also increased taxpayer exposure. And I add to that the 
fact that there are literally millions of homes on the market, 
many millions owned by banks, those being in foreclosure or 
facing foreclosure, which is an additional challenge.
    In closing, I commend Ranking Member Capito again for her 
work on the preservation and reform of the FHA program. Her 
legislation, H.R. 4811, the FHA Safety and Soundness and 
Taxpayer Protection Act of 2010, includes important 
enforcement, fiscal, and risk assessment tools necessary to 
adequately administer the program, detect fraud and abuse, 
strengthen underwriting standards, and protect the taxpayer. We 
believe these are worthy reforms that deserve the 
Administration's support.
    Commissioner Stevens, thank you again for being here. We 
look forward to your testimony.
    The Chairman. The gentlewoman from West Virginia, the 
ranking member of the subcommittee, is recognized.
    Mrs. Capito. Thank you, Mr. Chairman. I would like to thank 
you and the ranking member for--well, first of all, thank 
Chairman Frank for the debate that we had in July, and for 
honoring my request that we have this meeting here with 
Commissioner Stevens today. So thank you, Commissioner, for 
coming.
    Without repeating a lot of what we already know, almost a 
year ago, the FHA presented to Congress an independent 
actuarial report on the health of the Mutual Mortgage Insurance 
Fund. I think we were all a little stunned. We were surprised 
to learn that the reserves had fallen well below the mandated 2 
percent. But since that hearing, we have worked in good faith, 
I think, together to present commonsense ideas to help reform 
the FHA.
    As we know, the result of this was the introduction of H.R. 
4811, the FHA Safety and Soundness and Taxpayer Protection Act 
of 2010, which includes a lot of the reforms, much-needed 
reforms: enforcement, fiscal, and risk assessment tools; 
detection of fraud and abuse; and strengthening underwriting 
standards. A majority of these reforms were included in H.R. 
5072, which passed overwhelmingly in the House. One of the 
centerpieces of this was the ability for FHA to increase the 
annual premium, which was then signed into law, taken out 
separately and signed into law in July. But I would urge my 
colleagues in the Senate to move forward with further 
consideration of the reforms that we have.
    I look forward to hearing from Commissioner Stevens today 
about the progress of the changes FHA has already implemented 
to shore up the fund and to begin reducing FHA's market share. 
Some estimates show that the Federal Government accounts for 
over 95 percent of the mortgage market, with FHA making up 30 
percent of that on its own. We must find solutions to restore a 
healthy and vibrant private market if our economy is going to 
function properly. FHA does have a role to play in the mortgage 
market, but its presence should not be this large.
    What steps should we take to encourage private capital back 
into the market? FHA is currently able to insure loans up to 
$729,000; $750,000 in high-cost areas. The limits for 
conforming loans are similar. Are higher loan limits an 
impediment to private market participation? I hope that is a 
question we can get into today.
    Finally, as Ranking Member Bachus mentioned in his 
statement, FHA has implemented several new programs designed to 
assist homeowners facing foreclosure and borrowers whose 
mortgage principal exceeds the value of their homes, and to 
reduce the number of foreclosed properties in the FHA 
portfolio. These use TARP funds in neighborhood stabilization 
programs. Concerns have been raised. I have raised concerns as 
well. But these new programs will invite the same types of 
fraud, abuse, and poor underwriting practices that led to the 
current housing crisis, while also increasing taxpayer 
exposure. It would be interesting to hear your thoughts on 
these new programs, specifically on the concerns that have been 
raised.
    Additionally, I would like to say that one of the reasons I 
felt this hearing was so important is because in July when we 
moved forward with the reforms on the premium--on how to--FHA 
to assess the premiums, I had the feeling that our backs were 
up against the wall. We were in a situation where we needed to 
act in July, because waiting until September or October was 
going to put FHA in a bit of a precarious position. And that 
raised a major red flag for me, because if in 2 months, we are 
going to reach that level of, I don't want to say crisis, but 
concern, that concerns me as to what the status of this is and 
where we are moving forward.
    So I appreciate you coming today, and I again thank the 
chairman for calling this meeting. Thank you.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. Commissioner, it is good to see you. Again, today, as I 
recall, this is your fourth time up to testify before either 
the full Financial Services Committee or my subcommittee since 
you were appointed last year. We appreciate all the hard work 
you have undertaken at FHA to root out the bad actors and 
improve the financial health of the agency during the most 
devastating economic housing crisis in a generation.
    As you know, the House passed my bill, the FHA Reform Act 
of 2010, H.R. 5072, in June of this year. That bill contained 
many important reforms, including providing FHA with the 
ability to adjust their premium structure and giving new powers 
to FHA to crack down on lenders that use fraud or 
misrepresentation, don't originate or don't underwrite loans 
according to FHA requirements. In addition, my bill would give 
FHA the ability to withdraw originating and underwriting 
approval for a lender nationwide based on the performance of 
one or more of its regional branches, and would improve the 
reporting tools available to FHA to monitor risks.
    Unfortunately, the Senate did not take action on that bill, 
so many critical aspects of the reform we proposed have not 
been made law. However, I was pleased that both the House and 
Senate took action shortly before the August recess to pass a 
pared-down bill to simply give FHA the authority to increase 
the annual mortgage insurance premium.
    I am eager to hear from the Commissioner today on the 
continued need for the other provisions in the FHA Reform Act. 
Additionally, I am interested in hearing from the Commissioner 
about the implementation of the annual mortgage insurance 
premium increase which will become effective on October 4th and 
how FHA's new proposed premium structure change will impact the 
size of the agency's capital reserves.
    Finally, while I know that the new FHA actuarial study is 
not yet available, I would like to hear more from the 
Commissioner about his take on the state of the housing market 
and how that is impacting current FHA borrowers, individuals 
looking to purchase FHA-insured homes and the health of the 
Mutual Mortgage Insurance Fund. So, Mr. Commissioner, I look 
forward to your testimony.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    As you noted, Mr. Chairman, the private sector lenders have 
really scaled back their activities during the last 2 years, 
and the FHA has significantly stepped in and gone from probably 
less than 5 percent to more than 30 percent of the mortgage 
market. And if you include Fannie Mae and Freddie Mac in that, 
it is now over 90 percent of new mortgages in the United 
States.
    It would be misguided, however, I think, to claim that this 
amount of government involvement in the mortgage market 
following a crisis would be proof that the market would not be 
able to function without the government going forward into the 
future. It was largely through these government entities that 
we saw the erosion of lending standards, the elimination of 
downpayment requirements, and the proliferation of subprime and 
Alt-A loans. Since the government was complicit in inflating 
the housing bubble and causing many of the problems we are 
dealing with today, to turn around and to say then, see, you 
need us forevermore, would be nonsensical.
    So there is broad agreement that this much government 
support is unsustainable. At least at the margin, it appears 
the private market is ready and willing to step in, but in many 
ways is being priced out of the market by the FHA.
    The government has been and remains ill-equipped to 
evaluate and price mortgage default risk. If we hope to build a 
more resilient, less bubble-prone mortgage market, I would say 
now is the time to at least begin to look at scaling back the 
level of government support. Mr. Stevens, I look forward to 
hearing from you on these topics and questioning you.
    And I yield back, Mr. Chairman.
    The Chairman. And with that, Mr. Stevens, we will take your 
statement. Any material you want to submit in addition--I am 
sorry, Mr. Hensarling is recognized.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I do not believe that we will ultimately have a housing 
recovery until we have a job recovery. I think one thing that 
many members heard over the August recess was that there was 
too much uncertainty in this economy. And we know that the 
Federal Reserve has reported that there is at least $2 
trillion, roughly $2 trillion, of capital that public companies 
are sitting on that are on the sidelines that have not come 
into this market to create jobs.
    Over and over you hear questions about the cost and 
uncertainty of health care. Unfortunately, people don't even 
know what their effective tax rate is going to be beginning 
January 1st. After two over $1 trillion deficits in a row, 
businesses don't know how they are going to be called upon to 
pay for that. Under the Dodd-Frank bill with, I believe, 342 
rulemakings, more uncertainty in this economy, all of this has 
an impact ultimately on the FHA.
    I do want to thank the Commissioner. I think a number of 
solid steps have been taken under his stewardship. I want to 
thank the ranking member from West Virginia and the chairwoman 
from California for the legislation that they proffered that we 
passed in the House. Solid steps have been made. But people 
still are concerned, and rightfully so, about whether the FHA 
prove to be the next great American taxpayer bailout.
    I look forward to hearing the Commissioner's testimony, and 
not unlike the gentleman from California, once you have the 
government dominate 95 percent of the market, I do not believe 
that to be a good thing, a sustainable thing. I do not think it 
is something that the taxpayers of America want. And until we 
see a program that will allow the competitive market to once 
again come back into place, I fear for the future of the FHA's 
fund.
    Mr. Chairman, I thank you for calling this hearing. I yield 
back.
    The Chairman. The Commissioner is now recognized for such 
time as he needs.

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

    Mr. Stevens. Thank you, Mr. Chairman.
    Chairman Frank, Ranking Member Bachus, and members of the 
committee, thank you for the opportunity to testify on the 
financial condition of the Federal Housing Administration.
    With Congress' help over the last year, FHA has made 
significant reforms that have put the agency on stronger 
financial footing. I would like to discuss those reforms today 
and explain why our ability to protect the taxpayer for the 
future depends on Congress enacting a broader, more 
comprehensive set of reforms that we have proposed.
    As you know, last year we informed Congress of the 
independent actuary's findings that FHA's secondary reserves 
had fallen below--had fallen to .53 percent of the total 
insurance in force below the required 2 percent level. I told 
you then that Secretary Donovan and I would do everything in 
our power to ensure that the taxpayer was protected. And today, 
while we are by no means out of the woods, we have made 
significant headway toward stabilizing that portfolio.
    In fact, according to our third quarter report to Congress, 
instead of losing $2.6 billion in funds as the actuary 
predicted, FHA has generated an additional $1.3 billion in 
capital resources through the third fiscal quarter and 
continues to earn more funds for the taxpayer. Furthermore, 
actual foreclosures of FHA-insured homes have been 20 percent 
less than predicted, which is why we have paid $3.7 billion 
less in claims than projected. This was only possible because 
the Administration had already begun implementing the most 
sweeping set of reforms to FHA credit policy, risk management, 
lender enforcement, and consumer protections in the agency's 
history.
    Mr. Chairman, we said last year that we would hire the 
first Chief Risk Officer in the organization's history, and 
with congressional approval we have formally established a 
permanent risk management office within FHA, headed by a Deputy 
Assistant Secretary, allowing us to assess and annualize risk 
more actively and more proactively.
    We also said that FHA would strengthen its lender 
enforcement policies, and we have, eliminating FHA approval for 
loan correspondents and increasing net worth requirements for 
lenders. We have also suspended some well-known FHA-approved 
lenders and withdrawn FHA approval for over 1,500 other 
lenders, and have imposed over $4\1/4\ million in civil 
penalties and administrative payments to noncompliant 
institutions. We are sending a very clear message that if you 
don't operate ethically and transparently, we will not do 
business with you.
    We said that we would restructure our mortgage insurance 
premiums, and we have. In April, we raised our premiums from 
175 basis points to 225 basis points across all product types. 
In early October, thanks to legislation passed by Congress, FHA 
reduced that premium up front to 100 basis points, offset by an 
increase in the annual premium from 85 to 90 basis points 
depending on the loan's loan-to-value ratio. On behalf of 
Secretary Donovan and myself, I want to thank the House, 
particularly you, Chairman Frank, and Ranking Member Bachus for 
your leadership in passing that important legislation. I also 
want to thank Chairwoman Waters and Ranking Member Capito as 
well.
    In addition, we also said that we would improve the quality 
of loans we were making, and we have. We are strengthening 
credit, risk controls, and we have implemented a two-step FICO 
floor for FHA purchase borrowers. Purchase borrowers with 
credit scores below 580 are now required to make a minimum of 
10 percent downpayment. Only those with stronger credit scores 
can make a minimum of 3\1/2\ percent downpayment.
    We also promised to reduce seller concessions, which often 
create incentives to inflate appraised value and are 
significantly more likely to go into default. That is why we 
have proposed a rule to reduce the maximum seller concessions 
from 6 percent to 3 percent.
    Lastly, we said we would modernize technology within the 
FHA, and with your help we have made great strides towards 
improving technical capacity to handle increased volume, 
delivering our first comprehensive technology transformation 
plan to Congress and modernizing FHA's technology 
infrastructure.
    We have also awarded contracts to upgrade our risk and 
fraud tools and are building staff capacity through hiring and 
training.
    The early results of these efforts are encouraging. I 
mentioned earlier that our capital reserves are growing faster 
than projected, and that claim payments are less than 
forecasted. Loan quality is improving as well. Our third-
quarter report shows that loan performance, as measured by 
serious delinquencies and early payment delinquency rates, has 
improved significantly with the first year-over-year decline in 
new 90-day delinquencies in years. The average credit score on 
current insurance endorsements has risen from 634 in 2007 to 
700 today. Going forward, the President's budget projects these 
actions will produce an additional $4.1 billion in FHA receipts 
in Fiscal Year 2011, funds that FHA earns for the taxpayer.
    Of course, despite the progress we have made, Mr. Chairman, 
the job is far from over. Secretary Donovan and I remain 
committed to comprehensive FHA reform legislation. And I would 
like to thank the House of Representatives for recognizing the 
urgency of this issue by passing the FHA Reform Act. Here 
again, I want to thank this committee, and particularly the 
leaders from both parties, for bringing this bill to passage in 
the House. Tomorrow when I testify on the same set of issues in 
front of the Senate Banking Committee, I will be urging the 
panel members to follow the House's lead in passing 
comprehensive FHA legislation before the end of the year.
    In addition to strengthening FHA's lender enforcement 
ability, the bill will allow for third-party loan originators 
to close FHA-insured loans in their name and extend FHA's 
ability to hold all lenders to the same standard by permitting 
us to recoup losses through required indemnification for loans 
that were improperly eliminated or in which fraud or 
misrepresentation was involved. Building a stronger foundation 
for the future requires us to pass this legislation, and I hope 
the Senate will follow your lead and pass it by the end of the 
year.
    Mr. Chairman, these reforms are important not only because 
we still have a long way to go, because home prices may still 
decline further, and conditions may get worse before they get 
better; they are also important because we know the critical 
role FHA is playing in our housing market right now. Mr. 
Chairman, this makes it even more important that we continue to 
deliver on the commitments to strengthen the FHA and assist 
responsible borrowers who need a helping hand, while working to 
facilitate the return of private capital to the housing market. 
We look forward to working with Congress closely on all these 
issues as we further reduce risk to the American taxpayer and 
ensure FHA can continue to provide stability in the housing 
market at the moment we need it most.
    So thank you again for the opportunity to testify, and with 
that, I would be happy to answer any of your questions.
    [The prepared statement of Commissioner Stevens can be 
found on page 36 of the appendix.]
    The Chairman. Thank you, Commissioner Stevens.
    Let me say first, I am going to say to my Republican 
colleagues, I know if we have a lame duck session, there will 
be questions about what should and shouldn't be done, but I 
would hope that this FHA bill, which went through the House 
with virtual unanimity, would be considered sufficiently 
noncontroversial and bipartisan so that we would join those of 
us here with the Administration in asking the Senate to pass 
the rest of the bill. We got them to pass some pieces of it 
which you said were particularly important. But especially 
after what you said, I would hope that would be something, and 
I would think it would be, that we could jointly approach the 
Senate and say, whatever the fights are, set them aside.
    I know there are some people who argue that in a lame duck 
session, you don't do anything that is terribly controversial, 
although by Republican standards, apparently impeaching the 
President of the United States doesn't count as controversial, 
since the Republicans did that in the lame duck session of 
1998. That would seem to be a pretty high bar under which we 
could get other legislation. But leaving that aside, we, I 
think, could get some agreement on this.
    The other thing I just wanted to say is to thank you, 
Commissioner. But I want to take some credit on a bipartisan 
basis for this committee. You mentioned the debarment and the 
failure. We had during the transition between the Obama and 
Bush Administrations, the outgoing Bush Administration 
officials came and testified and mentioned--in fact, it was not 
even the Presidential appointees, they were the civil servants 
who ran the place--and told us--this would have been late 2008 
early 2009--that they did not have these powers of debarment; 
that the FHA would know there were bad actors, but would still 
have to give those bad actors a fifth, sixth, seventh, eighth 
bite at the apple, and maybe they would succeed in getting some 
things through. And this committee on a bipartisan basis 
initiated that grant after listening to the people running it 
in the last day's of the Bush Administration, and then the 
Obama Administration came in and we worked with them.
    And so, again, I think we will have our disagreements, and 
we will have the criticisms that people make, but I take some 
pride in that, and I was very pleased to have you tell us that, 
and we agree, the role that the public sector entities are now 
playing in the mortgage market is greater than it should be. 
But I take some comfort from the fact that while it is there, 
we have given you the tools to deal with it in an effective 
way. So I appreciate that. And that is really all I wanted to 
say, but I am through.
    Mr. Bachus. Mr. Chairman, I agree with a lot of what you 
said and would like Mrs. Capito, the chairman of the 
subcommittee, to respond further.
    The Chairman. I will yield to the gentlewoman.
    Mr. Bachus. If she would.
    Mrs. Capito. Well--
    The Chairman. I am through.
    Mrs. Capito. Oh, okay. Could I ask a question?
    The Chairman. Yes.
    Mrs. Capito. Okay. Great. Thank you.
    Commissioner Stevens, am I correct in assuming that the 
next independent review will be then coming out in November 
like the previous one?
    Mr. Stevens. Yes.
    Mrs. Capito. Do you have a sense of where you are there? I 
did miss the very beginning of your statement, so I apologize 
for that.
    Mr. Stevens. The actuary is done at the end of the fiscal 
year by an independent firm, I think as we all know, and the 
fiscal year obviously ends at the end of September. So at the 
end of the year, the actuarial firm will take the full year's 
data and produce a report. We intend to have that report in 
early November.
    Mrs. Capito. So you don't have a real--I am sure you have 
your month-to-months and those kind of things.
    Mr. Stevens. Here is what I would say. As we have said in 
our third-quarter report that we released to Congress, there 
are so many performance indicators that show that the strength 
of the portfolio is much stronger than it was a year ago. The 
variables, obviously, are what is the home price forecast. And 
that is the single biggest impact of putting out an actuarial 
forecast that could ultimately be the determinant of where the 
capital reserve will end up. And so that is one of the big 
variants. There are a variety of other things that we can talk 
through, but I would not want to assume what this independent 
firm will come out with when they release the actuarial study.
    Mrs. Capito. I raised an issue in my opening statement 
about the loan limits and the conforming limits. How many loans 
is the FHA making in that larger--say, over a half million up 
to whatever, the 700-and-some thousand? And do you see this a 
place where FHA should be playing, or is it time to pull back 
on that? Your comments?
    Mr. Stevens. I think you ask an important question, and I 
know it is one that you all are going to take up in debate here 
in the near term.
    There is absolutely no doubt that FHA should not be playing 
as large a role as it is playing in the market. It also was a 
sign of unhealthiness in the market when it was only 5 percent 
of the market. Traditionally over time, in my 3 decades in this 
industry, FHA has always played a role on sort of average terms 
in the low teens as a percent of the overall market, that being 
said as it relates specifically to loan limits.
    The thing that I think we all need to understand clearly 
about the FHA loan limits as it stands is that it is not about 
the cap. Less than 3 percent of FHA's loans are over $417,000, 
less than 3 percent.
    Mrs. Capito. So that would be the 3 percent of the actual 
numbers of the loans. But then what does that account--do you 
have a different figure that accounts for how much that is?
    Mr. Stevens. How much volume?
    Mrs. Capito. Yes.
    Mr. Stevens. I don't have a number I could give you, but 
since they are larger loans, it would be a slightly, but not 
significant difference between the numbers themselves.
    Mrs. Capito. So only 3 percent of those are in the category 
I am talking about?
    Mr. Stevens. Right.
    And if I could, I just want to clarify, for those of you 
who understand how FHA is set, and I know you do, it is based 
on median sales price, median home value, across the entire 
Nation. And the way that temporary limits provide for today is 
it provides for the FHA loan amount to be 125 percent of median 
home price in every MSA across the country. So it is a very 
detailed schedule.
    Very few MSAs--the majority of MSAs actually would never go 
anywhere near the cap based on the 125 percent. The concern we 
have is if that was not extended for another year, that would 
drop to 115 percent as was passed under HERA. So it is 115 
percent of median sales price, but the median sales prices will 
also be adjusted to current median sales prices, which are also 
going to be dropping. So there would be, in essence, a double 
hit to communities across the country that are really nowhere 
near these high loan limits. But it is the formula itself that 
is at the core of the necessity for the availability of FHA 
financing in communities across districts across the country.
    Mrs. Capito. And the other thing I raised, and I have one 
quick other question, was the Neighborhood Stabilization 
Program. As you know, we have put billions of dollars into this 
program, and it sort of morphed into a little bit different 
program through the FHA, or through HUD. How do you respond to 
accountability, transparency, and all the issues that I think 
are raised in a program such as this?
    Mr. Stevens. I think the key question that has been raised 
around FHA's role in the Neighborhood Stabilization Program has 
been around something called First Look, which provides an 
opportunity through the Stabilization Trust and their grantees 
to in many cases have a 14-day prelook period at FHA 
foreclosure in inventory before it goes to the open market.
    Now, the reason for that, and the reason why the Secretary 
has been so supportive of that and we supported that policy, is 
twofold. One, it actually--I think it protects FHA ultimately 
from a financial standpoint, and I will explain that. But first 
and foremost, it also protects communities. If by allowing in 
select communities, with the grantees' participation, to 
identify homes in those communities that would be best served 
by letting the grantee be involved and get a first look and 
potentially buy that home for potentially a homeowner, or 
potentially just to return that home back to the community that 
could be converted into other use, it allows for broader 
community stabilization.
    That is what Secretary Donovan has been so focused on is 
the broader impacts. But more importantly, please keep in mind 
that the 14-day period that the trust gets a look at these 
properties is preforeclosure, before we take control of that 
property for resale. And what we find is on the properties that 
ultimately are sold, they go much faster off our portfolio than 
they would otherwise, and so we actually reduce our carrying 
costs in FHA's REO space.
    So we don't--the overall impact of the First Look program 
in terms of the total REO portfolio will not be a significant 
number, but we do believe it will have value to the strength of 
the FHA while also stabilizing communities.
    The Chairman. Thank you.
    If I could get agreement, I gave up most of my time, but I 
had 1 minute of questions, if there is no objection. And that 
is there has been a lot of concern about the foreclosure 
process. You called it to mind when you talked about 
foreclosure. Now, I understand you have a pilot project with 
Wells Fargo where you and Wells were partnered in terms of 
third-party notification to try and diminish foreclosures, and 
I am told that worked well. And if that is the case, could we 
get it expanded? I do think we have learned one of the problems 
is inadequate notice, people weren't used to all this, and we 
are trying to improve this in a number of ways. You had some 
concerns about how Fannie Mae and Freddie Mac are doing. Is it 
correct that your experiment with Wells worked well, and if so, 
is that a basis for expanding it?
    Mr. Stevens. It is correct, Mr. Chairman, that Wells Fargo 
was experimenting with a third-party firm that would actually 
go door knocking in an attempt to try to mitigate, problem 
solve at-risk properties in the foreclosure process and make 
sure that those homeowners were aware of any option available. 
It had some success. We support any effort that would help 
mitigate that process.
    Please do keep in mind with FHA, we are a little different 
than other portfolios in the country that we require, mandate 
for all our servicers that they engage in loss mitigation in 
the early period of default, which these third-party firms 
could help. But our process is far more extensive than many 
other processes.
    The Chairman. But does it include some requirement that 
there be contact before foreclosure?
    Mr. Stevens. It does include, absolutely, a requirement 
that they contact the borrower pre-foreclosure, and that is 
mandated. And we are now at a point we are much more robust in 
our tracking of servicers and engaging with them much more--
    The Chairman. Could you, because we have heard a lot of 
complaints from members, it has been written about in the 
press, and there are some concerns in Florida about it that hit 
the New York Times, if you could respond in writing and tell us 
what you are doing and maybe some basis on which we might 
improve it, I thank you.
    Mr. Stevens. Absolutely.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    There are a number of issues here that I would like to 
spend just a little bit of time on. It is not going to be 
possible to go through all of these. But the loss mitigation 
process that he is talking about is, I guess, similar to what 
we are attempting to do in our legislation in mandating loss 
mitigation prior to foreclosure. So I would be interested also, 
as the chairman is, in seeing exactly the way that you are 
handling this.
    Let me just say on NSP, Mrs. Capito just asked some 
questions. I think it is about time that we hold hearings, and 
I think we had planned on holding some hearings, on NSP to see 
exactly what is happening. In some of the areas, they were a 
little slow getting started, and we need to find out whether or 
not we have provided the technical assistance to some of those 
entities to make sure they have NSP programs operating in the 
way that we intended them to operate.
    You also mentioned something about the 14-day period that 
you give to the grantees in order to access the REOs. And we 
have been holding some meetings out in my area about REOs, all 
of the REOs from everywhere. And we have discovered that FHA 
just didn't have that many that they were dealing with. But I 
want to make sure that in whatever way we dispose of them, that 
the local Realtors and realtists have an opportunity to do 
business. So when the 14-day period--if a grantee is interested 
in the REO, does that cut out the Realtor or the realtist? How 
does that work; do you know?
    Mr. Stevens. They would get a look through the contractors 
that are managing REO inventory for us. But you have made very 
clear to me in separate conversations about the need to utilize 
local Realtors in the markets where that REO exists. And you 
are absolutely right, Ms. Waters, that in California, 
obviously, we don't have a lot of loans in your State, so it is 
not as big a volume of numbers.
    I will tell you it is something that the Secretary is also 
interested in, and in the First Look rollout that we just 
announced, FHA was ahead of the curve, we announced it first. 
We then, both Assistant Secretary Mercedes Marquez and I, 
called every bank in the Nation, including Freddie Mac and 
Fannie Mae, every major servicer, and asked them to participate 
in First Look as well.
    So I do believe, to your concern, particularly in 
California, there is an opportunity to more broadly engage. And 
we could take that back also as a discussion item to follow up 
on to make sure, now that we have all the banks signed on with 
Freddie Mac and Fannie Mae and First Look, that obviously will 
cover every market in the Nation. And we can go through that 
dialogue also about making sure that local service providers 
are given the opportunity to participate in this process, if 
that is the core to your concern.
    Ms. Waters. Yes, that is part of my concern, not only the 
Realtors. But one of the things I want to take a closer look at 
is the management of these properties, because one of the 
complaints are--ongoing complaints we have is that you have a 
national management service, and the way that they work, you 
may end up with people providing services from one State to the 
other State, which cuts out the locals in some way. So I do 
want to talk about that more. Not today.
    Mr. Stevens. I understand.
    Ms. Waters. But in the future to see how we make sure that 
the local service providers, whatever services they are 
providing, have an opportunity to really participate, because 
this goes to the whole question of jobs in the communities, 
etc.
    Now, having said all that, what about the PTFA? This is, as 
I am told, the program protecting tenants in foreclosed 
properties. The Protecting Tenants in Foreclosed Property Act 
passed as part of the Helping Families Save Their Homes Act of 
2009. Under PTFA, in the event of a foreclosure, bona fide 
tenants have the right to stay in their property for 90 days or 
the remainder of their lease, whichever is longer. According to 
advocates working on this issue, they are not sure about what 
FHA is doing at this time. Are you familiar with this at all?
    Mr. Stevens. I am briefly familiar of it, and I went 
through a briefing on this yesterday.
    We are in complete compliance with the Protecting Families/
Save Their Homes Act, and I would be glad to follow up with 
more detailed information on that for you.
    Ms. Waters. Okay. Thank you. I would be interested to see 
how that is working.
    I yield back the balance of my time.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Commissioner, in my opening statement, I 
commented that certain estimates are that the government, the 
Federal Government, is responsible for 95 percent of new 
mortgages. I am not sure that is--you may have a little 
different figure. But the FHA is carrying more than 30 percent 
of the market. I have heard both you and Secretary Donovan 
express concern that the FHA's current market share is 
unsustainable, and I would like your comment on that. And also, 
what steps should Congress take to encourage private capital 
back into the market?
    Mr. Stevens. Thank you for that question, and it is 
something that we spend a significant amount of time concerned 
with.
    As I said earlier, I have been in this industry for 3 
decades, and I started at a time when private banks and savings 
and loans did much of the mortgage finance in America, and the 
GSEs were just a small part of the market. Clearly, that has 
changed as our markets have become more sophisticated over the 
past decades.
    There is also no doubt that there is a significant absence 
of capital. And I do not believe that there would be an avenue 
for private capital to emerge right now, given concerns about 
home price futures and volatility in terms of available 
capital, regulatory oversight, and the risk experience that 
many of the banks have from their previous years.
    As you can appreciate, many of the more interesting 
products that emerged over the last decade, many of those were 
bank portfolios, as well as the private sector that engaged in 
things like option ARMs, the home equity--HELOC--market, those 
kinds of things, which ultimately had performance rates that 
may cause some resistance to reemerging. That being said, we 
know markets are cyclical, and as the housing market recovers, 
which it will, albeit perhaps slowly, there will be interest 
for private capital to reemerge.
    Now, the way FHA needs to shrink its market share back and 
create an opportunity for private capital to reemerge is being 
undertaken right now in what I think are significant steps. We 
have made two mortgage insurance premium changes to price our 
credit risk in a way that is more safe and sound, and by doing 
so it is creating an entree for the private mortgage insurance 
industry combined with private capital on the first mortgage to 
reemerge. And I am sure your staff, if not you yourselves, have 
heard the mortgage insurance industry applaud at many of our 
recent changes, because we are clearly creating an opportunity 
for private capital to reengage.
    The changing of seller concessions--FHA has rules that are 
just frankly more lenient than the private markets allow and 
more lenient than should have been allowed at FHA, and we are 
trying to change those things as well. Requiring bigger 
downpayments for lower FICO scores, which we have just 
implemented, prior to my coming here, there was no FICO floor 
at all, prior to my being sworn in in July of last year. And 
now, we are saying for scores of 580 and below, you have to 
have a 10 percent downpayment. That is the biggest single 
change in downpayments in FHA's history in terms of requiring 
sort of more skin in the game to create a more level playing 
field.
    I think as we go forward, as financial stability begins to 
take hold, the future of the housing finance system decisions 
that need to be made, the White Paper that will be submitted to 
Congress in January on that subject, that will begin to create 
the rules of the road that I believe will create an environment 
for private capital to reengage. But without question, FHA 
needs to shrink its share of the market, but it needs to do so 
in a balanced way so that we are not just creating a vacuum 
where still no capital would come in regardless of our 
participation or the lack thereof.
    Mr. Bachus. And I agree that it has to be done in a 
reasonable manner. I think the housing market is really 
addicted to the government assistance now in this subsidy.
    How can we reduce the government's involvement and limit 
taxpayer exposure? You mentioned downpayments is one important 
thing and also requiring a sound credit history. Are there 
others?
    Mr. Stevens. And I think the way--perhaps a healthy way to 
look at this is to begin to reflect back on the environment we 
are in. Obviously, we are still very much in the thick of the 
worst housing crisis in our Nation's history. It was brought on 
by an excessive amount of speculation in terms of too many 
products that created an enthusiasm for homebuying that was far 
from rational. And one thing we have learned is clearly not 
everybody should own a home in the go-forward market, and this 
Administration understands that clearly as well.
    By all estimates by independents, the homeownership rate 
will begin to decline. The big void here at this point is to 
make certain that we don't create an additional tipping point 
by an aberrant action in the absence of any other capital 
provider in the market. And so having gone through market 
cycles, I believe that private capital will emerge as markets 
stabilize, and as we move into that scenario, the necessity for 
FHA to play this size of a role, I believe, will shrink. And I 
believe it will be the same for both--obviously for whatever 
the future of the financial system is--for Freddie Mac and 
Fannie Mae. Collectively, there is a commitment that private 
capital needs to emerge, and I believe it will emerge as 
markets begin to stabilize over time.
    Mr. Bachus. Thank you.
    The Chairman. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    My questions will build to some extent on those of Mrs. 
Capito. One way to get a--perhaps the most likely way we are 
going to get a double-dip recession is to see another sudden 
decline in housing prices, particularly in the 12 largest 
metropolitan areas, high-cost areas, in this country. 
Representing one of those areas, home sales are going forward, 
and every single home sale other than Malibu is Fannie, Freddie 
or FHA. And it is critical that we maintain the $729,000 limit, 
or we are going to see a sudden crash in home prices. Not only 
will the $800,000 home not be able to get financed and perhaps 
sell for $500,000, but the $500,000 then crashes 
commensurately.
    If we don't act soon, then how do you open escrow on 
November 1st, knowing that if the escrow doesn't get to close 
in January, you can't get financing, and it all falls through? 
The private sector, therefore, needs to know before November 
that we are going to maintain this limit at least for the 
foreseeable future. But it is also the public sector that needs 
to know you are running one of these agencies.
    It is my understanding that FHA will soon begin 
recalculating its loan limits to prepare for the scheduled 
December 31st expiration of the temporary higher limit that has 
been in place since 2008. I understand that it takes some time 
to recalibrate the underwriting programs after the loan limit 
changes. So if Congress decides to extend these higher levels, 
and I hope they will, we should act sooner, I believe, rather 
than later, or else there may be some lag time in 
implementation of the loan agreements.
    When will the FHA begin the process of recalculating loan 
limits? That is to say, what is the deadline for Congress to 
act to avoid any dislocation in the mortgage market and to 
ensure continued access to affordable markets in important 
places like Los Angeles?
    Mr. Stevens. I would support your statement that extending 
the loan limits for another year is important. The 
Administration does support extending the loan limits both for 
Freddie Mac, Fannie Mae, and FHA for an additional year for the 
reasons you describe.
    I also do want to as well reemphasize the point that for 
FHA, it is less about the high loan limit, since a very small 
number of loans actually go to that level. It is more how 
reverting back to the permanent policies from the temporary 
policies would affect every market area, every city in America 
by collapsing the formula of how the limits are calculated in 
every single market. So to that extent, the Administration is 
behind both the extension of the FHA and GSE loan limits.
    And beyond that, to your point, you are absolutely right as 
well, is that lenders are going to begin committing people at 
lower loan limits much sooner than in previous years because 
the processing times are longer, and portfolios and backlogs 
and mortgage applications are high in their operation. So 
getting that done quickly is going to be even more important in 
order to avoid people from not being able to get the high loan 
limits in the near term.
    We are in the process right now of looking at the median 
sales price data, and I don't have a specific timeline of when 
we would have the new policy. I would be glad to get that 
information back to this committee as to when we would announce 
our policy change, but it would be effective as of January 1st.
    Mr. Sherman. And would your life be a lot easier if we told 
you by the end of September what the rules were for January?
    Mr. Stevens. Clearly, getting this done sooner rather than 
later is important. And it is not about--with the FHA, this is 
really about how everybody associated with homeownership in 
America in every community across America will be impacted.
    Mr. Sherman. Let me sneak in one more question. When you 
and Secretary Donovan appeared before the committee last 
December, I asked whether you could quantify the benefits that 
accrue to the FHA reserves from the larger loan limits since 
they appear to perform better. The Secretary testified that it 
was too early to make such an estimate. We are a little later 
now. To what extent is the ability to ensure those somewhat 
larger home values in higher or--larger loans in high-cost 
areas benefiting your reserves?
    Mr. Stevens. The simple way to look at this is those higher 
loans, generally speaking, are a very small percentage of our 
portfolio, less than 3 percent. They perform no worse than any 
other loan in the portfolio; in some cases, they perform 
perhaps a little better on the recent portfolio. But it is not 
a huge income generator in that context for FHA. It is more 
about providing that level of opportunity for people to have 
access to the mortgage finance system, again, across the 
country.
    Mr. Sherman. Thank you.
    Ms. Waters. [presiding] Thank you.
    Mr. Royce?
    Mr. Royce. Thank you, Madam Chairwoman.
    I was going to ask you, Commissioner Stevens, we had an 
opportunity every couple of weeks, due to the work of Mr. 
Garrett and Mr. Kanjorski, to sit down in a private setting 
with Secretary Geithner, Paul Volcker, our former Federal 
Reserve Chairman Greenspan, Comptroller John Dugan of the OCC, 
and to listen to them give us their analysis of some of the 
actions that have been taken that put us into the crisis, as 
well as some of the recommendations going forward. And one of 
the comments that Paul Volcker made, and subsequently was 
reiterated in meetings when this was brought up, was just the 
real problem with overleverage in the system, that it was a 
great failing, and in particular, as explained, the 
overleveraging combined with some of the moral hazard that we 
had created with these quasi public-private entities that had 
an implied public backstop. And as a consequence they said that 
Fannie Mae and Freddie Mac, for example, were overleveraged 100 
to 1, involved in arbitri.
    Last year, we went through some of the numbers that were 
presented, which, if I understand it, meant that your capital 
reserve ratio had fallen to .53 percent, which would be a lot 
less than the 2 percent mandated. The 2 percent mandated itself 
would be a 50-to-1 ratio. So that would mean that the 
overleveraging was somewhere in the area--something less than 
200 to 1.
    Now, I remember in 2004, the arguments--those of us who 
were critics of Fannie and Freddie--the arguments we were 
making about the extent of the overleveraging. And, of course, 
we were told at the time that they would not need a taxpayer 
bailout. And I guess in essence, since it is all off balance 
sheet, we have losses of $145 billion now, but eventually, that 
is going to be on the books. That loss is going to be something 
that we are going to have to absorb, that the taxpayers will 
directly absorb.
    So the question I have for you is, can you say with any 
level of certainty, and I know the President--I read your 
remarks. We know that we have to see the actuarial study this 
year. We know it is--in a couple of months it will be prepared, 
but last year's number was very, very troubling. You had less 
than a fourth of the minimum capital requirements which you are 
required to hold. Is the capital level now going to take us out 
of the woods, and can you say with any level of certainty that 
FHA will not need to be bailed out? Let me just ask you that 
question.
    Mr. Stevens. This requires a little precision, but let me 
just try to explain this as succinctly as possible.
    I was sworn into this job in July of last year. When I 
testified in April, I was running a large company as president 
and COO, and I came in during testimony and said FHA was taking 
on risks it should not be taking, and the 2006, 2007, and 2008 
portfolios that were originated with very little control and 
very little scrutiny over the institutions that originated them 
are going to cost FHA a significant amount of money, and that 
is literally the--it is those book years that had the greatest 
impact on the portfolio. As a result, the capital reserve did 
drop below the 2 percent but it isn't the total capital.
    Mr. Royce. That is secondary capital?
    Mr. Stevens. That is secondary capital. What happened is we 
reduced what is in the capital reserve and shifted into what is 
called the financing account, because the financing account has 
to hold all reserves required to pay all forecasted losses.
    Mr. Royce. That is the 4.5 percent today?
    Mr. Stevens. That is correct. And so to just give you an 
example, last year when I reported the capital reserves, the 
combined accounts were $31.8 billion. In the third quarter 
report, we are at $33.1 billion. So we are $1.3 billion higher 
than we were.
    Mr. Royce. I understand. But the part that was extrapolated 
off of the poor position then was that it could be a loss of 
$1.6 billion in 2012, right? So what you are saying is that 
when the new analysis comes in, that projection is going to 
probably be significantly lower; or do you know?
    Mr. Stevens. Here is what I would strongly caution for any 
of us who have been in financial forecasting on financial 
institutional balance sheets. The most significant driver in 
the forecast is ultimately going to be the projected forecast 
of home prices, forecasted projection of interest rates. Those 
are going to be two significant drivers on the performance of 
the balance sheet.
    I am not going to answer with any certainty where I think 
the capital reserve will finish at the end of the year. Again, 
this is an independent actuarial firm that is reviewing our 
portfolio and running their models on the portfolio. I will 
tell you this: that if the fund has not gone negative and 
continues to remain positive, it will be thanks to the quick 
actions of this committee and Congress giving us more authority 
and actions of this Administration taking it--
    Mr. Royce. And you did imply that private capital was 
currently being priced out of the market by FHA as well? I 
think you implied that.
    Ms. Waters. Mr. Moore.
    Mr. Moore of Kansas. Thank you. Mr. Stevens, in June of 
2009, the Oversight Subcommittee I chair held a hearing on the 
need to strengthen fraud prevention efforts in FHA and other 
HUD programs. HUD's Inspector General Kenneth Donohue listed 
several traditional fraud schemes--namely, appraisal fraud, 
identity theft, and loan origination fraud--that remained a 
concern with respect to FHA as well as other kinds of fraud, 
such as foreclosure fraud, bankruptcy fraud, and reverse 
mortgage fraud that he was concerned about.
    It has been more than a year since that hearing. What steps 
has FHA taken to combat both the traditional and new forms of 
fraud, and is there a particular kind of fraud that is of most 
concern?
    Mr. Stevens. Well, thanks to observers like the Inspector 
General and others that have looked at fraud in the FHA, and 
with the help of Congress and the budget that was provided to 
FHA, we have taken a variety of significant actions, and I will 
try to outline a few of them very briefly.
    Mr. Moore of Kansas. Thank you.
    Mr. Stevens. First, we went after institutions that were 
behaving improperly, and we established a much more frequent 
regimen of mortgagee review board meetings which, in the last 
year alone, we have eliminated 1,500 institutions that we 
believe were acting improperly in the FHA portfolio, some of 
which became very visible stories in the media--such as Lend 
America and Taylor, Bean & Whitaker and others--where those 
announcements culminated even further legal action. That is our 
first line of defense.
    The second is we submitted a technology plan, and we have 
already to date awarded three contracts for fraud tools that 
are going to be developed within the FHA portfolio. We just 
announced our last contract a couple of days ago through 
appropriations to fight fraud and misrepresentation in the 
market at the loan level.
    There is institutional fraud that has existed in our 
industry, and it typically involves some form of collusion 
between multiple participants in the market. An appraiser, a 
loan officer, a title agent, perhaps a real estate agent, will 
work together to try to commit fraud. And we believe while 
there will always be these risks in the market, the 
implementation of the SAFE Act, our technology enhancements 
that we are making at FHA have significantly increased scrutiny 
on lenders. The additional authority we received from Congress 
and the additional authority we are asking for in the FHA 
Reform Act will help ensure that gets reduced to as small a 
number as possible on a going-forward basis.
    Mr. Moore of Kansas. Thank you, sir.
    And, Mr. Stevens, on page 4 of your testimony, you noted 
that last October you hired the organization's first Chief Risk 
Officer. Reflecting on the recent financial crisis, it was 
clear that many financial firms, Lehman Brothers and others, 
may have had risk officers in their organization, but they were 
often overruled for other priorities. Obviously, the government 
doesn't have the same profit motive as Lehman Brothers, but I 
believe that taxpayer resources should be carefully managed to 
minimize waste, fraud, and abuse.
    Since establishing this new risk management position, has 
this officer been influential in better managing FHA's risk 
profile, and going forward, how do you make sure the Chief Risk 
Officer's recommendations are fully considered and not 
disregarded for other FHA priorities?
    Mr. Stevens. The question you ask was one that was actually 
expressed by both parties here in the committee, and it is one 
that is a significant concern to me.
    In the entire history of FHA, there has never been a risk 
officer, a risk office; and quite frankly, when I walked into 
my position, there wasn't a risk report of information being 
provided. The risk officer now is an independent office 
reporting directly to the Commissioner as a Deputy Assistant 
Secretary on par with the heads of the multifamily business, 
the single family business, and the health care business.
    We are right now working on a regimen to change policies 
and procedures so that any recommended change to policy will 
actually go through the risk officer, where they can agree or 
disagree with that policy; and if they disagree, it will stop 
the process at that point, ultimately could result in things 
having to be escalated to a Secretary in the event of 
disagreement, but at least to the Commissioner for decision-
making.
    So I agree strongly with the concerns that you expressed 
and others have expressed here in the room, that at a bare 
minimum on a go-for-the-long-term, we need to make sure that 
that risk officer and that risk office has the procedures in 
place to support them regardless of who may be in the 
leadership chairs within the organization down the road.
    My risk officer is here with me today, Bob Ryan, who is 
behind me, and he has a strong, significant reputation in the 
industry for being thoughtful and focused on risk management. 
And I can assure you, under this Administration, no one will 
override the risk officer to be more lenient. As a matter of 
fact, we are clearly by our actions, if anything, going the 
other way.
    Mr. Moore. Thank you so very much. I yield back.
    Ms. Waters. Mr. Hensarling.
    Mr. Hensarling. Thank you, Madam Chairwoman.
    Commissioner Stevens, under the FHA, this first look sales 
program, the neighborhood stabilization groups, this can be 
both individual 501(c)(3)s and municipalities, is that correct, 
ultimately can qualify for the first loan program?
    Mr. Stevens. Yes.
    Mr. Hensarling. And as I understand it, you will sell these 
properties, I think is it within a 14-day window of putting it 
on the market?
    Mr. Stevens. That is correct.
    Mr. Hensarling. At a 10 percent discount to their appraised 
value, correct?
    Mr. Stevens. That is incorrect.
    Mr. Hensarling. That is incorrect?
    Mr. Stevens. Yes.
    Mr. Hensarling. FHA properties at a discount of 10 percent 
below their appraised value. Okay. What do you offer them at if 
this information is incorrect?
    Mr. Stevens. The minimum discount required for NSP through 
the trust is a 1 percent discount, and part of that is the 
grantee also must pay a fee. They must pay some of the fees 
that are incurred in the settlement of that transaction.
    Mr. Hensarling. Okay. They do receive a discount, and now 
we are debating perhaps what that discount is.
    Mr. Stevens. I have gone through extensive discussions on 
that particular issue, both in the development of the program 
and as recently as this morning, talking about the process that 
NSP grantees go through and what, if any, price advantage may 
be given. They get a bid process.
    Mr. Hensarling. Let me see if I am hearing what I think I 
am hearing. You are saying that the price advantage is 1 
percent?
    Mr. Stevens. The price advantage as guaranteed is 1 
percent.
    Mr. Hensarling. Guaranteed at 1 percent. So you can make it 
larger? And your interpretation--
    Mr. Stevens. That is correct.
    Mr. Hensarling. --of the statute--and just how large can 
you make the discount? What is your interpretation?
    Mr. Stevens. We have programs in FHA that have existed for 
years that allow discounts to communities for as high as 50 
percent, depending on the condition of the property and what it 
does for the community. They are done as a very small 
percentage over time. I have actually not found that many that 
have been done.
    Mr. Hensarling. Commissioner Stevens, let me ask this 
question.
    Again, we know that in the last 2 years, our Nation has 
experienced deficits, over $1 trillion, and we have the single 
largest debt we have ever had in America's history. Debt held 
by the public is going to double in 5 years under the 
President's budget, triple over 10. It is an unsustainable path 
that even the Administration has admitted, and so I am 
concerned with any discount with these properties that are 
provided.
    I guess my question here is this: If a municipality 
receives a property at some discount, it is my understanding 
that there is nothing that prevents them from turning around 
and perhaps flipping that at a profit, so that ultimately the 
Federal taxpayer who is going broke may subsidize a municipal 
taxpayer who may or may not also be going broke.
    Can you disabuse me of this notion, or is it possible under 
the program that the properties can be flipped?
    Mr. Stevens. First of all, there are restrictions on the 
resale through the Neighborhood Stabilization Program, but I 
want to emphasize your primary point. I hope it is your primary 
point. FHA is estimated by the President's budget to produce 
over $5 billion in net positive receipts to the taxpayer in the 
next year. This Administration--
    Mr. Hensarling. Again, that is a good thing, but it was not 
responsive to the question.
    Mr. Stevens. Well, excuse me, I apologize. I thought it was 
the beginning of the point that was being made.
    There are restrictions on the resale of properties, and 
from our perspective, we view actually this program on the REO 
sales where virtually all REO that is sold in America by us and 
virtually everybody else, ultimately is sold at whatever the 
market will bear.
    Mr. Hensarling. So the grantees conceivably can flip it at 
a profit, correct?
    Mr. Stevens. It is limited. It is capped in terms of the 
profit.
    Mr. Hensarling. My time is running out here, Mr. Stevens. 
Let me try to get in another question.
    As I look at the kind of the broad swath of the 
Administration's foreclosure mitigation plans that haven't 
seemed terribly successful to me, and that according to MVA 
stats that I think with the exception of one quarter, 
delinquencies have continued to climb.
    I am particularly concerned about certain aspects of the 
HEMP program. I think this summer I saw a report that the 
average back-end ratio and the debt-to-income for HEMP 
modifications is 63\1/2\ percent, which I believe most people 
would not believe to be a sustainable debt burden on American 
households. So I am curious. Of the FHA HEMP modifications, 
what assumption are you making on default rates going forward, 
and explain to me why risky borrowers are not being allowed to 
refinance into an already fiscally precarious insurance--
    Mr. Stevens. So the FHA HEMP refinance program takes an 
existing FHA loan and refinances them into another FHA loan at 
the same balance. So from a risk standpoint to the taxpayer and 
to the portfolio, it doesn't add any incremental increased 
risk. We already own the risk on that mortgage when we do the 
HEMP modification, where there is absolutely no incremental 
risk on that program.
    There is absolutely no doubt that back-end ratios are going 
to be a driver of performance on any of the HEMP programs. And 
that is why as an example in our FHA short refinance program, 
which will cause actual principal write-down, we have capped 
the back-end ratio for people to be eligible for that program. 
But I want to restate that there is no incremental risk.
    Mr. Hensarling. Incremental being the operative term?
    Mr. Stevens. Well, the risk is already on the loan, right?
    Ms. Waters. Thank you very much. Mr. Carson?
    Mr. Carson. Thank you, Madam Chairwoman.
    When you testified before the Subcommittee on Housing and 
Community Opportunity in March of this year, you proposed that 
the Secretary be allowed to hold all investment lenders to the 
same standard of accountability. Provisions in the FHA Reform 
Act of 2010 permit the Secretary to require indemnity to all 
such lenders.
    Do you believe that there is a need for more oversight or 
stricter qualifications as to which lenders are approved as 
direct endorsement lenders?
    Mr. Stevens. I do, and we did ask for that; and I 
appreciate the question.
    In the FHA reform bill that the House passed and this 
committee put forth, it allowed us to expand our 
indemnification capabilities from what is called LI lenders to 
direct endorsement lenders. That bill has not been through the 
Senate, and so at this point we still operate in a world where 
we have stronger indemnification rights with LI lenders than we 
do direct endorsement lenders. So that being said, I will tell 
you a couple of things we are doing.
    We increased the minimum capital standards required of all 
lenders, direct endorsement or otherwise, so that we are making 
sure that there at least is enough capital for these 
institutions to bear their obligations in the event of fraud or 
misrepresentation, which they all bear regardless of whether 
they are DE or LI.
    In addition to that, our mortgagee review board has stepped 
up our enforcement activities on all lenders where we are 
scrutinizing institutions with high compare ratios that are 
outside of the norm and taking them under a closer look than 
past organizations within FHA have done previously. But without 
question, the ability to get the remaining terms that were in 
the FHA Reform Act through the Senate and into law will give us 
the broader enforcement capabilities that we clearly need.
    Mr. Carson. One last question. Protecting the mortgage 
insurance fund and capital reserves and, in turn, the American 
taxpayers are major reasons for congressional support of FHA 
reform. Do you agree that the legislation appropriately 
addresses the concerns for current and future states of these 
funds?
    Mr. Stevens. Yes, I do.
    Mr. Carson. Thank you. I yield back my time.
    Ms. Waters. Mr. Posey?
    Mr. Posey. Thank you, Madam Chairwoman.
    Mr. Stevens, do you think the housing market has hit 
bottom? I notice you indicate that equities are up in your 
written testimony. Do you think the market has bottomed out?
    Mr. Stevens. I am not an economist. I do believe that the 
market is clearly in a better place than it was a year ago.
    Mr. Posey. Just give me a yes or no. Do you think the 
market has bottomed out?
    Mr. Stevens. I honestly--and I am not trying to be 
evasive--don't have a yes or no answer. I think we are near 
bottom. Whether there is a few percentage points further down--
    Mr. Posey. So that is no, you don't think it has bottomed 
out yet; you think we are near bottom?
    Mr. Stevens. I wouldn't be surprised--
    Mr. Posey. That has to be in your vocabulary. Gut reaction. 
Do you think we hit bottom yet or not? You are the second top 
guy. You ought to know this.
    Mr. Stevens. And I am not trying to be evasive. I am just 
going to tell you I think we are, at minimum, near bottom and 
we may be at bottom. To be honest--
    Mr. Posey. I can't believe you just can't say yes or no.
    Mr. Stevens. I review the same data that you have.
    Mr. Posey. I can't believe you are giving me a song and 
dance. I just want to know, do you think we have hit bottom 
yet? You say we are near bottom. That means we are past bottom 
and on the way down? Just tell me this straight: Do you think 
we have hit bottom yet?
    Mr. Stevens. I apologize if you are assuming I am trying to 
give you a song and dance. I am trying to give a statement that 
doesn't indicate that I have an absolute answer to--
    Mr. Posey. I don't want your absolute answer. I want your 
personal opinion. Do you think we have hit bottom yet?
    Mr. Stevens. I think we are, at minimum, near bottom.
    Mr. Posey. How many loans does FHA insure?
    Mr. Stevens. We are going to do about 1.7 million loans 
this year.
    Mr. Posey. No, how many total do you have insured?
    Mr. Stevens. Six million.
    Mr. Posey. How many of those are current?
    Mr. Stevens. If you give me just a moment, I will tell you 
the exact numbers, but about 91 percent are current.
    Mr. Posey. Okay. Of the 90 percent that aren't current, how 
many are 30 days, 60 days, 90 days or worse?
    Mr. Stevens. If you give me just one moment I want to 
pull--
    Mr. Posey. You can be looking at those while I ask you some 
more questions.
    Mr. Stevens. Okay.
    Mr. Posey. Original estimates for the HOPE for Homeowners 
Program would be that it would assist up to 400,000 troubled 
homeowners, and to date, there have only been 1,355 
applications when these notes were taken. What do you think the 
reason is for people not to participate?
    Mr. Stevens. I apologize; which specific program was this?
    Mr. Posey. HOPE for Homeowners.
    Mr. Stevens. The challenge with the HOPE for Homeowners, I 
think it was a program built on good intent, but the processes 
in place, as we have heard with a lot of these programs, the 
paperwork required, the fact that there is still not a clear 
liquid take-up, there is not a securitization market for that 
on the back end, puts some natural limitations into the 
program.
    Mr. Posey. Okay. Under the HEMP program, what do you think 
the status of that is? In other words, there was $14 billion 
provided for incentives to support write-downs and second 
liens. What percentage of that has been spent and what 
percentage is still unspent?
    Mr. Stevens. Well, HEMP has a variety of types of the 
program. One is obviously the modification of the first 
mortgage. There is a 2MP program which provides for second lien 
write-down which was just rolled out midyear this year, and I 
don't have the specific data for that. I would have to get that 
from Treasury, but it is a very minimum number that has 
utilized the second lien write-down.
    Mr. Posey. I would like you to get that for us in writing 
if you would.
    Mr. Stevens. Yes.
    Mr. Posey. I guess from TARP, that was $14 billion. I just 
wonder what portion has been utilized, and for what purpose, 
and what portion has still been unutilized. I hear from an 
awful lot of constituents who are in trouble, and you have 
quite a good Representative in central Florida, by the way, who 
does quite an effective job of helping people out; but there is 
still such a large amount of paperwork. They have such a 
difficulty, FHA and non-FHA loans, and being able to talk to 
anybody who is in a position of making the decisions, and not 
FHA-specific problem, but I think a problem that could largely 
mostly help turn this economy around.
    And just to re-ask another question that has already been 
asked, to what extent, if any, do you think FHA would be 
looking for a bailout in the future?
    Mr. Stevens. At this point, based on the reserves of FHA, 
it is running on its own. It is financially sound. It is below 
the minimum capital requirements. We need to increase that 
capital, but it is requiring a bailout. We will know more when 
the actuarial study is complete.
    Mr. Posey. Can I take that as a tentative no?
    Ms. Waters. Thank you. Mr. Klein?
    Mr. Klein. Thank you, Madam Chairwoman.
    I just want to pick up on, Mr. Stevens, what Chairman Frank 
brought up before. We passed an FHA reform bill earlier in the 
House, and the Senate sort of stalled on it. One of the things 
that I had worked on was this pilot program which--an outreach 
in terms of dealing with foreclosures and things like that. 
Wells Fargo, I think, had partnered in doing face-to-face 
outreach with troubled borrowers and it seems to have worked 
fairly well. This whole issue of informed borrowers, understand 
what their choices are, not just getting a foreclosure notice, 
and sort of face-to-face approach for more information.
    Since the bill didn't pass, I worked on this with Mr. 
Marchant, but this is something that you have the authority to 
consider and push it out there a little bit in terms of more 
information and working with these organizations or some third-
party professionals that do this. The more information 
borrowers can have about their choices, the better off we will 
be.
    A lot of it is they just don't know. People leave, they 
come, they go. The posting doesn't always work. The issue here 
is making more information available. So I want to encourage 
you, is that something you have the authority to do without the 
full legislation?
    Mr. Stevens. We are looking at precisely what our authority 
is for third-party outreach. We completely agree with you that 
it can be impactful. We have spoken to Wells Fargo in terms of 
the responsiveness of their pilot program they have been 
utilizing. They pay anywhere from $70 to $100 per door-knocker 
to go out. But we agree that early contact is critical and we 
completely support any effort that would be successful and we 
are looking to see how much authority we have and, more 
importantly, if we have the funds to deploy the door-knockers.
    I do want to restate, and Chairman Frank asked this 
question earlier, that FHA is a little different, that we 
require contact--loss mitigation actions within that early 
period of delinquency in all loans within the FHA portfolio as 
a part of our services. So we already have a broad set of 
interventions that are required of all services. We already 
have a broad set of interventions that are required, but if the 
door-knocking, third-party intervention would add value in 
improving performance and helping these homeowners who are so 
desperately in need, we would absolutely support that.
    Mr. Klein. If I can, just to continue on this, I think what 
we found is the face-to-face contact is very meaningful. People 
are stressed. They don't know where to turn. They don't know 
what their choices are. They hear about this program and that 
program, that some local not-for-profit in the community or 
city is doing something. It is a matter of getting good 
information to them, having someone they can look in the eye 
and say, ``Hey, here is what the choices are.''
    Again, the goal here is if someone can stay--and one of the 
points, we help them, we want them to stay. It is good for the 
community. It is good for that person. Sometimes it is 
deferring some of the principal to the back. There are a lot of 
things that can be done. It is a disconnect that sometimes 
makes people just lose it all.
    So I think it is a good investment. If you can get back to 
me and let me know what your position is on whether you have 
the authority, and if you do, what you are going to do. 
Certainly, I would just suggest Florida as a good case study 
for as much of this that can be done as possible. We would 
appreciate it.
    Mr. Stevens. We will do so.
    Mr. Klein. Thank you.
    Ms. Waters. Thank you very much. Mr. Garrett.
    Mr. Garrett. Thank you. And in 5 minutes, you are done and 
you can go home.
    Just to follow up on the gentleman from Texas, one 
question. The reason why I guess there was, I felt, confusion 
there as far as whether it is 1 point or 10 points with regard 
to the first loan program was because--and he didn't have that 
right then, but I do now--is that it is in the Department's 
press release, and I will just read the sentence.
    It says: ``Furthermore, first look would provide NSE 
purchasers with the opportunity to purchase FHA property at a 
discount of 10 percent below their appraised value. It is 
better.'' So he was going by your press release, so let's just 
clarify.
    This is an error, then; is that what you are saying?
    Mr. Stevens. If it would be permissible, I would like to 
respond in writing and make sure that we clarify what was 
stated in the press release versus our specific policy.
    Mr. Garrett. Okay. That would be very helpful. Thank you.
    I appreciate the fact the opening comment was that you have 
about what, 20 or 30 years in the industry, and coming to hear 
it was actually in private industry, and that is good in my 
book. Some people say that is what we are sort of lacking here 
in Washington in the Administration. So I appreciate your 
background in this.
    So I am going to put you on the spot in that respect. I 
know you don't want to give a specific number with regard to 
Ed's question to the capital levels, where we were before, at 
one quarter. I know your answer is we do not want to go below 
zero. That is a yes, right?
    Mr. Stevens. Correct.
    Mr. Garrett. But can you give me this answer? When the 
report comes out, will we be higher or lower than--I don't want 
a firm number from you--but can you give us your best estimate, 
with all your years of experience, of whether we will be higher 
or lower than that number?
    Mr. Stevens. A little of that is also trying to predict 
what home prices will be.
    Mr. Garrett. I understand that.
    Mr. Stevens. And to relate that to the previous question, 
let me just--and I want to be clear in the answer. I can't give 
you that answer. And the reason is that the firm that does the 
actuarial study will incorporate a home-price forecast that is 
a new model that is being used which takes local markets and 
looks at the exact rating of the FHA portfolio. It is much 
improved. We don't have the data of all the specific markets, 
so I just don't want to predict when the capital reserve that 
is such a small number ultimately will be in the actual study 
itself. So I do not have--
    Mr. Garrett. Is that something that you as the new guy in 
charge, new guy in town, sort of would want to have in your 
position that you would be able to--maybe not today, maybe not 
tomorrow, to quote a line from Casablanca--but is that not a 
line today that you would want to be able to do that yourself? 
Because that seems to be an important number you need to know 
so you can gauge the rest of your activities, right?
    Mr. Stevens. We would like to have the ability to do that 
and we are--
    Mr. Garrett. So you can't do it now; is what you are 
saying?
    Mr. Stevens. The resources required to be able to bring in 
third parties to be able to do the analytics--
    Mr. Garrett. Internally you can't do it?
    Mr. Stevens. The FHA Reform Act that you all voted and 
pushed through has that ability in there. So here is what we do 
do, and you have it in your third quarterly report to Congress 
which we just submitted. We give you a lot of data about the 
portfolio, which is clearly a lot stronger than anybody 
predicted.
    Mr. Garrett. So the short answer is you can't do it now; 
you want to do it; in the future you may be able to do it?
    Mr. Stevens. That is correct.
    Mr. Garrett. On the home loan prices, so your notes or 
notes I took was, okay, the larger loans are around--under 3 
percent of your portfolio, right? They are not a significant 
income generator for the FHA, right?
    Mr. Stevens. Right.
    Mr. Garrett. So here is the issue. Right now, we are in 
town very quickly trying to decide whether we should pass a tax 
cut for people--not tax cut--extend the tax breaks for those 
people making over $250,000. Should we be subsidizing those 
people on the revenue side, right? That is what the issue is in 
town right now.
    Here, over here at the FHA, though, we are basically 
subsidizing those people who are the high-income people in 
their home purchases of people making $200,000 to $250,000.
    Is that consistent that, on the one hand, the 
Administration does not want to subsidize them, but on the 
other hand, your agency says, no, we should be subsidizing, 
even though it is such a small percentage of the portfolio and 
it is not generating much money?
    Mr. Stevens. To be clear, the Administration supports the 
broad extension of the loan limits for the next year, and as I 
stated earlier, Mr. Garrett, is that the FHA high loan limit 
wouldn't be the most significant impact if they were not 
extended. The big impact would be to even the lower end of 
communities across the country which depend on this formula of 
whether it is 125 percent of median sales price or or 115--
    Mr. Garrett. So if we could just fix the formula, maybe 
then we can address this issue and the Administration could be 
consistent then in how we handle this?
    Mr. Stevens. That would clearly be an alternative if we 
went down the path. The challenge is we have such a short 
timeline for the industry to adopt any changes taking place, is 
that we would be impacting MSAs across the country if we do not 
extend.
    Mr. Garrett. Mr. Chairman, I just have one more question.
    The Chairman. Go ahead.
    Mr. Garrett. Other than the GSEs--I know we haven't fixed 
that problem yet, but that is coming. But right now, they have 
something over there called the adverse market fees and loan 
level price adjustments. Okay?
    Mr. Stevens. Yes.
    Mr. Garrett. And they charge these fees, and I understand 
when they were here, they explained why they do them. It helps 
the book, that sort of thing.
    But from your perspective, do you see them as actually 
driving away business from the GSEs because that raises the 
cost of going through the GSEs, right? And so if it drives 
business away from the GSEs, that is sort of pushing it into 
where? The only other market that is available and to you 
folks.
    Mr. Stevens. There are three markets, and we have seen them 
growing. We are seeing some of the larger financial 
institutions come into the market with jumbo financing, high 
loan balance financing, which usually has taken the form of 
adjustable rate mortgages, but we are seeing a growing volume 
occurring right now over recent weeks.
    The other two areas are clearly the loan level price 
adjustments--what consumers and participants in the industry 
are ultimately going to make a choice based on the cost of the 
loan.
    GSEs risk base price so they charge less for the top credit 
tier, and they charge more as the risk increases. FHA has 
always been a flat-priced market over time, and we have talked 
about this before in terms of this. But the one change we put 
into place so far, obviously, is if you are below 580 we are 
now adding additional expense to it. But generally speaking, 
there is no question that the cost of the loan is going to 
reflect consumer behavior in one direction or the other.
    Mr. Garrett. Say that last line again?
    Mr. Stevens. There is no question that the price of the 
loan is going to affect the decision the home buyer or borrower 
makes ultimately and which loan product they select.
    Mr. Garrett. So, at the end of the day, I will say all 
other things being equal, as far as the price risk and the 
pricing for that element of concern, if they add the price of 
the adverse fees into it, it is going to be--and as a consumer, 
that is that going to be higher cost for me, so I am going to 
do the GSE. I know I might go into the private market, but 
right now that really isn't there, so I am going to end up with 
you folks.
    Mr. Stevens. And I just say factually that we have had, 
with our recent price change, we have actually made the GSE 
review mortgage insurance and the loan level price adjustment 
is actually a better option for some home buyers, and so our 
adjustments have actually helped perhaps create a shift back. 
However, we would describe sort of the private capital entre, 
but without question, they will make a decision based on the 
price of their mortgage.
    Mr. Garrett. Just one follow-up on the beginning question, 
Mr. Chairman--where the gentleman from Texas is going.
    I understand I would think that the policy issue rationale 
behind the--what do you call it--the first loan--first look 
programs. I understand the theory behind that and I understand 
also where the gentleman from Texas is coming. I sort of lean 
that way, that at the end of the day, you want your book to be 
good; you want a situation that you are not coming back here 
with the capital level below 2 percent, or even below zero, and 
looking for any bailouts or what have you.
    The problem is, I wonder with the default rates that we 
currently see--maybe you can give me the number on that on the 
default rates. I forget what it is right now for the houses 
that go into it.
    Mr. Stevens. We have 8\1/2\ percent above 90 days late.
    Mr. Garrett. Okay. I thought it was higher than that.
    The Chairman. We do want to wind it up.
    Mr. Garrett. So the question is, don't you really just sort 
of kick the proverbial can down the road on these; so good for 
the first 6 months or 30 days or what have you on these things. 
But at the end of the day, if I am going to still default, the 
risk was on the book before and after; all you did was push it 
down the road and you didn't really benefit your bottom line at 
the end of the day anyway. Actually it may be worse because 
those people have just taken advantage of the house for 30 days 
or 60 days or 90 days and haven't paid on it.
    Mr. Stevens. Well, actually the performance rate on the FHA 
portfolio is significantly higher than any other portfolio. 
People actually will go into default, but they will recover at 
a rate that is significantly higher than what I experienced in 
the private sector or at the GSEs over time. A lot of it has to 
do with our aggressive loss mitigation and programs we can put 
in place to get people back on track.
    And I will just tell you, remember, all our loans are 
owner-occupied, primary residence, and our average loan balance 
is much lower than most other portfolios in the market. So I 
don't believe there is an alternative lifestyle option for many 
people if we can help them get back into the home.
    The Chairman. The time has expired. I don't want to get 
into too much more of a discussion of alternative lifestyle 
options. That would take us along a different path.
    I will say that any members, either those who are here or 
those who couldn't be here because we understand the schedule 
had been changed for votes, who have additional questions can 
submit them.
    We can expect the Commissioner, as he always has, to be 
responsive. And I would ask unanimous consent to insert into 
the record the statement submitted to us by our colleague Mr. 
Towns, the chairman of the Government Reform Committee, on his 
bill which deals with red lining, H.R. 5941, and without 
objection, that will be made a part of the record.
    And the committee will adjourn, to reconvene at 2 p.m. for 
a hearing with the Secretary of the Treasury.
    [Whereupon, at 11:35 a.m., the hearing was adjourned.]


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