[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
U.S. GOVERNMENT PRINTING OFFICE
66-870 PDF WASHINGTON : 2011
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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