[Senate Hearing 111-394]
[From the U.S. Government Publishing Office]
S. Hrg. 111-394
ROLE OF THE FEDERAL HOUSING ADMINISTRATION (FHA) IN ADDRESSING THE
HOUSING CRISIS
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HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
APRIL 2, 2009--WASHINGTON, DC
__________
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__________
COMMITTEE ON APPROPRIATIONS
DANIEL K. INOUYE, Hawaii, Chairman
ROBERT C. BYRD, West Virginia THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa MITCH McCONNELL, Kentucky
BARBARA A. MIKULSKI, Maryland RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin JUDD GREGG, New Hampshire
PATTY MURRAY, Washington ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
DIANNE FEINSTEIN, California SAM BROWNBACK, Kansas
RICHARD J. DURBIN, Illinois LAMAR ALEXANDER, Tennessee
TIM JOHNSON, South Dakota SUSAN COLLINS, Maine
MARY L. LANDRIEU, Louisiana GEORGE V. VOINOVICH, Ohio
JACK REED, Rhode Island LISA MURKOWSKI, Alaska
FRANK R. LAUTENBERG, New Jersey
BEN NELSON, Nebraska
MARK PRYOR, Arkansas
JON TESTER, Montana
ARLEN SPECTER, Pennsylvania
Charles J. Houy, Staff Director
Bruce Evans, Minority Staff Director
------
Subcommittee on Transportation and Housing and Urban Development, and
Related Agencies
PATTY MURRAY, Washington, Chairman
ROBERT C. BYRD, West Virginia CHRISTOPHER S. BOND, Missouri
BARBARA A. MIKULSKI, Maryland RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin ROBERT F. BENNETT, Utah
RICHARD J. DURBIN, Illinois KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota SAM BROWNBACK, Kansas
PATRICK J. LEAHY, Vermont LAMAR ALEXANDER, Tennessee
TOM HARKIN, Iowa SUSAN COLLINS, Maine
DIANNE FEINSTEIN, California GEORGE V. VOINOVICH, Ohio
TIM JOHNSON, South Dakota THAD COCHRAN, Mississippi (ex
FRANK R. LAUTENBERG, New Jersey officio)
ARLEN SPECTER, Pennsylvania
DANIEL K. INOUYE, Hawaii, (ex
officio)
Professional Staff
Peter Rogoff
Meaghan L. McCarthy
Rachel Milberg
Jonathan Harwitz
Jon Kamarck (Minority)
Matthew McCardle (Minority)
Ellen Beares (Minority)
Administrative Support
Teri Curtin
C O N T E N T S
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Page
Opening Statement of Senator Patty Murray........................ 1
Opening Statement of Senator Christopher S. Bond................. 4
Statement of Hon. Shaun Donovan, Secretary, Department of Housing
and Urban Development.......................................... 6
Prepared Statement........................................... 8
FHA Past and Present............................................. 8
FHA's Challenges................................................. 9
FHA Performance Today............................................ 9
Enhancing FHA Operations......................................... 10
Priorities Going Forward......................................... 11
Troublesome Lenders.............................................. 13
Early Payment Defaults........................................... 14
Loss Mitigation.................................................. 15
Loss Mitigation Costs on FHA Fund................................ 15
Mortgages Currently in Mitigation................................ 16
Statement of Senator Frank R. Lautenberg......................... 16
Prepared Statement........................................... 16
Low- and Moderate-Income Homeowners.............................. 17
FHA Solvency..................................................... 18
Statement of Senator George V. Voinovich......................... 18
Prepared Statement........................................... 18
Increase in FHA Lenders.......................................... 19
Demolition of Properties......................................... 19
Neighborhood Stabilization Program (NSP)......................... 21
HOPE for Homeowners Program...................................... 21
HOPE for Homeowners.............................................. 21
Demolition of Properties......................................... 21
Mortgage Scams................................................... 22
HECMS............................................................ 23
Statement of Hon. Kenneth M. Donohue, Inspector General,
Department of Housing and Urban Development.................... 24
Prepared Statement........................................... 25
The Evolving Landscape........................................... 26
Departmental Issues.............................................. 27
OIG Observations................................................. 27
Increased Risks to FHA........................................... 29
OIG Concerns Regarding Critical Front-End and Back-End Processes
(Improving the Quality of FHA Originations and the Enforcement
of Bad Actors)................................................. 32
OIG Challenges................................................... 35
Statement of J. Lennox Scott, Chief Executive Officer, John L.
Scott Real Estate, on Behalf of the National Association of
REALTORS...................................................... 36
Prepared Statement........................................... 37
Need for Increased Capacity...................................... 38
Increased Oversight/Risk Management.............................. 38
Technical Corrections to FHA Programs............................ 39
FHA and Use of the Homebuyer Tax Credit.......................... 40
Statement of Mia Vermillion, Senior Loan Consultant, Guild
Mortgage, Lakewood, Washington................................. 40
Prepared Statement........................................... 41
Mortgage Fraud Activity.......................................... 43
Maximum Loan Limit............................................... 44
Mortgage Rescue Scams............................................ 44
Default/Bailout.................................................. 45
FHA Appraisal Process............................................ 46
Pierce County.................................................... 46
HECMS............................................................ 47
FHA Improvements................................................. 48
Additional Committee Questions................................... 48
Questions Submitted to Hon. Shaun Donovan........................ 48
Questions Submitted by Senator Patrick J. Leahy.................. 48
The New Issue Bond Program (NIBP)................................ 50
The Temporary Credit and Liquidity Program (TCLP)................ 50
Question Submitted by Senator Frank R. Lautenberg................ 51
Question Submitted by Senator Sam Brownback...................... 51
Questions Submitted by Senator George V. Voinovich............... 51
ROLE OF THE FEDERAL HOUSING ADMINISTRATION (FHA) IN ADDRESSING THE
HOUSING CRISIS
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THURSDAY, APRIL 2, 2009
U.S. Senate,
Subcommittee on Transportation and Housing
and Urban Development, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:01 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. Patty Murray (chairman) presiding.
Present: Senators Murray, Lautenberg, Bond, and Voinovich.
OPENING STATEMENT OF SENATOR PATTY MURRAY
Senator Murray. This subcommittee will come to order. This
morning the subcommittee will hold its first hearing in the
111th Congress, and I can't think of a more timely subject for
us to examine than the current economic crisis and its impact
on homeowners across the country. There is no question that a
perfect storm of Wall Street greed, irresponsible mortgage
lending, and uninformed decisions by borrowers are at the heart
of our economic crisis. What this subcommittee will explore
today is what role the Federal Government and, more
specifically, the Federal Housing Administration will play in
the stemming of the housing crisis and assisting in our
Nation's long-term recovery.
First of all, I'd like to extend a very warm welcome to our
newly confirmed HUD Secretary, Shaun Donovan. Welcome. Good to
have you here today. This is Secretary Donovan's first
appearance before the subcommittee, but he and I have had many
conversations about the challenges that HUD is facing on a wide
variety of issues from homeless veterans to housing counseling
to the foreclosure crisis.
We look forward to hearing from you today and to working
with you to get the agency and the Nation headed down a
sustainable path when it comes to housing.
I also look forward to hearing from our second panel of
witnesses, including HUD Inspector General Ken Donohue, and
from our two housing experts from my home State of Washington,
Mr. Jay Lennox Scott, who's the Chairman and CEO of John L.
Scott Real Estate, a family-run business for three generations,
and Ms. Mia Vermillion, who is the Senior Mortgage Consultant
with Guild Mortgage in Lakewood, Washington.
Now, I travel home every weekend and hear from my home
State families about the challenges that they face, and I think
it's important that Congress get on-the-ground perspective from
experts in our communities who know what works and,
alternatively, where there is room for improvement.
Our Nation is facing the worst economic crisis in
generations. Since December 2007 we lost 4.4 million jobs,
including 2.6 million in just the past 4 months. At the root of
this crisis is years of reckless, unregulated, and
irresponsible mortgage lending. Many of the mortgages that were
initiated and then repackaged and sold during this period now
have a new name: toxic assets. They are a significant portion
of the assets that are poisoning the balance sheets of some of
the largest financial institutions in the world, bringing
uncertainty to the entire international banking system.
This impact has been felt in every sector of the American
economy, stifling credit from car and student loans to the
credit extended to help small businesses meet their payroll.
It's important to note that the housing crisis is not just some
abstract phenomenon impacting giant financial institutions.
There are currently over 290,000 American homes in foreclosure,
including 3,021 in my home State of Washington.
The housing crisis has swept across our communities and
some are now calling on the Federal Housing Administration to
be the savior of the market. The Federal Housing Administration
was established in 1934 when the Great Depression ground the
mortgage lending market to a standstill. The lending industry
would only extend very short-term loans to high income
households that could afford a very high down payment. Low- and
moderate-income families had no hope of participating. So the
FHA created a mechanism for working families to achieve the
dream of home ownership. It also lowered the risk to lending
institutions by putting the full faith and credit of the
Government behind new affordable mortgages.
The FHA was an overwhelming success. FHA was there in good
times and in bad, especially during recessions and periods of
declining home values, as happened in the 1980s. Today, 75
years after its founding to help American families purchase a
home, the FHA is now being called upon to keep millions of
families in their homes. In 2007, when Commissioner Montgomery
testified before us, it was to talk about the fact that the FHA
was almost irrelevant to the housing market. At the time, the
FHA's presence in the market had dropped to only 3 percent
because so many lenders had taken advantage of the housing boom
and instead offered exotic mortgages that families couldn't
afford. The FHA's modest loan limits kept it out of many
markets, including Seattle, King County the most populous
county in Washington State.
Working with my colleagues, I was able to increase the FHA
loan limits to make it relevant in these markets. But a lot of
other things have changed with the FHA in a very short period
of time that are threatening the integrity of the program and
the taxpayers that stand behind it. The subprime market has now
evaporated, and even the most creditworthy borrowers are having
a hard time getting a mortgage.
I want to read to you a part of a letter from a constituent
of mine in Kirkland, Washington, who, like a lot of Americans,
has scrimped and saved and has good credit and yet still can't
purchase a home of their own. They wrote to me and they said:
``In spite of my 18 years teaching public school in the
Puget Sound region, my husband and I have been unable to
purchase our own home. My husband was laid off from his job in
1998, returned to school to improve his employability, but
couldn't for some time find more than part-time work.
``Now that we are finally in a more comfortable earnings
bracket, we put every spare dollar into saving for a down
payment and paying off the debt that we incurred during those
darker days. Certainly there are many like us, unable to gather
the money necessary to take the first steps to home ownership,
but stably employed and with good credit, ready to make our own
small contribution to the economy by taking on the
responsibilities of home ownership.''
That's not an unusual story and it's one of the many
reasons that the solvency of the FHA is critical. The mission
of the agency is to take care of creditworthy borrowers.
Compared to the 3 percent market share FHA just had 2 years
ago, today they guarantee over 25 percent of the total mortgage
volume in the United States and the number of lenders with whom
it does business has grown by more than 500 percent since
fiscal year 2006. In Washington State, the number of FHA loans
increased from just fewer than 9,000 in 2007 to over 30,000 in
2008.
We all want to lend a helping hand to the struggling
families who need it, but we need to focus on exactly who the
FHA can help through updated laws and revised policies. We
don't want to invite a trend in which the worst mortgages are
moved off the bankers' books and onto the Federal Government's.
My constituents have been clear that they don't want to
wake up to learn that Congress has taken steps that leave the
taxpayer holding the bag, and that's exactly what could happen
if the FHA is pushed to buy loans that could go bad soon or
down the line. We have to ensure that FHA has the tools and
flexibility to charge enough in fees to cover its costs,
because if the FHA can't pay its debts it will be up to this
subcommittee to appropriate the funds to cover that shortfall
and we do not have the dollars to do that.
We are in tough budget times. Every dollar we spend to
cover defaults at the FHA is one less dollar going to public
housing, homelessness prevention, or housing counseling to keep
families in their homes.
This subcommittee has previously examined longstanding
challenges at the FHA, like outdated technology, personnel
shortages, and inadequate underwriting. Just because FHA has
become a major player in saving the housing market doesn't mean
those challenges have disappeared. As we talk about FHA's
expanded role, we have to also discuss more rigorous
underwriting and oversight.
I've convened this hearing with Senator Bond and I want to
thank him for working with me on this because we want the FHA
to be in a position to protect America's families and keep them
in their homes, and to do that we have to ensure that the FHA
isn't spread thin and it has the tools and resources needed to
adequately staff, underwrite, and monitor its skyrocketing loan
volume.
Both American homeowners and the American taxpayers deserve
to know the Federal Government is acting responsibly and
swiftly to help families in financial distress and to jump-
start the ailing real estate market.
So I look forward to the testimony and responses of all of
our witnesses today, and with that I want to turn it over to my
colleague, the subcommittee's ranking member, Senator Bond, who
has been very critical in helping us to put this together
today. So thank you very much, Senator.
OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND
Senator Bond. Thank you very much, Madam Chair. I hope I've
been critical in helping and not in criticizing.
Senator Murray. No, critical in helping, definitely.
Senator Bond. I begin by endorsing your warning that this
subcommittee and our ability to provide the many needs in
housing is threatened by a potential major drain on our
resources we can't stand. I appreciate your calling this
hearing, as I certainly asked you to do. I think it's time that
we laid out where we stand.
I welcome our witnesses today. I congratulate the Secretary
of HUD, Shaun Donovan, on his appointment and his willingness
to take on a very challenging job during a very challenging
time. I asked him repeatedly if he was willing to do it and he
indicated that he was willing to take the chance. I know
Secretary Donovan from his previous work. I've had good
conversations with him. I am impressed with his knowledge,
understanding, and his past forward.
I also recognize Mr. Ken Donohue, the HUD IG. Ken has done
a great job of providing the Department and the Congress with
independent and objective analysis and oversight of HUD's
responsibilities.
Make no mistake, the health and solvency of FHA is at high
risk. There are very troubling signs. FHA defaults are at their
highest rates in several years. FHA's economic value had fallen
by almost 40 percent over the past year. FHA-approved new
lenders have increased by 525 percent over the past 2 years,
and there are troubling signs that former subprime lenders and
brokers have been approved to conduct FHA business. Fraudulent
activity in the mortgage industry is on the rise, exposing FHA
to more risk.
I've just been advised by the U.S. Attorney for the Eastern
District of Missouri that she and her office have filed 58
individual and business criminal indictments, from large
communities like St. Louis to small communities like Sykeston,
and they have over 100 cases currently in review. That means
the system is at risk.
FHA has a significant increase in foreclosures, which
endanger the stability of communities and neighboring homes.
The rise in FHA defaults and foreclosures, especially in areas
already victimized by subprime lending, threaten to make a bad
problem worse. It is clear that the families who suffer
foreclosure go through a financial crisis. They go through a
tremendous personal upheaval, losing their homes. But
communities are suffering when the foreclosure rates become
high. I've heard community leaders as well as housing advocates
outline what happens to a community with foreclosures. Even on
a broader basis, the geniuses on Wall Street who took these
mortgages, securitized them, sliced them, diced them, and sent
them out to poison not only our financial system, but the
world's financial system, are really a very significant part of
the worldwide economic crisis that we face right now.
Mr. Secretary, you inherited an agency that has
longstanding challenges. I'm confident that you're up to the
task of turning the agency around. I appreciate your
recognition and willingness to tackle FHA's management and
operational problems. But despite your skills and leadership,
the Congress and the administration must not make your job
harder by placing more risk on FHA until the problems are
fixed, until the agency can handle it, or the agency will
crash.
I believe I'm hearing from Americans there's a message for
Congress and the administration: The taxpayer credit card is
maxed out, the alarm has sounded. If Congress and the
administration place more risk on FHA before the problems are
solved, this powder keg will explode and taxpayers will be on
the hook.
Now, we know that FHA has suffered from longstanding
management and oversight problems, and in addition past
administrations and Congress have contributed to FHA's woes by
making changes to FHA so that it could refinance existing
subprime mortgages. For example, the Bush administration
created a new program called FHA Secure to allow the agency to
refinance subprime borrowers who are late on a few payments.
While the program served a fraction of troubled subprime
borrowers and it was good, it did provide some assistance, the
FHA terminated the program because of the negative financial
impact on its insurance fund.
In addition, Congress created the FHA Home for Homeowners
Program as part of last summer's Housing and Economic Recovery
Act of 2008. Out of concern about the increased risk, the FHA
spoke against and voted against the bill. While this $300
billion program has not served as many borrowers as
anticipated, the Obama administration and some in Congress are
advocating changes that would relax the standards of the
program to increase participation.
In addition, there are efforts in the House to reestablish
no down payment programs that significantly contributed to
FHA's troubles. The seller no down payment program defaulted at
an unacceptable rate, higher than subprime loans. As a result,
I strongly oppose those efforts.
I look forward to working with the Secretary to ensure that
you, Mr. Secretary, have the needed resources to carry out
FHA's mission. It's vitally important that the FHA hire the
necessary staff, provide consistent and comprehensive training,
ensure that you install necessary safeguards to minimize fraud
and abuse, and get your IT systems up to the modern day
capabilities and the needs of the agency.
FHA has a very important role to provide home buyers with
clear and comprehensive requirements, to help ensure the
success of their home ownership. If the homeowners don't
succeed, they lose, the communities lose, and we all lose.
Thank you, Mr. Secretary, for taking on this major task.
Senator Murray. Thank you, Senator Bond.
Mr. Secretary, we will now turn to you for your testimony.
We do have your written testimony and we would ask you to
summarize in about 5 minutes for the subcommittee.
STATEMENT OF HON. SHAUN DONOVAN, SECRETARY, DEPARTMENT
OF HOUSING AND URBAN DEVELOPMENT
Secretary Donovan. Thank you very much. Chairwoman Murray,
Ranking Member Bond, and members of the subcommittee. Thank you
for the opportunity to speak with you today about the state of
the Federal Housing Administration. I come before you in a
historically unique moment. Our economy has deep challenges,
unemployment is high, incomes are falling, and home
foreclosures are greater than at any time since the Great
Depression.
The Obama administration has responded with a comprehensive
program to stimulate our economy and revive our housing
markets. Last week President Obama announced his intention to
nominate David Stevens to be the Assistant Secretary for
Housing, and the Federal Housing Commissioner. I believe that
Mr. Stevens is one of the best and brightest in the mortgage
business, with a deep range of experience, and will be a steady
hand in helping to manage through these challenging times.
Current market conditions highlight the critical role of
the Federal Government in keeping mortgage credit flowing. In
particular, FHA's role has grown substantially, from 3 percent
of lending activity by dollar volume in 2006 to over 20 percent
of all mortgages originated today.
Like other market players, FHA is experiencing elevated
defaults and foreclosures, and with it losses that exceed prior
estimates. In contrast to the subprime sector, where unsafe
loan features and poor underwriting made those mortgages risky
from the start, for FHA the primary reason for defaults and
foreclosures continues to be economic factors, especially loss
of income. FHA, however, is unlikely to face the catastrophic
losses born in the subprime sector.
Moreover, much of our recent loss activities have been
attributable to the growth in seller-funded down payment
assistance, which accounted for a large and growing share of
FHA losses and which Congress terminated last year. I thank you
for your leadership on this issue and this should help to
substantially reduce future losses in FHA's new business.
Several other factors should mitigate the damage in the
current recession--that the current recession wreaks on FHA's
portfolio. First, credit scores of FHA borrowers have risen
markedly as tighter underwriting standards in the private
market have driven better borrowers to FHA. Second, before mid-
2008 FHA's loan limits reduced its market share and exposure in
some of the Nation's highest cost housing markets, particularly
in California.
My overall goal then is to continue efforts to identify
both the existing strengths and to honestly look at the
weaknesses of FHA, to work with Congress to make sure that FHA
has the right program mix and pricing structure, is actuarially
sound, and has the organizational infrastructure to continue to
expand home ownership opportunities to those families
traditionally not well served by the private marketplace.
Let me talk for a minute about the investments in both
technology and human resources we need to make to build a sound
infrastructure. FHA relies too heavily today on manual
processes and needs to adopt more automated processes for
underwriting and risk management. FHA staff spends too much
time manually performing risk management duties, monitoring
lenders and appraisers, and reviewing the underwriting of
individual loan files. We must accelerate our adoption of
market standard technologies for both of these areas.
Specifically, technology can also enhance FHA's fraud
detection by borrowers, lenders and appraisers. We have already
secured the use of anti-fraud technology for our Hope for
Homeowners Program and are now looking to expand the use of
that tool to all of FHA's single family business, beginning
with a pilot application in fiscal year 2009.
These efforts tie in directly to the Obama administration's
multi-agency combating mortgage fraud initiative. Under this
initiative HUD and FHA will be playing a central role by
investing in bringing anti-fraud systems on line. This
initiative will also include additional resources from the FBI
and the Justice Department to investigate and prosecute
mortgage fraud.
I also want to say a special mention to the early
cooperation and collaboration I have had with HUD's Inspector
General, Ken Donohue.
Finally, as you well know, FHA's basic program data and
technology systems are old and woefully inadequate. We will be
requesting funding in our 2010 budget for IT investments and to
prioritize the modernization of FHA IT systems, to upgrade our
technology and core systems.
Automated tools to assist in risk management will be a good
addition, but FHA also needs more staff and staff with a
different skills mix than our current work force. I want to
thank you, Chairwoman Murray, and members of the entire
subcommittee for providing additional funding specifically for
the Office of Housing to hire approximately 200 additional
personnel in the fiscal year 2009 budget. The agency has
already developed a staffing plan and job announcements are
under way.
So my first priority is shoring up the basic infrastructure
of the program. In addition, two other priorities are at the
top of my list: helping homeowners avoid foreclosure and
rethinking FHA's role in the new mortgage market. Last month,
President Obama announced a bold plan to help borrowers avoid
foreclosure. In addition to the making home affordable
components, the President has called on Congress to enact
carefully crafted bankruptcy reform along with important
reforms to enable FHA to play a larger role in the overall
effort to stabilize our Nation's housing market.
As you know, housing legislation, H.R. 1106, has passed the
House and is now before the Senate. We hope it gets enacted
quickly so that more borrowers can avoid foreclosures. There
are two specific provisions that we'd like to see enacted:
changes to Hope for Homeowners as a viable prevention,
foreclosure prevention tool; and reform of FHA's loan
modification process to allow FHA to enhance its use of partial
claims authority, to align our loan modification activities
with making homes affordable.
Finally, the recent mortgage market meltdown has provided
ample evidence that we must work to rethink each and every
aspect of the Nation's housing finance system. Building on its
historic mission, I am committed to ensuring that FHA continues
to provide liquidity and stability to the mortgage market,
while at the same time developing the new products and programs
that continue to expand access to home ownership to lower
income and lower wealth households not well served by the
private market.
PREPARED STATEMENT
In summary, I want to assure the subcommittee that, while
significant challenges exist, the FHA is preparing to meet
these challenges head on. I'm looking forward to having Dave
Stevens confirmed and take the reins at FHA and look forward to
answering your questions. Thank you.
[The statement follows:]
Prepared Statement of Hon. Shaun Donovan
Chairwoman Murray, Ranking Member Bond, and members of the
subcommittee, thank you for the opportunity to speak with you today
about the state of the Federal Housing Administration (FHA).
I come before you in a historically unique moment. Our economy has
deep challenges: unemployment is high, incomes are falling, and home
foreclosures are greater than at any time since the Great Depression.
The Obama administration has responded with a comprehensive and
multifaceted program to stimulate our economy and revive our housing
markets: a recovery package to create or preserve 3-4 million jobs, a
comprehensive program to stabilize financial markets, lower mortgage
interest rates and unfreeze credit markets; and new efforts to help
homeowners refinance their mortgages, avert foreclosures, stabilize
hard hit neighborhoods and end the downward pressure on housing prices.
HUD has a critical role to play in each of these areas. I am deeply
appreciative of your subcommittee for providing HUD with $13 billion in
recovery funds, including a new infusion of funding for the
Neighborhood Stabilization Program to help communities prevent blight
and make foreclosed homes community assets rather than liabilities. HUD
has been deeply involved in the development of the Obama
administration's Homeowner Affordability and Stability Plan (HASP),
including the Making Home Affordable initiative that will allow 4 to 5
million homeowners now locked out of GSE refinance options to take
advantage of today's lower rates, and help 3 to 4 million additional
borrowers receive affordable, sustainable loan modifications and avert
more costly foreclosures.
But no part of HUD is more central and important to our national
effort to promote affordable homeownership than the Federal Housing
Administration, and I am committed to making FHA as responsive to
market demands as it was when it was founded.
FHA PAST AND PRESENT
As you all well know, the FHA was created in 1934 to address a set
of economic conditions that were unquestionably of greater scale, but
clearly of similar character to what we are facing today. Property
values were declining. Unemployment was rising and incomes were
dropping. Families could not pay their bills. It is no surprise that
many homeowners could not meet their mortgage obligations. The overall
contraction in the credit markets meant that borrowers had no place to
turn to refinance out of their mortgages, which, at that point in
history, were most often structured with 5-year terms and ``balloon''
repayment schedules.
FHA was set up as a Government mortgage insurance company to
protect financial institutions from risk of loss and, in so doing, to
encourage lenders to make longer-term, fixed rate home loans. The goal
was to create liquidity and stability for the mortgage and real estate
markets--to provide families access to credit, to keep them in their
homes, and to offer homebuyers a new way to buy homes, by offering
longer-term affordable financing.
The agency's mission has not changed since that time. As part of
this mission, FHA continues to play a countercyclical role--serving as
a backstop to the private mortgage market. FHA stays active in volatile
and declining markets, continuing to make mortgage credit available to
borrowers, even when private mortgage providers are withdrawing from
the market. During difficult times, it is critically important to have
an entity like FHA play this role--offering families access to near-
prime rate financing. FHA picked up private market slack in Texas,
Oklahoma and Louisiana during the Oil Patch bust in the late 1980s and
in Southern California during the early 1990s, and it is playing this
role again today.
Current market conditions highlight the critical role of the
Federal Government in keeping mortgage credit flowing. With the
collapse of global credit markets, FHA, Fannie Mae and Freddie Mac must
continue to work with strong and well managed private sector entities
to expand access to mortgage credit in the market. In particular, FHA's
role has grown substantially from 3 percent of lending activity by
dollar volume in 2006 to approximately 30 percent of all mortgages
originated today.
FHA'S CHALLENGES
FHA is now playing a critical role in addressing the current
mortgage crisis, but FHA also faces many challenges today. Like many
Federal domestic agencies, FHA has suffered under the penny-wise and
pound foolish priorities of the previous administration. FHA was
stagnant, limiting its ability to maintain adequate staffing levels and
invest in state-of-the art technology. Repeated budget stalemates and
resulting uncertainty of future funding levels undermined the ability
to implement long-term organizational improvements.
While FHA's volume of business has increased dramatically in the
last 2 years and increased administrative appropriations will help
ensure FHA properly oversees this workload. We certainly are
appreciative of the additional funding and management flexibility we
received in the fiscal year 2009 appropriations process and plan to
bolster our staffing quickly. Outdated information technology (IT)
systems, systems that were built to handle simpler and smaller mortgage
programs, continue to serve as the primary vehicles for collecting,
tracking, and validating program data and performance.
At the same time, I know that you Senator Murray and the rest of
the members of this subcommittee share my concerns of the importance of
helping FHA continue to operate safely and soundly in the current
environment. Your actions in the fiscal year 2009 budget to allow FHA
to have greater staffing and flexibility across the departments of the
agency was a critical first step in helping to build a stronger and
more market savvy FHA. But it was just a first step. For FHA to realize
its full potential to respond to the current mortgage crisis it will
require additional resources and development of new and innovative
reform initiatives.
That is why I was so pleased last week when President Obama
announced his intention to nominate David Stevens to be the Assistant
Secretary for Housing/Federal Housing Commissioner. I believe that Mr.
Stevens is one of the best and brightest in the mortgage business with
experience ranging from mortgage originations, to secondary markets, to
managing a national real estate firm. Should he be confirmed by this
body, Mr. Stevens and I will work closely together to diagnose and
address the challenges now facing FHA. Mr. Stevens brings a hands-on
systems approach to mortgage origination, and is anxious to see
firsthand the status of FHA's systems and programs and to quickly put
in place process and technology improvements in all facets of FHA's
operations
FHA PERFORMANCE TODAY
Prior to a fuller review, it is already clear to me that the agency
has done good work in meeting the growing needs of the industry and the
public. With resources constrained, the leadership and career staff at
FHA have worked hard to process rapidly growing levels of new business,
upgrade business processes and bring new FHA products--like FHA Secure
and Hope for Homeowners--to market in record time.
But we all know that the FHA team cannot sustain their efforts and
protect the programs over the long-term without an infusion of
resources: for new staffing with new skills, investments in new state-
of-the-art technologies, and new efforts to reach out to enforcement
agencies at all levels of Government to better monitor FHA partners. In
addition, the organization must continually rethink how to best reshape
its product mix and pricing, particularly in light of today's dramatic
market changes. The organization needs all of us to commit to providing
the support needed to implement strategic improvements in its business
operations and program designs.
As is the case with other mortgage market participants, currently
FHA is experiencing elevated defaults and foreclosures and with it,
losses that exceed prior estimates. In contrast to the subprime sector,
where unsafe loan features and poor underwriting made those mortgages
risky from the start, for FHA, the primary reason for defaults and
foreclosures continues to be loss of income combined with low or
negative home equity, and economic factors present in today's
environment. Although this is a challenging time for all entities in
the mortgage market, FHA is unlikely to face the catastrophic losses
borne in the subprime sector. FHA loans continue to substantially
outperform subprime loans: only 7 percent of FHA loans are seriously
delinquent (greater than 90 days delinquent or in foreclosure) compared
to more than 23 percent of subprime loans.
Moreover, much of our recent loss activities have been attributable
to the growth in seller-funded down payment assistance. These loans
grew from under 2 percent of all FHA home purchase originations in
fiscal year 2000 to greater than one-third of purchase originations in
fiscal year 2007 and 2008. The seller-funded down payment originations
result in completed foreclosure at three times the rate of loans where
borrowers provided their own downpayments and while they only
represented 12 percent of the FHA portfolio at the start of 2008,
accounted for 30 percent of all foreclosure completions that year. The
termination of this program should substantially reduce FHA loses on
new originations in the years ahead.
Several factors should mitigate the damage that the current deep
recession wreaks on FHA's portfolio. First, before mid-2008, FHA's
constrained loan limits reduced its market share and hence its exposure
in some of the Nation's highest-cost housing markets, including
California, where price declines and related foreclosure activity have
been particularly intense.
Second, FHA has been attracting better quality borrowers in the
last year. With much tighter underwriting standards in the private
market, more higher quality borrowers can't qualify for conventional
financing and end up with FHA-insured loans. Credit scores for new
borrowers grew sharply in 2008, averaging over 680 at the end of 2008,
compared to prior year averages of around 640. This is a positive
development although, given the dynamic housing market, it is difficult
to say how long this trend will continue in the future.
FHA is now playing its traditional role in today's turbulent
market. But it's important to understand the positive trends as well.
My goal is to continue my efforts to identify both the existing
strengths and weakness of FHA, to work with Congress and the rest of
the administration to make sure that FHA has the right healthy program
mix and pricing structure, is actuarially sound, and the organizational
capacity to continue to expand homeownership opportunities to those
families traditionally not well served by the private market place.
ENHANCING FHA OPERATIONS
Since FHA insurance is backed by the full faith and credit of the
United States Government, I want to assure the market participants that
FHA insurance is as reliable as ever and there is no possibility of FHA
``running out of money.'' Under authority provided to all Federal loan
programs, FHA has indefinite resources to honor its outstanding
commitments. At the same time, I want to reiterate my concern that FHA
does need to make significant business process improvements to cope
with growing demand and secure state-of-the-art fraud detection and
risk management systems.
Expanding Use of Automated Risk Management Tools
It appears to me that FHA relies too heavily on manual processes
and needs to adopt more automated processes for underwriting and risk
management. Today, approximately 90 percent of FHA's 850 Office of
Single Family staff and 100 percent of its contract dollars are devoted
to risk management practices. They perform three types of risk
management duties: assessing and monitoring business participants in
FHA business, including lenders and appraisers; evaluating individual
loan files to ensure compliance with FHA underwriting standards; and
monitoring the entire insurance portfolio, by analyzing performance
trends. The concentration of so many resources on quality control means
that simply freeing up staff from other functions to provide additional
support is not an option; there are very few staff who do anything but
quality control.
Underwriting.--Working in partnership with the GSEs, FHA developed
and utilizes an automated underwriting engine, but has not been able to
keep it updated for analytic, market and technological changes. This is
an area I'll look to improve. Greater reliance and application of
automated underwriting systems would also enhance uniformity in the
application of policy changes, which are now subject to interpretation
by four FHA Homeownership Centers (HOCs). Getting organizational
standards aligned with centralized oversight is critical, as is the
need to continuously enhance the training of existing staff in FHA's
own rules and procedures.
Fraud Detection.--Technology can also enhance FHA's fraud detection
by borrowers. Automated risk management tools are being used industry-
wide with great success, offering an efficient and effective means to
access a large amount of critical information that can be used to
detect the most common types of mortgage fraud--falsification of
borrower identity, income, and employment and misrepresentation of
property value.
Better automated tools will expand FHA's ability to closely monitor
past and present practices of FHA-approved lenders and appraisers.
Specifically, the best industry tools tap into public data sources that
provide FHA with information that is not readily apparent in individual
loan files or in the FHA-specific activities of lenders and appraisers.
Access to this broader mortgage-related data set will help FHA uncover
problematic practices before FHA insures loans or grants approval to
lenders and appraisers to participate in FHA programs.
To that end, we have already secured the use of anti-fraud
technology for our HOPE for Homeowners program and are now looking to
expand the use of that tool to all of FHA's single family business.
Unfortunately, by statute, the HOPE for Homeowners funding cannot be
used to support the core FHA refinance and purchase programs. Thanks to
our fiscal year 2009 appropriation, we now have funding and an existing
contract to begin testing the use of the fraud detection tool on the
entire FHA single family portfolio. The pilot will serve as the basis
of the framework for full implementation of the tool in fiscal year
2010.
These efforts tie in directly to the Obama administration's multi-
agency ``Combating Mortgage Fraud Initiative.'' Under this initiative,
HUD and FHA will be playing a central role, and the Department has
requested additional 2010 resources specifically for investing in
additional systems to enhance fraud detection and monitor lender
originations. This initiative will also include additional resources
for the FBI and the Justice Department to investigate and prosecute
mortgage fraud.
Finally, as you well know, FHA's basic program data and technology
systems are old and woefully inadequate. The basic IT infrastructure--
both hardware and software--is outdated and inflexible. The various
data systems are not well-integrated, so time is wasted reconciling
data across systems that all collect the same information individually.
Finally, and of greatest concern, the systems were written to support
business procedures that have changed substantially and the tools
themselves force FHA to maintain some practices that no longer make
sense. To that end, we will be requesting funding in our fiscal year
2010 budget for IT investments and prioritize the modernization of FHA
IT systems to upgrade our technology, to replace obsolete systems, and
to invest in infrastructure that can support our core systems into the
future.
Investing in Human Resources
Automated tools to assist in risk management will be a good
addition, but FHA also needs more staff and staff with a different
skills mix than our current workforce. We need to bolster specific
expertise and skill sets: housing finance, including underwriting and
appraisals; quality control and risk management; and policy analysis
and communications. Recent hirings have brought some new skills, but
with one of the oldest workforces of all Federal agencies, retirements
continue to take their toll.
Therefore, I want to thank you, Chairwoman Murray and members of
the subcommittee for providing an additional $12.7 million in funding
specifically for the Office of Housing to hire approximately 200
additional personnel. The agency has already developed a staffing plan
and job announcements are underway.
PRIORITIES GOING FORWARD
As noted earlier, my top priority for FHA is shoring up the basic
infrastructure of the program to ensure that it continues to meet the
needs of underserved borrowers through this current mortgage crisis.
Helping Borrowers Avoid Foreclosure.--Last month, President Obama
announced a bold plan to help borrowers avoid foreclosure. In addition
to the Making Home Affordable components that I mentioned earlier, the
President has called on Congress to enact carefully crafted bankruptcy
reform, along with important reforms to enable FHA to play a larger
role in the overall effort to stabilize our Nation's housing market. As
you know, housing legislation (H.R. 1106) has passed the House and is
now before the Senate. We hope it gets enacted quickly, so that more
borrowers can avert foreclosures
I would like to direct your attention to two critical elements of
that package: proposed changes to Hope for Homeowners and reform of
FHA's loan modification tools.
While Congress and the administration had high hopes for the Hope
for Homeowners program when originally enacted last year, it has
refinanced very few borrowers. I still believe in the original premise
of Hope for Homeowners: that many investors would be willing to accept
a refinance for less than the full amount of their loan to avoid the
uncertain possibility of future defaults. It could fill an existing
program void to refinance underwater borrowers who do not qualify for
either the Making Home Affordable refinance or loan modification
programs is a necessary addition to a comprehensive array of
foreclosure prevention tools.
We look forward to working with you and other leaders in the Senate
and House to develop a set of Hope for Homeowners programmatic reforms
that will provide HUD greater flexibility to better meet this critical
need in the marketplace.
In addition, I urge the Senate to enact pending provisions to
enhance FHA's loss mitigation program. Specifically, we are anxious to
incorporate new legislative authorities to enhance FHA's use of partial
claims to help facilitate more aggressive and timelier modifications in
FHA insured loans that are in imminent danger of default. These changes
will more closely align the FHA loan modification program with the
Making Home Affordable modification program in the conventional market.
More importantly, these reforms hold the promise of reducing losses to
the FHA fund by intervening at the earliest sign of mortgage payment
difficulties
Creating New and Innovative Products.--FHA can also be a market
leader in developing and introducing new mortgage products to make it
easier and less expensive for homebuyers to finance energy
improvements. Energy improvements reduce long-term costs to
homeownership in the form of lower utility bills. In addition to making
Energy Efficient Mortgages (EEMs) easier to obtain for homebuyers, we
can work with Fannie Mae and Freddie Mac to coordinate product designs
so that they are easily understandable and accessible to lenders and
borrowers.
Getting to scale in energy efficient mortgage development will
require the creation, testing and potential adoption of a range of
approaches. The objectives for these programs include creating the
proper incentives for energy-efficiency, being ``user-friendly'' to
both borrowers and lenders, and exhibiting a sound cost and risk
profile compared to other energy investments. Those approaches include
streamlining HUD's existing, but under-utilized energy efficient
mortgage program, and allowing greater flexibility in use of the EEM.
The program would extend the benefits of the existing FHA Energy
Efficient Mortgage (EEM) program to more homeowners through a
coordinated approach that addresses supply-side, demand-side, and
financing issues, while providing a mechanism for evaluating strengths
and weaknesses of the initiative.
Rethinking FHA's Role in the 21st Century Mortgage Market.--The
recent mortgage market meltdown has provided ample evidence that we
must work to rethink each and every aspect of the Nation's housing
finance system. Building on its historic mission, I am committed to
insuring that FHA continues to provide liquidity and stability to the
mortgage market, while at the same time developing the new products and
programs that continue to expand access to homeownership to lower-
income and lower-wealth households not well served by the private
market. This is not to say that all households should become
homeowners--we still need to provide decent and affordable rental
housing to those who by choice or necessity remain as renters. But FHA
has led the market in the past, and I am committed to making FHA once
again a market leader.
CONCLUSION
In summary, I want to assure the subcommittee that while
significant challenges exist, the FHA is prepared to meet these
challenges head on. I'm looking forward to having David Stevens
confirmed and take the reins at FHA.
Together we are committed to an ambitious reform agenda:
--Modernizing FHA's core technology systems;
--Enhancing our business practices;
--Ferreting out fraud among borrowers and lenders;
--Fixing and scaling up the Hope for Homeowners refinance program for
``underwater'' borrowers;
--Revamping FHA loan modification efforts to reduce foreclosures;
--Stimulating new energy efficiency mortgage products into the
market; and
--Restoring FHA to a respected position of leadership in the
marketplace.
I want to thank you for having me here and I'd be happy to answer
any questions.
Senator Murray. Thank you very much, Mr. Secretary.
We are now going to a round of questions by subcommittee
members. We will limit them to 5 minutes because we do have
votes starting at 11:30 and we have a second panel. We want to
make sure we have enough time to get to a second round for the
Secretary as well as do that.
Let me begin, Mr. Secretary. Back in November right before
the election, Business Week magazine published a cover story
that was entitled ``FHA-Backed Loans: The New Subprime.'' It
pointed out instances where subprime lenders that had been
disciplined in several States were being allowed into the FHA
guarantee program. It pointed out times where companies that
had officially filed for bankruptcy were still allowed to write
mortgages with an FHA guarantee. It even pointed out companies
that never verified incomes when they made subprime mortgages,
but now have been allowed to reorganize themselves into
companies that are participating with the FHA.
The number of brokers and lenders doing business now with
the FHA has gone through the roof. As of the end of 2008, FHA
had over 3,300 approved lenders. That is a 525 percent increase
compared to 2006. When you add the number of brokers now doing
business with the FHA, the numbers have skyrocketed from 16,000
in mid-2007 to 36,000 today.
I wanted to ask you if you believe the FHA has adequate
procedures in place to screen out lenders and brokers that
caused this housing crisis. And how do you do that when the
number of lenders has increased by more than 500 percent in
just the last 2 years?
Secretary Donovan. Chairwoman, a very, very important
question. Let me start first by making a distinction that I
think is critically important. I am absolutely concerned and
very focused on the issue of ensuring that troublesome lenders
don't migrate to the FHA programs. But I also want to be clear
that FHA's products are not subprime products. We have never
and we will never allow products that have exploding or hidden
fees that are short-term with large adjustments in interest
rates.
If you look at the default rates today and compare FHA's
roughly 7 percent default rate to the roughly 23 percent
default rate in the subprime market, I think it's clear that on
a product basis FHA is not subprime and will never be subprime.
That certainly will not happen under my watch.
TROUBLESOME LENDERS
But to get more directly to your question, there is
absolutely more that we must do and that we are doing to ensure
that we do everything we can to stop the migration of
troublesome lenders into the FHA products. We've already taken
significant action under my watch to begin to do that. In fact,
today we are issuing a mortgagee letter to remind lenders of
the procedures and processes that they must put in place.
A couple weeks ago we activated SWAT teams to look at and
make visits unannounced to ten of the most troublesome lenders,
and those teams will continue to focus on areas where we have
troublesome data from those. There are a range of other things
that I talked about in my testimony that we must do: improve
our systems, improve our training and technology.
In addition to that, I would highlight that we have worked
closely with you and the subcommittee and currently there are
in the H.R. 1106 legislation that is before the Senate at this
point increased authority that would allow us to screen out
lenders where they have been suspended or debarred from other
programs and to give us other additional authorities to stop
the migration of lenders.
So while we are acting quickly to try and limit that, and
I'm certainly concerned about it, I think there is also more
that we can do on a legislative basis to try to make sure we do
that.
Senator Murray. As an appropriation subcommittee, our
interest is knowing, do you have the resources to adequately
screen all of those people at this time?
Secretary Donovan. What I would say is that the additional
resources that we were provided in the 2009 bill by you are
very helpful, but I think we need to go further in addition,
particularly on the systems front, and I look forward to
working with you as part of the 2010 process, as well as report
back to you on what we're doing with the investments in 2009.
Senator Murray. Okay and we will be asking those questions
as we move forward.
Recently the FHA has experienced a spike in early payment
defaults, defaults when the borrower has made no payment or
very few payments before the FHA had to make good on its
guarantee. In your view is this just a sign of a worsening
economy or do you believe the FHA is now covering loans that
should never have been made in the first place?
EARLY PAYMENT DEFAULTS
Secretary Donovan. We've looked carefully at this data and
what we've seen is that early payment defaults have increased
substantially, but they've actually increased slightly slower
than the overall growth in the volume in the FHA program. So in
other words, they've gone from about .8 percent to roughly .6
percent of all of the originations. So yes, there has been a
significant increase. What we've also found is that the large
majority of those early payment defaults result from job loss
and other issues that are directly tied to the economy.
So, having said that, though, I do think there are--and
I've talked with Ken Donohue very recently about this--there
are ways that we can begin to ensure--and this was part of the
mortgagee letter that we released today--to ensure that we are
getting all of the detailed information we need on those early
payment defaults, to look at them more closely and ensure that
fraud is not happening even in a small percentage of those.
Senator Murray. Thank you very much.
Senator Bond.
Senator Bond. Thank you, Madam Chair.
I believe most people know my view on the no down payment
mortgage issue, but for the record, with the movement starting
on the other side for reinstating that, what's your view on no
down payment mortgages?
Secretary Donovan. Let me start by saying thank you,
Senator Bond, and to the chairwoman, for your leadership, and
the entire subcommittee, on this issue. When you look at the
facts, what we have seen is a dramatic increase in defaults
from these seller-funded down payment programs. They have
accounted for roughly a third of all the claims in recent
months at FHA, and I think it's been a critically important
change to make sure that we don't allow those types of programs
to continue to hurt the future of FHA. So I want to thank you
for your leadership on that.
Senator Bond. Thank you for your clear statement.
Mr. Secretary, on the question of defaults and
foreclosures, how does FHA define a default and when does it
move to foreclosure? We have, you said, 7 percent essentially
in default. What--where do you decide when to go for mitigation
into declaring a default or foreclosure? How does that process
work?
LOSS MITIGATION
Secretary Donovan. Yes. I do want to say that there have
been significant efforts at FHA around loss mitigation. I think
we've seen through the efforts more broadly that we've made
through the Making Home Affordable Plan that there is an
opportunity to avoid the major costs that foreclosures have
both on families and communities.
But as you rightly point out, there are situations where
you can't go far enough to save that home and that foreclosure
is the only option. What we've seen over recent months is that
in roughly two-thirds of the cases where we have a default we
are able to figure out some loss mitigation that will allow
that person to stay in their home and to avoid foreclosure,
whereas about one-third of the cases that we look at where
they're seriously delinquent end up in foreclosure immediately.
What we've also seen--and you've been very clear that this
is an important thing to look at; you're absolutely right--
making sure that that loss mitigation that we're doing is
successful in the long term. Our recent data indicates that 2
years after loss mitigation more than 90 percent of the
modifications and adjustments that we're making continue to be
successful. So we do feel like our loss mitigation efforts have
generally been successful. We continue to look closely at the
fact of whether there are other things we can do. We're making
some modifications along the lines of the Making Home
Affordable Plan. There are some changes in H.R. 1106 that we do
think are helpful for partial payments of claim in certain
situations that we don't currently have authority on. But
that's an explanation of the way our programs are working.
Senator Bond. What is the cost on the two-thirds that you
have been able to go into loss mitigation? Is there a portion
of that loss assumed by the FHA? What are the costs of those
mitigations to the FHA fund?
LOSS MITIGATION COSTS ON FHA FUND
Secretary Donovan. I actually have a precise number on
that. This year there were about 48,000 loss mitigation cases
and the cost of those mitigation efforts was about $107
million. If we had had a loss on all of those 48,000, the value
of those mortgages was about $2.5 billion. I'm not saying we
would have taken the full loss on that, but you can see that
should they be successful, those loss mitigation efforts, that
$107 million cost far outweighs the losses we would have had.
Senator Bond. Yes. We're all about keeping people in homes
that they can afford and making reasonable adjustments. I'd
like to see the originators sharing more of that cost and not
just the taxpayers, because there ought to be some burden on
the people who write the mortgages that aren't working. In the
private sector, I know there is a loss. But certainly
mitigation of $107 million compared to what the burdens would
have been makes some sense.
Do you know how many mortgages currently are in mitigation
and do they differ from State to State?
MORTGAGES CURRENTLY IN MITIGATION
Secretary Donovan. We do see significant differences State
to State. I gave you the figure, the 48,000 that we've done
over the past year. I don't have an exact number here. I'd be
happy to provide you more information of the details of what's
in mitigation.
What I would say is that, unlike the broader mortgage
market, where our delinquencies in the rest of the market have
been heavily concentrated in States like California, Florida,
Nevada, about 50 percent of all foreclosures in the country are
in California and Florida, we're seeing FHA's portfolio is,
because of the loan limits, very differently spread
geographically.
So Midwest is where we have a lot of our loss mitigation
efforts and we have seen a higher level of foreclosures in
those areas, Detroit in particular, Ohio. Senator Voinovich is
here. We've had discussions about Cleveland and other efforts
there where we can try to minimize the effect of those
foreclosures in those communities.
Senator Bond. Thank you, Madam Chairwoman.
Senator Murray. Senator Lautenberg.
STATEMENT OF SENATOR FRANK R. LAUTENBERG
Senator Lautenberg. Thank you, Madam Secretary. I ask
consent that my statement be included in the record.
Senator Murray. Without objection.
[The statement follows:]
Prepared Statement of Senator Frank R. Lautenberg
Madam Chairman, a home is more than just a building. It is a place
of safety from the elements. It is a place for families to spend time
together and for children to do their homework. And it is a source of
financial security that families use to build their future.
That's the reason this housing crisis weighs so heavily on our
Nation: it not only puts our economy at risk--it puts families at risk,
too. Millions of families have already lost their homes because they
were sold risky sub-prime mortgages--and millions more are at risk from
job losses and other unexpected expenses. Instead of realizing the
American Dream, 60,000 households in New Jersey may have their home
taken away this year.
People are working harder than ever before--and still losing their
homes. Congress and the administration must continue to take steps to
stop the foreclosure crisis. The Federal Housing Administration will
play a big role in our efforts. During the housing boom, homebuyers--
even those who qualified for FHA-backed loans--turned to the private
sector for their loans. But now that the housing bubble has burst,
borrowers are turning back to the FHA again. The agency has become a
life raft in a sea of debt for current homeowners looking to refinance
into a fixed-rate mortgage. And it is a source of hope for first-time
homebuyers.
I am pleased that the Economic Recovery law included a temporary
increase of the FHA's maximum loan limit for high-cost metropolitan
areas to help homeowners and homebuyers more easily get FHA loans.
There are 12 counties in New Jersey that will benefit from this change
and I encourage our residents to take advantage of these resources.
But with its new responsibilities and its new customers, FHA may
not be able to keep up with consumer demands. When FHA lost business
during the housing boom, it also lost staff and attention from the last
administration.
The average computer system at HUD is about 18 years old. I came to
the Senate from a company that depended on computers and technology.
And I know you cannot manage billions of dollars worth of business with
too few staff or technology that is outdated.
In these tough times, we need to make sure FHA has the funding and
staff to do its job.
Americans are relying on FHA to provide mortgages, investigate
fraud, and help revive the housing market. That is no small task. I
look forward to working with this subcommittee to accomplish these
important goals.
Senator Lautenberg. Mr. Secretary, when I see you here and
look at your history of service to Washington and to a previous
administration, you look so young. The job must be easy.
Right now New Jersey, for instance, currently has a surplus
of vacant affordable housing because prospective home buyers
can't find an agency to insure their loan. Now, will FHA
consider changing its policy so it can start insuring loans on
properties that are restricted for low- and moderate-income
homeowners?
Secretary Donovan. Two things I would say about that,
Senator. And I appreciate your comments about my appearance of
youth despite the difficult circumstances that we're facing in
the housing market and the country today.
LOW- AND MODERATE-INCOME HOMEOWNERS
What I would say is, first of all, that in many ways this
is the time that FHA needs to be ensuring that there's adequate
credit available to low- and moderate-income homeowners. We
continue to be a source for people traditionally left out of
the market, particularly low- and moderate-income buyers, to be
able to become homeowners.
Further than that, as you point out, there are vacant homes
around the country and it's been very important through our own
foreclosures, as well as through partnership with funding that
Congress has appropriated and we're very appreciative of
through the recovery bill under the Neighborhood Stabilization
Program, to begin to try to buy up and insure that foreclosed
homes get rehabilitated and get sold again as quickly as
possible, oftentimes to low- and moderate-income borrowers.
So we are working carefully, closely with our own portfolio
of REO homes with Neighborhood Stabilization funding to make
sure that we limit the period of time and the impact that those
vacant homes have on communities, particularly low- and
moderate-income communities.
Senator Lautenberg. So FHA essentially writes off the loss
from what may have been a subprime loan, and that's FHA's
responsibility, is it not? I mean, the failures are FHA's, fall
into FHA's lap.
Secretary Donovan. We do not take losses on any subprime
products. The subprime products have not been part of FHA's
programs. We do have losses on traditional FHA products.
Senator Lautenberg. The regulations were there to prevent
that from happening before the crisis began developing?
Secretary Donovan. That's right. But what we will do
through the funding in the Neighborhood Stabilization Program,
which runs actually through our Community Development Block
Grant rather than FHA--that's where we have funding
appropriated by Congress to work with local areas to acquire
those homes that may have had subprime mortgages on them.
There also is the Making Home Affordable Plan, which is
modifying loans to affordable interest rates that might have
been subprime to begin with.
Senator Lautenberg. Because it's a sad situation to see
people who need housing and empty houses and not to be able to
at least get them out of the weather and keep them whole for a
while.
Secretary Donovan. That's absolutely right. In fact, when
the President put forward the Making Home Affordable Plan we
did extensive research and believe that by stopping those
foreclosures and avoiding the vacancies of those homes, the
blight that they can introduce into a community, we can save
all American homeowners, not just the foreclosed homes but all
American homeowners, roughly $6,000 on average in the values of
their homes. So that goes exactly to your point.
Senator Lautenberg. The FHA currently funds its own
operations through homeowner fees. With the increase in demand
for FHA-backed mortgages, can FHA adequately continue to help
home buyers, homeowners, and still remain self-funded?
FHA SOLVENCY
Secretary Donovan. Let me say, Senator, we are looking very
closely at that issue, at the premiums that we charge, at the
losses that we have. At the time that we provide details of the
President's 2010 budget, we will have detailed information in
there about whether we believe the current insurance premiums
fully cover the losses in the programs.
We have had to take over the last few years' additional
losses against the claims and the foreclosures, but we are
looking very carefully and we should within a few weeks be able
to present to you our estimates of whether it will be self-
financing in the current programs.
Senator Lautenberg. Thank you.
Thanks, Madam Chairman.
Senator Murray. Senator Voinovich.
STATEMENT OF SENATOR GEORGE V. VOINOVICH
Senator Voinovich. Thank you. I would like to ask that my
written statement be made part of the record.
[The statement follows:]
Prepared Statement of Senator George V. Voinovich
Thank you Senators Murray and Bond for holding this hearing on
FHA's role in the current housing crisis. As many of you may know, Ohio
has been hit very hard by the housing crisis, and I have long been
concerned about the foreclosure tornado ripping through our cities and
neighborhoods. According to the Mortgage Bankers Association's most
recent report, Ohio is among the top 10 States in the Nation in
foreclosures, 4.09 percent of mortgages are in foreclosure in Ohio and
another 9.49 percent are past due. Unlike other States in the Nation,
Ohio's housing crisis has not stemmed from speculation or the bursting
of a housing bubble. The Foreclosure crisis in Ohio has been the result
of the economic downturn and irresponsible lending practices.
Over the past few years, I have worked to stop the rise of
foreclosures in my home State. I introduced the first piece of
legislation enacted to address the foreclosure crisis, The Mortgage
Debt Relief Act, which was signed into law December 2007. In addition,
I have worked relentlessly for FHA reform. Last Congress, I introduced
the Expanding American Homeownership Act to allow homeowners facing
foreclosure or resetting interest rates to refinance without the usual
burdens associated with a FHA loan by increasing and simplifying FHA's
loan limits and loan terms. I was pleased when similar FHA
modernization legislation was enacted in the Housing and Economic
Recovery Act last summer. But I am also concerned about the recent
trend of increased defaults of FHA loans and what this means for the
solvency of the FHA. FHA must balance the responsibility to provide an
adequate resource for refinancing with the responsibility to make sound
loans. I look forward to hearing from our witnesses about additional
ways we can increase FHA's fiscal soundness and effectiveness.
One of the primary missions of the FHA is to reach borrowers who
are underserved, or not served, by the existing conventional mortgage
marketplace. It is important that during this time of economic
difficulty, FHA continue to serve this critical role in the housing
market. During past recessions, including the downturns of the early
1980s, FHA remained a viable credit enhancer and was therefore
instrumental in preventing a more catastrophic collapse in housing
markets and a greater loss of homeowner equity. As housing prices fall
and credit remains difficult to obtain, many homeowners and prospective
homebuyers will need the less-expensive, safer financing alternative
that FHA mortgage insurance provides. With the FHA's share of the
mortgage market up from 2 percent 3 years ago to nearly one-third of
mortgages today, there is no doubt that consumers are flocking to FHA
loans.
As we continue to work together to restore the housing market and
FHA's fiscal soundness, I hope the FHA can establish itself as a
resource to the many families who are searching for a way to refinance
in order to stay in their homes, or who are looking to make a first
time home purchase, while maintaining their lending standards.
Senator Voinovich. The chairman has talked about the fact
that you've had a 500 percent increase in lenders, and what I'd
like to know is--you don't have to give it to me now because
you probably haven't got the numbers--but how many people do
you have working in that area right now, and with the
additional work that you have are you going to be able to
handle that work with the current folks that you've got, and
how many more do you think would be needed to do the job the
way it's supposed to be done?
INCREASE IN FHA LENDERS
Secretary Donovan. That's a very important question. First
of all, let me just say, while we do have a large number of new
applicants for FHA business--you've got the numbers right, over
a fivefold increase in the last few years--our volume has gone
up not quite that much, but close to that, and our largest 10
lenders continue to be roughly 90 percent of all loans
originated. So while we do have lots of new lenders, they tend
to be much smaller lenders and not in aggregate to originate
that much of the business.
What I would say is we have begun hiring a significant
number. I'd be happy to provide you detailed information about
exactly how many of those folks are doing lender approvals and
lender monitoring. But we have begun to increase that, and I
think in the 2010 budget you'll see our proposal for the
additional staff that we would need to be able to do that. I'd
be happy to provide more details to you.
DEMOLITION OF PROPERTIES
Senator Voinovich. The other thing that we did when I
talked to you in your office was the fact that in my city we
have, the city of Cleveland, a provision that says that when
you sell a property you're supposed to notify the person that
it's on the demolition list. I'm pleased that you have changed
that policy and you're going to abide by that ordinance, and
I'm sure there are ordinances all over the United States like
it.
The thing that's troublesome to me is that in so many of
your properties they get on the demolition list, and when they
do it appears that--for example, you're selling properties to
the city of Cleveland right now that are in pretty bad shape.
But you're expecting the city to pay for the demolition of
those properties with the NSP funds or some other funds.
I just wonder why doesn't HUD, when they have properties
that have so deteriorated that they have been condemned not pay
for the demolition of those properties. I know you hire people
to go out and they're supposed to maintain them, but from my
experience they go out, they allegedly maintain them, and
before you know it they're in a position where they're on the
demolition list.
I just wonder if somebody ought to look at maybe the people
that you're hiring to try and either get them to do a better
job or look at it from the point of view that they're your
properties, they've gotten in bad shape, and an ordinary person
owning them would have to pay for demolition. Why doesn't HUD
pay for the demolition?
Secretary Donovan. First of all let me say, the leadership
and the approach that I want to bring to HUD is not to be
defensive. You brought us an issue about the way we were
coordinating or not coordinating with local areas on this issue
of demolition and where homes have been condemned. You were
absolutely right. We made a change to our policy that's now
nationwide. So I want to thank you publicly for bringing that
to our attention and working with us on that. That's the kind
of approach I'll try to bring to any issue where we work
together.
I think it is a fair point that we ought to be looking more
broadly at our policies around our foreclosed homes and to be
working more closely with cities across the country, and I
think that is an issue worth looking at and evaluating whether
we ought to be involved in the cost of the demolitions of those
homes.
Senator Voinovich. I'd like you to look at it and the
reason why you're not--from a public policy, it seems to me you
should take care of them if you let them get in bad shape. But
there's a reason why you don't have it in your budget to get
the job done.
I've got three other questions real quick. One of them is,
you've received recommendations for a change in regulations for
the NSP program and I'd like to know the status of those
recommendations, because they come from some very responsible
organizations.
The other thing is, you've got the Home for Homeowners
Program and then the President's Making Home Affordable and I'd
like to have some written explanation as to what's the
difference between the one program and the other program.
Last but not least, on the Homes for Homeowners or Hope for
Homeowners, whatever they call it, that very few loans have
been made under that program and I'd like to know why and what
are you doing to remedy it so that more people will be able to
take advantage of the program?
Secretary Donovan. Do you want me to answer now?
Senator Voinovich. No, I just pose those. I'd like to have
those, the answers to that, in writing if I could.
Secretary Donovan. Absolutely, I'd be happy to do that.
Senator Murray. If you could provide those in writing, the
subcommittee would appreciate it, knowing that as well. So
thank you.
[The information follows:]
NEIGHBORHOOD STABILIZATION PROGRAM (NSP)
HUD has developed a document responding to several NSP issues:
errors and omissions in the October 6, 2008 NSP notice as published in
the Federal Register; policy changes recommended by grantees and
interest groups; and statutory changes made by the American Recovery
and Reinvestment Act (Recovery Act) to the NSP authorizing language in
the Housing and Economic Recovery Act of 2008 (HERA). HUD will be
proposing changes to several policy areas that have been of concern to
grantees and interests groups, specifically the discount provisions and
the need for full appraisals for de minimus value properties. The
notice will also establish rules for treatment of program income
generated from the use of NSP in light of the Recovery Act's repeal of
the HERA revenue provisions and implement other changes mandated by the
Recovery Act. HUD expects to issue this document in May.
HOPE FOR HOMEOWNERS PROGRAM
HOPE for Homeowners is not a different program but an integral part
of the comprehensive approach embodied by the administration's plan,
Making Home Affordable program, which is intended to bring stability to
the housing market and help American families reduce their monthly
mortgage payments to more affordable levels, or assist homeowners with
loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity
to refinance into more affordable monthly payments.
As an integral part of the Making Home Affordable program, a
revised HOPE for Homeowners program would help reduce defaults and
foreclosures. It would assist financially struggling homeowners by
providing relief to them, stabilizing home values, and allowing lenders
to liquidate toxic assets into new and performing assets. It is
intended to help homeowners whose loans are not owned or securitized by
Fannie Mae or Freddie Mac, who are behind on their payments, who owe
far more than they are worth, and who may find that modifying the terms
of their loans is not a workable solution. The program would assist
homeowners by taking into consideration their ability to pay and making
their mortgage sustainable over the long haul.
HOPE FOR HOMEOWNERS
There are significant barriers to participation created by the
legislative language as evidenced by its restrictive eligibility
requirements, its high costs to the consumer, and the departure from
standard FHA business rules. Lenders have stated that they are
reluctant to commit the resources to such a complex and costly program,
and that it is more cost effective for them to focus their efforts on
other available loss mitigation strategies to assist homeowners.
Consequently, the administration is seeking legislative amendments
to the HOPE for Homeowners program as outlined in H.R. 1106, which
would specifically lower costs to the consumer, ease the restrictive
eligibility criteria, and make the program easier for lenders to offer.
If the eligibility criteria are amended to allow more homeowners into
the program, the premiums are reduced, and the program looks and feels
more like a standard FHA program, HOPE for Homeowners would not only be
a viable program, but would also be an attractive solution to the
obstacles faced by both the consumers and lenders.
DEMOLITION OF PROPERTIES
On average, the Department annually acquires approximately 50,000
single family properties from HUD-approved lenders. To ensure that such
properties are properly secured, maintained, and marketed for sale, HUD
uses Management and Marketing (M&M) Contractors. These contractors are
required to appraise HUD-owned properties using FHA Roster Appraisers,
establish the list price for such properties, and market and sell
properties for the maximum price the market will bear. The Department
uses this disposition strategy as it is necessary to replenish the
Mutual Mortgage Insurance Fund and is the most effective way for FHA to
generate proceeds to provide homebuyers an affordable loan financing
alternative to conventional and subprime loans.
Thus, HUD does not require its contractors to simply demolish its
properties based on their appraised value. Instead, the conditions of
the real estate markets are also factored in the contractors'
determination of the ultimate disposition or sale of a property. In
markets such as Cleveland, for example, ``hard to sell'' properties are
offered to local governments at deep discounts to further the
Department's affordable housing and neighborhood stabilization
objectives. In addition, to the extent that the Department is aware of
a HUD-owned property being condemned or due to receive a Notice of
Condemnation, HUD's contractors have been directed to disclose this
information to all potential purchasers of HUD homes.
Lastly, the Department, via its Neighborhood Stabilization Program
(NSP), has awarded the city of Cleveland more than $16 million to
address its high rate of foreclosed, abandoned properties, which
contribute to blight within many of Cleveland's neighborhoods. Under
the NSP program, local governments may acquire, demolish and rebuild,
or rehabilitate foreclosed properties using NSP Federal grant funds.
Additionally, to assist local governments in combating blight and in
maximizing their use of the NSP grant funds, the Department is offering
HUD-owned foreclosed properties valued at $20,000 or less (i.e., those
considered to be ``demolition properties'') for $100. Specifically, 211
HUD-owned properties have been held off the market by the Department,
pending a direct sale to the city of Cleveland. Many of these 211 homes
are valued at $20,000 or less, with a collective value of $2,105,200.
Senator Murray. Again, we have votes in about 40 minutes.
So I just have a couple of really quick questions and if
anybody else has any quick ones. We want to get to the second
panel.
The first one was about mortgage scams. We're seeing these
signs in communities: Call 1-800. People are being ripped off.
We put $2 million into the Appropriations Committee last year
to deal with that and $6 million to the Neighborhood
Reinvestment Corporation. Can you just share with the
subcommittee really quickly what you are doing in terms of
dealing with that?
MORTGAGE SCAMS
Secretary Donovan. Yes. This is a serious issue. I've seen
it from my own experience as a local housing official, as well
as the concerns that you're raising at the national level. Two
things that we're doing: One is we're moving very quickly, and
I've already sat down and met with Attorney General Holder
about this issue, and we are beginning to work together with
them, along with the FBI and our own IG, to try to target these
rescue scams in a range of areas, as well as bringing in State
attorney generals from around the country, who oftentimes are
on the front lines of this issue.
I think you'll also see as we get into the details of our
budget proposals that this is an area where we think not only
through FHA, but also through our fair lending area, because
often these scams tend to target minority communities more
heavily than they do other communities, that we will have an
increased focus both in funding and programs on this issue.
Senator Murray. We're going to continue to follow that as
well.
I would like for you to provide in writing--we are
guaranteeing loans now that are as large as $730,000. I
supported that. I thought it was the right move. But I would
like you to share with the subcommittee the default and
delinquency experience of the borrowers with those higher loans
as we look to what our next policy is going to be.
Secretary Donovan. Absolutely.
Senator Bond. Madam Chair, I'm going to keep this very
short because I want to--we have to move on and we need to hear
the IG. I would just note that last year, at the recommendation
of the Treasury, I introduced the origination commission
proposal to regulate the clicks. We regulate the bricks with
the savings and loans and the banks, but nobody is regulating
the people who don't originate loans, and that is one reason
why I think there are 58 criminal indictments just in the
Eastern District of Missouri alone and more than 100 under
investigation.
I would like any thought that the Secretary has on whether
that is the right way to go and any suggestions you have on the
legislation.
I do want to ask one last question on the HECMs. How many
have been originated and how many defaulted? Are there any
specific problems with the implementation of the program and
the financial risk to the United States?
HECMS
Secretary Donovan. I'd be happy to have a further
discussion and provide you more detailed information on the
HECMs. What I can tell you because of the nature of the program
it doesn't have a default issue per se in the same way. But
what we've seen is in the entire history of the program under
10,000, about 9,300 HECM loans have been assigned to HUD out of
a total of 391,000 loans. So it's a very small percentage.
We do see some increase, given the economic climate
recently, in HECM borrowers who are unable to pay their taxes
and insurance, and we are looking very carefully at that issue
to make sure that our HECM lenders are responding
appropriately. I think that's an area where we have to make
sure that we don't end up, because of the nature of the HECM
program, with a problem down the line. So that's an area where
we need to have some increased focus.
Senator Bond. I should have phrased the question
differently. But if people start living a whole lot longer, as
all of us senior citizens hope we will, there is a potential
downstream risk, and I don't know whether you've looked at it.
We'll be happy to discuss that with you.
Thank you, Madam Chair. Thank you very much, Mr. Secretary.
Secretary Donovan. Thank you, Senator.
Senator Murray. Mr. Secretary, thank you very much for your
testimony today. We will have a number of questions in writing
that we'll submit to you and hope we can get a prompt response.
But thank you very much.
Secretary Donovan. I appreciate your interest in this issue
and all of the collaboration we've had thus far. Thank you.
Senator Murray. We will now turn to our second panel and if
those witnesses would please come forward. We're going to be
hearing from our Inspector General, the Honorable Kenneth
Donohue, who will begin his testimony as soon as he is at the
table here. We also will be hearing from Mr. Lennox Scott, who
is the Chief Executive Officer of John L. Scott Real Estate in
Bellevue, Washington, and Ms. Mia Vermillion, who is a Senior
Loan Consultant with Guild Mortgage in Lakewood, Washington.
So once our witnesses are in front of us we will begin
their testimony. I want all of you to know we do have your
testimony in writing. It will be part of the record and we
would ask each of you to limit your verbal testimony to 5
minutes.
Mr. Donohue, we'll begin with you.
STATEMENT OF HON. KENNETH M. DONOHUE, INSPECTOR
GENERAL, DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT
Mr. Donohue. Chairman Murray, Ranking Member Bond, members
of the subcommittee, thank you for inviting me here today. I
appreciate the opportunity to testify on the role of FHA in
addressing the housing crisis.
Through our work in auditing and investigating many facets
of FHA programs over the course of many years, we have had
concerns regarding the FHA systems and infrastructure to
adequately perform its current requirements. This was expressed
by the OIG to the FHA prior to the current influx of loans and
numerous proposals that expanded its reach. We remain keenly
interested in FHA's ability and capacity to oversee newly
generated businesses.
The volume of single family loans has increased by tripling
from $59 billion in 2007 to over $180 billion in 2008. FHA's
share of insured endorsements has increased from 21 percent to
70 percent, which includes home sales and refinancing.
We believe there's a critical need for more resources for
FHA: (1) to enhance its IT systems; (2) to increase personnel
to deal with escalation in processing requirements; (3) to
increase its training of personnel to maintain a workforce with
the necessary skills; (4) to oversee the numerous contractors
it maintains; and (5) to increase its oversight in all critical
front end issues, including areas such as appraisal, lender
approval, and underwriting process.
We are gratified the new penalty provision we helped craft
was inserted into the HERA bill. That statute now creates a
penalty for committing fraud against FHA programs and will be a
useful tool for prosecutors and the law enforcement community
to employ.
The results of the latest actuarial studies show that HUD
has sustained significant losses in its single family programs,
making a robust program reserve smaller. As of September 30,
the fund's economic value was an estimated $12.9 billion, an
almost 40 percent drop from over $21 billion a year ago. The
current value represents 3 percent of the mortgages insured by
FHA. Although above the 2 percent ratio required by law, it is
below the 6.4 percent ratio for the same time last year.
If more pessimistic assumptions are factored in, the ratio
could dip below 2 percent in succeeding years, requiring an
increase in premiums or Congressional appropriation
intervention to make up the shortfall.
The tightening credit market has increased FHA's position
as a loan insurer and with that is coming an increase in
lenders and brokers seeking to do business with the Federal
programs and a concern regarding some of these loan
originators. For example, we currently have under investigation
several FHA lenders who are also lenders in the subprime
market. The movement towards HUD is already under way, as
reflected in the recent statistics. FHA lender approvals
increased 525 percent in a 2-year period. We note that FHA and
GNMA's lenders and issuers' approval processes are largely
manual. Both groups will be challenged within current
constraints to keep up with the increased volume. Given the
recent aggressive history of the industry that is now seeking
to do business with the FHA, we think it may be prudent to
review standards for participation.
As you can see from my exhibit, the current application
contains a certification for those seeking to do business with
GNMA that if they knowingly make a false statement they could
be subject to criminal penalties, such as 18 U.S.C. 1001. There
are no such attestation requirements for lender applicants with
the FHA.
Moreover, we have recently initiated inspection of the
mortgage review board enforcement actions and its effectiveness
in resolving cases of serious noncompliance with FHA
regulations, particularly during the period of significant
changes in the housing market.
Another area of concern is the growing home equity
conversion mortgage program. We are aware that the larger loan
limits can be attractive to exploiters of the elderly whether
it is by third party or even family members who seek to strip
equity from seniors. Due to the vulnerability of the population
this program serves, we are also concerned about the evasions
of statutory counseling requirements.
PREPARED STATEMENT
Finally, the HUD IG has initiated a broad range of
strategies to leverage limited resources. As you can see from
the other exhibit, we are key partners in a variety of Federal
and State task forces, such as the Department of Justice
National Mortgage Fraud Teams and in many key jurisdictions
across the country.
Thank you, madam.
[The statement follows:]
Prepared Statement of Hon. Kenneth M. Donohue
Chairwoman Murray, Ranking Member Bond, and members of the
subcommittee, thank you for inviting me to testify today. I very much
appreciate the opportunity to speak on the important issue of the role
of the Federal Housing Administration (FHA) in addressing the housing
crisis currently confronting our Nation.
BACKGROUND
The U.S. Department of Housing and Urban Development (HUD)
Inspector General is one of the original 12 Inspectors General
authorized under the Inspector General Act of 1978. The OIG strives to
make a difference in HUD's performance and accountability. The OIG is
committed to its statutory mission of detecting and preventing fraud,
waste, and abuse, and promoting the effectiveness and efficiency of
Government operations. While organizationally located within the
Department, the OIG operates independently with separate budget
authority. This independence allows for clear and objective reporting
to the Secretary and to the Congress.
The Department's primary challenge is to find ways to improve
housing and to expand opportunities for families seeking to improve
their quality of life. HUD does this through a variety of housing and
community development programs aimed at helping Americans nationwide
obtain affordable housing. These programs, which include Federal
Housing Administration (FHA) mortgage insurance for Single-Family and
Multifamily properties, are funded through a $45+ billion annual budget
and, in the case of FHA, through mortgage insurance premiums.
The last 2 years have seen enormous and damaging developments in
the mortgage market: the dissolution of the subprime and Alt-A loan
markets; dramatic drops in housing prices in most areas of the country;
a concomitant rise in default and foreclosures; financial insecurity in
the mortgage-backed securities markets represented by the Government
takeover of Fannie Mae and Freddie Mac; the collapse of credit markets;
and, as a primary vehicle to address these issues, an urgent reliance
on the FHA to bolster the mortgage market. As the Mortgage Asset
Research Institute has stated, the unprecedented onslaught of financial
losses, reputational damages, and rehabilitative public policies will
forever reshape the mortgage industry.
While there are other programs at HUD that are being utilized in a
significant way to help stimulate the economy (i.e., billions of
dollars in new funding to Community Development Block Grants, to
increased Public Housing assistance, etc.), which are also vulnerable
to fraudulent and abusive activities, the focus of this testimony is on
the salient issues facing the FHA program due to the mortgage crisis
and to an increased reliance on our Department to resolve foreclosure
matters at this critical juncture. The current degree of FHA
predominance in the market is unparalleled.
First off, to put the FHA issues into perspective, we have recently
stated in testimony to the Congress that, through the multitude of our
work in auditing and investigating many facets of the FHA programs over
the course of many years, we have had, and continue to have, concerns
regarding FHA's systems and infrastructure to adequately perform its
current requirements and services. This was expressed by the OIG to the
FHA through audits and reports regarding a wide spectrum of areas prior
to the current influx of loans coming into the program and prior to the
consideration of the numerous proposals that expanded its reach. We
continue to remain concerned regarding FHA's ability and capacity to
oversee the newly generated business.
Some of these are long-standing concerns that go back to unresolved
issues highlighted in our work products from as far back as the early
to mid-1990s. In my discussions with the Secretary, it is clear he is
committed to positioning the Department as rapidly as he can to try to
deal with the changing dynamics. As the President recently stated,
however, the Government is an ocean liner, and not a speed boat, when
it comes to moving it in a new direction. The same can be said for some
of our departmental programs.
THE EVOLVING LANDSCAPE
The past year and a half have certainly produced a lot of changes
and initiatives. In response to increasing delinquencies and
foreclosures brought about by the collapsing subprime mortgage market,
in September 2007, HUD acted administratively to provide mortgage
assistance through the FHA Secure program to refinance existing
subprime mortgages. The program was expanded in May 2008 to provide
lenders the added flexibility to refinance and insure more mortgages,
including those for borrowers who were late on a few payments and/or
received a voluntary mortgage principal write-down from their lenders.
This program served a fraction of its anticipated scope. The FHA
recently issued a formal letter terminating the program stating that
``maintaining the program past the original termination date would have
a negative financial impact on the MMI Fund.''
The Housing and Economic Recovery Act (HERA) passed last summer,
created a new Hope for Homeowners program to enable FHA to refinance
the mortgages of at-risk borrowers. While activity to date has been
limited, the FHA was authorized to guarantee $300 billion in new loans
to help prevent an estimated 400,000 homeowners from foreclosure. The
Congress is working on legislation to revise this program so as to
increase participation. These proposals, and others, to remedy a
dysfunctional mortgage market are likely to increase the challenges to
the OIG. While the goal to help homeowners in distress is important, a
redraft to relax qualification requirements for borrowers and lenders
may create a situation that could be exploited by fraud perpetrators to
take advantage of desperate homeowners, at risk-lenders, and the FHA
insurance fund. The HERA legislation also authorized changes to the
FHA's Home Equity Conversion Mortgage (HECM) program that will enable
more seniors to tap into their home's equity and obtain higher payouts
which raises new oversight concerns for this agency.
As we turn to today's environment, the volume of Single-Family FHA-
insured loans has enlarged in fiscal year 2008 by tripling from $59
billion in fiscal year 2007 to over $180 billion in fiscal year 2008.
The latest figures from Single-Family market comparisons from the first
quarter of fiscal year 2009 show that FHA's total endorsements have
increased from 21 percent of the market the year before to 70 percent
of the market which includes both home sales and refinances. FHA's home
sales' market share (excluding refinances) has increased from
approximately 6 percent to close to 20 percent during this time period.
Many potential homeowner loans may not have come to the agency yet as
some of the new initiatives are still taking hold and the industry is
flushing out its options and possibly posturing for more favorable
terms.
FHA will be challenged to handle its expanded workload or new
programs that require the agency to take on riskier loans then it
historically has had in its portfolio. This surge in FHA loans is
likely to overtax the oversight resources of the FHA, making careful
and comprehensive lender oversight difficult. In addition, our
experience in prior high FHA volume periods (such as from 1997-2001)
shows that the program was vulnerable to exploitation by fraud schemes,
most notoriously flipping activities, that undercut the integrity of
the program.
DEPARTMENTAL ISSUES
It is our understanding from the Department that, even with the
projected increase in FHA business, they are planning for only 40 more
staff positions starting in fiscal year 2009. It remains very tight
particularly as it relates to departmental oversight. For example, the
mortgage licensing provisions contained in the new legislation set
minimum standards for nationwide licensing and a registration system
for mortgage broker and loan officers. When we last testified earlier
in the year, we had been told that there was one FHA person in the
RESPA (Real Estate Settlements Procedure Act) unit who was assigned to
work with the States in complying with this new regulatory requirement.
Though the recently-passed Omnibus Appropriations bill containing
fiscal year 2009 funding will help to alleviate some of its funding
constraints, we believe there is a critical need for more resources for
FHA: (1) to enhance its IT systems; (2) to increase its personnel to
meet the escalation in processing requirements; (3) to increase its
training of personnel to maintain a workforce with the necessary skills
to deal with the responsibility of this new portfolio; (4) to oversee
the numerous contractors it maintains; and (5) to increase its
oversight of all critical front-end issues including such important
areas as the appraisal, lender approval and underwriting processes.
We are also concerned that increases in demand to the FHA program
are having collateral implications for the integrity of the Government
National Mortgage Association (Ginnie Mae) mortgage-backed securities
(MBS) program including the potential for increases in fraud in that
program. HUD too needs to consider the downstream risks to investors
and financial institutions of Ginnie Mae's eventual securitization of a
large proportion of the Hope for Homeowners and Home Equity Conversion
Mortgage (HECM) Single-Family loans. Ginnie Mae securities are the only
MBS to carry the full faith and credit guaranty of the United States.
If an issuer fails to make the required pass-through payment of
principal and interest to MBS investors, Ginnie Mae is required to
assume responsibility for it. Typically, Ginnie Mae defaults the
issuers and assumes control of the issuer's MBS pools. Like FHA, Ginnie
Mae has seen an augmentation in its market share (it has even in some
recent months surpassed both Fannie Mae and Freddie Mac) and increased
$150 billion in outstanding mortgage-backed securities and commitments
during a 1 year period from fiscal year 2007 to fiscal year 2008. It
too has stretched and limited resources to adequately address this
increase. From a different vantage point, the industry has noted that
Ginnie's struggle to keep pace with FHA could also reduce liquidity at
a critical moment in the housing market.
The OIG has initiated investigations of Ginnie Mae MBS fraud. In
one recent case, the two former corporate officers of a Michigan
financial company were convicted of defrauding Ginnie Mae by retaining
the funds obtained from terminated and/or paid off loans. The
defendants failed to disclose to Ginnie Mae that the loans were
terminated, while one of the defendants utilized the funds from the
paid-off loans to invest in the stock market and to make fraudulent
monthly payments to Ginnie Mae on the loans that were previously paid-
off in order to conceal the fraud. The fraud began during July 1998 and
continued until October 2007, resulting in a loss of approximately
$20,000,000.
Despite all these enumerated issues, we are gratified that a new
penalty provision was inserted into the Housing and Economic Recovery
Act (now 18 U.S.C. section 1014). When we corresponded during
consideration of that legislation, we stated our belief that a new
penalty enunciated specifically for the FHA program would be beneficial
from an oversight and enforcement perspective. We assisted in its
development and were very pleased that it was included in the final
passage. The statute now creates a penalty of up to $1 million and 30
years in prison for committing fraud against FHA programs, similar to
the predicates established in the Financial Institutions Reform,
Recovery and Enforcement Act, and will be a useful tool for prosecutors
and the law enforcement community to employ in order to address those
who would seek to defraud the program.
OIG OBSERVATIONS
The results of the latest actuarial study show that HUD has
sustained significant losses in its Single-Family program making a once
fairly robust program's reserves smaller. The study shows that FHA's
fund to cover losses on the mortgages it insures are contracting. As of
September 30, the fund's economic value was an estimated $12.9 billion,
an almost 40 percent drop from over $21 billion a year ago. The $12.9
billion economic value represents 3 percent of the mortgages insured by
the FHA. Although above the 2 percent ratio required by law, it is well
below the 6.4 percent ratio from the same time last year. Moreover,
these latest projections used macroeconomic forecast data as of June
2008 and are profoundly sensitive to the accuracy of those forecasts.
If more pessimistic assumptions are factored in, the ratio could dip
below 2 percent in succeeding years requiring an increase in premiums
or Congressional appropriation intervention to make up the shortfall.
We think it might be useful for the Department to conduct interim
assessments of the viability of the fund. Further, the new Office of
Management and Budget (OMB) Director is quoted in a March 18, 2009
online OMB blog as saying that the Congressional Budget Office recently
estimated FHA loans of the last few years as accruing $15 billion in
losses, and that OMB needed to move the true costs of this program to
the budget's discretionary ledger. Since its inception in 1934, FHA has
been self-sustaining and premiums paid to the fund have covered the
losses due to fluctuating defaults and foreclosures.
A significant problem facing FHA, and the lenders it works with, is
the fallout from decreasing home values. This increases the risk of
default, abandonment and foreclosure, and makes it correspondingly
difficult for FHA to resell the properties. About 7.3 percent of FHA
loans are currently in default (i.e., more than 90 days non-payment
status, foreclosure or bankruptcy). The Mortgage Bankers Association
reports a 30-day + delinquency rate for FHA loans of about 13 percent.
A major cause for concern is that even as FHA endorsement levels meet
or exceed previous peaks in its program history, FHA defaults have
already exceeded previous years. Default levels on FHA loans are above
those for prime conventional loans as evidenced below:
This reinforces the importance for FHA approved lenders to maintain
solid underwriting standards and quality control processes in order to
withstand severe adverse economic conditions. Another extensive problem
confronting FHA has been its inability to upgrade and replace legacy
(developed in the 1970s and 1980s) application systems that had been
previously scheduled to be integrated. The FHA systems environment
remains at risk and must evolve to keep up with its new demands. Add to
that an escalation in the properties owned and managed by FHA and the
overall picture becomes more complicated. The chart below is an OIG
analysis of some areas of the Nation and of the projected potential
impact of subprime loans refinanced to FHA.
INCREASED RISKS TO FHA
Until recently, FHA's market share remained quite low as
conventional subprime loans were heavily marketed by lenders. The
tightening credit market has increased FHA's position as a loan insurer
and, with that, is coming an increase in lender/brokers seeking to do
business with the Federal program and an overall concern regarding some
of these loan originators. For example, we currently have under
investigation for alleged inappropriate activities several FHA lenders
who were also lenders in the subprime market. The movement toward HUD
is already underway as reflected in recent statistics. FHA approval of
new lenders increased 525 percent in a 2 year period. For example, as
of the end of fiscal year 2008, FHA had over 3,300 approved lenders as
compared to 997 at the end of fiscal year 2007 for an increase of 330
percent. If you compare the fiscal year 2008 totals (over 3,300) to the
fiscal year 2006 totals (692) it is a 525 percent increase. Lender
approvals for fiscal year 2009 currently total over 1,600.
The integrity and reliability of this crop of program loan
originators is, in our view, unproven and, in light of the aggressive
recent history of this industry, may pose a risk to the program. The
Mortgage Bankers Association (MBA) in recent testimony stated the ``MBA
is concerned that since the once lucrative subprime market has
evaporated, some of the less scrupulous lenders who specialized in that
business are now turning their attention to FHA lending.''
In addition, we have seen lenders reacquiring FHA approval despite
past abuses. A previous investigation on an FHA lender in New York led
to the debarment of its owner for a period of 5 years from originating
FHA insured loans. After the debarment was served, the lender, under
the same owner, resumed operations using the same fraudulent practices.
We again reviewed some of the loans and determined that the
originations were fraudulent similar to the loans investigated in the
first case. The OIG, in conjunction with the U.S. Attorney's Office and
departmental officials, sought and received an injunction against them
in order to stop the business from operating. Following the injunction,
FHA withdrew their lender approval.
Our audit work also highlights how problem lenders may regain
admission into the FHA program even when previous transgressions were
apparent. For example, we reviewed an Arizona corporation that was
approved as an FHA mortgage lender by HUD in 1996. This particular
lender had 13 active branch offices and sponsored close to 2,000 FHA-
approved loan correspondents nationwide. As highlighted in our audit,
this lender had a number of serious issues related to RESPA violations
such as paying marketing fees, non-competition fees and quality
incentives to real estate companies in exchange for more than $57
million in FHA mortgage business. The corporation's license was
suspended by the State and it filed for bankruptcy. One of the
principal owners and principal managers reconstituted under a different
name but operates from the same location. In 2008, HUD approved the new
entity to originate and process FHA loans despite its principals' prior
citations for RESPA violations.
Adding to the risk, FHA is now, due to loan limit increases,
serving new metropolitan areas with which it previously has had little
interaction. Recent legislation increased maximum FHA loan limits to
$729,750. With such entry, come new players and unknown hazards. The
effects of this significantly increased loan limit are potentially much
greater losses sustained by FHA on defaulted loans and that the loans
may be much more attractive to perpetrators of fraud who will be able
to extract greater payouts in fraudulent loans schemes.
Simultaneous to this confluence of events, is an increase in the
reported incidents of mortgage fraud. As the Federal Bureau of
Investigation (FBI) points out, a significant portion of the mortgage
industry is void of any mandatory fraud reporting and presently there
is no central repository to collect all mortgage fraud complaints.
Mortgage fraud incidents reports, as compiled, however, by the Mortgage
Asset Research Institute in the overall marketplace, have increased by
45 percent in the second quarter compared to a year-ago period. It's
most recent third quarter assessment states that fraud incidence is at
an ``all-time high'' and that ``reported mortgage fraud is more
prevalent now than in the heyday of the origination boom.''
Our long-term investigative exposure in the area of mortgage fraud
schemes impacting both FHA and conventional loans (since most fraud
schemes cross loan programs) has given us vast experience and extensive
knowledge. Many ``traditional'' fraud schemes continue to affect FHA
and are described below:
--Appraisal Fraud.--Typically central to every loan origination fraud
and includes deliberately fraudulent appraisals (substantially
misrepresented properties, fictitious properties, bogus
comparables) and/or inflated appraisals (designed to ``hit the
numbers''); appraiser kickbacks; and appraiser coercion.
--Identity Theft.--Often includes use of bogus, invalid or misused
Social Security numbers and may include involvement of illegal
aliens, false ownership documents or certifications.
--Loan Origination Fraud.--Including false, fraudulent and
substantially inaccurate income, assets and employment
information; false loan applications, false credit letters and
reports; false gift letters; seller-funded down payments;
concealed cash transactions; straw buyers; flipping; kickbacks;
cash-out schemes; fraud rings; and inadequate or fraudulent
underwriting activities.
While these types of mortgage fraud schemes continue to operate,
changing market conditions have generated new, or variant, schemes:
--Rescue or Foreclosure Fraud.--Recent trends show that certain
individuals in the industry are preying on desperate and
vulnerable homeowners who are facing foreclosure. Some improper
activities include equity skimming (whereby the homeowner is
approached and offered an opportunity to get out of financial
trouble by the promise to pay off the mortgage or to receive a
sum of money when the property is sold--the property is then
deeded to the unscrupulous individual who may charge the
homeowner rent and then fails to make the mortgage payment
thereby causing the property to go into foreclosure) and lease/
buy-back plans (wherein the homeowner is deceived into signing
over title with the belief that they can remain in the house as
a renter and eventually buy back--the terms are so unrealistic
that buy-back is impossible and the homeowner loses possession
with the new title holder walking away with most or all of the
equity).
--Bankruptcy Fraud.--Typically chapter 7 bankruptcy petitions are
filed in lieu of chapter 13 petitions on behalf of debtors;
however, property sales information is fraudulently withheld
from the bankruptcy court and the properties are leased back to
the debtors at inflated rents. The debtors' property ownership
and equity are stripped from them.
--Home Equity Conversion Mortgage (Reverse Mortgage) Fraud.--FHA
reverse mortgages are a new and potentially vulnerable area for
fraud perpetrators. We are aware that the larger loan limits
can be attractive to exploiters of the elderly, whether it is
by third parties or by family members, who seek to strip equity
from senior homeowners. Due to the vulnerability of the
population this program serves, we are also concerned about
evasions of statutory counseling requirements or of fraud by
counseling entities. We are working with the chairman and
members (Senator McCaskill, in particular) of the Senate
Committee on Aging and the chairman of the House Committee on
Financial Services to address some of their concerns regarding
these issues. We have also been partnering with the AARP and
other groups to foster consumer protection education awareness.
The following represent some of the types of schemes that we
are encountering:
--Flipping.--The perpetrator creates a fake mortgage company and
``lends'' funds to the borrower (no money changes hands, no
loan is given, but a mortgage is filed). The subject
refinances the borrower into a HECM. At closing the title
company pays all outstanding debt including the fraud
perpetrators' fake mortgage and the perpetrator walks away
with the payoff.
--Recruitment.--Some HECM-related fraud activities involve an
investor who sells the property to an elderly straw buyer
and enters into a quit claim deed with the straw buyer. The
buyer applies for the HECM loan within a short timeframe
and the appraisal used to originate the HECM loan is then
fraudulently inflated. This allows the investor to
illegally divert the proceeds of the loan. Straw buyers are
``recruited'' in residential areas with a high rate of
renters. The buyers are often unaware that they must pay
property taxes and some are unaware that the cash due to
them at closing has been diverted. A current investigation
involves recruiting elderly homeless to live in properties
victimizing these seniors who often have desperate needs.
--Annuity.--Another activity that we currently have under
investigation involves financial professionals fraudulently
convincing HECM borrowers to invest HECM proceeds in a
financial product, such as an annuity, in an improper way.
The financial professionals receive increased fees and, in
the case of annuities, the victims are unable to get access
to their savings for many years or even past their
projected life expectancy.
--Unauthorized Recipient.--Individual, often family members, may
keep HECM payments after the authorized recipient dies or
permanently leaves the residence.
HECM loans represent a significant investment by FHA, with
considerable recent increases. The chart below shows a 253 percent
increase in the dollar amount of HECM loans from 2004 through 2008.
In addition to the schemes described previously, the following case
histories also illustrate some of the types of prevalent mortgage fraud
that the OIG typically encounters:
--In January 2009, in Philadelphia, Pennsylvania, an appraiser and
two settlement agents, were collectively sentenced to 45 months
incarceration and 9 years probation and ordered to pay HUD
$235,802 in restitution for their earlier guilty pleas to
making false statements to HUD and committing a conspiracy and
wire and identity fraud. The defendants and others provided
fraudulent appraisals and other documents used by unqualified
borrowers to obtain FHA-insured mortgages. HUD realized losses
of $4,460,588 after 183 mortgages defaulted.
--In September 2008, two defendants in South Florida were charged in
a 21 count indictment for their participation in a mortgage
fraud scheme that resulted in the approval and disbursement of
six mortgage loans totaling $980,000. According to the
indictment, one of the defendants, through his company, sold
six properties in Miami-Dade County to unqualified buyers using
FHA loans. In all six sales, the same defendant, through straw
donors, fraudulently financed the down payments and closing
costs of the buyers. The second defendant, one of the false
donors, was also a silent investor in the scheme. Both
defendants allegedly received sizable payments once the
properties were sold. When the loans were closed, four of the
six properties went into foreclosure.
--An investigation was initiated against a southwest mortgage
company. The investigation revealed that the defendant, a real
estate broker and owner of an investment company, fraudulently
sold 17 properties to undocumented aliens in the Fort Worth,
Texas area. The fraudulent FHA loans totaled $1,060,600. The
defendant placed false Social Security numbers on the loan
applications, inflated loan application figures, made side
payment agreements with the borrowers for down payments that,
in some cases, were never made and conducted other fraudulent
activities. Subsequently, 12 of the 17 loans defaulted and HUD
sustained a loss of $445,862. On December 31, 2008, the
defendant was sentenced to 37 months in prison, 36 months
probation and ordered to pay restitution of $445,862.
--In Rockford, Illinois, a loan officer, realtor, loan processor, and
company employers were charged with conspiracy, making false
statements to HUD, and mail fraud, in a 35 count indictment.
Specifically, the defendants were alleged to have engaged in a
complex scheme to defraud HUD through a litany of false and
fraudulent statements on FHA loan applications. These included,
but were not limited to, the following: verifications of
employment, pay stubs, W-2's, credit letters, cashier's checks,
Social Security numbers, Social Security cards, and letters
containing Social Security Administration letterhead. Overall,
50 FHA loans were in question, with losses totaling in excess
of $2 million.
To meet the current crisis, the HUD OIG has initiated a broad range
of strategies to leverage available resources including participation
in Task Forces [See exhibit]. We are a key partner in the FBI National
Mortgage Fraud team and have provided a full-time supervisory special
agent to the FBI to coordinate our joint activities. We also sponsor
training sessions for the FBI on FHA fraud and participate in special
joint operations such as ``Operation Malicious Mortgage.''
OIG CONCERNS REGARDING CRITICAL FRONT-END AND BACK-END PROCESSES
(IMPROVING THE QUALITY OF FHA ORIGINATIONS AND THE ENFORCEMENT OF BAD
ACTORS)
To some extent, the FHA has had to work with the hand it was dealt
in terms of funding and of industry-led initiatives to diminish its
authority. As others have noted, the FHA cannot keep pace with an
industry that is increasingly technology driven, and it cannot use its
revenues to invest in any new technology. Many of its deficiencies
could be mitigated with additional resources dedicated to systems and
staffing enhancement. Our audit and investigative work point to
critical front-end and back-end process issues that, if strengthened,
could enable the FHA to overcome some of its present vulnerabilities.
Appraiser Oversight.--Our work of the FHA appraiser roster
identified more critical front-end weaknesses as evidenced in the
quality control review and monitoring of the roster. The roster
contained unreliable data including the listing of 3,480 appraisers
with expired licenses and 199 appraisers that had been State
sanctioned. In a further review, we found that HUD's appraiser review
process was not adequate to reliably and consistently identify and
remedy deficiencies associated with appraisers.
The FHA's current Single-Family insured exposure totals over $560
billion representing 4.8 million FHA-insured mortgages. Inflated
appraisals cause higher loan amounts. If the properties foreclose, the
loss to the insurance fund is greater. With significant increases in
volume and new responsibilities in the mortgage marketplace, we do
believe it may be time for the Department to return to an FHA Appraiser
Fee Panel similar to the one dismantled by statute in 1994. It is
essential if the mortgage industry wants to overcome perceptions
regarding its integrity and its role in the current economic crisis
that it ensures true market values are correctly estimated. Such a move
would relieve pressures on appraisers to return predetermined values
and would change a system based on misplaced incentives. A recent study
indicated that 90 percent of appraisers felt pressure ``to hit the
number'' provided (i.e., on the sales contract). The old FHA fee panel
was rotational and guaranteed work as long as the appraiser met certain
HUD requirements.
Our concern that appraisers tied to lenders may impact the quality
of the FHA appraisal was also a matter of interest elsewhere as
evidenced in last year's settlement involving Fannie Mae and Freddie
Mac and the New York Attorney General whereby lenders selling loans to
those entities were required to follow stricter guidelines to ensure
that people involved in the processing of loans did not also choose the
appraiser. While the FHA fee panel was disbanded a number of years ago,
the Department of Veterans Affairs has not abandoned this concept and
we believe that this Department might want to follow suit thus
eliminating the relationship between the loan officers, real estate
agents and appraisers. We should remain cognizant that the downstream
negative effect of overinflated appraisals is long-term and can be
fundamentally corrosive to the housing market and to even, as we know
today, the world economy.
Late Payment Endorsement Requirements Changed.--Results from a
number of other key audits have noted significant lender underwriting
deficiencies, inadequate quality controls, and other operational
irregularities. In another important front-end audit, we analyzed the
impact of FHA late endorsement policy changes affecting FHA insured
loans. On May 17, 2005, the Federal Housing Commissioner issued
Mortgagee Letter 2005-23, which significantly changed the requirements
for late endorsements for Single-Family insurance. A request for
endorsement is considered late whenever the loan binder is received by
the FHA more than 60 days after mortgage loan settlement or funds
disbursement, whichever is later. The Mortgagee Letter removed the
prior 6-month good payment history requirement for these loans and
provided an additional 15 days grace period before the current month's
payment was considered late.
We conducted a review of this rule change and found that, although
FHA asserted the change did not materially increase the insurance risk,
FHA did not perform a risk analysis to support this determination. Our
review of the performance of loans from seven prior OIG late
endorsement audits (i.e., Wells Fargo, National City Mortgage, Cendant,
etc.) found a 3\1/2\ times higher risk of claims when loans had
unacceptable payment histories within the prior 6 months. Since the
issuance of the Mortgagee Letter, the default rate for loans submitted
late has increased and is significantly higher than the default rate
for loans submitted in a timely manner. The HUD Handbook itself
acknowledged the risk of unacceptable payment histories by stating that
``Past credit performance serves as the most useful guide in
determining a borrower's attitude toward credit obligations and
predicting a borrower's future actions.''
We issued an audit report in 2006 and recommended that HUD rescind
the Mortgagee Letter until appropriate rule changes could be designed
that were supported by an adequate risk assessment. The FHA disagreed
with our audit report and declined to implement the audit
recommendations. We referred this matter to HUD's Deputy Secretary who
concurred with our recommendations on February 27, 2007 and ordered the
FHA to immediately rescind the Mortgagee Letter.
Initially, the FHA agreed to implement the Deputy Secretary's
directive but failed to take action, instead taking efforts to dispute
our audit results. This continued until April 2008, when the Deputy
Secretary's office again intervened, at our request, and instructed the
FHA to publish the proposed rule change in the Federal Register
reinstating the 6 month payment history requirement for late
endorsements. In June 2008, the proposed rule change was published in
the Federal Register for comment.
Although the final rule rescinding the Mortgagee Letter was never
published, we were notified by the Audit Resolution and Corrective
Action Tracking System that the audit recommendation had been closed at
the request of the FHA. Indeed it was not implemented, therefore, in a
Memorandum dated March 18, 2009, we informed the FHA that, given the
amount of time that had lapsed and the absence of a corrective action,
the OIG would report this in our next Semi-Annual Report to Congress.
Given the current mortgage crisis, concerns over losses to the
insurance fund, and requirements for transparency, we believe that this
is an important recommendation that should not be dismissed.
Capturing Key Information in, and Upgrading, Data Systems.--Another
major input process, touched on earlier in the testimony, is the
integration and upgrading of FHA legacy systems. While there has been
much discussion on an overall plan, and what particular types of
systems are needed to go forward, we think it would be useful at this
juncture to reposition the discussion to ascertain which data should
actually be collected, and maintained, in the system in order to
control the new demands placed on the program. Our audit work and our
investigative ``Systemic Implication Reports'' transmitted to the
Department over the years, makes it clear that, at a minimum, we need
the system to track identifying information on key individuals involved
in the transaction such as the originating loan officer.
This person, for example, is central to the initiation part of the
loan process where due diligence should hypothetically be done on the
application material (i.e., credit scores, appraisal information,
etc.). We would like to see that that person's name and corresponding
identifying information (i.e., license, etc.) are put in FHA's data
fields. This will allow the FHA and OIG to key in on a vital part of
the loan process in which fraud typically can occur. If the system
could also capture information on other loan participants such as the
real estate agent for the seller and buyer, and other parties to the
transaction, that too would be helpful for purposes of increasing
integrity in the processes in our investigative and audit functions.
Further, we think it could be beneficial for the FHA to come
together more significantly in a unified lender oversight consortium
with Fannie Mae, Freddie Mac, the Federal Deposit Insurance
Corporation, and Ginnie Mae in order to, among other things, create
standardized forms that could produce common machine readable data
fields with consistent information as well as to leverage existing data
systems.
Additionally, FHA will be challenged within current resource
constraints to keep up with the increasing volume of entities doing
business. FHA controls currently rely upon random, manual processes by
contractors to select for review approximately 2 percent of lender
endorsements, a decrease from 5 percent due, in part, to an increase in
volume and to funding limitations. FHA then relies upon post-
endorsement automated lender or service performance information, such
as high delinquency or early default rates, to target these entities
for examining a limited number of loans for quality assurance reviews.
We believe FHA needs the resources to take advantage of commercial off-
the-shelf pre-screening loan software or to require at least the larger
lenders use such tools as part of their underwriting process.
Lender Approval Process.--Earlier in this testimony we discussed
the increasing number of applicants coming into FHA for lender approval
and the abuses that could result. It should be noted that FHA's lender
approval process, like the review of loan processes described in the
preceding paragraph, is largely manual. The FHA lender approval
procedure has different requirements dependent on the type of lender
making the application. The general process appears to try to strike a
balance between not overburdening the applicant with extraneous
requirements with a need for important oversight information. In light
of the recent aggressive history of the industry that is now seeking to
do business with this Department, we think it may be prudent to review
the standards and qualifications for participation. While we are
currently auditing this process and will make recommendations when the
work is completed, due to the urgent nature of the current
circumstances confronting the Nation and this Department from the
fallout of the mortgage crisis, we believe some interim steps might
need to be assessed.
For example, while the current application contains a certification
for those seeking to do business with the Ginnie Mae program that if
they knowingly make a false statement in the application, then they may
be subject to civil and criminal penalties (18 U.S.C. sections 1001,
etc.), there is no such attestation requirement on the application for
those seeking to do business with FHA program (See exhibit of
Application for Approval to be FHA Lender and accompanying
certification statements). Along those lines, we also believe that the
FHA should have a criminal background check done on each applicant by
seeking to access data systems that contain such information.
Mortgagee Review Board.--As we move to a discussion of essential
back-end processes, we note that we have recently initiated a review,
at the request of Senator Grassley, of the Mortgagee Review Board (MRB)
enforcement actions and its efficiency, effectiveness and impact in
resolving cases of serious non-compliance with FHA regulations
particularly during this period of significant changes in the housing
market. FHA Single-Family endorsements total $71.7 billion in the first
quarter of 2009, up 245 percent from the same period a year earlier,
emphasizing the need for a strong deterrence to irregular mortgage
lending practices. The MRB is a statutorily created board within the
Department that has responsibility to sanction FHA-approved lending
institutions that violate applicable housing laws and HUD regulations
and policies. Established in 1989, it is the sole authorized
enforcement body at HUD to remove noncompliant FHA lenders.
Since FHA lending authority is held by more than 12,000 mortgagees
and loan correspondents, FHA relies on risk management tools other than
the MRB to protect its portfolio and the insurance fund including
computerized monitoring of loan default and claim rates, post-
endorsement underwriting and appraisal reviews, and on-site lender
monitoring. Nevertheless, we believe that a strong deterrence to
abusive practices is an effective Board that reaches in a significant
way to problematic lenders by, for example, imposing penalties viewed
as of real financial consequence to the violating lender, by hearing
cases against larger numbers of violators, and by better exposing
decisions, in an effort to increase transparency, on more publicly
visible sites such as the Department's Web site. Similarly, the
Mortgage Bankers Association, in recent testimony, stated that the
``FHA should have more aggressive, streamlined and timely processes to
expel ``bad actors.''
Specifically, our review of the MRB will determine the timeliness
of decisions; evaluate controls over the mortgagee referral and
enforcement processes; summarize data gathered on settlement agreements
and collections; and provide an objective basis to comment on the
effectiveness of the MRB as a regulatory body. We are looking into
issues such as the types of penalties assessed; whether the penalties
were mitigated to administrative payments; the sizes of the mortgagees
brought before the board; the elapsed time from referral to board
action; whether indemnification was required; and whether the
mortgagees were repeat offenders or their principals were under limited
denial of participations or debarred. We anticipate completion of this
review shortly.
OIG CHALLENGES
The task before the HUD OIG is a daunting one: addressing the
elements of fraud that were involved in the collapse of the mortgage
market; monitoring the roll-out of new FHA loan products in order to
reduce exploitation of program vulnerabilities; and, combating
perpetrators of fraud, including those who have migrated from the
subprime markets, who would exploit FHA loan programs. The consequences
of the current mortgage crisis, its worldwide economic implications,
and the subsequent pressures placed on the Department and OIG could not
have come at a more inopportune time. The Department, as a whole, has
had significant new leadership responsibilities over the last 7 years
in rebuilding communities devastated by disasters (i.e., lower
Manhattan post-September 11th; the gulf coast region after hurricanes
Katrina, Rita and Wilma; the Galveston area after recent hurricanes;
California fires; and Midwest flooding) that have added tens of
billions of dollars in new program funds that require quick
distribution and keen oversight. In addition, HUD received over $13.6
billion in the American Recovery and Reinvestment Act that again
requires rapid dissemination to an even more widespread area.
While there have been some monies appropriated for salaries and
expenses needed for administering all these new programs and the recent
passage of the fiscal year 2009 Omnibus Appropriation bill will help,
the Department has historically not received analogous increases needed
to deal with this new influx of requirements. They, and we, are quite
stretched in our combined ability to keep up with the pace of new,
critical needs and the changing dynamics of fundamental demands placed
on the Department.
Lastly, we would like to note, and emphasize, that we are pleased
to be partnering with the FHA in a marketing endeavor to increase the
general public's awareness of departmental anti-fraud activities and
enhance education through better outreach activities, and to heighten
efforts aimed at fraud prevention and at fraud reporting. The HUD OIG
is launching a new Web site, www.mortgagefraud.gov, and with the FHA
will be using this, as well as other avenues, to better publicize our
hotline and activities. Below is the new HUD OIG brand insignia that
will accompany our marketing effort to reach the public.
CONCLUSION
As can be deduced from reading through the totality of issues
raised in this testimony, a number of cross-cutting concerns transverse
many of the highlighted FHA processes. These include: (A) inadequate
quality controls; (B) reliance on manual processes; (C) over dependence
on the honesty of program participant(s) to provide accurate and
truthful information; (D) tendency to focus on entities rather than
individuals; and (E) the need to work more with the mortgage industry
to better capture data on individuals involved in the process. Further,
although not within the control of the FHA, the fact that our
nationwide mortgage lending system is fragmented with separate players
embracing differing requirements creates opportunities for waste, fraud
and abuse that a more unified approach could potentially ameliorate.
In conclusion, though the challenges and tribulations are
increasing, the Office of the Inspector General stands ready to assist
in whatever way is deemed necessary and will be vigilant in its efforts
to protect the funds of the American taxpayer. We thank you for the
opportunity to relay our thoughts on these important issues based on
the body of our work and of our experience, and greatly appreciate the
activities of the Congress to protect the Department's funds from
predatory and improper practices and to ensure an effective response on
oversight at this critical time.
Senator Murray. Thank you.
Mr. Scott.
STATEMENT OF J. LENNOX SCOTT, CHIEF EXECUTIVE OFFICER,
JOHN L. SCOTT REAL ESTATE, ON BEHALF OF THE
NATIONAL ASSOCIATION OF REALTORS
Mr. Scott. Thank you, Chairwoman Murray and Ranking Member
Bond.
I would like to talk a little bit about what's going on in
the housing market. I'm going to refer to my chart quickly
about how the housing market is working and the importance of
FHA in today's solving the housing crisis. Today I represent
the 1.2 million members of the National Association of
REALTORS, myself and my company.
In looking at the chart, the basis, the foundation of the
residential housing market is in first-time home buyers coming
into the marketplace. Some of them buy new construction, but
the majority buys resale homes. So when you bring in first-time
home buyers, it causes a chain reaction of sales up the price
points.
We break the market into four categories: the first-time
home buyer category, the more affordable, the above the
midpoint, and the high end. The inventories are always lower in
the first-time home buyer category, and they increase as you go
up the price points for that.
We have seen an increase in sales activity in first-time
home buyer category because of four reasons: the first one
being the FHA loans with the flexible credit score. It is
allowing more families to come into homeownership, and these
are families, individuals or families, who have good credit,
that can make the payment.
The next item would be the mortgage interest rates have
come down 1 percentage point since last October. This is due
mainly in part to the Treasury stepping in to buy mortgage-
backed securities. That 1 percent lower on interest rates has
created a 12 percent increase in purchasing power.
The other two items that we have that are in fact helping
the marketplace are that prices have just been lowered. This
past 5 months starting in October, we saw inventory levels
raised since October and prices adjusted lower. Even in the
first-time home buyer price range, they adjusted the prices 5
percent lower.
Then the last item that we have is that Congress approved
and President Obama signed a stimulus package on February 17
that had the $8,000 first-time home buyer tax credit, and
buyers were waiting for that tax credit. It came about and they
are entering the marketplace.
I'll give you an example of months supply real quick. In
Tacoma, Pierce County area, the months supply for existing
homes in the first-time buyer category is 4.6 months, around
the midpoint is 8 months, above the midpoint is 13.8 months
supply, and in the upper end it's 20 months supply. So that
just gives you an idea of where the months of inventory is and
pricing dictates off the monthly inventory levels.
So we have a low inventory level in the more affordable, in
the first-time buyer price range.
Overall, the months supply is 7.2 months supply in Pierce
County, Tacoma. Healthy is thought to be in the 5 to 6 months
supply range. King County, for example, where Washington is--I
mean, where Seattle is, is at an 8.3 months supply.
So we believe FHA is playing a very important role and they
can play even a greater role in the recovery of this housing
crisis that is taking place. First--there's four points. First,
we ask that FHA receive the funding necessary to increase the
staff and improve technology. This just expedites the programs
and the efficiency and the security of them.
Second, we would like to see the $8,000 first-time buyer
tax credit monetized, which means that it's available at the
closing table, so that buyers can use that $8,000 for a down
payment. I was talking with NAR chief economist Lawrence Hyun
yesterday and we are projecting that would bring in an
additional 500,000 first-time home buyers into the marketplace.
They have good credit. They have the capability to make the
payment. It's just that they do not have enough money for the
down payment.
That would stimulate the first-time buyer category and
cause that chain reaction of sales up the price points. Already
we're seeing in many areas of the Nation prices stabilizing in
the first-time home buyer category, and this would then
stabilize home prices in the more affordable and work its way
upward.
They would then pay this $8,000 back from the first-time
buyer tax credit, which has already been approved by Congress
and signed by the President. This would release pent-up demand.
Also, we'd like to see the higher loan limits made
permanent. They are making a difference, especially for move-up
buyers, that they could then receive the lower interest rate.
Their equities have gone down in this market correction. They
need the FHA loans for credit. They have the capability.
They're both buying and selling in the same market timing. It's
okay to buy and sell at the same market timing in the upper
price ranges. They just need the lower interest rates and the
credit available to them.
Lastly, ease the financing for condominiums. Right now
there is a requirement for an environmental review on a Federal
level. We would like to see that the environmental reviews at
the State and local level be accepted. This would expedite the
process for condominium projects to be able to move forward.
Also we'd like to see that the 51 percent occupancy ratio
be lowered to a number below 50 percent for that.
PREPARED STATEMENT
We have submitted our written statement and we'd like to
thank you for your support of the Federal housing program.
Senator Murray, I'd like to thank you in particular for raising
the temporary loan limits up to help us move this market
forward during this housing crisis.
[The statement follows:]
Prepared Statement of J. Lennox Scott
Chairwoman Murray, Ranking Member Bond, and members of the
subcommittee, thank you for inviting me to testify today on the role of
the Federal Housing Administration in addressing the housing crisis.
My name is Lennox Scott, and I am the chief executive officer of
John L. Scott Real Estate in Bellevue, Washington. I am here today to
represent the views of the nearly 1.2 million members of the National
Association of REALTORS, who are involved in every aspect of the real
estate business.
The members of the National Association of REALTORS have had a
long tradition of support for innovative and effective Federal housing
programs and we have worked diligently with the Congress to fashion
housing policies that ensure Federal housing programs meet their
mission responsibly and efficiently. With the collapse of the private
mortgage market, the importance of the Federal Housing Administration
has never been more apparent. As liquidity has dried up and
underwriting standards have been squeezed tight, the FHA is one of the
primary sources of mortgage financing available to families today.
Without FHA financing, families would be unable to purchase homes and
communities would suffer from continued foreclosure and blight.
In 1934 the Federal Housing Administration was established to
provide consumers an alternative during a lending crisis similar to
what we face today. At that time, short-term, interest-only and balloon
loans were prevalent. FHA was an innovator with the 30-year fixed rate
mortgage. Once again, FHA is now the leader in providing safe,
affordable financing. The universal and consistent availability of FHA
loan products is the principal hallmark of the program that has made
mortgage insurance available to individuals regardless of their racial,
ethnic, or social characteristics during periods of economic prosperity
and economic downturn.
FHA's market share has grown from less than 3 percent to more than
30 percent in a very short time. While this change was necessary to
provide a functioning mortgage market, it also provides concern for the
safety and soundness of FHA. With such dramatic growth comes increased
responsibility, and the need for increased infrastructure and staff.
We believe FHA is doing its best to step up to the challenge. Over
the last 18 months, FHA has demonstrated it can handle volume increases
at four times 2007 levels while its market share increased to over 30
percent. Despite receiving minimal additional resources, there are two
reasons why FHA has been capable of handling the volume. First, once
lenders have been approved by FHA, they perform all of the loan
processing, underwriting, closing and insuring functions without HUD
review. This takes the burden off FHA, although additional oversight in
approval may be needed. Second, FHA's technology, despite being 25
years old, remains resilient and fundamentally sound. That said, there
are a number of changes that should be implemented to ensure that FHA's
Mutual Mortgage Insurance Fund (MMIF) remains strong and healthy.
NEED FOR INCREASED CAPACITY
For years FHA has been hampered by a lack of investment in staff
and information technology. The Single Family FHA program currently
operates with a nation-wide staff of about 900, which is approximately
160 positions less than needed. In addition, FHA operates with
technology that is an average of 18 years old. FHA Commissioner Brian
Montgomery had said the software programs FHA uses are, in many cases,
older than the staff maintaining it. Quickly upgrading the dozens of
incompatible systems, such as the 30 year old COBOL system, to web
based customer centric applications is necessary for the agency's
continued existence and future success.
Our membership believes that FHA cannot continue to serve its
constituency without rapidly implementing a quality and systems
initiative. Other financial institutions more adequately staffed and
with more advanced technology have already gone out of business. It has
been estimated that $65 million is required to upgrade the FHA systems
and add the appropriate number of staff. These expenditures could save
the taxpayer tens of millions of dollars per year and result in a more
efficient Government mortgage insurance program.
INCREASED OVERSIGHT/RISK MANAGEMENT
Recent articles have expressed concern about FHA's oversight of
loan originators. In order for a lender to be a direct endorser for FHA
(and not require HUD approval on every loan), they must submit an
application to HUD. The number of applications has skyrocketed in
recent months, and we agree with the concerns expressed about both time
to process applications and provide the necessary oversight of lenders.
Despite media concern that FHA has become a ``dumping ground'' for
subprime loans and high-risk borrowers, the fiscal year 2008
independent Actuarial Review demonstrates that the FHA Mutual Mortgage
Insurance Fund (MMIF) is fiscally sound, and projected to remain so
over the next 7 years. While the MMIF has experienced a decline in
value, it remains above the congressionally mandated 2 percent
capitalization ratio. A high percentage of the decline was the result
of falling house prices--something everyone has been facing. In
addition, the quality of borrowers utilizing FHA has improved.
Borrowers now have higher credit scores and lower loan-to-value ratios;
these changes are expected to further improve the financial status of
the FHA MMIF.
The Actuarial Review suggests that if current conditions continue,
FHA will be able to handle the increased claim activity and decreased
valuation of the housing market while meeting its current capital
reserve requirements. However, it is important to note that the
Actuarial Review is based on July 2008 data, and may not take into
account the full impact of actual home value declines since then. The
review also does not take into account the latest estimates of
anticipated employment decline, which could impact borrower incomes and
ability to pay. These factors--higher than expected home price declines
and higher than expected unemployment--could present a troubling
macroeconomic picture for FHA going forward. While current borrowers'
higher credit quality provides some protection from these trends, it
cannot eliminate all risks. The most recent data shows that FHA'a
delinquency rate is climbing at a troubling rate.
Additional personnel are needed to assure that FHA does not fall
victim to fraud or abuse. Recent reports indicate an increase in early
payment defaults, i.e those loans that are delinquent with just their
first or second payment. Currently monitoring of these loans is limited
due to staffing constraints. Increasing lender oversight and staff to
monitor fraud and abuse will help keep FHA fiscally strong, and will
protect the taxpayers' interest.
TECHNICAL CORRECTIONS TO FHA PROGRAMS
The Housing and Economic Recovery Act (HERA) of 2008, signed into
law in July 2008, provided a number of valuable reforms to FHA.
However, not all of them have been able to be implemented due to
confusion over implementation or interpretation of the law.
HERA included provisions intended to ease financing of condominiums
for FHA. However, HUD's attorneys have stated that the legislation does
not specifically remove the requirement for an environmental review of
the property for a condominium loan to be processed. This review is
very time consuming and complicates the home purchase process. Since
Congressional intent was to ease financing for condominiums, this
matter should be clarified in the law so HUD may implement the new HERA
provisions.
Condominiums remain one of the more affordable housing options for
American families. NAR further recommends that the FHA reduce the 51
percent occupancy ratio to a number below 50 percent for all
condominium developments. Amending the owner-occupancy rules for
condominium developments for buyers with FHA mortgages will benefit all
parties in the real estate transaction. Individuals and families
purchasing condominiums will have access to more flexible and
affordable financing opportunities. Potential buyers with FHA mortgages
will have a wider choice of condominium developments. Finally, existing
owners in these developments benefit as vacant units are purchased and
occupied and the owner-occupied ratio increases.
HERA also promoted the use of FHA's energy efficient mortgage (EEM)
product. Currently an EEM may include up to $8,000 of energy efficient
improvements to a home. However, HERA increased that amount up to 20
percent of the value of the home. FHA has been unable to implement this
provision due to a technical flaw in the statute. Given the
administrations support of energy efficiency, we urge this technical
correction be made to allow borrowers purchasing homes to use FHA to
get the full benefit.
Chairman Murray and the subcommittee members have been strong
supporters of increasing the FHA loan limits, which was done in both
the HERA legislation and in the American Recovery and Reinvestment Act
(ARRA) passed earlier this year. ARRA reinstated the 2008 loan limit
levels, at 125 percent of local area median home price, capped at
$729,750. ARRA also provided the HUD Secretary with discretion to
increase the limits in ``sub-areas,'' where home prices may far exceed
the county average. However, HUD has chosen not to exercise this
authority. We believe the loan limits need to be made permanent at the
current levels, as to provide some stability to the market. We also
believe that FHA should be encouraged to use their authority to
increase the limits in communities that simply have prices higher than
their surrounding counties.
FHA AND USE OF THE HOMEBUYER TAX CREDIT
The Housing and Economic Recovery Act of 2008 also includes a
first-time homebuyer refundable tax credit up to $7,500 to first-time
home buyers for the purchase of a principal residence on or after April
9, 2008 and before July 1, 2009. This was followed by the American
Recovery and Reinvestment Act, which offers a tax credit of up to
$8,000 for first-time homebuyers who purchase on or after January 1,
2009 and before December 1, 2009.
Enabling homebuyers to have access to their tax credit funds at the
time of closing, through a collateralized loan against the tax credit,
would allow the home buyer to use the credit toward a down payment. The
repayment of the funds borrowed against the credit would be obtained
through use of the tax refund. During his confirmation hearings, HUD
Secretary Shaun Donovan stated that FHA has the discretion to permit
this type of financing mechanism. FHA regulations permit a borrower to
use loan proceeds for a home purchase as long as the loan is ``secured
by property or collateral owned by the borrower independently of the
mortgaged property,'' Loans may be used for a down payment, and secured
by the mortgaged property, in certain circumstances and assuming the
loan is not provided by a party having a direct or indirect interest in
the real estate transaction. This use of the tax credit benefits
potential first-time homebuyers with little down payment available for
purchase.
Monetizing the tax credit through a loan combined with FHA's low
3.5 percent down payment requirement would offer a strong incentive to
buyers who would otherwise not purchase a home this year. NAR estimates
that hundreds of thousands of buyers will take advantage of the tax
credit. However, proactive use of the tax credit will release even more
pent up demand in real estate markets across the country. Granting
borrowers access to their tax credit through collateralized loans will
further ensure FHA products are the mortgage products of choice for
homebuyers.
CONCLUSION
Today's FHA is not your father's FHA. Congress and HUD have made a
number of important and valuable changes to FHA over the last several
years that have enabled it to stand up to the challenges of today's
mortgage market. FHA is now the principal source of financing for
millions of American families. Without FHA our economic crisis would be
significantly prolonged.
There are a number of reforms that can be made to FHA to ensure its
continued success and its availability to hardworking families. We urge
the subcommittee to review our proposals and consider using these
suggestions to strengthen FHA. We thank you for your continued support
of Federal housing programs, and stand ready to work with you to keep
these programs viable.
Senator Murray. Thank you very much for your excellent
testimony.
Ms. Vermillion, we'll go with you.
STATEMENT OF MIA VERMILLION, SENIOR LOAN CONSULTANT,
GUILD MORTGAGE, LAKEWOOD, WASHINGTON
Ms. Vermillion. Madam Chair, distinguished members of the
subcommittee----
Senator Murray. You want to turn on your mike in front of
you.
Ms. Vermillion. Madam Chair, distinguished members of the
subcommittee: I am honored to be here today. I'm glad to assist
this subcommittee in any way possible. Please note I am here as
a lender, with over 25 years experience, and not a
representative of my current employer.
I started originating home loans in Texas and have been in
the great State of Washington for the last 9 years. My
experience includes a number of HUD products, such as the
Tribal 184, but for today we're discussing only the basic FHA
fixed rate loan.
As you have pointed out, in Washington State FHA loans went
out of favor and have now come back. Many loan originators
during 2004 and 2007 had no knowledge of FHA. They'd never done
anything that required asset and income verification, so if you
didn't have to ask anybody for information it was very simple
to close loans. In retrospect, the lower volumes in these
bubble years actually benefited the FHA insurance fund by
avoiding the losses associated with the revaluation of those
assets.
Currently we have a great climate for FHA loans and they
are playing a critical role in reviving this real estate
market. Thanks in great part to Senator Murray, the increased
loan limits have allowed buyers of more expensive homes to
benefit from FHA financing. First-time home buyers are out in
droves. I usually teach three to four home buyer classes each
month following the 5 hour format of the Washington State
Housing Finance Commission and our class attendance is sharply
up--a good indicator that buyers want to be better informed
before committing to a mortgage loan.
Our trade organization I'm sure has let you know that the
biggest challenge for FHA lenders relates to warehouse
capacity. We have a huge demand for funds and many lenders are
struggling to accommodate the volume.
The FHA loan program is a cornerstone of our prudent
lending as we move forward. One of my personal concerns is the
attempted revival of the seller-funded down payment assistance
program. The current down payment for FHA is only 3.5 percent.
There are a number of sound down payment assistance programs
such as the Washington State Housing Finance Commission offers.
The down payment can come from relatives, 401k, or buyers' own
funds.
When a seller funnels a down payment to a borrower, we're
not only actually doing a zero down loan; in most cases that
borrower is paying more as a higher price for that home than
they otherwise would.
PREPARED STATEMENT
In conclusion, I hope we all learn from this current
housing crisis and do not repeat some of the practices that
have led us here. Thank you for your time and attention.
[The statement follows:]
Prepared Statement of Mia Vermillion
I am honored to be here today and glad to assist this subcommittee
in any way possible. Please note that I am here as a lender with over
25 years of experience and not as a representative of my current
employer. I started originating home loans in Texas and have been in
Washington State for the last 9 years. My experience includes a number
of HUD products, such as the Tribal 184 loans. For today, I am
discussing the basic FHA 30 year fixed rate loan, known as a 203B.
In Texas we experienced a very challenging real estate market in
the early 1980s. Fixed interest rates went from 11.5 percent to 18
percent. The market responded with financial innovation and produced
many adjustable rate products for conventional loans. Compared to these
products, FHA loans often took longer to close and thus fell out of
favor in the market. When the overheated real estate market cooled off
these conventional loans became very difficult to obtain. At that time,
FHA then became the only loan option for buyers who were not VA
eligible and did not have the 10-20 percent down payment required for
conventional loans.
Moving forward to Washington State, FHA loan endorsements for the
most common loan type--the 203B--grew from 15,372 loans in 2000, to
30,766 loans in 2003. After that the number of FHA closed loans dropped
to 15,556 in 2004, 8,290 in 2005, 7,707 in 2006 and 8,704 in 2007.
Please refer to the attached chart from the HUD site.
WASHINGTON STATE FHA 203B CLOSED LOANS 1990 THRU FEBRUARY 28, 2009
------------------------------------------------------------------------
Year Loans
------------------------------------------------------------------------
2009.................................................... \1\ 6,307
2008.................................................... 30,500
2007.................................................... 8,704
2006.................................................... 7,707
2005.................................................... 8,290
2004.................................................... 15,556
2003.................................................... 30,755
2002.................................................... 24,162
2001.................................................... 22,958
2000.................................................... 15,372
1999.................................................... 18,657
1998.................................................... 17,698
1997.................................................... 14,169
1996.................................................... 13,175
1995.................................................... 9,150
1994.................................................... 22,791
1993.................................................... 20,704
1992.................................................... 13,908
1991.................................................... 16,411
1990.................................................... 21,183
---------------
Total............................................. 338,157
------------------------------------------------------------------------
\1\ Two Months Activity.
Source: HUD.
Many loan originators during 2004-2007 had no knowledge of
FHA and had never done anything besides a conventional loan.
The market provided varieties of zero down loans, and loans
with no proof of income or assets required. These loans not
only made it easy for borrowers to qualify, but made it easy
for the loan originators. There was just not much work involved
when documentation was not necessary. So FHA, requirements for
strict borrower income documentation, asset verifications
combined with Realtor perceptions that the FHA product was
unwieldy, resulted in lower volumes. In retrospect the lower
volumes in the ``bubble years'' has actually benefited the FHA
insurance fund by avoiding the losses resulting from the re-
valuation of real estate.
And now we have come full cycle again. In 2008 Washington
State had 30,500 FHA loans closed. FHA loans are again the best
product for both buyers and people trying to refinance--as long
as they still have some equity. Conventional loans have
additional fees, and mortgage insurance companies are
experiencing heavy losses and tightening their guidelines. Loan
officers who have never before collected W2s, bank statements,
and paystubs are learning we are ``back to the basics'' in
mortgage lending. FHA loans are playing a critical role in
reviving this real estate market. In this environment of
uncertainty, FHA provides a stable source of liquidity. Thanks
in great part to Senator Murray, we now have increased loan
limits so buyers of more expensive homes can also benefit from
FHA financing.
This is especially true for the first time homebuyers who
are benefiting from a combination of lower prices, great
interest rates, and the $8,000 tax credit. I usually teach
three to four home buyer classes each month, following the 5
hour format of the Washington State Housing Finance Commission.
Our class attendance is sharply up, a good indicator that
buyers want to be better informed before committing to a
mortgage loan.
Mindful of loan quality, most lenders have now implemented
minimum FICO scores for their FHA product. These actions will
benefit the insurance fund going forward.
As you have heard from our trade organization, the Mortgage
Bankers Association, the largest challenge for FHA lenders
relates to warehouse capacity. With rates nearing record
levels, there is a huge demand for funds. The credit crisis has
removed much of the warehouse capacity from the industry and
many lenders are struggling to accommodate the volume. This
will have a negative effect on consumers as it impacts our
ability to continue to make good loans to qualified borrowers,
a key element to revive our housing industry.
The FHA loan program is a cornerstone of our prudent
lending as we move forward. One of my personal concerns is the
attempted revival of the ``seller funded down payment.'' The
current down payment for FHA is only 3.5 percent, and there are
a number of sound down payment assistance programs such as the
Washington State Housing Finance Commission offers. The down
payment can also come from relatives, 401k accounts, or a
buyer's own funds. When a seller funnels the down payment to a
borrower, we are actually not only doing a zero down loan, but
in most cases the buyer is paying a higher price for that home
than they otherwise could.
In conclusion, I hope we all learn from this current
housing crisis and do not repeat some of the practices that
have led us here.
Thank you for your time and attention.
Senator Murray. Thank you very much.
I appreciate both of you traveling all the way out here
from Washington State to lend us your advice and counsel as we
move forward to deal with this very important issue. So thank
you for being here.
Mr. Donohue, I do want to start with you on questioning.
None of us want to see the FHA's portfolio infected with the
kind of bad loans that caused the current economic crisis that
we're in. Historically, FHA's strong underwriting and
programming compliance process has prevented that from
happening.
Your testimony and your written testimony explained in
great detail the different forms of fraud that can enter into
the FHA loan guarantee process. Have your audits shown that
there is a significant increase in any of these forms of fraud
since the FHA's role started to expand in this current credit
crisis?
MORTGAGE FRAUD ACTIVITY
Mr. Donohue. Senator, first of all let me thank you and
Senator Bond for the support you've given me over the past
several years as the IG. I do want to say too that my friend
Secretary Donovan--we met regularly and discussed these very
issues in a very practical way.
I think the best way to answer this question is that with
the increased volume of FHA activity going back on we're seeing
an increase in regard to fraud activity. It stands to reason
and certainly the FBI and ourselves, have both commented that
as the time goes on with the more activity--the way I look at
it is to instill as much prevention as you possibly can to
ensure that you're doing what you can to prevent that.
I made reference to my easel over here that I think,
stating to the effect that when applicants come back into our
business at FHA they need to know that if they lie, if they
provide false information that they're going to be held
accountable to a particular criminal statute.
I think FHA--and I was pleased by the comments of the
Secretary as far as being very proactive as far as ensuring the
policing of lenders and brokers. I have a host of ideas I've
spoken to the Secretary about, and I think my comments
mentioned that, such as--my best example of this, Senator, was
a matter that came up in your very State, in Seattle,
Washington. I couldn't help but notice about a month ago there
was an article in the paper about a scam that went on with
regard to activity. It mentioned convicts, including
embezzlers, robbers, rapists, being involved in mortgage fraud
activity.
It was the leadership of the Senate and I believe the State
as well to try and police that and make sure it doesn't happen
again. So I think we're trying to, working close with the State
and the Federal authorities and DOJ, to make sure we police
these activities when we hear about it, and we get information
from the Department. They refer cases to us on a regular basis.
Senator Murray. Thank you very much.
MAXIMUM LOAN LIMIT
Mr. Scott, in your testimony you talked about the raised
loan limits and our support of that. As the law is currently
written today, the maximum loan limit is supposed to be
adjusted downward by over 100,000 on January 1, 2010. Maybe you
and Ms. Vermillion both could comment on what you believe would
happen to the market if those higher loan limits are allowed to
adjust downward as is currently called for.
Mr. Scott. Well, the higher loan limits provide a lower
interest rate for borrowers in those price ranges. That
increases the purchasing power. It allows them to move forward
in their purchases. Especially in the condition where the
months supply is so high, it helps get the markets moving in
that price category.
Otherwise they're jumping maybe from a conforming loan up
to a jumbo loan. The jumbo loan interest rates are higher than
the Government-backed loans of FHA. So it is extremely
important in the marketplace.
Also, I talked about first-time buyers up 500,000
additional if we can get the money at the closing table. That
would equate into a million sales overall because of the chain
reaction effect of monetizing the $8,000 first-time home buyer
tax credit at the closing table, and that combined--the higher
loan limits are a piece of that chain reaction of sales.
Senator Murray. Ms. Vermillion, can you comment on that?
Ms. Vermillion. I agree with that, and I think it's really
critical. We have the first-time home buyers out right now
because of the combination of low interest rates, lower home
prices, and the $8,000 tax credit. So as Mr. Scott has pointed
out, that is the very first chain on our chain reaction, and I
think the higher limits for FHA are critical to ensure good
loans for upper income borrowers.
Senator Murray. I expect that you don't expect the current
economic crisis to be gone by 2010. That would say we're past
this and we need to move on? Do you see that extending out into
next year?
Mr. Scott. Well, the economics will come forward as they
may. But also, the higher loan limits create fairness across
the Nation to have access for families to have affordable
priced loans. So this--on both coasts and in several areas
throughout the Nation, there are higher cost areas, and just
making loans accessible.
MORTGAGE RESCUE SCAMS
Senator Murray. Are either one of you concerned about an
influx of shady lenders and brokers into the FHA program now
that the subprime market has disappeared?
Ms. Vermillion. I am very concerned about that. We're
seeing a lot of ``mortgage rescue'' scams. We're seeing a lot
of ``loss mitigation'' scams. And we are seeing increased fraud
in the FHA arena, since that's the primary lending mechanism
now. We saw that in Texas back in the 1980s and we're seeing it
again.
Senator Murray. Okay, thank you very much.
Senator Bond. Thank you, Madam Chair.
A special thanks to our private sector witnesses from
Washington traveling here. It really helps to hear your views
of the challenges on the ground and providing adequate
financing for homeowners. Ms. Vermillion, I appreciate your
recognition of the point that I made with Secretary Donovan and
he so strongly endorsed, that we don't need any mechanisms that
encourage foreclosure. It may not be fraudulent, but they are
just in a position to be foreclosed if they don't have enough
money to put down a down payment.
DEFAULT/BAILOUT
I turn to our good friend the Inspector General, Mr.
Donohue. With this tremendous fivefold increase in business of
the FHA, what's your honest assessment that the explosion of
FHA authorities and responsibilities might lead to a default or
the requirement for a significant bailout from taxpayers,
either through what I consider to be a back door way of marking
it down as directed spending, taking it out of the budget,
appropriating it, or having to recognize it elsewhere on the
budget?
What are the risks to taxpayers?
Mr. Donohue. Well, Senator, based on my testimony you could
see the impact it's had on the FHA MMI fund. It's going the
wrong direction. I will state again, as I know you've been an
avid supporter of the elimination of selling down. You know how
strongly I felt about that.
Senator Bond. We were together on that one.
Mr. Donohue. And I'm so pleased to see that end, and so on.
But I do think, as it goes--I think the FHA is trying to make
some corrective actions. They're working with us. Obviously, if
in fact it goes down to the 2 percent margin, then of course
they're faced with the very thing that has been raised today,
and that's the fact of appropriated funds or an increase in
premium. I think that's the only two alternatives that would be
placed to ensure the fact that the FHA stays solvent.
Senator Bond. What do you think is the real--are we looking
at the potential of a significant taxpayer bailout, given where
we are now? Can you assess that?
Mr. Donohue. Well, it's hard to say, sir. I think that,
based on the numbers we're seeing, I think that it's going to
wrong direction by the sheer volume. I think it's something I'd
have to take a look at in more detail to comment to you about
as far as to the volume. I think with the increased volume
certainly is increased premiums. There are actuarial studies
that would indicate that it has impacted on this past year.
I see my job, sir, as to try and do everything I possibly
can to work with FHA to insure in a proactive way that we
prevent any bad activity from coming further into this program
as a result of it. But as far as specifics, it's just the
pattern we're seeing and the direction its going is not going
in the direction which I would like to see and as you would not
like to see.
Senator Bond. I would be interested in any further thoughts
that you have on needs for FHA staffing. We will be seeing that
in the budget, and the IT system.
FHA APPRAISAL PROCESS
But there's a particular area where I think we've seen some
really questionable activities. That is in the appraisal
process. A good appraisal is essential to make sure that we are
not insuring something that isn't worth it. The value of the
property has to be accurate. There is always a risk of conflict
of interest. I live in a small town. The appraisers are good
friends with everybody else.
There is also a danger that appraisers--and I believe that
some of the 58 actions that have been brought by the U.S.
Attorney for the Eastern District put appraisers in with the
mortgage originators.
What kind of steps, what additional steps, should FHA take
to make sure that they are getting--that the appraisals are
being made by competent people without conflict and on a
professional, realistic evaluation of the property?
Mr. Donohue. Senator, I think this is a concern that we've
shared for some time. The large amount of increase in appraisal
activity has drawn the application process. We have seen in our
cases and across the country licenses expired. We have seen the
absence of good review. As you all know, dating back to 1994
FHA had an appraisal fee panel that used to actually go back
and approve FHA appraisals specifically and monitor that
number.
I talk to the appraisers as well and of course their
challenge is that they're asked to hit the mark, whether it's
going down or going up. I think that's of great concern. I
couldn't help but notice that the New York Attorney General
with FNMA had gone back and expressed a third party resolution
to have some uninterested person hire the appraiser involved,
and I think it's an interesting notion.
The former general counsel at HUD and I have spoken and he
came out of the Mortgage Bankers Association. He expressed to
me directly concerns in the ongoing process that appraisals are
the thing that we have to look at so very, very carefully.
Finally, sir, the VA itself, which doesn't deal with the
volume we deal with, has an appraisal fee program that's still
in place and they approve their appraisers on a regular basis.
Senator Bond. Is that something that the FHA should
consider?
Mr. Donohue. I think they'd have to look at that, sir. They
don't certainly do the volume that FHA has done, but I
certainly think it's worth taking a look at.
Senator Bond. Thank you very much for your suggestions.
Thank you, Madam Chair.
Senator Murray. Thank you.
Mr. Scott and Ms. Vermillion--Ms. Vermillion, you live and
work in Pierce County, that's one of the hardest hit areas in
our State. Mr. Scott, I know you're familiar with that area as
well. I wanted to ask you if there's something particularly
there that we should be focused on doing here at the Federal
level to help that county.
PIERCE COUNTY
Ms. Vermillion. Pierce County has been the hardest hit
compared to many places in Washington. I believe a great deal
of that is due to the economic numbers.
The other thing I would like to see--and I don't know if
HUD has the ability to do this; I am assuming they do--is the
tracking of foreclosures based on originators or based on
sellers. I know we have the notice of deferment--I'm sorry. We
debar people if they've been involved. But it was my experience
previously that typically if someone is involved in fraud that
they don't typically complete one transaction; they typically
do multiple transactions.
The other thing that's happened in Pierce County is partly
just the economy. We did an FHA loan for a real estate agent,
very successful, obviously a full documentation loan, tax
returns, et cetera. That person's income has sharply gone down,
to the point where she is currently working additional part-
time jobs. But she is at risk of losing her home. And that is
not something that anybody could have anticipated in
retrospect.
Senator Murray. Mr. Scott, any comments on that?
Mr. Scott. Yes. The Pierce County market changed the year
before the Seattle market did, and so the cumulative effects of
the years of the economic situation. But as I've pointed out
earlier, the months supply in the first-time buyer category has
already stabilized and we're seeing renewed activity that will
move up the price points.
If we can monetize the $8,000 for an FHA loan at the
closing table, that would make a huge impact. If FHA and the
IRS could get together and figure that out, that would be just
incredible for our Nation to move these programs forward.
We are very excited about having David Stevens as nominee
for the head of FHA. The National Realtor Association is very
excited about that.
Senator Murray. Okay, that's good to know. Thank you very
much for that.
HECMS
Mr. Donohue, I wanted to ask you about HECMs. Senator Bond
referred to them earlier. They're relatively new, but it is a
pretty rapidly growing business for FHA. Those reverse mortgage
programs are obviously mostly senior citizens. Can you talk a
little bit about any special concerns you might have about
HECMs and their potential impact on solvency?
Mr. Donohue. I certainly can, Senator. I'm sure you agree
this is a very vulnerable population of people with regard to
HECMs, from everything from the third party to family
participation. We're seeing--we have cases throughout the
country that deal with some of these as well. The larger loan
limits are certainly going to have a concern with regard to it
as to making it attractive to go and pursue these matters.
The other thing we're interested about is the statutory
counseling, to make sure they are going back and sitting down
with these people and addressing these matters as a primary
concern.
We have said--I have met with Senator McCaskill and the
Senate Committee on Aging. We have met with the AARP, the
Mortgage Bankers Association. They're all concerned about the
effect of this program. I think we'd like to see as they go
through the process, be it the counselor or the closing agent,
to make sure when they see something that's not right to refer
those matters to us and address those things rather quickly.
It's a consumer issue that I think, as I said, AARP and
they are very much involved with. We're trying to do as much
outreach, too, also in letting the communities know how to be
on guard with regard to the possibility of this activity.
Senator Murray. Thank you.
FHA IMPROVEMENTS
Senator Bond, thank you. I just have one final question to
Mr. Scott and Ms. Vermillion. FHA's not been known as the
easiest bureaucracy to deal with. You're on the ground out
there. Can you tell me your experience? Is it improving, not
improving? Does it need improvement? What are you seeing?
Ms. Vermillion. I'm an FHA fan. I've been working with them
for a long time. So when you say it's a bureaucracy, in our
level we're originating the loans, we're funding the loans,
we're fine.
In terms of going back to the appraisal issue, that has
become a concern for a number of appraisers. VA has us use a
panel. FHA used to do that and it became so unwieldy it was a
problem. I think again if we can address that with monitoring
quality that we will be there. But I'm a big fan of FHA loans.
I would appreciate them having the additional technology and
staff to do what they need to do to keep us going.
Mr. Scott. We appreciate the FHA loans. It's making a
difference in the marketplace. Of course, the technology
enhancements always make a difference.
Senator Murray. You both talked about increased staffing,
particularly because of the high use right now, too. So I
appreciate that.
Mr. Scott. Well, it's not only on newly originated
transactions, but it would also be refinance activity coming
through on top of that, and they will need the staffing.
ADDITIONAL COMMITTEE QUESTIONS
Senator Murray. Okay. At this time I will ask the
subcommittee members to submit for the record, any additional
questions they have for the witnesses.
[The following questions were not asked at the hearing, but
were submitted to the Department for response subsequent to the
hearing:]
Questions Submitted to Hon. Shaun Donovan
Questions Submitted by Senator Patrick J. Leahy
Question. Secretary Donovan, I would like to explore how ongoing
issues surrounding HUD and the housing markets are impacting rural
areas.
I understand that the Department is working with the Department of
Energy on a memorandum of understanding regarding the utilization of
weatherization funding from the stimulus. Additionally I understand
that it is your intention to make assisted housing automatically
eligible for weatherization funds. I believe that this type of
coordination is important to ensure that stimulus funds are well
utilized, but would like you to clarify what projects will be eligible
to receive funding.
As part of this MOU will all types of assisted housing such as
section 8, those that have received funds through the HOME, CDBG, and
Low Income Housing Tax Credit Programs be automatically eligible for
weatherization funds?
Answer. HUD and DOE signed a Memorandum of Understanding on May 6,
2009 aimed at streamlining the use of DOE weatherization funds in HUD-
assisted, public housing, and Low Income Housing Tax Credit (LIHTC)
multifamily properties. The MOU was aimed primarily at eliminating
duplicative income verification requirements which have proved to be a
barrier to the use of these funds in these properties in the past. DOE
published a Proposed Rule implementing the terms of the MOU in June
2009, solicited public comments, and published a Final Rule on January
25, 2010.
The following projects are generally covered by the new regulation:
(1) Public housing; (2) Project-based section 8 assisted housing,
section 202 Supportive Housing for the Elderly, section 811 Supportive
Housing for Persons with Disabilities; (3) Certain Low Income Housing
Tax Credit (LIHTC) properties. Under the terms of the MOU and the DOE
rule, HUD will provide DOE with a list of properties in these
categories where at least two-thirds of their residents meet the DOE
income requirement (200 percent below poverty) for weatherization
assistance. Properties identified by HUD that appear on this list will
not be required to provide independent income verification, but will
automatically meet the DOE income eligibility requirements.
Due to lack of available data, several programs are not
specifically covered by the rule: section 221(d)3 and d(5), and section
236 Below Market Interest Rate properties, as well as Indian housing,
unless they fall into one of the three categories noted above. Section
8 tenant-based rental vouchers are also not addressed. However, any of
these programs will continue to be eligible for weatherization
assistance through normal DOE procedures.
Please note that it is not entirely accurate to say that the MOU
and subsequent DOE Rule would make assisted housing ``automatically
eligible for weatherization funds''--it is still up to individual
States and local weatherization providers to allocate these funds to
individual properties, according to local preferences and priorities
and as outlined in each State's weatherization plan. Nothing in the
Final Rule overrides these State prerogatives. Most States have focused
their resources on single-family housing; the DOE regulation will
streamline procedures for verifying rental incomes in those States and/
or for those local weatherization providers who wish to allocate funds
for multifamily weatherization assistance.
Question. The Neighborhood Stabilization Program has helped many
communities around the country address their redevelopment needs.
However for many rural States, conditions other than foreclosures have
led to distressed housing markets. I believe that this program should
be more flexible in order to support addressing the diverse issues
facing in our housing markets.
Would the Department be open to modifying or waiving the
established targeting areas for States receiving the minimum allocation
under this program? Further, would the Department support counting the
redevelopment of demolished, vacant or blighted properties toward the
requirement that 25 percent of the NSP units serve very low income
families? And, for State's like Vermont that have not received adequate
counseling assistance due to relatively low foreclosure rates, but
still facing the skyrocketing foreclosure crisis, will the Department
allow at least 10 percent of a State's allocation of NSP funds to be
used for foreclosure counseling and prevention activities?
Answer. With regard to expanding target areas for States with
minimum Neighborhood Stabilization Program (NSP) allocations, a
provision in Public Law 111-22 authorized HUD to permit qualifying
States to expand their target areas and is in the process of issuing
guidance to implement this provision. With regard to properties
eligible to meet the requirement that 25 percent of NSP funds be
expended to provide housing to households at or below 50 percent of
area median income, HUD is constrained by the NSP authorizing language
in the Housing and Economic Recovery Act of 2008 (HERA) which
specifically states that only abandoned or foreclosed properties can
qualify as meeting this low income benefit requirement. Finally, HERA
defines the eligible uses of NSP funds and foreclosure counseling is
included as not an eligible use. HUD has, however, permitted the use of
NSP funds to pay for housing counseling when it is associated with the
purchase of a property assisted with NSP funds.
Question. Due to the frozen credit markets, Housing Finance
Agencies (HFAs) cannot find investors for their mortgage revenue bonds
or liquidity providers to back their bonds. As a result, more than 30
housing finance agencies across the country are being forced to suspend
or limit their mortgage lending programs. Among the housing recovery
plans announced by the administration at the beginning of March,
support for HFAs was among these plans.
What specific steps are the Department and administration going to
take to improve liquidity for State HFAs and when will this action be
taken?
Answer. On October 19, the administration announced a new
initiative to provide critically needed assistance to State and local
HFAs to help support low mortgage rates and expand resources for low
and middle income borrowers to purchase or rent homes that are
affordable over the long term. Following up on the intent to support
HFAs first outlined in February under the Homeowner Affordability and
Stability Plan, the administration's initiative has two parts: a New
Issue Bond Program (NIBP) to support new lending by HFAs and a
Temporary Credit and Liquidity Program (TCLP) to improve the access of
HFAs to liquidity for outstanding HFA bonds.
THE NEW ISSUE BOND PROGRAM (NIBP)
The New Issue Bond Program (NIBP) provided temporary financing for
HFAs to issue new housing bonds. Treasury purchased securities of
Fannie Mae and Freddie Mac backed by these new housing bonds. With
these investments, the HFAs have issued an amount of new housing bonds
equal to what they are authorized to issue with the allocations
provided them by Congress but have been unable to issue given the
current challenges in housing and related markets. The program may
support up to several hundred thousand new mortgages to first time home
buyers this coming year, as well as refinancing opportunities to put
at-risk, but responsible and performing, borrowers into more
sustainable mortgages. The NIBP will also support development of tens
of thousands of new rental housing units for working families.
THE TEMPORARY CREDIT AND LIQUIDITY PROGRAM (TCLP)
Fannie Mae and Freddie Mac are administering a Temporary Credit and
Liquidity Program (TCLP) for HFAs to help relieve current financial
strains and enable them to continue to serve their important role in
providing housing resources to working families. Treasury has agreed to
purchase a participation interest in the Temporary Credit and Liquidity
Facilities (TCLFs) provided to HFAs under the program, providing a
credit and liquidity backstop. The TCLP provides HFAs with temporary
credit and liquidity facilities to help the HFAs maintain their
financial health and preserve the viability of the HFA infrastructure
so that HFAs can continue their Congressionally supported role in
helping provide affordable mortgage credit to low and moderate income
Americans, as well as continue their other important activities in
communities.
On January 13, the administration announced the completion of all
transactions under the State and local Housing Finance Agency (HFA)
Initiative, With these transactions, the Obama administration helps
support low mortgage rates and expands resources for low and middle
income borrowers to purchase or rent homes that are affordable over the
long term.
Over 90 State and local HFAs representing 49 States participated in
the NIBP for an aggregate total new issuance of $15.3 billion. Twelve
HFAs participated in the TCLP for an aggregate total usage of $8.2
billion. The Initiative is expected to come at no cost to the taxpayers
and to the Government Sponsored Enterprises.
Question. With more and more Americans facing eviction and the
threat of homelessness, the already-long waiting lists for section 8
vouchers continues to swell. In Vermont, the Vermont State Housing
Authority has intermittently had to close the wait list and it has been
thousands of people long at different times--a wait of several years
for assistance finding a safe and affordable place to live.
What does the Department plan to do about the increasing demand for
rental assistance? Will you support the creation of additional
vouchers?
Answer. The housing choice voucher program is HUD's largest
affordable housing program, which currently assists over 2 million
families. Under the fiscal year 2010 Appropriations Act, HUD received
$75 million in new vouchers for the Veterans Affairs Supportive Housing
(VASH) program, which targets voucher rental assistance and supportive
services to homeless veterans. HUD also received $15 million in new
vouchers for the Family Unification Program (FUP), which provides
rental assistance to families for whom the lack of adequate housing is
a primary factor in the separation of a child from their family. In
addition, HUD received $150 million in new voucher assistance for
tenant protection activities such as public housing demolition and
disposition.
HUD recognizes that long waiting lists are common in many areas of
the country. While vouchers are a vital component in addressing that
need, additional funding requests cannot adversely impact funding needs
for other critical HUD programs and initiatives. HUD is seeking to
expand affordable housing opportunities for families not only through
the use of tenant-based rental assistance but also by increasing
affordable housing production and preserving existing housing stock.
______
Question Submitted by Senator Frank R. Lautenberg
Question. In the wake of the credit crisis, the New Jersey Housing
and Mortgage Finance Agency--along with housing and finance agencies
around the country--is having trouble finding agencies that will insure
loans for homes designated for low-income homeowners. I understand
that, under current policy, the Federal Housing Administration (FHA)
does not insure mortgage loans made to purchasers of income-restricted
housing. New Jersey currently has a surplus of vacant affordable
housing because prospective home buyers cannot find an agency to insure
their loan.
Will the FHA consider changing its policy so it can start insuring
loans on properties that are restricted for low- and moderate-income
homeowners?
Answer. FHA does not permit any form of ``resale'' restriction as a
general practice, any type of requirement that would prevent a home
from being sold on the open market to any buyer. However, when resale
restrictions are established as part of a specialized affordable
homeownership program, the FHA does have regulatory authority to permit
these types of arrangements. We would be happy to work with the New
Jersey Housing and Mortgage Finance Agency to ensure that FHA financing
is available to home buyers purchasing homes that are part of the
agency's program.
______
Question Submitted by Senator Sam Brownback
Question. Secretary Donovan, most economists agree that the housing
market continues to be the primary concern for the economy. Part of
solving that is decreasing the amount of housing stock available. To
assist in that, Congress included a first-time home buyer tax credit in
legislation last year and then increased and extended the tax credit in
this year's stimulus legislation. Unfortunately, the tax credit can
only be effective in helping individuals get into homes if it can be
utilized up-front. I understand there is confusion in the marketplace
as to whether that tax credit can be monetized and used at closing for
downpayment and closing costs. In a response to a question from my
colleague, Senator Corker, I'm told that you stated that the Federal
Housing Administration (FHA) has the ``discretion'' to allow for the
tax credit to be monetized (under certain specific provisions of FHA's
underwriting guidelines). However, I also understand that some lenders
are having trouble receiving clear guidance from HUD as to whether the
tax credit can be used as collateral to obtain a loan for down payment
and closing costs at closing.
Can you provide clarity and certainty as to whether this can be
allowed?
Answer. FHA will not permit the home buyer tax credit to be
monetized and used to meet the borrower's downpayment, which is also
referred to as FHA's statutory 3.5 percent minimum cash investment
requirement. However, an advance on the credit (or monetization) may be
used to help cover the borrower's closing costs.
______
Questions Submitted by Senator George V. Voinovich
Question. At HUD and the FHA, do you have the human capital needed
to responsibly approve new lenders doing business with the FHA?
Answer. Yes. FHA's monthly average number of entities requesting
approval as an FHA lender has decreased from 396 in fiscal year 2008,
to 215 in fiscal year 2009, to 154 for fiscal year 2010 to date. In
addition, turnaround time for applications that meet all of FHA
requirements during the first review is within the 30-day standard set
by FHA's Lender Approval Division. FHA is working to obtain the
necessary system and contracting dollars needed to comply with the
additional eligibility standards for approval as an FHA lender in the
``Helping Families Save Their Homes Act of 2009'' (Public Law 111-22).
Question. Do you have the human capital to investigate the
potential abuse by lenders misleading homeowners?
Answer. This question is very general and thus it is difficult to
provide a comprehensive response. FHA and HUD have a myriad of
responsibilities and consumer protections built into its various
programs. For instance, Housing's Office of Regulatory Affairs and
Manufactured Housing is equipped to enforce violations under the Real
Estate Settlement Procedures Act (RESPA). HUD's Office of Fair Housing
and Equal Opportunity (FHEO) is equipped to investigate violations of
Fair Housing laws. Within FHA, approved lenders serve as the financial
intermediary between FHA and the homeowner. Consequently, FHA does not
receive a great deal of direct consumer complaints regarding potential
abuses by lenders. Nonetheless, FHA does pay particular attention to
any complaint regarding abuses within its loan programs. FHA uses a
rigorous nationwide Quality Assurance program to monitor lender
performance and compliance with its program rules and regulations. As
an element of its risk-based lender targeting, FHA incorporates
complaints received on abusive or misleading lending practices. Any
instances of consumer abuse discovered during FHA lender reviews are
addressed via administrative action through FHA's Mortgagee Review
Board. All instances of potential fraud and/or criminal activity are
referred to HUD's Office of Inspector General for investigation.
Question. What training is provided for new FHA lenders regarding
FHA loan guidelines? Who ensures that FHA loan guidelines are being
carried out, such as agency rules requiring borrowers to document their
income, down payment requirement, and a time commitment to living in
the home?
Answer. FHA is constantly monitoring lender performance and loan
level compliance from the moment a lender is approved to originate and/
or service FHA loans, and from the instant a loan is originated. Lender
applications for FHA approval undergo an evaluation of: (1) the
company's financial capacity/resources; (2) its possession of
appropriate State licensing; (3) the eligibility of the company and its
principals, owners and officers to participate in Government programs;
and (4) the company's quality control and compliance plans and
procedures. Once approved, lenders recertify annually to ensure
continued adherence to FHA requirements. Moreover, if a lender wishes
to gain Direct Endorsement approval, it must undergo a ``Test Case''
evaluation, which helps FHA assess the lender's knowledge of and
adherence to FHA underwriting guidelines.
After ensuring that a lender meets all approval requirements, FHA
switches the focus of its monitoring activities to the loans
underwritten by a lender. All loans are required to pass certain checks
prior to insurance endorsement, including but not limited to,
verifications of borrower identity, confirmation that borrowers do not
possess outstanding obligations to the Government, and certification
that borrowers have not participated in property flipping activities.
Following endorsement of a loan, FHA staff conducts Post Endorsement
Technical Reviews (PETRs), emphasizing compliance with FHA requirements
to ensure that loans do not pose a risk to the FHA insurance fund.
FHA's Quality Assurance Division (QAD) also administers the Credit
Watch Termination Initiative, which identifies underwriting lenders and
originators whose default and claim rates are deemed excessive relative
to other lenders in the same HUD Field Office Jurisdiction.
Additionally, Headquarters QAD is responsible for the Neighborhood
Watch Early Warning System, which is used to monitor lender and
servicer performance by FHA staff, lenders, and other stakeholders.
Utilizing Neighborhood Watch to assess risk indicators and default
rates, FHA staff target lenders for on-site review by QAD Divisions
that are based in field offices throughout the country.
QAD offices located in the field conduct HUD Lender Monitoring
Reviews that include on-site loan level review of lender files, and a
review of lenders' compliance with FHA program requirements. FHA's
review of loans continues throughout the life of the loan.
FHA's National Servicing Center conducts an analysis of lenders'
participation in loss mitigation, which identifies those lenders in
need of additional training from the NSC, as well as those that should
be considered for a lender monitoring review or possible investigation.
During the course of quality assurance reviews, HUD staff identify
potential evidence of fraud and refer those findings to the HUD OIG.
Additionally, evidence of program violations is referred to the
Enforcement Center and/or the Mortgagee Review Board for possible
administrative action.
The Mortgagee Review Board may take the following administrative
actions against mortgagees and lenders: withdrawal, suspension,
probation, letter of reprimand, and cease and desist. The Board also
has the power to impose civil money penalties as well as enter into
settlement agreements. It is only by settlement agreement that the
Board can obtain an indemnification agreement. The Board does not have
statutory authority to require indemnification.
As stated above, the Board can penalize FHA lenders and mortgagees
for material violations of HUD requirements and may also enter into
settlement agreements.
Question. Why is the participation rate for the Home for Homeowners
program so low when foreclosure rates continue to increase? What can be
done to improve the Hope for Homeowners program to increase
participation?
Answer. HOPE for Homeowners (H4H) was initially authorized under
the Housing and Economic Recovery Act of 2008 to provide a mechanism to
help distressed homeowners refinance into FHA insured loans.
Unfortunately, due to several obstacles to participation, including
steep borrower fees and costs, complex program requirements, and lack
of operational flexibility in program design, the original program only
assisted a small number of homeowners.
The administration has taken a number of steps to improve the
uptake for the program. On April 28, 2009, the administration announced
steps to incorporate H4H into the Making Home Affordable program. In
addition, on May 20, 2009, the President signed the ``Helping Families
Save Their Homes Act of 2009'' which provided improved program
features. The legislation eases eligibility requirements and
streamlined the application process for the HOPE for Homeowners
program.
Guidance for the improved H4H program was issued in October and
went into effect on January 1. However, there are some continuing
challenges to maximizing program uptake. Because of legislative
language mandating certain underwriting features for the program,
servicers must modify their underwriting systems. In addition, the
underwriting features also raise questions about the pricing of H4H MBS
in market place. The administration is pursuing regulatory and
legislative changes to increase the number of at-risk borrowers who can
benefit from the program.
Question. How does the Obama administration's foreclosure plan--
``Making Home Affordable'' coordinate with Home for Homeowners to help
families refinance into more affordable loans?
Answer. As mentioned above, the H4H program has been integrated
into the administration's comprehensive approach to stabilizing the
housing markets--the Making Home Affordable program. When a borrower
approaches a participating MHA servicers for assistance, the servicer
is required to offer the option for a H4H refinancing in tandem with
the MHA trial modification option. To ensure proper alignment of
incentives, servicers and lenders will receive pay-for-success payments
for H4H refinancing similar to those offered for Home Affordable
Modifications. The Home Affordable Modification program is intended to
bring stability to the housing market and help American families reduce
their monthly mortgage payments. The revised H4H program is intended to
help homeowners whose loans are not owned or securitized by Fannie Mae
or Freddie Mac, who are behind on their payments, who owe far more than
they are worth, and who may find that modifying the terms of their
loans is not a workable solution. The program would assist homeowners
by taking into consideration their ability to pay and making their
mortgage sustainable over the long haul.
Question. In my hometown of Cleveland, the foreclosure crisis has
ripped through like a tornado. I have supported the Neighborhood
Stabilization Program (NSP) created last summer to provide local
communities resources to address vacant, abandoned, and foreclosed
properties. Recently, it has been brought to my attention that HUD is
selling condemned HUD-owned properties to the city of Cleveland for the
city to use its limited NSP resources to demolish the home. Can you
please explain to me why HUD cannot use its own resources to demolish
the homes they should have taken care of in the first place?
Answer. On average, the Department annually acquires approximately
50,000 single family properties from HUD-approved lenders. To ensure
that such properties are properly secured, maintained, and marketed for
sale, HUD uses Management and Marketing (M&M) Contractors. These
contractors are required to appraise HUD-owned properties using FHA
Roster Appraisers, establish the list price for such properties, and
market and sell properties for the maximum price the market will bear.
The Department uses this disposition strategy as it is necessary to
replenish the Mutual Mortgage Insurance Fund and is the most effective
way for FHA to generate proceeds to provide home buyers an affordable
loan financing alternative to conventional and subprime loans.
Thus, HUD does not require its contractors to simply demolish its
properties based on their appraised value. Instead, the conditions of
the real estate markets are also factored in the contractors'
determination of the ultimate disposition or sale of a property. In
markets such as Cleveland, for example, ``hard to sell'' properties are
offered to local governments at deep discounts to further the
Department's affordable housing and neighborhood stabilization
objectives. In addition, to the extent that the Department is aware of
a HUD-owned property being condemned or due to receive a Notice of
Condemnation, HUD's contractors have been directed to disclose this
information to all potential purchasers of HUD homes.
Lastly, the Department, via its Neighborhood Stabilization Program
(NSP), has awarded the city of Cleveland more than $16 million to
address its high rate of foreclosed, abandoned properties, which
contribute to blight within many of Cleveland's neighborhoods. Under
the NSP program, local governments may acquire, demolish and rebuild,
or rehabilitate foreclosed properties using NSP Federal grant funds.
Additionally, to assist local governments in combating blight and in
maximizing their use of the NSP grant funds, the Department is offering
HUD-owned foreclosed properties valued at $20,000 or less (i.e., those
considered to be ``demolition properties'') for $100. Specifically, 211
HUD-owned properties have been held off the market by the Department,
pending a direct sale to the city of Cleveland. Many of these 211 homes
are valued at $20,000 or less, with a collective value of $2,105,200.
Question. Secretary Donovan, in a previous meeting I gave you a
list of recommended modifications to the Neighborhood Stabilization
Program supported by the ``National Foreclosure Prevention and
Neighborhood Stabilization Task Force.'' What is the status of the
proposed regulatory modifications for NSP?
Answer. The Department implemented several regulatory changes for
NSP in a notice issue in June 2009. These changes reduced the required
purchase discount for NSP properties to 1 percent and eliminated the
overall portfolio discount requirement. HUD also reduced appraisal
requirements associated with properties having value below $25,000. The
notice also implemented several statutory amendments made to NSP by the
American Recovery and Reinvestment Act of 2009, most notably the repeal
of NSP revenue provision. This enabled HUD to implement program income
provisions for NSP that parallel the program income requirements of the
Community Development Block Grant program. The Department is committed
to working closely with its NSP grantees to address and resolve
programmatic issues that arise in the implementation of the program.
Senator Murray. Well, I'd like to thank all of our
witnesses today, especially for keeping your testimony tight,
as we are in budget mode here and have a number of amendments
that we'll start voting on shortly. But thank you again to both
of our Washington State folks for coming out here. To all the
FHA and to Mr. Donohue, we appreciate your testimony.
CONCLUSION OF HEARING
At this time the subcommittee will be recessed subject to
the call of the Chair.
[Whereupon, at 11:25 a.m., Thursday, April 2, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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