[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                   LEGISLATIVE PROPOSALS TO DETERMINE
                      THE FUTURE ROLE OF FHA, RHS,
                      AND GNMA IN THE SINGLE- AND
                     MULTI-FAMILY MORTGAGE MARKETS

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        INSURANCE, HOUSING, AND
                         COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-32







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
     Subcommittee on Insurance, Housing, and Community Opportunity

                    JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice          LUIS V. GUTIERREZ, Illinois, 
    Chairman                             Ranking Member
GARY G. MILLER, California           MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia  NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey            EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia        MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin             BRAD SHERMAN, California
ROBERT J. DOLD, Illinois             MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio








                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 25, 2011.................................................     1
Appendix:
    May 25, 2011.................................................    43

                               WITNESSES
                        Wednesday, May 25, 2011

Alitz, Katherine M., Senior Vice President, Boston Capital, on 
  behalf of the Council for Affordable and Rural Housing (CARH)..     6
Berman, Michael D., CMB, Chairman, Mortgage Bankers Association 
  (MBA)..........................................................     8
Calabria, Mark A., Ph.D., Director of Financial Regulation 
  Studies, Cato Institute, Washington, D.C.......................    10
Carey, Peter, President and CEO, Self-Help Enterprises, on behalf 
  of the Housing Assistance Council (HAC) and the National Rural 
  Housing Coalition (NRHC).......................................    12
Chappelle, Brian, Partner, Potomac Partners LLC..................    14
Evans, Peter W., Partner, Moran & Company, on behalf of the 
  National Multi Housing Council (NMHC) and the National 
  Apartment Association (NAA)....................................    15
Petrou, Basil N., Managing Partner, Federal Financial Analytics, 
  Inc............................................................    17
Phipps, Ron, Broker, Phipps Realty, and President, National 
  Association of REALTORS (NAR).................................    19
Rutenberg, Barry, First Vice Chairman, National Association of 
  Home Builders (NAHB)...........................................    20

                                APPENDIX

Prepared statements:
    Alitz, Katherine M...........................................    44
    Berman, Michael D............................................    50
    Calabria, Mark A.............................................    63
    Carey, Peter.................................................    72
    Chappelle, Brian.............................................    78
    Evans, Peter W...............................................    99
    Petrou, Basil N..............................................   114
    Phipps, Ron..................................................   128
    Rutenberg, Barry.............................................   148

              Additional Material Submitted for the Record

Biggert, Hon. Judy:
    Written statement of the National Council of State Housing 
      Agencies (NCSHA)...........................................   158
    Written statement of the National Housing Law Project........   161
    Written statement of the Securities and Financial Markets 
      Association (SIFMA)........................................   167

 
                   LEGISLATIVE PROPOSALS TO DETERMINE
                      THE FUTURE ROLE OF FHA, RHS,
                      AND GNMA IN THE SINGLE- AND
                     MULTI-FAMILY MORTGAGE MARKETS

                              ----------                              


                        Wednesday, May 25, 2011

             U.S. House of Representatives,
                Subcommittee on Insurance, Housing,
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Biggert, Hurt, Miller of 
California, Capito, Garrett, McHenry, Duffy, Dold, Stivers; 
Gutierrez, Waters, Cleaver, Sherman, and Capuano.
    Also present: Representative Green.
    Chairwoman Biggert. This hearing of the Subcommittee on 
Insurance, Housing, and Community Opportunity will come to 
order. And I would like to welcome all the witnesses. Thank you 
for being here today. And I will recognize myself for my 
opening statement.
    Good morning and welcome. Today's hearing will examine the 
legislative proposals to determine the future role of the 
Federal Housing Administration (FHA), the Rural Housing Service 
(RHS) and the Government National Mortgage Association (GNMA or 
Ginnie Mae) and the single- and multi-family mortgage markets. 
Our goal is to have a constructive dialogue about potential 
reforms to help shape a stronger framework for the future of 
housing finance.
    Together, I hope we can better determine what role, if any, 
the government should play in housing finance, or should the 
private sector be the sole financer of housing. Is there a 
hybrid role for a joint private/public sector partnership? I 
think these are critical questions that face lawmakers on both 
sides of the aisle.
    Today, we will examine legislative proposals that aim to 
stabilize the housing market, facilitate the return of private 
capital to housing finance, and reduce taxpayers' liabilities.
    One thing that we have all learned in the wake of the 
financial crisis is that homeownership is not for everyone. It 
is also increasingly clear that buyers with a stronger 
financial stake in their homes are far less likely to enter 
foreclosure and walk away from their loans.
    And finally, we have learned that the private market can't 
function when it is crowded by the Federal Government. The 
proposals under discussion today aim to encompass these lessons 
learned by reducing the role of government and ultimately the 
taxpayer, in house financing, and facilitate the return of 
private capital. These are sensible changes that would ensure 
accountability and financial stability within the FHA program.
    The Administration has acknowledged that the modernization 
of FHA must go hand in hand with GSE reform. The goal of these 
reforms, as stated by the Administration, is to limit the 
government's primary role to ``robust oversight and consumer 
protection, targeted assistance for low- and moderate-income 
homeowners and renters, and carefully design support for market 
stability and credit crisis response.''
    With that, I would just like to say that the government's 
role in housing finance is unsustainable. With a $14.3 trillion 
national debt, our country can ill-afford expansive government 
programs of any kind, especially when there is a private sector 
alternative. But the last thing we want to do is stop the 
recovery of the housing market. The reforms we embrace must, by 
every means possible, minimize disruptions to the recovery as 
we allow private capital to replace government capital.
    As always, it is critical that we achieve the right balance 
for taxpayers and home buyers. I look forward to working with 
my colleagues on both sides of the aisle to facilitate the 
private sector reentry, eliminate taxpayer risk, and promote a 
vibrant housing finance system that serves the best interest of 
all Americans.
    I welcome today's witnesses. And with that, I recognize 
Ranking Member Gutierrez for his opening statement.
    Mr. Gutierrez. Thank you very much, Madam Chairwoman, and 
good morning. I want to thank our witnesses for being here 
today as we discuss the future of the Federal Housing 
Administration, the Rural Housing Service, and the Government 
National Mortgage Association.
    There is no doubt that our districts and our communities 
are still reeling from our country's recent great recession. I 
think we can all agree that the housing market has not yet 
fully recovered. We need to continue working together to help 
American families who are literally still struggling to make 
ends meet and stay in their homes.
    I firmly believe that our government needs to continue 
playing the critical role of providing homeowners with the 
assistance and support they need during these tough economic 
times while the fragile housing market recovers. And I hope 
that is what we are discussing today.
    I want to thank Congresswoman Waters for reintroducing the 
FHA reform bill to improve the financial safety and soundness 
of the FHA mortgage insurance program. Let's not forget it was 
less than a year ago that my colleagues on both sides of the 
aisle overwhelmingly supported this exact same bill in 
committee and also voted for final passage on the House Floor. 
I hope the spirit of cooperation and collaboration still 
continues as we consider Congresswoman Waters' proposal.
    I would like to say that I look at the Republican 
counterproposal and it worries me a little bit, wanting to 
increase the downpayment from 3\1/2\ to 5 percent. Not long 
ago, we all had a different point of view, and I am not quite 
sure what change of heart has occurred, and that we might have 
some further discussion on that.
    FHA's market share has certainly grown in recent years, and 
this growth is not because FHA loosened its underwriting 
standards, but because the private sector has been absent from 
the market. I understand that my Republican colleagues would 
like to give entry to the private sector, but I have said it 
before and I will say it again, there is no assurance that 
private investment will take FHA's formidable place to assist 
qualified homeowners to purchase homes.
    Right now, assistance to homeowners and potential 
homebuyers is key to the recovery of our housing market. We 
need to continue supporting the FHA, the Rural Housing Service, 
and Ginnie Mae and do what they do best: find ways to improve 
so that we can better serve current and potential homeowners 
and help restore a robust housing market.
    I look forward to the testimony, and I thank the chairwoman 
for calling the hearing.
    Chairwoman Biggert. And I thank the ranking member for his 
comments.
    I think that is why we are here today to look at these 
potential drafts so that we can have a dialogue and really come 
up with the right process so that we can all find common ground 
there. I recognize Mr. Miller for 1 minute.
    Mr. Miller of California. Thank you, Madam Chairwoman.
    There is no question we need to bring private capital back 
into the marketplace. When this happens, the role of FHA will 
be reduced automatically. We have seen this historically, that 
FHA plays a countercylical partner role. But the worst thing we 
can do today to create a lack of stability in the marketplace 
is to reduce those loan limits in this marketplace. Some of the 
best loans they are making are in high-cost areas. Conforming 
and high-cost GSEs and FHA are providing 92 percent of all the 
liquidity in the marketplace. If the private sector dollar was 
there today to backfill that, that is an argument some could 
make. But it is not there. To say it is, you would have to show 
me where it is at, because it is not. And if you want to create 
more instability in the marketplace, start modifying the loan 
limits that we have downwardly, and it will have a tremendously 
negative impact.
    I am glad this is just a discussion draft. We need to be 
very, very cautious in what we are doing. If you want to hurt 
buyers and sellers, who are taxpayers in this country, you will 
start messing with the system we have today that is doing 
nothing but trying to stabilize a very distressed marketplace. 
If you don't understand how distressed it is, talk to builders, 
REALTORS, mortgage brokers, and bankers, and they will tell 
you how bad it is. Talk to the people out there in the 
marketplace who have lost tremendous amounts of equity in their 
home. And when you have a lesser amount of liquidity in the 
marketplace and fewer lenders willing to make loans and you 
want to sell a house, the value of your house is going to drop 
dramatically.
    So I am glad this is a discussion draft. We need to move 
very cautiously and very carefully. We have a tremendously 
impacted marketplace. Let's not do something knee-jerk that is 
going to make it more difficult.
    I yield back. Thank you, Madam Chairwoman.
    Chairwoman Biggert. The gentlelady from California, Ms. 
Waters, is recognized for 2 minutes.
    Ms. Waters. Thank you very much. Madam Chairwoman, I would 
like to thank you for holding this hearing on the future of 
FHA, the Rural Housing Service, and Ginnie Mae. FHA's role has 
grown more significant in the years following the financial 
crisis of 2008, providing a crucial backdrop in our mortgage 
market and ensuring continued access to safe and affordable 
products while the private market constricted.
    Of course, with this increased role, it is appropriate to 
increase oversight and scrutiny of FHA. That is why FHA was one 
of my top priorities when I chaired the Housing and Community 
Opportunity Subcommittee during the last Congress.
    In order to continue my work from the 111th Congress, 
yesterday I reintroduced the FHA Reform Act. Last year, I was 
able to work well with then-Ranking Member Capito on an FHA 
bill that overwhelmingly passed the House on a bipartisan 
basis. I hope that I can work with Chairwoman Biggert in a 
similar fashion in the 112th Congress.
    I would like to note, however, a few concerns with the FHA 
discussion draft that we are considering at this hearing today. 
This discussion draft would increase downpayments, a move that 
was overwhelmingly rejected in committee markup last year on a 
bipartisan basis. The rationale for this rejection was because 
FHA data demonstrated that increasing downpayments across-the-
board would do little to improve FHA's reserves, while also 
restricting credit to qualified borrowers. I think that 
allowing FHA to manage risk in a flexible manner is the best 
way to continue to protect their reserves.
    Additionally, I strongly oppose the rapid reduction in FHA 
loan limits proposed in this bill, as I believe that decrease 
would have an absolutely chilling impact on our economic 
recovery. And unfortunately, because of the elimination of the 
nationwide loan limit floor, this impact would likely be felt 
the hardest in places where home prices are already low.
    Finally, I think there are major problems with moving rural 
housing programs to HUD. And I am very interested to hear the 
testimony from the rural advocates here today.
    So Madam Chairwoman, I think there are some areas for 
agreement. I hope we can work together in the coming months, 
but I remain very concerned about several of the provisions in 
this bill.
    Thank you, and I yield back the balance of my time.
    Chairwoman Biggert. Thank you very much. And I am sure we 
can find some common ground.
    The gentlelady from West Virginia, Mrs. Capito, is 
recognized for 1 minute.
    Mrs. Capito. Thank you. I would like to thank Chairwoman 
Biggert and the ranking member for having the hearing. I would 
like to thank the witnesses as well.
    As we have heard, we know this is of critical importance 
for us to restore our overall housing market, and I am 
particularly interested in hearing about the proposals that are 
set forth in the draft legislation.
    As has been discussed many times previously, we worked on 
FHA reform last year, and got it all the way through the House 
on a bipartisan basis. We know that FHA will play an important 
role in the housing market by providing stability and 
liquidity.
    This has not been the case for the last several years, 
however. As mortgage defaults begin to mount when the Federal 
Government insured and guaranteed 9 out of every 10 new 
mortgages, FHA lost some of its financial footing. Capital 
reserves fell well below federally mandated levels and I think 
that has the possibility of putting our taxpayers at risk, 
which is what this hearing is about today.
    So I know fundamental reforms have already been moving 
forward, and I am pleased about that, but I believe we still 
have obstacles remaining where we can't get the private market 
in, as Congressman Miller was talking about.
    I look forward to hearing from our witnesses on the 
advantages and disadvantages of the discussion draft. And I am 
also interested on the RHS, moving RHS out of the Department of 
Agriculture.
    And with that, I yield back the time I don't have.
    Chairwoman Biggert. Thank you very much.
    The gentleman from New Jersey, Mr. Garrett, is recognized 
for 1 minute.
    Mr. Garrett. I thank the Chair for all your hard work, for 
your thoughtful work on this legislative draft that we have 
before us, because reforming the FHA is of critical importance 
and should be a top priority of this committee. And the draft 
before us, as indicated, has a number of good proposals in it 
that should add to the safety and soundness of the FHA, and 
also protect taxpayers in possible future losses.
    And one provision that I believe is in fact a positive is 
the downpayment increase from 3\1/2\ to 5 percent. A lot of you 
know I sponsored legislation in the past Congress to do exactly 
that. I believe it is significant, but really just a modest 
step in the right direction to ensure borrowers have what we 
have been talking about, real skin in the game. LTV, loan to 
value ratio, is an important component. It is not the only one. 
But going to 5 percent is a far cry from what the QRM is 
talking about in that area of around 20 percent in their draft 
rules.
    Today, the FHA insures roughly 50 percent of new 
originations in the United States. This is really an 
astronomical number compared to pre-crisis stage, and as we 
begin to reduce the footprint of them, of FHA and the 
government more broadly, we have to get the private market back 
into the game.
    And with that, I too yield back the time that I do not 
have.
    Chairwoman Biggert. I thank the gentleman.
    At this time, I ask unanimous consent that the gentleman 
from Texas, Mr. Green, a member of the full Financial Services 
Committee, be allowed to participate in the hearing. He is 
recognized for 1 minute.
    Mr. Green. Thank you very much. Madam Chairwoman, and thank 
you, Mr. Ranking Member, for allowing me the opportunity to 
speak for just a moment.
    I am concerned about the increase of the downpayment from 
3.5 percent to 5 percent for many persons, not all, but many 
persons, who have never had a home; for many persons, not all, 
who have never had a home. The home itself is skin in the game. 
They finally get a place to call home. That is skin in the 
game. Keeping that home, for them, is keeping something that is 
a dream come true. That is skin in the game for them; for many 
people, not all.
    So my hope is that we will understand that there are plenty 
of people out there, good, hardworking American citizens, who 
can afford a monthly payment, who will consider the home skin 
in the game, who can't afford a downpayment as high as we might 
move it to.
    Commissioner Stevens has indicated that this might cause as 
many as 300,000 fewer homes to get financed. So my hope is that 
we will strike a balance, that we will make sure that those who 
can afford rent that would be higher than a mortgage payment 
can get the mortgage payment and have skin in the game; namely, 
a place to call home.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. I thank the gentleman.
    I would now like to again welcome the witnesses. And, 
without objection, your written statements will be made a part 
of the record. You will each be recognized for a 5-minute 
summary of your testimony.
    Let me just introduce you all. First, we have Ms. Katherine 
Alitz, senior vice president, Boston Capital, on behalf of the 
Council for Affordable and Rural Housing. Next, is Mr. Michael 
D. Berman, chairman, Mortgage Bankers Association, followed by 
Dr. Mark A Calabria, director of financial regulation studies, 
Cato Institute, Washington, D.C.
    I don't think we have ever had a panel this big. There are 
a lot of names here.
    Mr. Peter Carey, president and CEO, Self-Help Enterprises, 
on behalf of the Housing Assistance Council and the National 
Rural Housing Coalition; Mr. Brian Chappelle, partner, Potomac 
Partners; Mr. Peter W. Evans, partner, Moran and Company, on 
behalf of the National Multi Housing Council and the National 
Apartment Association; Mr. Basil Petrou, managing partner, 
Federal Financial Analytics, Inc.; Mr. Ron Phipps, broker, 
Phipps Realty, on behalf of the National Association of 
REALTORS; and Mr. Barry Rutenberg, first vice chairman, 
National Association of Home Builders.
    Welcome, all of you. Now, we will recognize each of you for 
5 minutes.
    And we will start with Ms. Alitz. You may begin.

STATEMENT OF KATHERINE M. ALITZ, SENIOR VICE PRESIDENT, BOSTON 
  CAPITAL, ON BEHALF OF THE COUNCIL FOR AFFORDABLE AND RURAL 
                         HOUSING (CARH)

    Ms. Alitz. Thank you, Madam Chairwoman. I am the president 
of the Council for Affordable and Rural Housing, and on behalf 
of myself and CARH, I want to thank the committee for the 
opportunity today to testify about the importance of Federal 
rural housing programs, the need to support these programs, and 
to address the draft legislation.
    CARH members house hundreds of thousands of low-income, 
elderly, and disabled residents in rural America. CARH has 
sought to promote the development and preservation of 
affordable rural housing throughout its 30-year history as an 
association of for-profit companies, nonprofit companies, and 
public agencies that together build, own, manage, and invest in 
rural affordable housing.
    My comments will address the later portions of the draft 
legislation which concern rural housing. CARH is very much 
focused on saving from elimination the Section 538 Guaranteed 
Rural Rental Housing Program. Section 14 of the draft 
legislation proposes a fee-based system to continue the 538 
program. We hope the much-needed 538 program provisions move 
forward with all due speed, as many development projects and 
the housing and jobs they create are waiting to proceed.
    CARH also appreciates the interest in streamlining Federal 
housing program administration. At the same time, the different 
housing agencies did not develop arbitrarily, but rather in 
response to different housing needs. Any consolidation of 
functions must address these different constituencies.
    CARH members continue to review the issue because there are 
pros and cons. The notion of moving some parts of rural 
development to HUD has been a topic of discussion in the past. 
However, the draft legislation circulated in advance of this 
hearing is the first serious legislative proposal we can recall 
regarding this issue.
    Before moving forward, we believe it merits further 
discussion among the housing industry and the affected 
authorizing and appropriating committees. It is important to 
ensure that whatever the context, certain programs continue and 
budget support remains for these programs.
    In rural America, the key rental housing programs have been 
and remain the rural development multi-family programs. The 
Administration's Fiscal Year 2012 budget request is notable in 
that it eliminates the Section 538 programs, even though the 
538 program is one of the most successful and low-cost programs 
currently used by rural development. CARH strongly supports 
maintaining a program level of $129 million.
    Further, we believe the 538 program can be rendered 
revenue-neutral, or virtually so, by allowing for a fee to be 
charged. The Section 538 statute already provides USDA with the 
discretion to charge a fee, but appropriations language has 
prohibited rural development from charging fees.
    CARH strongly supports Section 14 of the draft legislation. 
By incorporating fees, this section would restore financial 
balance to the program, while saving Federal appropriations.
    The Section 521 Rental Assistance Program is a lifeline for 
extremely low-income rural residents. Section 521 is similar to 
HUD's Section 8 program. The Administration's Fiscal Year 2012 
budget reduces rental assistance funding to $907 million. This 
is an unsustainable reduction which may result in the loss of 
housing for residents living in several hundred apartment 
complexes in rural America.
    Rural development has openly discussed how it anticipates 
achieving this by reducing the number of our rental assistance 
recipients through foreclosure of certain targeted Section 515 
loans, or by pressing for the payment of other 515 loans.
    To avoid the dislocation of residents, CARH urges full 
funding of rental assistance for Fiscal Year 2012 at the Fiscal 
Year 2010 level of $971 million.
    To the extent that Congress looks to pass rental assistance 
funding levels, we believe it is important to explain that 
rental assistance budgets have not increased in any real sense, 
although the budget amount has increased. For approximately the 
past 5 years, Congress has sought to convert rental assistance 
contracts from multi-year allocations to single-year 
allocations because this creates a short-term budget savings.
    Since Fiscal Year 2009, rental assistance contracts between 
rural development and property owners have been for 1-year 
terms. So, for example, if Congress decides to look back to 
Fiscal Year 2008 funding levels without adjusting for these 
budget changes, it may unwittingly dislocate over 100,000 
residents.
    Time constraints permit me from talking about every topic 
included in our written testimony, so I refer the committee to 
that testimony for more on the Section 515 program and the 
elimination of the MPR program in the Fiscal Year 2012 budget.
    We appreciate the committee's efforts to balance the needs 
of rural America's elderly, disabled, and working poor with our 
ongoing budget issues. The rural programs have been and remain 
our most efficient Federal housing, Federal rental housing 
programs, and are a resource that rural America cannot afford 
to lose. Thank you.
    [The prepared statement of Ms. Alitz can be found on page 
44 of the appendix.]
    Chairwoman Biggert. Thank you very much--
    Mr. Berman, you are recognized for 5 minutes.

STATEMENT OF MICHAEL D. BERMAN, CMB, CHAIRMAN, MORTGAGE BANKERS 
                       ASSOCIATION (MBA)

    Mr. Berman. Thank you, Chairwoman Biggert.
    FHA is at an important crossroads today, and this hearing 
occurring in the midst of efforts to reshape our housing 
financial system is especially timely. A few years ago, a 
growing number of voices were asking whether there was still a 
need for FHA or if the private market could fully absorb its 
functions.
    MBA never wavered in its support for the critical mission 
FHA performs, and the last few years have underscored that 
point many times over. Today, FHA is performing its traditional 
countercylical role, increasing its market share from 3 to 30 
percent, and providing necessary liquidity to our otherwise 
frozen housing finance sector. In doing so, it is ensuring 
access to safe mortgage products, helping homeowners to 
refinance into more affordable interest rates, and supporting 
the growing need for decent, affordable rental housing.
    We should all be grateful FHA is here today, and this 
subcommittee deserves recognition for the bipartisan focus it 
has put on FHA. Recent Congresses have made important changes 
to loan limits, given FHA more flexibility to set insurance 
premiums, and eliminated the failed, seller-funded downpayment 
assistance program, and provided FHA with additional staffing 
and technology upgrades. Thanks to your efforts, FHA is not 
only serving an expanded segment of the market during this 
economic downturn, but doing so while remaining in the black, 
an amazing feat, considering the impacts the foreclosure crisis 
has had on other market participants.
    While MBA's full recommendations are in our submitted 
statement, I would like to highlight the effect of two pending 
proposals on FHA. First, MBA members are deeply concerned with 
the proposed risk retention rule, its narrowly written 
competition for qualified residential mortgages and the 
ultimate effect it would have on FHA. The proposed QRM 
definition appears to conflict directly with the Obama 
Administration's preference for shrinking FHA from its current 
role of financing nearly one-third of all mortgages. It is not 
at all clear whether regulators reflected on the relationship 
between the proposed QRM definition and FHA's eligibility 
requirements in light of FHA's exemption from risk retention.
    By making it even more difficult for private capital to 
reenter the housing finance market, the QRM rule would lead FHA 
to being flooded with even more, not fewer, loans. And while 
FHA has an important role to play, MBA firmly believes that it 
is not in the public interest for a government insurance 
program to dominate the market. One of our primary concerns 
about the proposed QRM rule is the overemphasis on downpayment 
as an indicator of a risky loan.
    Likewise, we have similar apprehension about the 
legislation to raise FHA's minimum downpayment to 5 percent. We 
should not be placing such a high emphasis on just one factor 
in determining a loan product's overall risk. While downpayment 
has an important impact on default, other factors, including 
full documentation of income and borrower credit, can mitigate 
this risk. In fact, it is FHA's requirement for full 
documentation of all loans and its limited product options that 
helped insulate it from experiencing a more devastating default 
rate during the height of the housing crisis.
    MBA's most recent national delinquency survey, which we 
just released last week, drives this point home. The data found 
that for the first quarter of 2011, the FHA delinquency rate is 
down a full percentage point relative to last year, and the 
foreclosure start rate is down about 50 basis points. 
Policymakers need to carefully weigh their desire to decrease 
risk by raising minimum downpayments versus the certain and 
dramatic negative impact such a change would have on the 
availability of loans to low- to moderate-income, first-time, 
and minority home buyers.
    I would also like to touch on the proposals to lower FHA 
loan limits. Intense focus has been placed on the narrow slice 
of loans at the high end of the spectrum. MBA understands that 
those maximum loan limits are likely to go down to $625,000 on 
October 1st, but we think it would also be a mistake, and a 
mistake to also lower the limits in low-cost areas where FHA 
does most of its business. The average new FHA loan is about 
$190,000. In places like Texas, Georgia, and North Carolina, 
reducing or eliminating FHA's floor of $271,000 would 
drastically deny access to credit for many otherwise qualified 
lower- and middle-income borrowers. We need to be very cautious 
in enacting these proposals, given the continued weak state of 
the housing market.
    Finally, as a multi-family lender, I would like to note 
that FHA's statutory limits for multi-family housing are 
severely restricting the ability of rental property owners in 
urban markets to use FHA insurance programs. These limits can 
have an especially adverse effect on seniors, and should be 
addressed by Congress.
    Further, given the backlog of loans in the FHA multi-family 
arena, it is important that Congress encourage FHA to create 
operational efficiencies without political constraints.
    Madam Chairwoman, thank you for the opportunity to testify 
today.
    [The prepared statement of Mr. Berman can be found on page 
50 of the appendix.]
    Chairwoman Biggert. Thank you very much, Mr. Berman.
    And now, Mr. Calabria for 5 minutes.

  STATEMENT OF MARK A. CALABRIA, Ph.D., DIRECTOR OF FINANCIAL 
      REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, D.C.

    Mr. Calabria. Since the end of 2007, FHA reserves have 
declined from $22 billion to currently around $3.5 billion. 
While of course some decline is to be expected, given the 
bursting of the housing bubble and the continued weakness in 
the labor market, further declines could easily erode the 
remaining reserves and require a direct appropriation to cover 
future claims.
    The potential for a bailout of FHA remains not a remote 
possibility. According to the 2010 Actuarial Review, the net 
present value of future cash flows from FHA's current book of 
business is a negative $25.4 billion. The Actuarial Review 
projects a positive value for FHA on the basis of assuming that 
future business will generate revenue sufficient to cover 
embedded losses. In order for that assumption to turn out 
correct and to protect us from a bailout of FHA, credit quality 
of FHA lending standards must improve considerably.
    The estimated positive value of FHA's single-family 
business is also predicated upon stability in house prices. The 
most recent actuarial review from which the current positive 
values derive also gives a 40 percent chance that the true 
value of the fund is negative. We are essentially at the point 
of tossing a coin to determine the value of FHA, whether it is 
negative or positive.
    To improve the stability of FHA, I think we need to take a 
number of recommendations. Prior to giving those 
recommendations, however, I think we should start from maybe 
what I think is the most important observation of the financial 
crisis, which is, if lenders, borrowers, investors and 
governments do not face the actual cost of their decisions, 
those decisions are likely to have negative consequences.
    For at least three reasons, FHA's current premiums do not 
reflect its true cost. First among those is FHA's 
administrative costs are not covered by premiums but are 
covered by direct appropriations. A program can hardly claim to 
pay for itself when a very large portion of its costs are 
directly appropriated by the taxpayers. Going forward, I urge 
that premiums be structured in a way to cover FHA's 
administrative costs.
    Since FHA's premiums do not reflect any market risk, that 
risk is also not accounted for. CBO estimates that this 
admission distorts FHA's true costs by billions annually.
    Just as Congress, this body, required TARP to reflect 
market risk, FHA should reflect market risk and should be 
estimated on a fair-value basis.
    Lastly, FHA has a poor track record in estimating its own 
subsidies, even under the flawed framework of the Credit Reform 
Act. Over the last decade, FHA subsidy estimates were off by a 
net total of $44 billion, turning all of the supposed negative 
subsidies into actual subsidies over the last decade. These 
errors have always been biased in the direction of 
underestimating cost and must be addressed in order for both 
Congress and FHA to appropriately manage FHA's risks.
    Going forward, I think we need to make a variety of 
changes. First and foremost, I believe we need to change the 
incentive of FHA-participating lenders. The incentive for 
diligent and thorough underwriting is in my opinion simply too 
weak under existing procedures.
    First of all, we should immediately reduce FHA's coverage 
from 100 percent of the loan to 80 percent of the loan. Any 
mortgage that goes 100 percent bad is likely to involve fraud 
or negligence. Private mortgage insurance rarely covers more 
than 30 percent of the value of the loan. Other Federal 
guarantee programs, such as those under SBA, function quite 
well without covering 100 percent of the risk. As the lender is 
in the best position to monitor risk, the lender should also be 
required to maintain a portion of that risk under FHA. FHA 
should also put back to the lender any loan that defaults 
within 6 months of origination. Mortgages that go sour so 
quickly also are likely to have involved fraud or negligence.
    FHA should also end the practice of letting the lender 
choose the appraisal. We should go back to the practice that 
was prior to the mid-1990s where you had an appraisal practice 
that ensured appraisal independence. Changing lender 
incentives, while vital, will not be sufficient, in my opinion, 
to reduce continued losses in FHA. Significant changes to 
borrower eligibility must be implemented.
    As I document in my written testimony, the worst losses in 
FHA, as well as mortgage lending in general, come from a 
combination of poor credit history and loan downpayment. You 
could manage either manageably, but you cannot combine the two 
without resulting in significant losses. To manage this risk, I 
recommend that FHA immediately require an all-cash downpayment 
of at least 5 percent from all borrowers.
    We also know that high debt burdens can contribute to 
default. FHA should accordingly guarantee loans with only 
reasonable debt-to-income ratios. It should tell us something 
that you can get a new FHA loan today and be immediately 
eligible for a modification under HAMP. Other programs, for 
instance, such as 31 percent is deemed a reasonable debt-to-
income under HAMP, then it strikes me as a reasonable debt-to-
income for FHA.
    Borrower eligibility income should also be changed so that 
FHA mirrors the Rural Housing Service, and that borrowers with 
incomes at or below 115 percent with AMI are eligible for FHA 
guarantees. I would go as far as to say we should just simply 
scrap the whole loan limit framework and base FHA on income, as 
we do in the rural housing program.
    With that, I will wrap up my statements and look forward to 
questions.
    [The prepared statement of Dr. Calabria can be found on 
page 63 of the appendix.]
    Chairwoman Biggert. Thank you very much, Mr. Calabria. I am 
trying to get these names.
    Mr. Calabria. You are doing quite well.
    Chairwoman Biggert. Thank you.
    Mr. Carey, you are recognized for 5 minutes.

    STATEMENT OF PETER CAREY, PRESIDENT AND CEO, SELF-HELP 
ENTERPRISES, ON BEHALF OF THE HOUSING ASSISTANCE COUNCIL (HAC) 
        AND THE NATIONAL RURAL HOUSING COALITION (NRHC)

    Mr. Carey. Thank you, Chairwoman Biggert. I appreciate the 
opportunity to be here today to testify specifically on the 
proposed transfer of rural housing programs to HUD. I am Peter 
Carey, president of Self-Help Enterprises, a regional and 
nonprofit housing development organization serving California's 
agricultural San Joaquin Valley. And I am representing the 
Housing Assistance Council and the National Rural Housing 
Coalition.
    The draft bill before the subcommittee would move the 
entire lock, stock, and barrel housing programs of Rural 
Housing Services to the Department of Housing and Urban 
Development with the intent of improving service delivery to 
rural America. Four decades of hands-on rural housing 
experience at the three organizations I represent are confident 
such a move would not improve the administration of rural 
housing programs, would not help accomplish the mission 
Congress established them to deliver, and would make it more 
difficult for USDA to deliver its comprehensive rural 
development programs effectively.
    There is no time to go into the details today, but suffice 
it to say that Rural Housing Services is a remarkably 
successful, long-term mortgage provider, both for rental 
housing and for homeownership in rural America. Most of RHS' 
service goes to small communities, primarily communities under 
10,000 in population.
    The Rural Housing Service is certainly not perfect, and 
USDA's attention to housing could certainly be improved, but 
moving the rural housing programs from one department to 
another would not address those problems and would create 
significant additional challenges for service delivery.
    While there are concerns about USDA's attention to housing, 
we have equally grave concerns that HUD's structure is not set 
up to deliver Title 5 programs. HUD has limited experience in 
administering programs directed exclusively to rural areas. 
Most of HUD's programs can be used in rural areas, because 
their lack of context are delivered through State agencies, and 
the HUD Department structure is primarily urban-based. And 
historically, statistics show that home, CDBG, and FHA have 
spent a lower proportion of their funds in rural areas than the 
populations living there.
    HUD has never had a direct homeownership lending program 
like the Section 502 direct loan program and does not make 
direct loans to rental developers. HUD's experience, frankly, 
is in delivering block grants, guarantees, rental subsidies, 
not mortgage loans. It works through local, State, and tribal 
governments; developers; banks; intermediaries; and public 
housing authorities.
    In short, while the loans and grants offered by the Title 5 
rural housing programs are really retail items, HUD is a 
wholesaler, not a retailer.
    HUD's office infrastructure is not well suited to rural 
delivery. In my own State of California, there are six 
metropolitan HUD offices, where USDA has 18 local offices. I 
can get to discuss programs with a rural development staff 
person within about 10 minutes. It is a 250-mile drive to San 
Francisco or Los Angeles to have the same conversation with 
HUD, and the same is true for rural borrowers and others.
    The difference is even more dramatic in States with fewer 
large urban centers. In Illinois, for instance, HUD has 2 
offices, while Rural Development has 12 offices.
    The retail nature of Title 5 programs would require HUD to 
shift dramatically the way it does business. It is much more 
likely that the rural housing programs would be force-fit into 
the HUD delivery system. That would change the ability of those 
programs to reach rural communities. The dollar amount is not 
significant enough. It would represent about 5 percent of HUD's 
budget, and would not be significant enough to change the way 
HUD could deliver those programs.
    At USDA, it is important to realize that housing programs 
are interwoven with other mission areas, rural community 
facilities, rural businesses and cooperatives, rural utilities. 
They represent all facets of rural development in California 
and other rural areas. Removing those programs would complicate 
USDA's ability to deliver those rural development programs. And 
in many cases, those offices are co-located with Farm Service 
Administration, Soil Conversation, and others, creating a very 
comprehensive presence in rural America that is unmatched, even 
by State governments.
    The cost in money and human capital to make such a move is 
mind-boggling. Six hundred people and the attached 
infrastructure would be moved to HUD with, we believe, little 
to gain.
    There is no doubt that HRS can and should do better. There 
is also no doubt in our minds that HUD lacks the administrative 
system to deliver effective rural programs. Its programs, 
constituency, and interests lie elsewhere.
    Self-Help Enterprises, the Housing Assistance Council, and 
the National Rural Housing Coalition and hundreds of other 
rural housing organizations around the country would be happy 
to work with this committee and the subcommittee to identify 
less expensive, more effective ways to address RHS' 
shortcomings and maximize its capabilities. Thank you.
    [The prepared statement of Mr. Carey can be found on page 
72 of the appendix.]
    Chairwoman Biggert. Thank you very much, Mr. Carey.
    And Mr. Chappelle, you are recognized for 5 minutes.

  STATEMENT OF BRIAN CHAPPELLE, PARTNER, POTOMAC PARTNERS LLC

    Mr. Chappelle. Thank you, Chairwoman Biggert, Ranking 
Member Gutierrez, and members of the subcommittee. I am Brian 
Chappelle.
    I would first like to review FHA's key tenets and current 
performance. FHA, at its core, is an insurance program, and 
like any successful insurance program it needs to spread its 
risk. Just like an auto insurer could not be limited to drivers 
under the age of 25, FHA cannot be targeted only to high-risk 
borrowers.
    FHA has an even more daunting task, however, than your 
typical insurer. Its mission is to serve borrowers not 
adequately served by the private sector and still operate at no 
expense to the American taxpayer. As if those goals weren't 
enough, FHA is asked to accomplish them without encroaching on 
the private sector.
    Finally, it was asked to increase its role in 2007 when 
others were running away from the market.
    So how is FHA doing?
    First and foremost, we are 4 years removed from the 
collapse of the housing market, and FHA hasn't needed any 
taxpayer assistance. In fact, according to Secretary Donovan's 
testimony last month, its cash reserves were at a historical 
high in 2009, and grew again in 2010.
    At the hearing, Secretary Donovan also said that they 
expect FHA to make substantially more money for the taxpayer 
this year than their actuary predicted. This means that FHA's 
net worth, including expenses, should more than double in 
Fiscal Year 2011 to over $11 billion.
    In MBA's latest delinquency survey, FHA was the only market 
segment that saw its total delinquency rate fall in the first 
quarter of 2011. It is now at the lowest level in 5 years. Its 
credit quality is the best in decades, as about 60 percent of 
its borrowers have credit scores higher than 680, and only 3 
percent have credit scores below 620.
    Not surprisingly, the loans that FHA has insured in the 
last 2\1/2\ years have very low rates of delinquency. A couple 
of statistics to underscore this point: The early default rates 
in the FHA program have declined 85 percent from 2007 to 2010. 
Of the 1.4 million loans that FHA made last year, only 5,000 of 
1.4 million loans are currently in default. Clearly, fraud and 
poor underwriting are being rooted out of the FHA program.
    In the wake of the housing crisis, FHA has helped millions 
of families from all walks of life. Still, FHA has maintained 
its core role of helping the underserved.
    According to 2009 HMDA data, the government insured 65 
percent of the loans made to low- and moderate-income families 
and 75 percent of the loans made to minority home buyers. So 
how is FHA doing it?
    The Congress eliminated seller-funded downpayments in 2008. 
Without these loans, FHA would be over the 2 percent capital 
ratio today.
    Secretary Donovan and his team moved quickly on a variety 
of fronts to ensure FHA's long-term solvency, including strong 
enforcement actions that have reverberated throughout the 
industry.
    While it may not be popular to give lenders any credit in 
this process, it is a fact that starting in 2008, lenders 
implemented their own underwriting restrictions on top of FHA 
requirements. With these credit overlays, as they are called, 
lenders in effect are saying they are unwilling to originate 
certain loans that meet government criteria because of the 
contingent liability. Why would lenders do this when there is 
100 percent government backing of these loans?
    Mortgage lenders have skin in the game and in the FHA 
program. They have financial risk, have enforcement risk, and 
probably most importantly, have reputation risk. Lenders are 
using credit overlays to manage these risks.
    Finally, I have comments on two of the proposals. I would 
support raising downpayments if it were necessary to protect 
the fund. However, the performance data does not support it and 
it would hurt the very people who need FHA the most.
    Regarding the reduction in the mortgage limits, I oppose 
this provision since it would jeopardize FHA's financial 
strength. It has been a cornerstone of the FHA program that 
higher-balance loans perform better than lower-balance ones. 
This point has been made in every recent audit, including the 
Fiscal Year 2010 audit.
    In conclusion, any additional targeting in the FHA program 
will increase premiums to FHA borrowers and increase risk to 
the American taxpayer.
    Thank you, and I would be glad to answer any questions.
    [The prepared statement of Mr. Chappelle can be found on 
page 78 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Chappelle.
    Mr. Evans from Illinois, you are recognized for 5 minutes.

   STATEMENT OF PETER W. EVANS, PARTNER, MORAN & COMPANY, ON 
  BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL (NMHC) AND THE 
              NATIONAL APARTMENT ASSOCIATION (NAA)

    Mr. Evans. Thank you, Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee. On behalf of this 
Nation's 17 million households who call an apartment their 
home, thank you for the opportunity to testify on the role of 
FHA and Ginnie Mae in the multi-family industry.
    I am Peter Evans, a partner at Moran & Company. We 
specialize in developing, acquiring, and financing apartments, 
and we use FHA's multi-family mortgage insurance programs to 
finance both conventional and affordable rental housing. I am 
testifying on behalf of the National Multi Housing Council and 
the National Apartment Association. NMHC and NAA work together 
to represent the full spectrum of the Nation's apartment 
industry.
    Before I offer my comments on FHA and Ginnie Mae, I want to 
first give some perspective on the growing importance of rental 
housing in our society.
    The United States is truly on the cusp of a fundamental 
change in our housing dynamics. For demographic, financial, and 
lifestyle reasons, rental demand is surging. In this decade, 
renters can make up half of all new households. I want to 
reiterate that point: Half of all new households, for a total 
of more than seven million new households.
    But supply is falling short of demand. We need to build 
300,000 units a year to meet demand, yet we will start fewer 
than half of that this year. That demand and our industry's 
capacity to meet it is why today's hearing on FHA is so 
important.
    FHA has always been an important capital provider for the 
industry, admirably filling a specific market. But during the 
financial crisis, it became one of the few remaining sources of 
liquidity for our industry. Demand for FHA financing has 
increased more than fivefold. Applications have increased from 
2 billion to 10 billion, and HUD anticipates that demand will 
continue for the next couple of years.
    FHA has had a hard time keeping up with this demand, 
unfortunately. Loan processing times can now exceed 18 to 24 
months, and many borrowers have no idea where in the pipeline 
their applications are. This has resulted in an enormous 
backlog that is preventing our industry from meeting the 
Nation's growing demand for rental housing. We strongly support 
FHA's efforts to maintain sound credit and underwriting 
policies, but the resulting bottleneck is jeopardizing the 
thousands of jobs created by the multi-family construction, not 
to mention the net revenues and profits the Agency's multi-
family program generates for the Federal Government.
    We offer the following recommendations to improve FHA's 
ability to serve the multi-family marketplace, which includes 
some items that HUD and FHA have already identified:
    Follow the multi-family accelerated process guide to ensure 
loans are processed efficiently and adhere to the time lines 
within that guide:
    Seek a more efficient means to address credit concerns. For 
instance, FHA requires all loans over $15 million to be 
processed by a national loan committee instead of the field 
office. Instead of using a dollar limit, FHA should only 
require centralized review of the loans that exceed the 
program's terms and requirements.
    FHA should also establish a special underwriting team for 
large atypical loans, expediting the process of more standard 
transactions.
    Provide greater oversight over market assessment data 
information. Better manage multi-family resources with no 
additional costs such as exempting high-performing offices from 
having the national loan committee review certain types of 
transactions that present little risk to the taxpayer.
    The committee has asked us to comment on its discussion 
draft of FHA reform legislation. While the bill is primarily 
focused on single-family and rural housing, there are two very 
important multi-family issues that we would like to address. We 
would urge you to add a provision to the bill raising the FHA 
loan limits for high-rise elevator properties, because the 
current limits are too low to allow FHA financing to be used in 
urban areas where affordable and work force housing shortages 
are often most severe. Last year the House passed bipartisan 
legislation to do just that.
    We also appreciate the committee's efforts to improve the 
long-term viability of the FHA multi-family programs by 
implementing a risk-based capital reserve. We oppose, however, 
increasing the mortgage insurance premium for lower-risk loan 
programs to subsidize higher-risk FHA insurance activities. 
Raising multi-family premiums to subsidize losses in other 
programs could have a chilling effect on rental housing 
production.
    And finally, I would like to address suggestions that FHA 
replace or take over Fannie Mae and Freddie Mac's multi-family 
programs. We strongly oppose such efforts. As we have noted, 
FHA is unprepared to assume a larger role. In addition to the 
capacity issues identified, it is important to understand that 
FHA serves a specific niche within the market. It is simply not 
capable of providing a full range of unique and complex loans 
required by the apartment sector.
    NMHC and NAA look forward to working with you on reforming 
our housing financial system in a way that ensures a robust and 
uninterrupted supply of capital is available to ensure our 
Nation's work force housing needs are met.
    Thank you again for the opportunity to testify.
    [The prepared statement of Mr. Evans can be found on page 
99 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Evans.
    And, Mr. Petrou, you are recognized for 5 minutes.

    STATEMENT OF BASIL N. PETROU, MANAGING PARTNER, FEDERAL 
                   FINANCIAL ANALYTICS, INC.

    Mr. Petrou. Thank you, Madam Chairwoman. I commend the 
subcommittee for its attention to the important question of FHA 
and Ginnie Mae reform, but this legislation must be seen in the 
larger context of both ensuring the return of private capital 
to the U.S. mortgage finance system and balancing reform of FHA 
and Ginnie Mae with the reform of the GSEs.
    I want to second the concern that has been raised this 
morning with the qualified residential mortgage definition as 
it is being proposed by the banking agency. Because the law 
exempts FHA, and the proposed rule would impose stringent risk 
retention requirements on all mortgages with downpayments of 
less than 20 percent, low downpayment lending will flow to FHA, 
unnecessarily increasing taxpayer risk.
    Congress and the Administration are correct in focusing on 
winding down the GSEs in concert with changes to the FHA so 
that the U.S. residential mortgage secondary market does not 
become the sole province of entities backed directly or 
indirectly by the taxpayer.
    The draft legislation considered today is a vital first 
step towards a newly rebalanced policy in mortgage finance. Key 
provisions in it that I support include:
    First, the increase in the minimum borrower downpayment to 
5 percent which, when combined with a prohibition against the 
financing of closing costs, will increase the skin in the game 
contributed by borrowers. In a world of unstable house prices, 
beginning ownership with the bare minimum 3\1/2\ percent equity 
interest in a house means that the borrower is vulnerable to 
even relatively slight house price reductions. If house prices 
fall, first-time buyers will see their equity wiped out very 
quickly. This is highly problematic for borrowers, their 
communities, and the solvency of the U.S. mortgage finance 
system.
    Second, the revised approach to setting area loan limit 
amounts and, in particular, elimination of the FHA national 
loan limit floor. Home prices have fallen across most of the 
country in the past few years. And the current FHA national 
loan limit floor is at least 60 percent higher than the 
national median existing house price. This undermines FHA's 
missions of targeting low- and moderate-income borrowers, 
permitting the United States to back borrowers with the highest 
incomes in their local areas.
    Third, the establishment of minimum FHA mortgage insurance 
premiums is essential to rebuilding the solvency of the FHA, 
and thus to reducing taxpayer risk.
    Finally, I support improvements in the powers of the FHA to 
terminate or discipline lenders and to require indemnification 
from them. As long as FHA continues its current structure of 
direct endorsement lending and 100 percent Federal guarantee, 
the MMI fund will be faced with a misalignment of incentives 
for FHA lenders. The measures proposed in this legislation will 
help protect the U.S. taxpayer.
    I would like to suggest to the committee additional 
legislative changes which would allow FHA to initiate pilot 
programs to test the best way to alter its future activities to 
serve borrowers while protecting taxpayers.
    First, instead of targeting house prices, the FHA should be 
allowed to target borrower income as it relates to the median 
family income in an area. This approach would limit gaming of 
the FHA loan limits in future years as median family income 
fluctuates far less than median house price over time.
    Second, FHA should insure less than 100 percent of the loan 
amount. The MMI fund would be far healthier over time if 
lenders were required to have more skin in the game. The 
current VA program is an example where less than 100 percent 
coverage is currently implemented with Ginnie Mae. Congress 
could have FHA insure 30 percent of a loan amount in areas 
where there is already a high homeownership rate and where 
borrower incomes are sufficient to meet housing needs. But 
where homeownership is low and house prices are uncertain, FHA 
could insure 85 percent of the loan amount to provide lenders 
with an incentive to advance funding.
    Finally, FHA should experiment with risk-sharing programs 
with private capital. For example, FHA has the authority to 
enter into a risk-share pilot program with private insurers, 
but this authority should be amended to allow risk-sharing 
where the private insurer takes a first-loss position and the 
FHA assumes a second-loss one. This approach would 
significantly reduce taxpayer risk due to the direct risk 
absorption provided by private capital and through the benefit 
of an independent second underwriting of the loan.
    I want to commend the subcommittee for this important 
reform bill. Thank you.
    [The prepared statement of Mr. Petrou can be found on page 
114 of the appendix.]
    Chairwoman Biggert. Thank you.
    Mr. Phipps, you are recognized for 5 minutes.

STATEMENT OF RON PHIPPS, BROKER, PHIPPS REALTY, AND PRESIDENT, 
            NATIONAL ASSOCIATION OF REALTORS (NAR)

    Mr. Phipps. Good morning, Madam Chairwoman, Ranking Member 
Gutierrez, and members of the subcommittee. My name is Ron 
Phipps, and I am the 2011 President of the National Association 
of REALTORS. I am also an active part of a four-generation, 
family-owned residential real estate business in Rhode Island, 
and I am proud to testify today on behalf of the 1 million 
REALTORS, the 75 million Americans who own homes, and the 310 
million Americans who require shelter. Thank you for the 
opportunity to present our views on the importance of FHA.
    There is a common misconception that exists that FHA was 
intended only to benefit low-income borrowers who could not 
afford large downpayments on a new home. The truth is that FHA 
was intended to provide safe, affordable mortgage financing to 
all Americans in all markets, high- and low-cost. To that end, 
FHA has been a critical part of the Nation's economic recovery, 
especially in the last few years when the private lenders have 
left. The program has outperformed all expectations in 
providing safe, affordable mortgage financing to home buyers in 
all markets during these economic conditions.
    The fact that FHA has successfully operated for 77 years as 
a self-sufficient entity, without expense to American 
taxpayers, speaks to the value of the program and its 
management.
    During the past year, the FHA has taken a number of steps 
to mitigate risks that have resulted in greater improvements in 
the loan performance package in the MMIF. These include 
increasing mortgage insurance premiums, raising downpayments on 
riskier borrowers, and increasing lender enforcement. So while 
there has been much made of the fact that the FHA audit showed 
capital reserves falling below 2 percent, the fact is that FHA 
loans are outperforming the private market. Loans originated in 
Fiscal Year 2010 are the highest-quality FHA book of business 
has ever had.
    The current average credit score for FHA borrowers is up to 
703. FHA's seriously delinquent rate continues to decline, and 
the FHA foreclosure rate is lower than the rate for prime 
conventional loans. In fact, FHA's recent audit shows that if 
FHA makes no changes in the way that they do business today, 
the reserves will go back above the 2 percent threshold in the 
next several years.
    What we need now, what we really need now is for markets to 
heal, to self-correct, and to stabilize. The more you 
manipulate the markets, the more you magnify the problems.
    Specifically, we strongly oppose the proposal to further 
increase FHA downpayments. Increasing FHA downpayments would 
not add a penny to FHA reserves. The housing prices 
demonstrated that the key to reducing foreclosures and defaults 
is underwriting, not downpayments. And this is evidenced by the 
fact that FHA loans and VA loans have lower foreclosure ratios 
than prime conventional mortgages.
    We also strongly oppose provisions to decrease loan limits. 
Instead, we urge support for H.R. 1754, the bill introduced by 
Representatives Miller and Sherman, to make the current limits 
for FHA and GSEs permanent.
    Decreasing the loan limits would impact 3,049 counties in 
every State in the Nation and reduce the availability of 
mortgage loans for millions of home buyers. The decline would 
have a dramatic impact on the housing recovery and, we think, 
would halt it. In my own market area, the change would go from 
475 to 241, almost in half.
    That said, we strongly support the provisions of the 
discussion draft that provide FHA with increased tools for 
oversight and enforcement. We believe that FHA has shown 
tremendous strength in the current crisis. Due to solid 
underwriting requirements and responsible lending practices, 
FHA has avoided the brunt of defaults and foreclosures facing 
the private mortgage lending industry.
    To be clear: one, we oppose any increase to the 
downpayment; and two, we oppose any reduction in the loan 
limits. What our economy needs is less government interference 
and more market activity. Thank you.
    [The prepared statement of Mr. Phipps can be found on page 
128 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Phipps. Mr. Rutenberg, 
you are recognized for 5 minutes.

  STATEMENT OF BARRY RUTENBERG, FIRST VICE CHAIRMAN, NATIONAL 
              ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Rutenberg. Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee, thank you for the 
opportunity to testify. My name is Barry Rutenberg, and I am a 
home builder from Gainesville, Florida, as well as first vice 
chairman of the board for the National Association of Home 
Builders. NAHB represents over 160,000 members, many of whom 
rely on HUD programs and FHA to help provide decent, safe, and 
affordable housing to many of our fellow citizens. We commend 
the subcommittee for working to reform FHA, Ginnie Mae, and 
Rural Housing, yet we urge reform to be approached with 
caution.
    Changes to these programs cannot be separated from reform 
of the complex housing finance system, including future reforms 
to Fannie Mae and Freddie Mac. The Federal Government, through 
FHA and Fannie and Freddie, currently accounts for nearly all 
the credit volume to home buyers and rental properties. Even 
with this, fewer mortgage products are being offered and loans 
are underwritten on much more stringent terms adversely 
affecting home builders and buyers alike. As changes to the 
housing finance system are discussed, NAHB believes that it is 
crucial that there be a permanent Federal backstop to ensure a 
reliable and adequate flow of affordable housing credit. NAHB 
has been very supportive of FHA's changes to ensure that the 
mutual mortgage insurance fund is sustainable.
    We understand FHA has a disproportionate share of the 
mortgage market, and current levels are neither desirable nor 
sustainable. The subcommittee has proposed changes, including: 
increasing the downpayment to 5 percent; prohibition on 
financing certain closing costs; potentially higher mortgage 
insurance premiums; and lowering mortgage limits.
    NAHB believes these changes will restrict access to FHA 
credit and we have strong concerns about the impact of the 
proposed reforms on FHA's ability to maintain its critical 
mission of supporting home buyers during a tenuous juncture in 
the economy. NAHB believes that increasing the downpayment from 
3.5 percent to 5 percent will create a substantial burden for 
home buyers, especially younger buyers and those with strong 
credit profiles but not enough available funds to make the 
increased downpayment.
    Not often considered is the impact on homeowners looking to 
move up who cannot do so because of the reduced number of 
qualified buyers. NAHB appreciates the continued focus on 
strengthening the FHA's risk management practices. However, we 
are concerned that removing the ceiling on the annual MIP 
presently at 1.5 percent to result in a higher annual MIP. 
Increasing insurance premiums puts additional financial strains 
on home buyers who potentially could be buying excess housing 
inventory. NAHB has concerns for the proposal which would 
calculate the FHA loan limit based on 125 percent of median 
home price by county with no floor and a ceiling equal to that 
established in 2008 under HERA.
    Eliminating the floor for FHA loans would reduce the loan 
limits for significant parts of the country, including large 
numbers of first-time buyers without a key source of mortgage 
financing. In my hometown in Alachua County, Florida, we would 
go from $270,000 to $190,000, a drop of 30 percent.
    NAHB supports making permanent the current loan limits for 
FHA and GSEs and strongly supports H.R. 1754, the Preserving 
Equal Access to Mortgage Finance Programs Act, introduced by 
Representatives Gary Miller and Brad Sherman.
    Turning to multi-family, there are a few alternative 
sources of financing for multi-family rental housing. FHA, 
Fannie Mae, and Freddie Mac have provided the vast majority of 
financing for multi-family rental housing during this economic 
crisis and will continue to do so for the foreseeable future. 
The discussion bill proposes to establish capital ratios for 
the GI/SRI funds.
    While NAHB applauds the strengthening of FHA's risk 
management practices, we strongly urge the subcommittee to 
conduct an in-depth study to determine the appropriate levels 
and timeframe in which to implement them. With regards to rural 
housing, we are also opposed to the proposed transfer of the 
rural housing programs at HUD. NAHB believes that the rural 
housing programs are uniquely structured to address low- and 
moderate-income persons in rural areas. NAHB fears that it will 
be more difficult for persons living in rural areas to obtain 
an affordable mortgage and considerably more difficult to 
finance small properties in rural areas. We appreciate the key 
role FHA has played in keeping our housing market liquid, 
stable, and affordable. Looking at ways to improve the housing 
market is not an easy task. NAHB has some serious concerns on 
how to move forward, but we would like to continue working with 
you as you progress. Thank you for your time and this 
opportunity to testify.
    [The prepared statement of Mr. Rutenberg can be found on 
page 148 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Rutenberg.
    We will now turn to questions from members. And I will 
recognize members for 5 minutes each to ask their questions, 
and we will try to keep to that. I will yield myself 5 minutes 
for questions.
    Mr. Phipps, in a FOX News article that was published 
yesterday, it says that, ``The National Association of 
REALTORS,'' citing Obama Administration estimates from last 
year, said that, ``if the required payment rose to 5 percent, 
more than 300,000 creditworthy buyers would be locked out.'' Do 
you know how that figure was determined?
    Mr. Phipps. I believe actually that is from the FHA, and I 
can verify that and provide that in a written statement. Madam 
Chairwoman, one other thing that I think needs to be brought to 
the conversation is when you are a buyer, you have to come up 
with more than 3.5 percent. And I think what has been lost in 
the conversation is that there is an insurance premium with FHA 
and there are other closing costs. So that, in terms of the 
hard money the buyer has to come up with, often it is from 7 
percent to 10 percent, even though the downpayment is only 3.5 
percent. So I want to make sure that piece is introduced. We 
will provide the documentation as to the source of the 300,000.
    Chairwoman Biggert. The problem with the 300,000 was, how 
was it determined? I know that it was the Administration, but I 
wondered if they explained to you how they reached that number?
    Mr. Phipps. Go ahead, Brian.
    Mr. Chappelle. It was in testimony last March, FHA 
Commissioner Dave Stevens had it in testimony last March that 
talked about the 40 percent decline in borrowers and 300,000.
    Chairwoman Biggert. I do have the testimony. Thank you. I 
just wondered if any of you had asked him how that was 
determined? Mr. Calabria?
    Mr. Calabria. I haven't asked him. But if you look at the 
overall distribution of FHA's business in 2009, then his 
assumption must be that everybody who paid in that range simply 
cannot. So his assumption is based on that, you would never 
have any more money to put in as a downpayment. So Commissioner 
Stevens' assumption is simply that everything above 95 percent 
goes away, which I think is a pretty strong assumption.
    Chairwoman Biggert. Okay. Thank you. I guess then that 
there was no definite on that. It was assumptions.
    This year, the same Administration has proposed a QRM rule 
that would require borrowers to have a 20 percent downpayment. 
Can anyone comment on the discrepancies between the 
Administration's opposition to a 5 percent downpayment last 
year and his proposal for a 20 percent downpayment this year? 
Does anybody have any comments on that? Mr. Berman?
    Mr. Berman. Chairwoman Biggert, it would appear that the 
right hand and the left hand aren't taking a holistic view of 
the impact on the market. Clearly a 20 percent downpayment, as 
suggested in the current QRM, would have a dramatic impact on 
bringing private capital back into the sector, which is 
something that clearly the Obama Administration and I think all 
of us feel is necessary. So we would hope that the entire QRM 
proposal would be reconsidered.
    Chairwoman Biggert. Okay. Then instead of increasing the 
downpayment for FHA, let's look at the alternatives. Decreasing 
the downpayment. Would a zero downpayment stoke the housing 
market? Would that get it going more? And if Congress approved 
such a change and FHA implemented that change, what would 
happen to the FHA fund? Would taxpayers be at greater risk and 
need to bail out FHA? Would anybody care to comment on that? 
Let's try Mr. Petrou.
    Mr. Petrou. I think that what is important to think is not 
just the downpayment isolated, but also interconnected with the 
amount of insurance coverage on the loan. So that, for example, 
the VA program has a zero downpayment, but they only cover, at 
most, 50 percent insurance coverage on the loan and the 
insurance coverage falls as the loan amount goes up. And so 
most VA loans are looking at 25 percent insurance coverage. 
When you have a restructured system that looks at all of the 
factors in underwriting, you can, in fact, make a zero 
downpayment program and have the underwriter basically look at 
the loan from the perspective of what his own risk is going to 
be. And that, I think, is the key. Just picking one little part 
out and saying, let's change this and not look at everything 
else ends up with a problem.
    Chairwoman Biggert. Okay. Mr. Calabria, I think you had, in 
your testimony, talked about the loan performance in 
correlation with the downpayment.
    Mr. Calabria. That is absolutely a very important part. Let 
me say, for starters, and go back to the QRM. I think the QRM 
is probably beyond repair and Congress should seriously 
consider just repealing it outright. It is probably beyond 
fixing, in my opinion. An important thing to keep in mind about 
a downpayment is it is one of many factors. And if you change 
the other factors, what concerns me when I suggest we need to 
raise the downpayment is I hear zero discussion of changing the 
other factors, such as credit score. If you give people with a 
very bad credit a very low downpayment loan, you will see a 
high default.
    If we want to move FHA towards setting higher minimum 
credit scores, then you wouldn't have to worry about the 
downpayment. So again, it is the pieces moving together. And if 
you are not mentioning the other pieces, you need to focus on 
the downpayment. If you are going to change the other pieces, 
then you don't have to change the downpayment.
    Chairwoman Biggert. Thank you. My time has expired. It goes 
very fast. The gentlelady from California, Ms. Waters, is 
recognized for 5 minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman. I have 
identified some of my concerns when you gave me the opportunity 
to have an opening statement. And I would like to follow up on 
some of that. First, let me ask Mr. Calabria, I see that you 
have a tremendous background in public policy. You have worked 
here on the Hill. You have worked at HUD. You have done 
research. Have you ever been involved directly, like boots on 
the ground, with real estate sales or anything like that?
    Mr. Calabria. I will start with--
    Ms. Waters. No, no, no, no. You don't have to go back to 
all that. We have read it already.
    Mr. Calabria. I was going to start with my own experiences 
buying a home and also in addition to the policy experience 
that is listed there, I spent a tremendous amount of time with 
constituents, as I know many of us have in trying to make--
    Ms. Waters. I am going to cut you off because I don't want 
to take up my time with the history. We all buy homes. I am 
looking for real hands-on experience. Let me go to the 
REALTORS. Mr. Phipps, are you heading an association because 
you have some experience or background in public policy or 
doing--as an analyst or a consultant? Or have you been on the 
ground talking to people and writing loans and mortgages?
    Mr. Phipps. Yes. Yesterday morning, I was showing clients 
houses.
    Ms. Waters. Okay. Then you are the one I want to talk to. 
Can you react to the claim in Mr. Petrou's testimony that 
increasing downpayment requirements will not adversely affect 
first-time or low- and moderate-income home buyers? I want to 
get a better understanding of this downpayment debate.
    Mr. Phipps. Our experience would suggest that is just 
simply not true. In my own personal experience, I work with a 
significant number of buyers who do not have 20 percent down. 
Most recently, the couple that I was working with yesterday did 
not have 20 percent down. They will have enough for 5 to 7 
percent. They are looked at and preapproved on a very 
comprehensive basis. And one of the things that we have learned 
from the experience of 5 years ago is how to look at holistic 
approvals. We think it is too rigorous now. But if you increase 
the amount down, you really take a lot of people who should be 
able to buy who will be responsible, sustainable homeowners out 
of the marketplace. And that amplifies the problem for value. 
You are not absorbing the inventory then.
    Ms. Waters. So would you be referring to, for example, a 
young couple, both working, renting property, pay their bills 
on time and are saving some portion of their income--as much as 
they possibly can with average salaries--who want to get into a 
home and perhaps can get, like you said, 3 to 5 percent down. 
But 20 percent, 10 percent would be a real reach for them.
    Mr. Phipps. It is real. It really is real. Last year, I 
worked with a couple. He was a Narragansett police officer, and 
she was a schoolteacher. If they needed more than 3.5 percent 
down, they would not have been able to buy the home. And they 
bought in Apponaug, they bought in Warwick. That is real.
    Ms. Waters. These are not deadbeats, are they?
    Mr. Phipps. No. A police officer and a schoolteacher. When 
we come here, what is very frustrating is there is a lack of 
appreciation--we are talking individual families. And the 
families really, their skin in the game truly is ownership. 
They know that long term, it is important for them to be 
homeowners. But if it takes the average family 14 years to come 
up with 20 percent, you postpone their ability to own for a 
long time. Plus, it doesn't make a lot of sense. And we think 
the facts--and we can provide you with lots of documents--but 
please remember that each statistic is a family, a family who 
wants to own and understands the value of homeownership.
    Ms. Waters. These are people that you see in your business 
and the REALTORS interact with and they know who we are 
talking about and what we are trying to do and the average 
American that we are trying to assist in the American Dream, is 
that right?
    Mr. Phipps. Yes, ma'am. In all 50 States, in every town and 
city in this country.
    Ms. Waters. I yield back the balance of my time.
    Chairwoman Biggert. Thank you, Ms. Waters. Mr. Hurt, you 
are recognized for 5 minutes.
    Mr. Hurt. Thank you. And I thank each of you for your 
testimony this morning on a very important subject. I guess I 
kind of come at this subject with a couple of things in mind. 
Number one is, obviously, we want to I think in this country 
encourage responsible homeownership everywhere wherever we can. 
But I think also we have to remember that these programs and 
with the backstop offered by the government, these things 
propose a risk to the taxpayer. And I think that we see 
examples of that, that we are not dealing with in other bills. 
I also think philosophically that, to the extent that the free 
market can address the issues and address these issues on its 
own without government intervention, I think that that is what 
we should work toward.
    So I was interested to hear Mr. Phipps talking about 
wanting more market activity, which I think we would all agree 
with. We want to see more market activity. But also talking 
about less government intrusion. I guess for my part 
philosophically, I think that a government backstop encourages 
behavior that perhaps could not be sustained if the system was 
totally within the private sector. And I guess my question--I 
would love to hear from Mr. Phipps and Mr. Rutenberg whether or 
not you believe it is legitimate to want to have the private 
sector come more into the mortgage market or not because it 
seems to me that by increasing the downpayments very modestly 
and by reducing the loan limits modestly, while it may have an 
immediate effect in the long term, it would encourage the 
private sector to come in.
    So I would like to just hear you say--do you think that the 
private sector should come into this market more and FHA has 
too much? Or do you think we should just leave it the way it 
is? And if we do take these actions, increasing the 
downpayment--this is the second part of the question--if we do 
take these actions, will the private sector come in? And if 
maybe Mr. Phipps and Mr. Rutenberg can address that 
individually. Thank you.
    Mr. Phipps. The short answer is, we would like to see more 
private activity in general. We think the reliance on FHA is 
probably unnecessarily large. But they are filling a void that 
the private sector has not stepped into. As a practical matter, 
when you talk to the GSEs and you look at the fact that their 
credit scores have gone from 720 now to 760, there is a good 
portion of the market that should be able to have access to the 
market that do not. That is a major problem.
    Our fear, our genuine fear is that when you look at the 
limited amount of private activity in the marketplace right now 
that there is no entity to step in and fill that. And this 
industry relies on the flow of capital. So for the immediate 
present, we need what we have in place and more so that 
transactions can happen. But we don't see anybody else ready to 
step into the market and fill the void that we need across-the-
board.
    Mr. Hurt. But if you support the idea that the private 
sector should come in, then let me ask you this: How would you 
do it? We have to make that decision. I know you are not 
sitting up here. We are sitting up here. But how do you do that 
if you support that philosophically?
    Mr. Phipps. The short answer is, and your comment about 
interference, we would like the system that FHA has in place 
right now to stay in place. The improvements for enforcements, 
etc., are fine. On the GSE piece, ultimately we believe we need 
a government guarantee. At the end of the day, we believe that 
is what we need and we need that. And then you can have more 
flow and reliable floor. We really believe, at the end of the 
day, you will need a government guarantee.
    Mr. Hurt. Thank you. Mr. Rutenberg, if you don't mind?
    Mr. Rutenberg. I am a home builder. I talk with clients. I 
haven't talked to one since about 9:40 this morning. The market 
is healing. It is taking a while. It has taken longer than we 
would want. I think that when we talk about one thing at a 
time, what we miss is how interactive all the pieces are to our 
buyers. When we sell a house, we no longer tell them they are 
going to have a mortgage application. We now tell them they are 
going to have a mortgage inquisition. The amount of data, the 
amount of the depth that has been gone into is setting a base 
for a much healthier future. You can look at the numbers that 
many people on this panel have talked about, how things are 
improving.
    It has not improved enough yet to where a lot of private 
money is coming in. The major lenders are still straightening 
out some of the things that have happened in the past. They 
have not yet quite seen their profit potential. But as the 
market comes back, they will come back and they will 
participate more. It won't be exactly as you probably would 
want it without you having to motivate them.
    There is so much potential that is out there that they will 
come back. But they have lost so much money over time that 
their eagerness is not there yet. And they will put their toe 
in and they will gradually come back. We don't think that we 
should have Fannie and Freddie and the FHA at the current 
levels. But at the moment, if you did not keep them here where 
they are, we would see further problems in financing. You would 
see further declines in the house prices that would further 
erode consumer confidence. You can play the economics out of in 
your head.
    Chairwoman Biggert. The gentleman's time has expired. The 
gentleman from California is recognized for 5 minutes.
    Mr. Sherman. Thank you. To hear the philosophical comments 
from the Cato Institute, from the gentleman from Illinois, I 
would remind you that whatever the philosophy is for some 
perfect world or where we might want to be 20 years from now, 
right now, the patient has suffered a heart attack and is on 
the gurney. And even if you believe fervently in exercise, 
usually a triathlon should take place more than a few weeks 
after the heart attack. This bill gives us a chance to 
experience a double-dip recession. The best way to have a 
double-dip recession is to see another dip in housing prices.
    I particularly would like to focus attention on those areas 
where you have high-cost housing. And this bill would take the 
FHA from $729,000 down to $537,000 in Los Angeles County. Mr. 
Phipps, what effect would that have on home prices, not only of 
the homes that sell for $800,000. But if they drop by a couple 
hundred thousand dollars, what is going to happen to the home 
that traditionally sells for a couple hundred thousand dollars 
less than that?
    Mr. Phipps. The short answer, Congressman, is the entire 
market is linked. So as the upper bracket gets pressure on 
prices, downward pressure because financing becomes harder, it 
has a ripple effect in both directions. So the bottom line is 
you are going to see a huge loss of equity. And candidly, what 
is frustrating about the proposal is it is done by county 
rather than metropolitan area. So it de facto becomes a 
redlining. You are going to have certain counties that are much 
more negatively impacted because you are not allowing for the 
whole presence of the metropolitan area. So it has a huge 
negative impact on value.
    Mr. Sherman. And it is that county rather than the 
metropolitan area that would be responsible for the drop to 
about $537,000 in L.A. County, really a $200,000 drop. A recent 
report showed that three banks are closing half the mortgages. 
And now this bill would cause an awful lot more mortgages to 
have to be held in part or in full by--in the portfolios of 
banks rather than sold as securities. That means the banks that 
would benefit with those would be the lowest cost to funds and 
those are the banks that are too-big-to-fail and enjoy an 
implicit Federal guarantee.
    What impact does it have on the market to have 3 banks 
controlling 56 percent of the market? And what impact would it 
have for those loans over, say, $537,000 where you might see 70 
or 80 percent in the control of these 3 banks?
    Mr. Phipps. There is less competition. So that, in fact, 
the cost of the money would be more expensive. You will have 
fewer options. When I started in the business 30 years ago, the 
top 5 lenders represented less than 25 percent of the market. 
We have such a concentration now that it is unlikely--you can't 
shop the mortgage the way you used to. And the underwriting 
criteria universally is the same. So there are real constraints 
as to what you would have available.
    Mr. Sherman. I would also point out, you understand the 
pain from the home buyers' perspective. In this room, the 
greatest pain was when we had to consider the TARP bill. Some 
voted one way, some voted the other. But if these institutions 
are able to add to their portfolios 56 percent--huge 
percentages of mortgages in addition to their other assets, 
they become really, really too-big-to-fail. And so you may see 
pain here as well as with your customers. And they also become 
concentrated in real estate. If you want to respond?
    Mr. Phipps. Congressman, if I may make one other point. One 
of the challenges right now, if you are self-employed, if you 
are a 1099 person, your ability to get financing is extremely 
difficult because the large lenders really prefer people with 
W-2s. So there is a huge piece of the market that is having 
trouble being placed. It would actually be in the market right 
now. And that is indicative of the lack of flexibility and 
competition.
    Mr. Sherman. As an old tax collector, I would say I would 
only want those with the 1099 income, reporting all that 
income. And I am sure that is the kind of person you had in 
mind.
    Including a recently announced increase, FHA increased 
premiums 3 times last year. How does this affect home buyers?
    Mr. Phipps. It has actually reduced the number of people 
who are able to finance and the people who are being approved 
now are much more creditworthy. It just seems to me, we are 
trying to fix a problem again that we have already addressed. 
If we let the market absorb the changes that are in place now, 
that is better for us.
    Mr. Sherman. Thank you.
    Chairwoman Biggert. The gentleman's time has expired. The 
gentlelady from West Virginia, Mrs. Capito, is recognized for 5 
minutes.
    Mrs. Capito. Thank you, Madam Chairwoman. I thank all of 
you. I want to talk about two things, I hope I have time for 
them. First of all, I want to talk about USDA Rural Housing 
Service proposal to move it within HUD. The folks--I believe it 
was Ms. Alitz and Mr. Carey talked a lot about this. We are 
looking for efficiencies in government obviously and we have 
the $14 trillion debt that we all know about. There was a 
report that came out maybe a month or 6 weeks ago--and I can't 
remember exactly what is the title of it--but it talked about 
duplicative housing programs across all the different 
government agencies. And certainly, I represent a very rural 
area. You know when I hear loan limits of--our housing price is 
probably $120,000. So it just boggles my mind that $700,000 to 
move down to $500,000 is going to be so painful because in my 
area, that is somebody living on the hill, big.
    So I want to know, you have both said that you think this 
is not a good idea because you think it would dilute the 
ability to reach the population that this program is designed 
for, which are the very low-income rural areas. Do you think if 
the expertise was transferred from USDA into--I am talking 
about staffing and infrastructure--into HUD within the umbrella 
there, I am looking for efficiencies here. Do you still think 
that if it was not done precisely and carefully that HUD 
couldn't retool into this market and be just as effective as 
the USDA has been?
    Ms. Alitz. We actually said that we think there are pros 
and cons to the plan. We just don't know enough about it right 
now. And we have to, I think, take a stronger look at it. That 
is one of the cons. We think if the whole thing was transferred 
to HUD, it would be shoved in a back room somewhere and it 
wouldn't get the attention that it deserves. And currently, 
what I hear from most of my membership is those that deal with 
rural development on a daily basis, they have a pretty good 
line of communications and they have good relationships and 
they are afraid of losing those. But we do think that there are 
some pros to looking at moving to HUD. And those are mostly 
related to funding. We have had problems with the current 
Administration's budget and we wonder about the USDA's 
commitment to its rural housing portfolio.
    Mrs. Capito. Right. We had the issue in April where we had 
to keep moving.
    Ms. Alitz. Right. So we think that their funding sources--
this portfolio really needs to be conserved because it is 
aging. Most of it is over 20 years old. We think for funding 
purposes we may be better off at HUD.
    Mrs. Capito. Mr. Carey?
    Mr. Carey. I think the important element of the USDA 
delivery system is the infrastructure that is in rural 
communities. They have a presence. They are community members. 
Sort of like community bankers, like we used to have. So they 
are there. And their delivery system typically collocates and 
combines farm service programs, soil conservation, wastewater 
and water assistance, community facilities funding and 
homeownership and rental housing.
    And my first experience was in Buffalo Creek rural housing. 
When a borrower for USDA loan wants to apply for a loan, they 
go to the local office and they are dealing with local people. 
And if you take the housing out of that system, you will still 
have that same system there but nothing to replace it from HUD 
because HUD--if a homeowner in a local community in 
Farmersville, California, wants to borrow from HUD, if HUD was 
direct lending, they would go to San Francisco, not the same as 
going to somewhere 10 miles away.
    Mrs. Capito. The other way--and I only have a minute left--
is on the QRM. I have heard from several folks who think it 
needs to be thrown out, retooled. It is going to be 
ineffective. It seems to me what I am hearing baseline--and 
correct me if I am wrong--is that this creation of the QRM is 
just going to bloat FHA even more. I see a lot of nodding 
heads. Does somebody want to comment on that? I will go with 
Mr. Berman and then Mr. Rutenberg.
    Mr. Berman. Sure. So if the concept is that we are trying 
to bring private capital back into the market--and I think we 
all agree on that--and yet we are going to put these 
significant constraints on private capital, we are going to 
have--
    Mrs. Capito. Have adverse effects.
    Mr. Berman. Exactly. An adverse effect.
    Mrs. Capito. Mr. Rutenberg?
    Mr. Rutenberg. The QRMs are probably flawed. Hopefully, 
they will not go in as they are. But if it does go in, it will 
put a lot more pressure on FHA to do more lending, no question.
    Mrs. Capito. Thank you.
    Chairwoman Biggert. The gentlelady's time has expired. The 
gentleman from Massachusetts, Mr. Capuano.
    Mr. Capuano. Thank you. Madam Chairwoman, I don't know 
where to start. I just have a couple of questions. Mr. Phipps, 
did I hear you say you are from Rhode Island?
    Mr. Phipps. Yes, Congressman.
    Mr. Capuano. Have you done any work in the greater Boston 
area?
    Mr. Phipps. I am licensed in Massachusetts and Vermont.
    Mr. Capuano. Great. I represent, Boston, Somerville, 
Cambridge, and Chelsea. Do you know any place in my district 
where I can get a reasonable house for less than $500,000?
    Mr. Phipps. The short answer is, it is challenging.
    Mr. Capuano. It is challenging?
    Mr. Phipps. With a good REALTOR, yes, I think that you 
can. But $500,000 is--
    Mr. Capuano. A really good REALTOR. The reason I am amazed 
is when you say increasing a downpayment from 3.5 to 5 percent, 
that doesn't sound like much. That sounds reasonable. But when 
you put it down on a $500,000 home, that is $7,500 in cash. 
Which I know that there is probably nobody here at this table 
who has a problem coming up with $7,500 in cash, but a lot of 
my constituents do. And that means that they will never own a 
home. Has anybody had any discussions yet about maybe a sliding 
scale? I understand that more people can afford certain things. 
That is fair. Have there been any proposals for a sliding scale 
downpayment?
    Mr. Phipps. Not that I know of.
    Mr. Capuano. Does anyone else know of any proposals?
    Mr. Chappelle. FHA used to have a sliding scale 
historically.
    Mr. Capuano. Yes, I know.
    Mr. Chappelle. They switched in 1998, I think, to make it 
simpler so people could understand what the downpayment was so 
it would be a flat percentage of all loan amounts.
    Mr. Capuano. You do realize that most people who go in to 
get an affordable mortgage don't understand much. They just 
want to get a mortgage. And if you tell them what they are 
going to put down, they are going to say, yes, I can afford it, 
or no, I can't.
    Mr. Chappelle. The only thing I would add, Congressman, is 
that the performance of the FHA Fund today demonstrates that 
low downpayment loans perform very well. So I don't think there 
is a need from a statistical performance perspective.
    Mr. Capuano. I am fine with having no need. I am painfully 
trying to be reasonable which is tough for me, but I am trying.
    Mr. Calabria. If I could comment, FHA actually does have a 
little bit of a sliding scale now in that if you are below a 
certain credit score they require you to do the 10 percent. So 
there is a sliding scale in mind. And I think if you are going 
to base it that way, again, we know it is the interaction 
between the credit score--as Ms. Waters said, people paying 
their bills on time versus downpayment. So you could do a 
sliding scale on credit and FHA has actually proposed--
    Mr. Capuano. Bringing up FICO scores is a whole different 
issue which is another little bit of a problem. Conceptually, I 
don't disagree. But we have to get FICO scores right first.
    I guess the other question--I want to just thank the 
Majority staffer who wrote the little memo for today because 
they made my point. Prior to the creation of the FHA, home 
mortgages did not exceed 50 percent of the home value and did 
not extend past the 5th year. The rates were about the same 
rates as we have today, give or take 5 or 7 percent. But 5 or 7 
percent over 5 years versus 30 years, does anybody have any 
clue how much that is? Because I do. I think the official 
answer is, way too much money for anybody to afford which is 
why people didn't have homes.
    I guess I am sitting here today--there is no argument 
that--look, the private market has a role to play in this. But 
somebody needs to tell me why right now we are having a hard 
time getting people into homeownership when the home builders 
are building nothing, for all intents and purposes, because 
there are no buyers out there. We can't move this part of the 
market around. Why in the world would we want to, overnight, 
simply just shut down one of the few escape valves we have had, 
other than for some holy sacred cow that we want to light 
candles at?
    Mr. Calabria. Since I sort of feel this coming my way, I 
guess I will--
    Mr. Capuano. It is not personal.
    Mr. Calabria. Exactly. I don't take it that way. First of 
all, I think certainly myself--I know that it has been clear--
that any sort of transition should be over time. For instance, 
I don't propose getting rid of Freddie or Fannie tomorrow. I 
think it needs a 5- or 6-year period. I see these changes that 
have been proposed in FHA as quite modest.
    Mr. Capuano. So you want to do them all together?
    Mr. Calabria. Absolutely.
    Mr. Capuano. That is fine. You just made my point. So you 
think it is okay to go back to--or you think somehow the 
miraculous market that didn't exist before Fannie and Freddie 
will somehow exist now. The goodness and the graciousness of 
the private market will get rid of those 5-year mortgages.
    Mr. Calabria. I think if you go back and you actually look 
at the data on homeownership rates--I would be happy to come in 
and show you some time--
    Mr. Capuano. Oh, please do.
    Mr. Calabria. --in the 1950s and 1960s, when Freddie and 
Fannie's market share was essentially zero, homeownership--look 
at the data.
    Mr. Capuano. I have looked at the data. Take a look at the 
homeownership rates prior to the 1930s.
    Mr. Calabria. The homeownership rates prior to the 1930s 
was about 45 percent. Homeownership was not limited to the 
wealthy prior to the New Deal.
    Mr. Capuano. And you think that is a good idea?
    Mr. Calabria. I think that you would have it any other way. 
You have had income growth. You had a lot of other reasons--
    Mr. Capuano. It is okay to think it is a good idea. I just 
seriously disagree with you.
    Mr. Calabria. First of all, I think it is absolutely the 
wrong idea to target the homeownership rate as a matter of 
policy. I think that is one of the reasons we are in the mess 
we are today. I think homeownership rates would be upper 50s, 
low 60s if we had no Federal support. And I am absolutely 
convinced of that and I think there is significant data to 
support that. So it is not simply some sort of philosophical 
choice.
    Mr. Capuano. See, here is where we have a basic 
philosophical difference. When my ancestors came over, they 
didn't come over with a satchel full of cash.
    Mr. Calabria. Neither did mine. Mine came from nothing.
    Mr. Capuano. I appreciate that. And guess what got them 
into the middle class, homeownership.
    Mr. Calabria. You know what got mine into the middle class? 
Working.
    Mr. Capuano. Oh, that is good for you. Because my family 
never worked. We were on the dole. That is very good.
    Chairwoman Biggert. The gentleman's time has expired, 
fortunately.
    Mr. Capuano. Does anybody want to yield?
    Chairwoman Biggert. And I would say to the gentleman that 
you missed the beginning of this.
    Mr. Capuano. Oh, no. I watched it on TV.
    Chairwoman Biggert. We have several drafts that we are 
looking at, and to have this kind of dialogue so that we can 
really do no harm.
    Ms. Waters. Madam Chairwoman, since we have so few members 
on this other side, can I make a unanimous consent request to 
give the gentleman 1 more minute?
    Chairwoman Biggert. Must I? The gentleman is recognized for 
1 more minute.
    Mr. Capuano. Thank you, Madam Chairwoman.
    Mr. Garrett. If the panel gets another 30 seconds to 
respond.
    Mr. Capuano. I would love this.
    It is amazing to me that your family was the only one who 
worked in all of America, that none of us did. See, the 
difference between people who think that homeownership should 
be left to the private market and people like me who think the 
government has a role to play to ensure that the middle class 
can afford homes because nobody else has ever done it in the 
history of the world except when government got involved, that 
is the only time it has ever happened. The reason I think that 
is because people like me would never have gotten into the 
middle class. We would still be driving trucks for vegetable 
farms that don't exist anymore. And I know that is fine. That 
would have served your purposes just fine. But most of my 
constituents would never have owned a home. And I personally 
think that is what has made America great. That is how my kids 
went to college, remortgaging the house.
    Now I know that many people in the financial services world 
don't have to do that. Many people, most people do. And that is 
why I came today. I am not opposed to trying to narrow some of 
these things down. Nobody wants bad mortgages given out to bad 
people or people who can't afford it. That is ridiculous. It 
kills the whole system. But to sit here and pretend or argue--
    Chairwoman Biggert. The gentleman's time has expired.
    Mr. Calabria. The panel's time perhaps?
    Mr. Garrett. I seek unanimous consent to give 30 seconds to 
Mr. Calabria to respond.
    Chairwoman Biggert. Without objection, it is so ordered.
    Mr. Calabria. I very much appreciate the point. I think if 
you go back, and again, you look at the historical data when 
people actually had equity in their homes--for instance, in 
1980, the typical equity in a home was 70 percent. So the 
question is whether debt creates homeownership. If we want to 
subsidize homeownership, why don't we subsidize home equity 
rather than home debt? Getting people leveraged over their head 
is, in my opinion, not a way to create the middle class. And 
again, the middle class has to pay taxes too.
    There is another side of this. Do you want to know what my 
experience is? My experience as a taxpayer is, and I think a 
lot of people out there, the more you pay in taxes, the less 
you actually have to spend towards your mortgage, toward the 
other necessities of life. So all of these pieces fit together. 
And I think it is important ultimately to ask at the end of the 
day, do we get much for the money that we spend in our mortgage 
finance system? I think the answer is absolutely not. I think 
the bill in front of us contains very minor changes that do not 
gut the system to any extent of the imagination.
    Chairwoman Biggert. Thank you. The gentleman's time has 
expired. The gentleman from New Jersey, Mr. Garrett, is 
recognized for 5 minutes.
    Mr. Garrett. Let's just try this from another tact.
    So is there anybody on the panel who does not believe that 
there is risk in the marketplace today? No. Does anybody 
believe that we should be pricing for that risk in the 
marketplace today? We all agree that we should be pricing for 
that risk. Does anybody disagree that we, as far as the 
accounting methodology that the FHA uses, that accounting 
should be transparent and show that pricing risk as well? Does 
anybody disagree with that? You disagree with that. We should 
not show that. Yes?
    Mr. Chappelle. Are you referring to the CBO study on fair 
value accounting?
    Mr. Garrett. Sure.
    Mr. Chappelle. The only trouble with fair value accounting, 
as I see it, Congressman, is that the value is an estimate. It 
is a projection. And the projection that the CBO used was based 
on Fannie and Freddie's fees and the private mortgage insurance 
fees. So you are comparing government, which is hard to compare 
because you can't find something comparable.
    Mr. Garrett. So what fees are used right now? Only FHA. 
GSEs doesn't do this, right? The FHA uses the valuation of 
what, treasuries as basically accounting.
    Mr. Chappelle. Right.
    Mr. Garrett. Does anyone on the panel believe that the 
current pricing of treasuries is what we are going to see 3 
years from now, 10 years or 15 years? Or are we going to stay 
at these historically low levels? So everyone agrees that the 
treasuries are going to go up. Does anyone believe that they 
might go up significantly? A lot of nodding heads. So is it 
fair, then, that we are using that as the basis for the 
valuation?
    No. Okay. So if that is not the correct valuation for 
valuing, then perhaps the CBO score is. So do you use fair 
value? Or some variation of a fair value accounting.
    Mr. Chappelle. If I could answer, Congressman. The concern 
I have with the fair value is it is based off of Fannie, 
Freddie, and MI fees. The MI fees are comparable to FHA fees. 
If the Fannie and Freddie fees were not so high, the private 
mortgage insurance business would be back in business today. 
But because of those fees that Fannie and Freddie charge, which 
they are set because they are trying to--I understand why they 
set them where they set them--but they are trying to preserve 
capital for the taxpayer which is an altruistic reason. But the 
upshot is, it is making the private sector less competitive. 
The point is, FHA has raised its fees 4 times in the last 3 
years. They have raised them 60 percent. They have gone up to 
the highest fees in FHA's history.
    Mr. Garrett. So what you are saying is that the CBO score 
evaluation is wrong?
    Mr. Chappelle. No, it is not wrong. Excuse me, Congressman. 
It is not wrong. It is just that by using Fannie/Freddie data, 
FHA is doing fine. I wouldn't say FHA is charging too little. I 
would say Freddie and Fannie are charging too much.
    Mr. Garrett. It looked like you had a comment.
    Mr. Calabria. I will make a couple of quick points. Along 
fair value, absolutely when you were transferring risk from the 
private sector to the government, there is market risk 
involved. This is not charged. So if the government is giving 
something to the private sector, that should be priced 
appropriately. We did that in the TARP. And I think it makes 
sense in this context. And I want to reiterate a point I made 
in my written testimony. FHA does not charge to cover its 
administrative expenses. I don't know what business, if it 
didn't pay its employees, would actually claim to be 
profitable.
    Mr. Garrett. So we are in agreement that we need more 
transparency. We are in agreement on the panel that the current 
methodology, which is using Treasury rates for discounting, is 
showing at--because of the law as having no cost to the 
government for the risk-based in there. And it seemed to be 
correct. So we should be on agreement then on this panel, then, 
that we need to move away for proper accounting methodology 
from what we are currently using to something else. Perhaps not 
to the CBO score methodology for that reason, but to some--
although I don't know what else we should be going by here in 
this committee and on the Budget Committee because that is what 
we go by in this House. And if the panel's recommendation is we 
go askew from that, but we should move away from what we have 
right now to include risk assessment. Do I see any objection? I 
don't. I only have 55 seconds left. Let me just change a topic 
there. Default rates. Quickly, can someone just tell me what 
the current default rate is now at FHA?
    Mr. Chappelle. The total default rate, their 90-day 
delinquency is about 8.7 percent. That is the total portfolio.
    Mr. Garrett. So it is around 9 percent. Okay. Do we have a 
target where we want to be on our default rate, FHA?
    Mr. Chappelle. It is a balancing act, Congressman, between 
the premiums charged and the number of defaults and claims.
    Mr. Garrett. That is a good question. Do premiums currently 
adequately cover the default rate?
    Mr. Chappelle. Yes. Because that is what the actuarial 
review determines.
    Mr. Garrett. Wait, how can you say that when just a minute 
ago, you all agreed that the current valuation was not correct 
because it is based on treasuries, not assuming any market 
rate. And that is how you came up with around a $4.4 billion 
savings. You would actually have a $3.2 billion cost under the 
CBO score. So you really can't say that the premiums are--
    Mr. Chappelle. Congressman, the determination that its 
shortfall is $3 billion is predicated on the fact of the fees 
Fannie, Freddie, and the MIs are charging.
    Mr. Garrett. But you all already agreed that the current 
methodology is not adequate, so we need to go away from the 
current methodology based upon the Treasury rates, basically no 
discount rate involved there. So if you all agreed on that, 
then you really can't say that the premiums are currently are 
based correctly because you--
    Mr. Chappelle. Congressman, I am no expert on accounting.
    Chairwoman Biggert. The gentleman's time has expired. I 
can't get a word in edgewise, you talk so fast.
    The gentleman from Ohio, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. Thank you, Madam Chairwoman. The first 
question I want to ask the panel is just about the current 
status of the multi-family market. Can anybody give me kind of 
an update of the role of private capital in the multi-family 
market today and how much private capital is engaged in the 
multi-family market today and how this asset class have 
performed through the crisis? Mr. Berman?
    Mr. Berman. Congressman, the multi-family market is one of 
the few areas where liquidity has started to return. Having 
said that, last year, between Fannie, Freddie, and FHA, it 
still represented at over 80 percent, close to 90 percent 
market share. We have seen private capital come back into the 
sector over the last 6 months. But it is really a tale of two 
worlds. Most of that capital has come in at the luxury end of 
the market, and then what I call the gateway cities. If you go 
to secondary markets or even primary markets that don't happen 
to be Los Angeles, New York, San Francisco, Boston, or 
Washington, the capital has not been anywhere near as available 
as it was, and there is a heavy reliance on FHA, Freddie, and 
Fannie still for all the other markets.
    Mr. Stivers. Great. Thank you. Somebody earlier was talking 
a little bit about--I think it may have been Mr. Calabria. The 
current FHA downpayment, obviously, it varies depending on your 
credit score. I think if your credit score is below 580, you 
have to pay 10 percent down.
    Mr. Calabria. That is correct.
    Mr. Stivers. I am trying to remember off the top of my head 
that number. But in the discussion draft, I believe we raised 
the minimum downpayment to 5 percent regardless of your credit 
score. And it kind of brings me to the similarity of the QRM 
too. They have all these stand-alone factors in the QRM, but 
they don't look at the interplay. They kind of look at as, each 
of them as hurdles. But they just see if you clear them. And if 
you clear, for example, the credit score much higher than where 
the hurdle is, or if you clear the payment ratios higher than 
where the minimum is, you get no credit for that. I guess my 
comment is to the discussion draft. Should we look at a way to 
provide a sliding scale so that if your coverage ratio of 
payment, ability to make your payment and your credit score is 
higher that we consider sliding the downpayment.
    Mr. Calabria. I think absolutely. Let me preface with, I am 
very uncomfortable with thinking of putting the phrase ``FICO'' 
in the statute. There are problems with it. But beyond that, 
having some interaction between the credit history, debt to 
income and downpayment, how all those fit together, you should 
be able to trade off. And again, I favor a 5 percent because 
quite simply, I don't think FHA has done a very good job about 
that trade-off in the past and I think that trade-off is often 
difficult to get statute. But if you can do that, then again, 
you lessen the hit.
    Mr. Stivers. I guess my point is, government doesn't do a 
very good job of pricing risk. But if we could allow that 
trade-off--and underwriters do it every day, and I see some 
other folks want to make comments. And we will just go down the 
line until we have time out because this is really what I would 
like to spend most of my time on. Mr. Chappelle and then Mr. 
Petrou and then if anybody down at the end wants to comment.
    Mr. Chappelle. Thank you, Congressman. What you have 
described is basically what underwriting is. If you are going 
to put more requirements in the statute to shoehorn what is 
allowed and what isn't allowed, it will just create more 
complexity, more hurdles, more everything. A good underwriter 
can make that decision. And then you can evaluate the 
performance of the lender. And FHA has a database that is 
public that lets people see how each company is performing. And 
that is why a lot of them appeared in the papers recently for 
poor performance. So I think there are enough sticks and 
carrots and sticks to do it without having to put things in the 
statute about underwriting requirements because otherwise you 
are never going to get a loan approved.
    Mr. Stivers. And one of you called for the actual ultimate 
credit officer who approved the loans for the database to go 
that far down. Was that your testimony?
    Mr. Chappelle. It was the loan originator.
    Mr. Stivers. The loan originator. So that the loan 
originator, by individual, you could actually track whose loans 
were performing and whose weren't. I think that is a great 
idea. Does that require a congressional change or can they do 
it through a rule?
    Mr. Chappelle. They could do it regulatorily.
    Mr. Stivers. That is a great idea. I would like to keep 
moving down.
    Mr. Petrou. I would like to note that historically, FHA 
actually did have a sliding scale downpayment. If you go back 
to the glory days of the 1970s, as you increase the borrowed 
amount, the percentage of the loan that was required to be put 
down increased. So by the time you got to the top of the FHA 
limit back in the 1970s, you ended up with having well above a 
5 percent minimum downpayment. FHA, as a 3 percent downpayment 
program, did not exist in the 1970s.
    Mr. Stivers. I am out of time. But how do we do this 
without giving so much discretion that essentially we have 
nothing anymore?
    Mr. Petrou. I think that the key here is to mix downpayment 
with coverage level. I don't think FHA should be insuring 100 
percent of every loan that it buys.
    Chairwoman Biggert. The gentleman's time has expired.
    Mr. Stivers. Thank you, Madam Chairwoman.
    Chairwoman Biggert. The gentleman from Wisconsin, Mr. 
Duffy, is recognized for 5 minutes.
    Mr. Duffy. Thank you, Madam Chairwoman. I will yield my 
time to Mr. Garrett.
    Mr. Garrett. I thank the gentleman. And just to close on 
the other point, I look forward to working with the Chair on 
the last point that we were discussing, if we can address a way 
to find out how we can have better transparency and accuracy in 
the accounting to move from where we are right now to go in a 
direction maybe not as far as what CBO, is but whatever that 
correct assessment is. So I look forward to going in that 
direction.
    Secondly, to Mr. Evans a question, your testimony goes on 
to say that HUD anticipates that demand for FHA multi-family 
has increased more than fivefold, and the estimates point to a 
high demand for these programs for the next several years. Can 
you say how FHA meets this increased demand without sacrificing 
credit requirements and underwriting that would further expose 
it to taxpayers?
    Mr. Evans. I am sorry. I missed the question.
    Mr. Garrett. The last part of it, how can FHA meet these 
increased demands for multi-family without sacrificing credit 
requirements and underwriting that would further expose all of 
us to the taxpayers? How can you do that and to meet the demand 
for multi-family housing increases? Because we are hearing that 
is where it is working out there.
    Mr. Evans. Exactly. And we are fully behind credit policy. 
What we are concerned about is really the process. And some of 
the things that have been implemented, they have taken control 
out of the local offices and centralized it. One of the points 
that I brought up in my testimony was that if you have a loan 
that is over $15 million, the home office has to approve this 
loan. So giving more authority to the local offices would speed 
up the process. Also giving more reliance to the multi-family 
accelerated processing guide, which was implemented in order to 
speed up the process, a lot of these guidelines' timeframes are 
no longer adhered to, where you have maximum review periods, 60 
days for a 223(f) loan and 90 days for a 221(d)(4) loan, those 
time frames have been thrown away. So people really don't know 
where they are at in their application process. Giving more 
authority to the map lenders and giving more authority to the 
local offices.
    Mr. Garrett. I appreciate that. Let me just switch gears to 
something that the Administration had said on another note. 
Back when the Administration rolled out their GSE proposals, 
one thing they said--and I think we all agree on this--is that 
we have to do something with regard to GSEs to make sure that 
some segment goes back to the private market and that the huge 
amount that is over the GSEs goes down, and the huge amount 
that is over the FHA goes down as well. We are all in agreement 
on that point. The rub comes though with Dodd-Frank 
legislation. And what does that do? That goes into the whole 
issue of risk retention, right, which is one issue. But in the 
risk retention issue, what does it do? It gives an exemption, 
right, to the GSEs and to FHA.
    So some of the people who have sat at this panel say, when 
you do that, what happens? Basically by giving the exemption 
over here to GSEs and FHA, you are going to create a 
disincentive in the private market. Why? Because if you still 
have the risk retention over in the private sector, they have 
to do what? They have to hold capital on their books. And that 
is a disincentive--not only disincentive, it is a higher cost 
for them. So where do the loans go? When they are coming to you 
to get a loan, or people who are going through real estate, 
going through you to get loans, where do they go? They don't go 
there because it is more expensive. They are going to continue 
to flow into the FHA, into the GSEs. That is the argument. Is 
there any basis to that argument?
    Mr. Chappelle. Congressman, I think from reading the 
Administration's White Paper, they make it pretty clear. They 
want to raise the FHA and GSE requirements so that the private 
sector is competitive. I personally don't agree with that. But 
that is what the White Paper says.
    Mr. Garrett. But not in this area. Not on the risk 
retention area. On the risk retention area, they make an 
exemption and they make it different.
    Mr. Chappelle. They make an exemption in the short term. 
But it is pretty clear from reading the White Paper, they say, 
establish a timeline for raising fees, increasing downpayments, 
and lowering maximum mortgage amounts. So they are on the same 
page.
    Mr. Garrett. That is interesting. So your reading of that 
is, create this exemption for today while you have this deal 
problem. And then maybe phase out that risk retention?
    Mr. Chappelle. Right.
    Mr. Garrett. Okay. That is your understanding.
    Mr. Calabria. While I rarely find myself in defense of the 
Administration--
    Mr. Garrett. We will mark this down.
    Mr. Calabria. --in terms of the QRM, I think they are 
largely following the direction that Congress has given them, 
which is why I believe you ultimately need to either impose 
those same restrictions on FHA or Congress needs to outright 
repeal the QRM. This will drive business in the FHA and the 
GSEs, which certainly conflicts with the White Paper.
    Chairwoman Biggert. The gentleman's time has expired.
    Mr. Garrett. Thanks, everybody.
    Chairwoman Biggert. The gentleman from Illinois, Mr. Dold, 
is recognized for 5 minutes.
    Mr. Dold. Thank you, Madam Chairwoman. I appreciate that. 
And thank you all for taking your time to be with us today. I 
certainly appreciate that.
    Mr. Calabria, if I can just continue with you just for a 
minute. Are there policies or regulations in place currently 
that are hindering the return of private capital into the 
mortgage market?
    Mr. Calabria. I think there are a tremendous number of 
things that are hindering a return in the private. Obviously, 
the QRM I think is keeping capital out of the market. I think 
we need to get some resolution to the foreclosure crisis. Right 
now, it is not clear. Let me put it this way: I don't know 
anybody who would rationally want to invest their money in the 
mortgage market. Would you want mortgage money now, given the 
risk that is inherent in it?
    So I do think we need to get a set set of rules on 
servicing, on foreclosures, and on what the deal is going to be 
going forward. Even if you buy GSE debt today, you have no 
guarantee that essentially you are going to get paid. So there 
is a tremendous amount of uncertainty. And I think we need to 
start removing that uncertainty sooner rather than later.
    Mr. Dold. Okay. What do you envision as the proper role of 
private capital in a functioning market for mortgage lending?
    Mr. Calabria. I think, ultimately, the principle we should 
follow is those who get the upside take the potential for the 
downside. And the biggest underlying problem in our mortgage 
market I think is the mortgage industry essentially--with all 
due respect to my friends in the mortgage industry--get to 
gamble on the upside and the taxpayer takes the downside. I 
think that risk needs to be aligned in a way so that, again, 
you take the upside risk, you take the downside risk.
    Mr. Dold. I recognize taking the downside risk. Should 
there be any safety net in any way, shape or form? Do you think 
it should just be a strict up or down?
    Mr. Calabria. I would rather have a strict up or down. I do 
think we need to recognize something that absolutely seems 
there is no chance of changing in my mind, which is the Federal 
Reserve has set a precedent of buying $1 trillion-plus in 
mortgage-backed securities in a crisis. They seem like they are 
going to do that next time as well, so you already have a 
catastrophic backstop in place that nobody seems to be talking 
about getting rid of, and we should recognize that as part of 
the debate.
    Mr. Dold. Yes, sir, Mr. Berman?
    Mr. Berman. Thank you, Congressman. With respect to the 
upside/downside discussion, I think we need to step back from 
this. Clearly--and as Mr. Calabria pointed out--there is a lack 
of confidence in the market, and a lack of confidence in the 
market is a very broad-based concern. Doing anything that would 
constrain the ability today to deliver financing to potential 
homeowners, first-time home buyers and so on, changing the 
downpayment limits, making it more difficult for people to get 
FHA financing, I think would be something that would be ill-
advised given the fragility. In other words, if we want to 
bring private capital back to the market, the first thing we 
have to do is get confidence. We can't legislate confidence. 
What we need to do is create a base to re-establish 
homeownership, to make sure that FHA, Fannie, and Freddie can 
continue to deliver what they have been delivering.
    As the economy stabilizes and grows and as homeownership 
and home values stabilize, private capital will come in. It 
will come back. FHA had, as has been discussed, a 3 percent 
market share not that many years ago. Those same kinds of 
structures can exist. So the key is to not do anything that 
would have the unintended consequences of upsetting, re-
establishing a base today.
    Mr. Dold. Let me just jump down because I know you have had 
an opportunity. Yes, sir?
    Mr. Chappelle. The trouble in the market today is it is 
widespread. It is not just the government gobbling up the 
private sector. The government is not doing enough loans 
either. Combined, Fannie, Freddie, and FHA only did 1.9 million 
purchase loans last year. And we don't have enough private 
sector involvement because of that, because all FHA has done--
FHA's volume right now is running behind, from a purchase 
market activity, below what it did in 2000. So it is not like 
FHA is exploding anymore. Because of the changes the 
Administration made, raising the premium, their business is 
falling back, too. But we are just not doing enough loans of 
any kind, much less whether it is private or public.
    Mr. Dold. If I may just follow up on that comment, why is 
the private sector not loaning as much? You say they are not 
loaning as much right now. Why is that? I have heard from 
others who are saying that the regulators are coming in 
preventing that, or preventing a more robust loaning 
environment. Can you tell me your thoughts in terms of that?
    Mr. Chappelle. To me, the market has been predominantly a 
government market for the last--since the Great Depression, 
because it was portfolio lending by banks which have deposit 
insurance, so it has always been a government-based market.
    What is happening today is lenders, in addition to the 
rules that are out there, lenders are establishing their own 
rules on government loans because they are afraid of the risks. 
So we are getting a glimpse of a private mortgage market today 
because lenders are even establishing their own rules when they 
theoretically have 100 percent government insurance.
    Mr. Dold. I appreciate that.
    I know, I just have one last question if I may, Madam 
Chairwoman. And back to you, Mr. Berman.
    You and other stakeholders have raised the importance of 
reforming the GSEs in concert with changes--
    Chairwoman Biggert. I am sorry, Mr. Dold. Your time has 
expired. You can submit that in writing, and I am sure they 
will be happy to answer you.
    The gentleman from North Carolina, Mr. McHenry, is 
recognized for 5 minutes.
    Mr. McHenry. I thank the Chair. Mr. Calabria, it looked 
like you wanted to respond to that previous question.
    Mr. Calabria. Yes, there were a number of pieces of that. 
And I would say foremost, FHA is not capacity-constrained. If 
there was more demand for the product, people would be able to 
meet more of it. What I am getting at is the ultimate driver 
here is that buyers are sitting on the sidelines because they 
are massively uncertain about what is going to happen next in 
the housing market. And part of my concern that we have had 
very low downpayments in FHA over the last couple of years is, 
it is fair to say that probably 30, 40 percent of the FHA book 
of business in 2008, 2009 is underwater today. And if we see 
continued declines in prices, I think it is reasonable that we 
will see at a national level another 5 percent, 6 percent 
decline in prices. So a tremendous amount of FHA going 
business, we are creating essentially foreclosures of tomorrow, 
and that is what greatly concerns me.
    I want to follow up on Michael's point about yes, I think 
as we go forward, FHA's business will decline once the market 
starts to heal. But the way that that is going to decline is 
for a prime borrower--the price of an FHA is simply not that 
attractive. And I am concerned that the decline will become in 
the better-quality borrowers and will go back to an FHA that 
looks like 2005 where predominantly 60 percent of the business 
for FHA in 2005 were subprime borrowers. And I fear we are 
going to get back to that world unless we start making changes 
today.
    Mr. McHenry. To a greater point here, on the QRM. As I see 
it, without a role for private mortgage insurance, you are 
basically forcing this market to maintain a more government-
dominated role.
    Mr. Calabria. That is absolutely the case.
    Mr. McHenry. And I would open it up to the panel, but you 
can kick it off, Mr. Calabria, and anyone else who would like 
to comment. I am very concerned that without private mortgage 
insurance being a part of the QRM, that we are going to crowd 
people out.
    Mr. Chappelle. Absolutely, Congressman. I agree with you. 
And the point I would make is we are seeing how low downpayment 
loans can perform well today. I know some of us disagree on 
this panel, but the FHA performance has been very good since 
loans originated in 2008 onward are doing remarkably well. I 
think private mortgage insurance could do equally well, if not 
better. So I think hopefully, when we can see the performance 
of the FHA loans, the private mortgage insurance industry 
should be able to do the same things FHA does.
    Mr. McHenry. Mr. Rutenberg? And then we will come to you, 
Mr. Petrou, next.
    Mr. Rutenberg. The QRMs, if they come into effect as they 
are now, have unintended consequences that are going to skew 
the market terribly. There is not only the 20 percent. They 
have the PITI at 28 percent, total loan at 36 percent. If you 
missed any credit card payment in the last 2 years, you are not 
eligible. We have to have a different way of doing it.
    Members of the Senate who were involved in this tell me 
that what we have now is not exactly what they thought they 
were going to get. And I hope that it is seriously looked at 
it, and it evolves or does not come forward as it is.
    Mr. McHenry. So too much rigidity and more prescriptive 
than it should be, without any sort of level of--
    Mr. Rutenberg. I have seen estimates that 50 to 60 percent 
of the people who qualified for a mortgage last year could not 
qualify under QRM in that type of market.
    Mr. McHenry. Mr. Petrou?
    Mr. Petrou. I agree the QRM is a real problem. I do think 
that private mortgage insurance on loans with downpayments 
below 20 percent should definitely be part of any kind of QRM. 
I think the private mortgage insurance will come back, but it 
doesn't have to wait for the FHA or anything else. The problem 
they have at this stage is the loan level fees that Fannie Mae 
and Freddie Mac are charging over and above the private 
mortgage insurance premiums, which in essence push people into 
the FHA as a consequence of that. I think, really, as I 
indicated in my testimony, these are many multiple moving parts 
that have to be thought and worked together.
    And I commend the committee for doing this bill because it 
is very critical that FHA be changed along with the GSEs so 
that when the final product is put together, we have a new view 
of what the role of government in the market is, and people 
will understand that, as opposed to little spot changes which 
can be very destructive.
    Mr. McHenry. Mr. Berman?
    Mr. Berman. Thank you, Congressman. The concept of 
responsible lending and risk, skin in the game by lenders is 
certainly one that has merit. But having said that, I think 
that for us to not take into account the private mortgage 
insurance as having skin in the game who have that overlay of 
underwriting is a mistake. I think that we should clearly view 
them as being part of the equation, and the overly prescriptive 
QRM approach clearly does not give the kind of credence that we 
have to the multiple factors that go into a responsible 
underwriting of a loan.
    Mr. McHenry. Thank you.
    Chairwoman Biggert. The gentleman yields back. I would ask 
unanimous consent that the following letters and written 
testimony be inserted into the written hearing record: May 24, 
2011, the National Council of State Housing Agencies letter; 
May 25, 2011, the National Housing Law Project statement for 
the record; and May 25, 2011, the Securities Industry and 
Financial Markets Association statement.
    And I would like to thank the members and the witnesses for 
starting the dialogue on potential reforms to help shape a 
stronger framework for the future of housing finance. We have 
had a robust discussion today, with not too many sparks. So I 
will anticipate that we will have additional subcommittee 
hearings on reform proposals.
    With that, the Chair notes that some members may have 
additional questions for this panel which they may wish to 
submit in writing. The hearing record will remain open for 30 
days for members to submit written questions to these 
witnesses, and to place their responses in the record.
    I would also encourage any of you who really didn't have--
it was too late to really include more about the proposals in 
your statements. If you wish to submit further testimony, we 
would be very happy to receive that. I think it has been very 
helpful so far and we are going to continue to work on this. So 
appreciate your being here.
    And with that, this hearing is adjourned.
    [Whereupon, at 12:09 p.m., the hearing was adjourned.]





                            A P P E N D I X



                              May 25, 2011



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