[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, PART 2

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

                                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

                               __________

                           SEPTEMBER 8, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-57








                                _____

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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:
    September 8, 2011............................................     1
Appendix:
    September 8, 2011............................................    33

                               WITNESSES
                      Thursday, September 8, 2011

Galante, Carol J., Acting Assistant Secretary for Housing/FHA 
  Commissioner, U.S. Department of Housing and Urban Development.    14
Isakson, Hon. Johnny, a United States Senator from the State of 
  Georgia........................................................     4
Tozer, Theodore ``Ted'', President, Government National Mortgage 
  Association (Ginnie Mae).......................................    17
Trevino, Tammye H., Rural Housing Services Administrator, Rural 
  Housing Service, U.S. Department of Agriculture................    16

                                APPENDIX

Prepared statements:
    Galante, Carol J.............................................    34
    Isakson, Hon. Johnny.........................................    50
    Tozer, Theodore ``Ted',......................................    59
    Trevino, Tammye H............................................    70

              Additional Material Submitted for the Record

Biggert, Hon. Judy:
    Written statement of Community Associations Institute........    75
    Letter from Carol J. Galante supplying additional information 
      for the record.............................................    92
    Written statement of the Mortgage Bankers Association........    94
    Written statement of the National Low Income Housing 
      Coalition..................................................   103

 
                   LEGISLATIVE PROPOSALS TO DETERMINE
                      THE FUTURE ROLE OF FHA, RHS,
                      AND GNMA IN THE SINGLE- AND
                 MULTI-FAMILY MORTGAGE MARKETS, PART 2

                              ----------                              


                      Thursday, September 8, 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 2:14 p.m., in 
room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Biggert, Hurt, Capito, 
Garrett, Dold; Gutierrez, Waters, Cleaver, and Sherman.
    Ex officio present: Representative Frank.
    Also present: Representatives Hinojosa and Green.
    Chairwoman Biggert. This hearing of the Financial Services 
Committee's Subcommittee on Insurance, Housing and Community 
Opportunity will come to order. We are going to start with two 
opening statements from the chairman and the ranking member, 
and then have our first witness. And then we will come back to 
anybody else on the committee who would like to make an opening 
statement.
    Thank you all for your patience. Those pesky votes 
sometimes get in the way of moving forward on time.
    With that, I will yield myself time for an opening 
statement.
    I would like to welcome everybody here today. Today we 
continue our work as part of a broader initiative that the 
Committee on Financial Services is undertaking, a comprehensive 
review of the mortgage finance system, including the secondary 
markets in the public and private sector.
    Combined, FHA, Fannie Mae, and Freddie Mac monopolize well 
over 90 percent of the mortgage market. The private sector 
can't compete with the taxpayer-backed government housing 
programs. We must allow the private sector to capture as much 
of the mortgage market as possible, and the only way to do that 
is to phase out the government and taxpayer-backed capital to 
allow private capital to return.
    Today's hearing is the second in a series--the first 
hearing was held on May 25, 2011 [Serial No. 112-32]--and we 
will again examine legislative proposals to help stabilize the 
housing market, facilitate the return of private capital to 
housing finance, and reduce taxpayers' liabilities. These 
proposals are a starting point for our continued constructive 
dialogue about the future role of the FHA, our Federal Housing 
Administration; the RHS, the Rural Housing Service; and Ginnie 
Mae in the single- and multiple-family mortgage markets. This 
hearing offers Administration officials an opportunity to weigh 
in on our reforms. It also offers the Administration a chance 
to provide input on the future roles of FHA, RHS, and Ginnie 
Mae; how best to ensure their financial soundness and wind down 
their government involvement in the mortgage market, while 
increasing private-sector participation. I guess I have said 
that an awful lot.
    Additionally, we have asked the Administration to comment 
on H.R. 2573, a bill introduced by Representative Hinojosa to 
reauthorize an expired program that allows FHA to provide 
Federal mortgage loan insurance to finance health care 
facilities. Does this program pose any risk to taxpayers? And 
are there private-sector alternatives?
    Finally, along with our panel of two witnesses, we have 
invited a special guest from the upper Chamber today, or as we 
sometimes call it the ``House of Lords.'' Senator Johnny 
Isakson of Georgia is here to discuss his views on the impact 
of the Administration's March 31st proposed risk retention 
rule, specifically the Qualified Residential Mortgage, or QRM. 
As proposed, these rules could distort competition in the 
housing market, limit the availability of credit, raise costs 
for consumers, add uncertainty, and cost jobs. In addition, 
they could actually increase the market share of FHA and the 
GSEs, which would move us 180 degrees in the wrong direction.
    Private-sector businesses need regulatory relief, 
certainty, and common sense, not unfair competition from 
Washington. And Americans need jobs, which is what businesses, 
not governments, create. The bottom line is that the government 
needs to get out of the housing business, let the private 
sector return, and allow the free market to work. Housing 
typically leads us out of recession, so we must get this right.
    With that, I recognize Ranking Member Gutierrez for his 
opening statement.
    Mr. Gutierrez. Good afternoon, and thank you, Chairwoman 
Biggert, for holding this hearing. I would like to welcome our 
witnesses, especially the Senator, and thank them for being 
here today as we continue to discuss the role these agencies 
play in our Nation's housing.
    When the subcommittee convened on the same subject in May, 
we received feedback from industry representatives that I 
suspect will be echoed in the testimony we hear today. First, 
that hearing highlighted the fact that our communities continue 
to struggle, and that the housing market remains particularly 
fragile. Second, the witnesses acknowledged that government 
housing programs have played a critical, stabilizing role by 
providing access to loans for creditworthy borrowers. The 
agencies represented here today have prevented the housing 
crisis from spiraling out of control, and done so while 
managing risk to the American taxpayer. Third, we heard loud 
and clear that any additional proposals intended to reduce 
FHA's footprint in the housing market must be carefully 
considered and be incremental. Otherwise, we risk causing 
additional disruption at a time of continued economic 
instability.
    I would like to note that Congresswoman Waters reintroduced 
the FHA reform bill in July, a bill that makes it easier for 
FHA to go after bad lenders, strengthens oversight for the 
single-family program, and raises FHA multifamily loan limits 
in very high-cost areas. This is substantially the same FHA 
reform bill that passed this committee and the House of 
Representatives with broad bipartisan support a little over a 
year ago.
    The discussion draft that we are considering again today 
contains some of those bipartisan provisions, but it has 
several others that I am concerned will limit access to 
homeownership at a time when the housing market is still 
struggling. The proposal to increase the downpayment 
requirement from 3.5 to 5 percent could effectively cut cash-
strapped individuals out of the housing market. I have to tell 
everyone that it kind of feels like ``Groundhog Day'' on this 
issue, because we have seen it before. A similar amendment was 
struck down in this very committee by a vote of 52-12 and 
failed substantially when it was raised in the House of 
Representatives.
    The draft also substantially reduces FHA loan limits and 
sets new county-by-county limits. In the State of Illinois, we 
have probably a couple dozen counties. This change would be an 
added administrative burden to FHA and would make it more 
difficult for small lenders to offer FHA loans in their 
communities. That sounds a lot like the kind of unnecessary 
government regulation that stifles business and economic growth 
that my Republican colleagues often condemn. County by county. 
Every bank is going to have to figure it out. More government 
regulation.
    Even more importantly, the change will make homeownership 
more expensive for families across the Nation. A reduction in 
loan limits is already scheduled, and it is simply too risky to 
implement further reductions at this time.
    Finally, I am concerned that moving the Rural Housing 
Service under the authority of the FHA will prove expensive to 
implement, will lead to minimum gains in efficiency, and could 
result in less attention to rural housing needs. A large-scale 
reorganization like the one proposed would be extremely 
disruptive to both agencies at this time. Why are we spending 
more money to create more government agencies? Let us keep it 
the way it is until we can implement some of the other aspects 
of this.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. Thank you, Mr. Gutierrez.
    Now, we will turn to our first panel. And then after that, 
we will have the remainder of the opening statements. I would 
like to welcome Senator Johnny Isakson of Georgia. It is nice 
to see you back in this Chamber.
    Senator Isakson. It is good to be home again.
    Chairwoman Biggert. That is good.
    So with that, I recognize you for 5 minutes for your 
statement.

  STATEMENT OF THE HONORABLE JOHNNY ISAKSON, A UNITED STATES 
               SENATOR FROM THE STATE OF GEORGIA

    Senator Isakson. Chairwoman Biggert, Ranking Member 
Gutierrez, and other members of the subcommittee, thank you 
very much for having me testify before this very important 
subcommittee on the very important investigation that you are 
doing. You have my written statement, which I will not read. I 
will try and emphasize what I think is so important on the QRM 
issue, the housing market, and mortgage credit in this country.
    Chairwoman Biggert. Let me just say that without objection, 
your written statement will be made a part of the record.
    Senator Isakson. Thank you, Madam Chairwoman.
    For reference only, let me give you my life experience in 
single-family housing. I spent 33 years, 11 of them as a 
salesman and sales manager for a real estate company, and 20 of 
them running that real estate company. In the latter years of 
my service, before I came to Congress, we averaged selling more 
than 10,000 single-family homes a year in metropolitan Atlanta 
and utilized every type of conventional financing, as well as 
FHA, VA, and securitized loans.
    During that career I went through 4 housing recessions: 
1968; 1974; 1981-1982; and 1990-1991. They were all 
devastating, but nothing anywhere close to the pervasive 
devastation of the current crisis. And what you are looking at 
is going to be important to the recovery of the housing market.
    When the Dodd-Frank bill came before the United States 
Senate, and the 5 percent risk retention proposal on mortgages 
was made, I got involved with Mary Landrieu, Kay Hagan, and 
other Members of the Senate to develop what became known as the 
Qualified Residential Mortgage rule to the Dodd-Frank bill. It 
was intended to create an exception for risk retention. And 
this is critically important in the entire testimony. The Dodd-
Frank bill eliminates from risk retention Freddie, Fannie, and 
FHA, but any other lender would be required to hold 5 percent 
risk retention in a residential mortgage that it made. Five 
percent risk retention is a tremendous burden that very few 
people could actually meet.
    So we put in the Qualified Residential Mortgage to address 
the crisis that was caused in 2007. We did not have a 
downpayment recession; we had an underwriting recession. Rules 
became loosey-goosey; people made mortgages to folks as long as 
they could fog up a mirror. They didn't check their 
qualifications, they didn't appraise the houses, they didn't 
check their income ratios, and we made bad loans. They became 
securitized and sold. And, in fact, partially because of 
congressional delegation, Freddie and Fannie owned a portfolio 
of those loans which began the crisis that started in September 
2008 when they all collapsed.
    So our intention was to ensure in the bill that you could 
exempt from risk retention any loan made that met the Qualified 
Residential Mortgage standards, which meant: good ratios of 
debt to monthly payment or income to monthly payment; a credit 
report that demonstrated you could make the payments that you 
would end up having to pay; a background check that included 
third-party verification of your employment, credit run and 
appraisals made; and all the normal underwriting we saw for 
years and years. With that done, you could exempt yourself from 
the 5 percent risk retention, which would attract tremendous 
private capital into the residential mortgage market.
    Unfortunately, when the rule got to the FDIC, the 
Comptroller of the Currency and the others on the committee 
writing the rule published that the chairman referenced in 
March added to those requirements a minimum 20 percent down to 
avoid risk retention. And that is what I am here to really 
emphasize today.
    Beginning with 1967's creation of the 90 percent loan, and 
1982's creation of the 95 percent conventional loan, during the 
last 45 years, the American housing market has depended in 
large measure on loans that were up to 95 percent loan to 
value, conventional loans. Those loans had additional insurance 
on the amount of the loan above 80 percent called private 
mortgage insurance, which was double underwriting and double 
security for the lender, so their principal risk was 80 percent 
of the purchase price, the same difference you would have if 
you required a 20 percent cash downpayment and made an 80 
percent loan.
    The effect of the rule that has been circulated, and to the 
credit of the FDIC--Chairman Bair and others--they postponed 
the comment period from the end of June until the beginning of 
August to get more comments in about QRM. I do not know what 
process they are in, but 39 other Members have joined me in a 
letter from the Senate asking them to review the rule and 
remove the requirement for 20 percent down, and instead allow 
loans up to 95 percent of value as long as there is private 
mortgage insurance and credit enhancement on that amount of the 
debt above 80 percent.
    The reason we did it is this: The consequences of the QRM 
rule as it is written going in place will be devastating for 
FHA. Because they are exempt, everybody will move to FHA 
because of its downpayment of 3.5 percent, and I respect the 
Chair's move to consider 5 percent. Whichever it is, it is a 
lower downpayment. As I understand it, almost 40 percent of the 
loans made in 2010 were by FHA, and 10 years ago, it was 2 
percent. The whole marketplace has descended on them because of 
the evacuation of readily available credit and capital into the 
conventional mortgage market.
    The QRM rule will impact between 40 and 50 percent of the 
traditional housing purchases in America and remove those 
people from competitiveness at a time when we need people 
coming back to the marketplace to stabilize values and begin to 
build back the U.S. housing market.
    So my message to the subcommittee today, and it is the same 
message I have shared with the Comptroller of the Currency, 
Chairman Bernanke, Chairman Bair and others is that the QRM 
rule is a well-intended rule that has devastating consequences. 
It will put pressure on FHA, Freddie Mac, and Fannie Mae to the 
extent they can't stand it. It will reduce the flow of 
conventional capital into the mortgage markets. It will cause 
more job loss, less construction, and a more protracted housing 
recession. All those things I hate to predict, but they, in 
fact, would take place.
    Madam Chairwoman, I appreciate your allowing me to comment 
on it, and I will be happy to respond to any questions the 
committee might have.
    [The prepared statement of Senator Isakson can be found on 
page 50 of the appendix.]
    Chairwoman Biggert. Thank you very much, Senator.
    What you have had to say shows that what started out has 
changed dramatically because of the regulations?
    Senator Isakson. What started out as an intention to exempt 
from risk retention qualified loans has turned into a 
definition of a qualified loan that is going to make it 
impossible for most Americans in the marketplace to get a loan 
other than through FHA, Freddie or Fannie.
    Chairwoman Biggert. Okay. What would be the ramification if 
QRM remains as it is right now to those loans that are not 
under QRM? Would the property value change and others if they 
don't qualify, but they still get a mortgage? Is that going to 
have an effect on the actual value of the property?
    Senator Isakson. QRM was designed as an exemption to the 5 
percent risk retention.
    Chairwoman Biggert. Right.
    Senator Isakson. So if QRM stays the way it is, and it only 
applies to loans with 20 percent down or more and the other 
parameters written in it, then it greatly eliminates the amount 
of 90 and 95 percent conventional financing in the marketplace 
to almost zero and puts FHA in the position of carrying the 
full burden for the entire country. This would be a devastating 
load on FHA, which is already under stress.
    I want to reiterate that a conventional 90 and 95 percent 
underwritten loan requiring private mortgage insurance to 
insure the amount of the loan above 80 percent would be just as 
competitive as a 20 percent down loan with no private mortgage 
insurance requirement, which is what the QRM rule is trying to 
promote. So the net effect is going to be a great restriction 
in the available conventional money for 90 and 95 percent loans 
in the marketplace. And the few people who will make them will 
price them high because they control the marketplace, which 
ends up hurting the consumer as well.
    Chairwoman Biggert. So it decreases competition?
    Senator Isakson. From a lending standpoint, it does. 
Already, in anticipation of this rule going into effect, 
private mortgage insurance companies have closed. Most mortgage 
brokers in the marketplace are not operating. There has already 
been a devastating effect on the mortgage industry just because 
of the anticipation of this rule. And it will be even worse on 
the overall housing industry if it goes into effect as it is 
written.
    Chairwoman Biggert. Can you estimate how many jobs would be 
lost from that?
    Senator Isakson. No. I know when to stop guessing at 
things, and I would not want to guess at something like that.
    Let me just say this: We will never get our job market back 
until construction comes back. The City of Atlanta, in my State 
of Georgia, has 10.2 percent unemployment, about 1.1 percent 
higher than the rest of the country, principally because we 
were a major southeastern Sunbelt growth State with a lot of 
construction. Those jobs are gone, and they are not going to 
come back until residential housing comes back. And we are 
never going to get below 8 percent in unemployment until we do 
return the construction industry to some sense of viability. 
That is not a chicken-or-egg question; it is residential 
housing first, and then it is commercial properties and 
apartments second.
    Chairwoman Biggert. Thank you very much.
    I would you like to recognize the ranking member of the 
full committee, Mr. Frank, for 5 minutes.
    Mr. Frank. Thank you. I appreciate it. This is a very 
important conversation to have. And I agreed that 20 percent 
was too high, but we have some disagreements that I wanted to 
talk about.
    First, as one of those who helped write the bill, I differ 
with the Senator's interpretation of the purpose. I thought 
risk retention was very important, and I wanted it to be the 
rule, not the exception.
    I just finished reading Michael Lewis' ``The Big Short'' 
and Gillian Tett's ``Fool's Gold.'' I don't think there is much 
question but that the ability to make loans and not have to pay 
a penalty if they went bad was an enormous contributor to this. 
And I guess I have a couple of questions. First, Senator, you 
mentioned mortgage insurance. My problem with mortgage 
insurance is it is there if the loan goes bad, but for that 
very reason it is not a deterrent to making loans that 
shouldn't be made. The mortgage insurance would hold you 
harmless. So I don't understand how mortgage insurance--I 
understand the purpose of mortgage insurance in some ways, but 
I don't see it as a substitute for risk retention. How is 
mortgage insurance a deterrent for the lender making bad loans?
    Senator Isakson. Let me apologize at the outset. I didn't 
realize you had snuck in. I certainly would have recognized you 
when I recognized--
    Mr. Frank. I wouldn't say that I snuck in, Senator. I 
thought I kind of walked in.
    Senator Isakson. Quietly came in.
    That is an excellent question, and it allows me to 
elaborate on something, a point I do want to make. When I first 
did 90 and 95 percent loans as a residential salesman in the 
1960s and 1970s, you had dual underwriting. You had the 
principal underwriting by the lender that loaned 80 percent, or 
in some cases 75 percent, and then the 90 percent became a 
piggyback second mortgage, if you will, made by somebody like 
Mortgage Guaranty Insurance Corporation, or PMI, or somebody 
like that. So you had dual underwriting. You had the principal 
lender making the first loan of 75 to 80 percent of value, did 
their underwriting, and then the PMI company came in, and in 
return for their guarantee and a fee they received, they 
underwrote the loan as well. In fact, initially there were even 
rate differentials on the piggyback loan over the principal 
loan. So you had double underwriting, or a redundant 
underwriting system.
    Secondly, the principal lender, their risk on the loan was 
80 percent or 75 percent of the value of the house, not 90 or 
95, because the insurance was on that amount above 75 or 80 
percent. That worked really well until we got into the mid-
2000s, when stated income, and Alt-A, and windshield 
appraisals, and zero downpayment, and all the other stuff came 
in, and Wall Street securitized or sold securities to raise the 
capital to make these loans to principally people who really 
weren't either prepared or qualified to make them, which is why 
I say, and this is--
    Mr. Frank. But, Senator, the point is that mortgage 
insurance didn't deter that then. Why would it deter it now?
    Senator Isakson. I am sorry?
    Mr. Frank. The fact is that mortgage insurance did not 
deter that, because it did not deter the lenders from making 
the loans that they shouldn't have made because they would be 
held harmless.
    Senator Isakson. First of all, in the QRM amendment which 
we placed in the Senate, it put in principles of underwriting 
that had to be met.
    Mr. Frank. I agree with that.
    Senator Isakson. Hold on a second. What happened with the 
collapse of the mortgage market or the housing market was no 
underwriting at all. There was none whatsoever. And that is 
what took place.
    Mr. Frank. I understand that.
    I don't want to prolong this. I just want to make two 
points. First of all, I disagree that risk retention is as 
heavy a burden as many have argued it. If the ability to 
securitize with no risk retention is essential to the housing 
market, I have to wonder where people were living before the 
1990s. Because, of course, securitization of mortgages is a 
very recent phenomenon of the 1990s. People used to not be able 
to securitize. They had 100 risk retention, and a pretty good 
housing market, as you indicated during that period when you 
were there.
    Second, with regard to mortgage insurance, this is my 
point, I understand these problems. My point is that mortgage 
insurance is not a sufficient deterrent because the lender is 
held harmless.
    And the final point I would make is this, and I think it is 
an odd argument for me to be having with some of my 
conservative friends. Yes, we wrote those standards in. Those 
standards are dependent on regulators enforcing them. Those 
standards are, of course, not self-executing. And I agree we 
want to have standards, and the regulators didn't do enough.
    One of the things I think we agreed on bipartisanly was--
and I know you would agree that many of the loans were being 
made by people who were outside of the regulatory structure 
because they were nonbanks. And if only banks had made the 
loans, we wouldn't have been in as much trouble. So, we have 
extended a set of rules to nonbanks.
    The problem, though, is that I don't want to rely wholly on 
the regulators. I think the thing about risk retention is it is 
a market incentive to the lender itself. So my concern is that 
I don't think we should put too much on the lender.
    Finally, let me say this, and I agree, I agreed with 
legislation that was brought forward by the Majority to make it 
explicit that Fannie and Freddie would be covered by risk 
retention. And I had this argument back and forth. I am now 
ready to find ways to cover FHA. I do think that distinction is 
a problem. The downpayment issue can be dealt with. But, yes, I 
think it is a good argument. I am for a strong risk retention 
requirement, and probably including FHA.
    Chairwoman Biggert. The gentleman's time has expired. Would 
you like to respond?
    Senator Isakson. If I could, please. We have a lot of areas 
of agreement. And I want to acknowledge, first of all, your 
statement in July following my statement on the Senate Floor 
regarding the QRM rule as it was being circulated, because I 
think we both share some common feelings about that. Your 
reference to the savings and loans and their housing market did 
fine before securitization, as you probably will remember, it 
was the change of a Federal rule on S&Ls that caused the 
ultimate collapse of them and the housing market. When we took 
away their interest preference over banks in terms of what they 
could pay on deposits, it dried up all their money to make 
loans. So they basically went out of business. And then Freddie 
and Fannie really burgeoned because securitization became the 
way that capital was created to put into mortgages in America 
up until the time that we also dictated and got Freddie and 
Fannie more in the business of holding some of those in their 
portfolio, which gave a purchaser of those subprime securities 
that were then made on Wall Street, which ultimately 
contributed to the problem.
    So I fully agree with you that there are concerns, but I 
would tell you this: Quality underwriting makes good loans, and 
historically that has always been true.
    Mr. Frank. Can you depend on the regulator to enforce 
those? My problem is I don't want to depend entirely on the 
regulator. I want the lender to have more incentive than they 
would otherwise have to make those kind of loans.
    Senator Isakson. That is why we wrote those criteria in 
QRM, because we did think there should be a standard if risk 
retention was waived so you didn't just make a loosey-goosey 
loan or a poorly underwritten loan.
    Mr. Frank. Thank you. I will try to sneak out now.
    Chairwoman Biggert. The gentleman from Virginia.
    Mr. Hurt. Thank you, Madam Chairwoman.
    Thank you, Senator, for speaking to us this afternoon. And 
I appreciate it in the context especially of sort of the 
backdrop of what I think that most people here in Washington 
would like to see, and that is a winding down of Fannie Mae and 
Freddie Mac, and also in the context of jobs. I would like to 
hear from you your thoughts on the big picture of how we entice 
the private sector into the secondary mortgage market. I think 
that is something that is obviously the big struggle that we 
are facing now for those of us who would like to see Fannie Mae 
and Freddie Mac diminished.
    And the second thing that I would like you to speak to, if 
you would, is as it relates to what you said about the jobs 
picture in your State of Georgia. How do we do it in a way that 
takes into account the fact that we don't want to put any 
additional burdens on the home-building sector? We don't want 
to put additional burdens, unnecessary burdens on the real 
estate sector. So how do we do this in an intelligent way and a 
careful way so as to wind those institutions down, but at the 
same time do it in a way that doesn't prolong this stalled 
economic recovery?
    Senator Isakson. Let me thank you for the question. And 
both of those are right on point.
    I am deeply disappointed about the failure of Freddie and 
Fannie, as everybody is. And the implied government sponsorship 
obviously became a government obligation and cost this country 
a great deal of money. I am going to have a conversation in a 
little bit with the head of HUD on this very subject in terms 
of opinions, discussions that we might have.
    There is a role for a Freddie or a Fannie, but it is much 
different than the role it has right now. FHA, Freddie, and 
Fannie are the housing market in terms of mortgages in this 
country principally right now, and an implied government 
sponsorship that is reduced over time or amortized over time 
probably is the best way to bridge from where we are to where 
we need to be.
    I have said publicly that if you took the Pool Re concept, 
which is a concept in Europe where you put a premium fee on 
each closing, say, 50 basis points or 100 basis points, and 
that goes into a walled-off sinking fund over 10 years' bills 
to be the backdrop and collateral for the mortgages that are 
made where you become self-insured rather than backed by the 
full faith and credit of the taxpayers probably would be the 
best way to go to ensure that you have liquidity for the 
purchase of those loans in this country.
    But there would probably be a role for a Freddie or Fannie-
like institution. And, quite frankly, with regard to multi-
family construction, which right now is the only construction 
in the United States, if it weren't for Fannie Mae and Freddie 
Mac, there wouldn't be any multi-family construction. So you 
are going to have to find a way to attract that capital in the 
marketplace, or you are not going to have enough liquidity in 
it to bring the housing market back, either multi-family or 
single-family.
    I think the one message that--again, I gave this speech in 
the Senate a few months ago, the unintended consequence of 
well-intended regulators. The big wet blanket that exists over 
housing construction, real estate development, and all the 
component parts are what--the next shoe dropping from a 
regulatory standpoint.
    I think we need to move as expeditiously as we can to take 
things like the QRM rule, get it straight so it works. If it 
accomplishes what the former chairman said in terms of 
insuring, you have better underwritten, better qualified loans, 
but we have some sense of predictability. I personally would 
guess, and I haven't talked to them, but I think FHA would like 
a little relief from the pressure it is under right now as 
being the only act in town for a substantial number of the 
mortgages made in the United States. This is my opinion now 
that I am stating. Government's role is to mitigate risk, but 
right now it looks like everybody's job is to eliminate risk. 
And if you eliminate risk, you eliminate free enterprise and 
capital formation and all the things we need to come back in 
this country.
    So I think we need to measure the effect of regulations, be 
sure we have those regulations that are in place to protect the 
consumer and ensure a fair and a level playing field, but not 
so proscriptive as the proposed QRM rule that it actually 
drives capital away from the housing market at a time it has 
very little capital coming to it as it is.
    Chairwoman Biggert. Mr. Gutierrez?
    Mr. Gutierrez. Thank you.
    Chairwoman Biggert. You are recognized for 5 minutes.
    Mr. Gutierrez. Okay. So I want to thank you again, Senator, 
for your testimony. And I agree that the Qualified Residential 
Mortgage is important and will encourage a return of private 
capital, with quality underwriting, to the mortgage market. But 
the details matter. You said you think 5 percent downpayment is 
the right number for the QRM standard. Can you speak a little 
bit more about that and why 5 percent?
    Senator Isakson. I think it is the right minimum number. I 
don't think any lower downpayment would be--I wouldn't--given 
the experiences we have seen and the history I had in the 
industry, except for our veterans, who have earned every bit of 
their 100 percent loan guarantee that they have on a VA loan, I 
think skin in the game is very important. I know people tend to 
protect that which they have an investment in, and that initial 
cash downpayment is important.
    But I think 5 percent--all I can base it on is my 
experience of almost 30 years when we were doing 95 percent 
loans in the marketplace. It was an alternative to the FHA 
loan, which was a 3 or 3\1/2\ percent downpayment. And as long 
as the loan is underwritten to demonstrate the borrower can 
make the payments, has a credit rating that shows they are 
responsible, the house is appraised, and you have third-party 
verification of employment and ability to pay, and you have 
parameters on the ratio between monthly payment and gross 
monthly income, you can well underwrite a loan whose 
downpayment, whether 20 or 5 percent, wouldn't be any different 
in terms of the quality of the loan.
    Mr. Gutierrez. I just needed to ask that one. I won't use 
my whole 5 minutes. Thank you.
    Chairwoman Biggert. The gentleman yields back.
    The gentleman from New Jersey. Do you have any questions?
    Mr. Garrett. Maybe not so much questions, but just a 
comment or two. I appreciate the comment from the gentleman 
from Massachusetts saying that he does not feel that we should 
be depending upon the regulators so much in this area. Would 
that be the case with regard to Dodd-Frank, which, as we know, 
is going to promulgate over 400 new regulations, where the 
regulators are going to have more authority than they ever had 
before? I think that was the entire intention of that piece of 
legislation; not to let the markets be the deciding factors, 
but the regulators. Could we peel that back? Maybe that is a 
direction we should be going.
    To your comment with regard to the wet blanket, I agree 
with you as far as it is in part the next shoe to drop that is 
out there as far as the market is concerned. It is also, you 
would probably agree with me--the wet blanket also is the fact 
that we have those 400 regulations coming down the pike, and 
the small banks having to hire all of the new compliance 
officers in order to comply basically with it. That certainly 
is a wet blanket, I think you will agree, as well.
    But I do appreciate the Chair holding this important 
hearing today, because reforming FHA and Ginnie Mae is 
important to the overall fix to this problem. The fact that we 
are looking at over 90 percent of the U.S. mortgage market 
being controlled or financed by the Federal Government is an 
unsustainable path that we are on right now. With debt over $14 
trillion, it is one that is simply not sustainable to add an 
additional $10 trillion of credit risk to the Federal 
Government's balance sheet now. We must begin, I think you 
agree, to add private capital back into the mortgage market.
    Now, one small step that we can do in that regard will 
occur at the end of this month, and that is when conforming 
loan limits are set to drop from 729- down to 625-. I think 
this is an appropriate first step in beginning to transfer the 
housing risk off the taxpayers' back and put it in the private 
sector. In the aftermath of that big debt discussion that we 
had last month, it is very clear the Federal Government 
currently has very limited resources in which to allocate to 
the broader public. I do not feel that subsidizing, and 
basically that is what we are doing here, almost million-dollar 
homes is the way to utilize those limited resources.
    If you look at the banks out there and the broader 
financial conditions that they are in, the banks are basically 
flush right now with deposits. And they have ample room on 
their balance sheets to take on an additional segment of the 
market without, I have heard this from experts, a drastic spike 
in rates. And so for someone to be able to afford that $750,000 
house, how much do they need to make? They basically need to 
make a quarter of a million dollars a year to afford that. This 
is the same segment of the population that my colleagues on the 
other side of the aisle say are the rich and that should be 
paying more taxes. Maybe the solution is not to tax them even 
more and then subsidize them on one hand; it is simply allow 
those people to keep their own money and basically pay for 
their own house, without the subsidization of the taxpayer.
    I also don't think FHA was ever intended to help these 
higher-income individuals to buy their homes. I believe FHA 
should only be used to help lower-income individuals and first-
time buyers. I know housing conditions are still very fragile, 
as the Senator has indicated, and that is why I advocate for 
reforms to occur over time in a responsible and appropriate 
manner. But we really need to begin with these first steps 
because it will be harder otherwise to put the market back in 
order.
    With that, I yield back to the Chair, and I thank the 
Senator.
    Chairwoman Biggert. I thank the gentleman.
    And we thank you, Senator, for coming. I think that you 
really helped us with a lot of information. I appreciate your 
testimony.
    Senator Isakson. Thank you, Madam Chairwoman. I just leave 
you with one--if you remember one message from what I said, the 
deep collapse of the housing industry in America was 
principally a failure of underwriting, and that is what caused 
the collapse and led to all the subsequent things that took 
place. And that is where we ought to focus to ensure loans are 
qualified for the future.
    Chairwoman Biggert. Thank you so much for being here.
    Senator Isakson. Thank you, Madam Chairwoman.
    Chairwoman Biggert. Before we call up the next panel, I do 
want to mention something that is very important, and that is 
that Scott Olson is retiring on Friday, having served 20 years 
with the House of Representatives. The majority of Scott's 
career has been with the Financial Services Committee, working 
on housing and mortgage finance issues. So we thank Scott for 
his service to the U.S. Congress and to this committee.
    Mr. Frank. Madam Chairwoman?
    Chairwoman Biggert. I would yield to the ranking member.
    Mr. Frank. Madam Chairwoman, thank you first for your 
courtesy in sending someone to make sure I didn't sneak out 
prematurely. I appreciate it, because I would have been very 
regretful if I hadn't been able to participate. Thank you for 
your taking this initiative.
    The greatest bargain the American people get without 
question, in my judgment, consists of the people who work for 
us here. They can have different opinions about us, but on both 
sides of the aisle, in our personal offices and in the 
committee offices, the staff here work longer hours for less 
pay than almost all of them would make in other contexts. And 
they do it because of that kind of commitment. No one has 
exemplified that better than Scott Olson. He has become a 
source of information about housing policy in all aspects: 
legal; economic; and social. That has been an invaluable asset. 
His dedication to the public interest is extraordinary. And I 
will miss him, this Congress will miss him. He has every right, 
having worked as hard as he did, to move on. I know he will 
still be available. And after a suitable period of purdah 
mandated by the ethics rules, I look forward to drawing on his 
advice again. But I want to join you, Madam Chairwoman, and 
thank you for giving us the chance to thank an extraordinary 
public servant.
    Chairwoman Biggert. Thank you again.
    We will now hear from the second panel, if you would take 
your seats at the table. With that, if we have any more opening 
statements, I hope that they will be short.
    Mr. Hurt, do you have an opening statement? You are 
recognized for 1 minute.
    Mr. Hurt. Just briefly. Thank you, Madam Chairwoman.
    Thank you for holding another important hearing in this 
subcommittee to discuss ways in which we can strengthen FHA, 
RHS, and Ginnie Mae. I appreciate your leadership on these 
issues and your commitment to responsible policies that will 
get the housing market back on the right track, which is vital 
to our economy in Virginia's Fifth District, my district, and 
across the country.
    As the witness at our last hearing on the subject 
testified, we must take steps to encourage the private sector 
to return to the marketplace and reduce the risks to which 
taxpayers are currently exposed. The FHA's role in the mortgage 
market has increased to the point that it is crowding out 
private investment. Excessive government intervention causes 
consumers to behave in ways that do not adhere to market 
principles.
    The reforms that Chairwoman Biggert proposes will take 
modest steps to promote the return of private capital to the 
housing market, while improving the effectiveness and 
efficiency of the housing programs that these agencies operate. 
With our Nation over $14.5 trillion in debt, Fifth District 
Virginians want Congress to closely scrutinize government 
programs and policies that are putting taxpayers at risk and to 
implement commonsense reforms to remedy these problems.
    Again, I want to thank the Chair for holding this hearing 
today. I look forward to the testimony of our distinguished 
witnesses. I thank you all for coming. I look forward to your 
perspectives on the discussion draft before the subcommittee 
today.
    I yield back my time.
    Chairwoman Biggert. Thank you.
    With that, I will introduce our second panel: Mrs. Carol 
Galante, Acting Federal Housing Administration Commissioner, 
and Assistant Secretary for Housing, U.S. Department of Housing 
and Urban Development; Ms. Tammye Trevino, Administrator, 
Housing and Community Facilities Programs, U.S. Department of 
Agriculture's Rural Development Agency; and the Honorable Ted 
Tozer, President, Government National Mortgage Association.
    Thank you all for being here. Let me just say that, without 
objection, your written statements will be made a part of the 
record, and you will each be recognized for a 5-minute summary 
of your testimony. After that, we will have 5 minutes of 
questioning from our members.
    I recognize Mrs. Galante for 5 minutes.

 STATEMENT OF CAROL J. GALANTE, ACTING ASSISTANT SECRETARY FOR 
HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    Ms. Galante. Thank you, Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee. Thank you for 
inviting me here today. Having served as Deputy Assistant 
Secretary of Multifamily Programs at HUD for the last 2 years, 
and having recently been named Acting FHA Commissioner, I am 
pleased to have this opportunity to testify. As my predecessor 
Bob Ryan becomes Senior Advisor for Housing Finance, I, as 
Acting Commissioner, look forward to continuing the progress we 
have made under Secretary Donovan to strengthen the FHA for the 
future.
    As you know, FHA has provided a critically important source 
of mortgage credit during this economic recovery, particularly 
for underserved communities. And I will build upon a strong 
foundation of reforms initiated by the Administration and 
continue the three fundamental priorities we have focused on 
since President Obama took office: first, stabilizing the 
housing market and assisting homeowners at risk of foreclosure; 
second, protecting FHA's fiscal health and strengthening risk 
management; and third, ensuring responsible access to credit 
and liquidity as we work with Congress to bring back private 
capital to the market and build a 21st Century housing finance 
system.
    But, of course, the job is not over, and our housing market 
and economy remain fragile. That is why I am pleased to share 
my views today on the draft legislation. And I want to commend 
the subcommittee for three provisions in particular. The first 
is the proposal to increase access to credit by supporting 
small lending institutions such as community banks that 
participate in FHA's programs, but are not able to close FHA 
loans in their own names.
    Second, we are pleased that the legislation would extend 
FHA's ability to hold all lenders to the same enforcement 
standard for loans that were improperly originated or in which 
fraud or misrepresentation were involved. FHA's current 
indemnification authority covers those lenders responsible for 
70 percent of FHA's loan volume, but the time has come to hold 
all underwriters to the same standards, and, with this 
legislation, we will.
    And last, the legislation provides explicit authority to 
terminate lenders for poor performance in specific geographies 
or on a nationwide basis. Such flexibility will ensure that we 
can protect FHA from lenders whose poor performance put the 
taxpayers at risk.
    I would, however, like to call your attention to several 
provisions that the Administration looks forward to working 
with you to refine. The first is the proposal to create 
separate capital reserve accounts for the General and Special 
Risk Insurance Funds through which we provide financing for the 
FHA multifamily and health care loan guarantee programs, among 
others. Even though we agree that FHA must manage risk to these 
portfolios with the same focus and urgency as we treat the 
single-family fund, FHA is concerned that the creation of new 
capital reserve requirements, as detailed in the discussion 
draft, would be unworkable because they would apply the current 
requirements of the MMI Fund to funds that have a very 
different risk characteristic and structure, and contain a mix 
of existing and legacy programs. And so we look forward to 
working with the subcommittee to determine an alternative means 
to increase transparency and appropriately manage the risks 
associated with the GI/SRI Funds.
    In addition, we are particularly concerned about the 
legislation's proposal to increase the minimum downpayment for 
all FHA borrowers to 5 percent. If this had been required 
during the past year, 345,000 families would have been shut out 
of the opportunity to become homeowners. Our experience during 
this crisis has shown that the combination of downpayment and 
FICO score is a far better predictor of loan performance than 
either of these components alone. We believe it is essential to 
retain the flexibility to respond to the market and loan 
performance conditions with a variety of tools rather than 
being locked into a specific downpayment structure.
    And last, while my colleague with USDA will specifically 
address the rural components of the draft, let me say that we 
are already working very closely in aligning the agency's 
rental programs through a White House Rental Policy Working 
Group that includes HUD, USDA, and Treasury. And having 
initiated a similar conversation on the single family side as 
well, we believe it makes sense to continue focusing for now on 
those efforts rather than contemplating any more extensive 
reordering of the various Federal agencies' roles in these 
programs as outlined in the legislation.
    I look forward to working with the subcommittee to refine 
this legislation and to address a number of other significant 
issues important to the Department, one of which is the 
methodology used in the bill to determine loan limits, which 
warrants further discussion and analysis given that it appears 
it could dramatically lower FHA loan limits in some places. I 
look forward to working with you to ensure that FHA continues 
to fulfill its mission of supporting our housing market and 
economic recovery, while minimizing risk to the taxpayer, as we 
have done throughout Secretary Donovan's tenure.
    Thank you, and I look forward to your questions.
    [The prepared statement of Assistant Secretary Galante can 
be found on page 34 of the appendix.]
    Chairwoman Biggert. Thank you.
    Ms. Trevino, you are recognized for 5 minutes.

    STATEMENT OF TAMMYE H. TREVINO, RURAL HOUSING SERVICES 
   ADMINISTRATOR, RURAL HOUSING SERVICE, U.S. DEPARTMENT OF 
                          AGRICULTURE

    Ms. Trevino. Thank you, Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee. It is my privilege 
to be with you today to discuss USDA's role in supporting 
America's continuing need for safe, affordable housing. For 
over 60 years, the Rural Housing Service, part of the 
Department of Agriculture's Rural Development Mission Area, 
along with Rural Utilities Service and the Rural Business and 
Cooperative Service, has been working to help rural America 
thrive by supporting the housing needs of these communities.
    Rural Development is a collaborative agency. Our programs 
build upon one another, ultimately creating efficiencies for 
the taxpayer and for the communities that we serve. As part of 
the Rural Development Mission Area, Rural Housing Service 
provides single-family homeownership programs, multifamily 
housing programs, housing loans and grants for repair and 
rehabilitation, and community programs. All are integrated into 
a more holistic approach of rural community and economic 
development.
    We have exceptional staff and a network of 47 State offices 
and 500 area offices across the rural landscape, working 
closely with dedicated partners in the for-profit, nonprofit, 
and private sector. Our field staff deliver programs for all 
three agencies in the mission area. By being located in rural 
communities, we are able to cultivate important relationships 
with lenders, REALTORS, community-based organizations, 
redevelopment authorities, and others.
    Our efficiency is noted in the strategic centralization of 
a significant portion of core operations, while leveraging the 
community knowledge of our field structure across all programs. 
For example, staff delivering Rural Housing Service's Community 
Facilities Program to eligible municipalities, tribes, and 
nonprofit organizations also work with these same partners on 
the Rural Utilities Service's water and waste programs. The 
importance of our local staffers cannot be overemphasized. They 
know the needs of their neighbors and their rural communities 
and provide critical support, both effectively and efficiently.
    In the wake of natural disasters, Rural Development 
programs have worked in concert to build communities from the 
ground up. No other department in the Federal family offers 
rural communities the range of financial services available 
from USDA Rural Development and staff nearby to provide the 
technical assistance. Utilizing a total budget authority of 
$1.03 billion, RHS leveraged a program level of approximately 
$26.3 billion in loans, loan guarantees, grants, and technical 
assistance in Fiscal Year 2010. Our programs are provided 
through the Housing Act in combination with the Consolidated 
Farm and Rural Development Act, or the ConAct.
    Rural Housing Service is a big part of Rural Development's 
overall success in effective program operations. Delinquencies 
for Rural Development are less than 2 percent of our 
outstanding loan portfolio of over $150 billion. Despite 
doubling our borrowers' numbers over the last 2 years, RHS's 
direct and guaranteed loan portfolios continue to perform well, 
thanks in large part to our state-of-the-art call center, the 
Centralized Servicing Center in St. Louis, Missouri. In the 
interest of saving time, information about delinquencies and 
accomplishment in the RHS programs have been provided in 
written form.
    While RHS and HUD share an important commitment to meet the 
housing needs of rural America, we believe that our mission and 
the delivery of our programs are different and distinctive. 
Rural Housing, through Rural Development, has the flexibility 
to respond to changing needs across the rural landscape and 
lead other public-sector and private-sector for-profit and 
nonprofit partners to invest strategically in rural people and 
rural places, particularly those who are traditionally 
underserved by conventional financial models, and at times 
where the private sector is unable to step in.
    Rural communities have a unique set of challenges, and 
Rural Development is well suited to address these. As 
policymakers, we will look to the future of the Federal role in 
housing, but it is important that this discussion address the 
needs that are inherently rural. Chairwoman Biggert, Ranking 
Member Gutierrez, and members of the subcommittee, while we 
appreciate Congress' intent to identify duplication of services 
across the Federal Government, we do not support the draft 
proposal in its current form.
    Thank you for the opportunity to be here, and I look 
forward to answering questions.
    [The prepared statement of Administrator Trevino can be 
found on page 70 of the appendix.]
    Chairwoman Biggert. Thank you.
    Mr. Tozer, you are recognized for 5 minutes.

  STATEMENT OF THEODORE ``TED'' TOZER, PRESIDENT, GOVERNMENT 
           NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)

    Mr. Tozer. Thank you, Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee.
    Chairwoman Biggert. I don't think you have your microphone 
on.
    Mr. Tozer. Is that better?
    Chairwoman Biggert. Yes.
    Mr. Tozer. Chairwoman Biggert, Ranking Member Gutierrez, 
and members of the subcommittee, thank you for the opportunity 
to appear before you today.
    I have been in the housing finance industry for more than 
30 years, most recently serving as senior vice president of 
capital markets for National City Mortgage Company, where I 
managed loan pricing, sales, delivery, and pipeline risk 
management, and where I developed a deep appreciation for 
Ginnie Mae--
    Chairwoman Biggert. Could you just pull the microphone a 
little bit closer? Thank you.
    Mr. Tozer. Okay. To appreciate Ginnie Mae as a lender. Now, 
as Ginnie Mae's President, my appreciation has only increased.
    As you know, we remain embroiled in the worst housing 
crisis since the Great Depression. In response, Congress and 
the Administration have launched a number of efforts to 
stabilize our economy. Even though not every initiative was as 
successful as we might have hoped, as a whole these efforts 
have made a positive difference. Ginnie Mae has played its 
part, making it possible for lenders to continue to lend 
mortgages. As providing an outlet for the sale of government-
insured products, we helped stem the tide of economic upheaval 
and have been an essential element of the Nation's recovery 
efforts. In fact, during the financial crisis Ginnie Mae has 
provided more than $1.2 trillion in capital for mortgages, 
which has financed more than 4.4 million single-family homes 
and nearly half a million multi-family units.
    We have weathered this crisis without requesting any 
support from the U.S. taxpayer. Indeed, our financial condition 
is strong. From 2008 through 2010, during these tough economic 
times, we have actually generated a net profit for the U.S. 
Treasury of over $2 billion, and we expect to earn nearly a 
billion dollars more this fiscal year. And we also hold right 
now $14 billion in retained earnings on our balance sheet.
    Such strong financial performance is evidence that Ginnie 
Mae is an excellent example of smart and efficient government. 
For more than 40 years, the corporation has served as a 
principal financing arm for the government mortgage products, 
ensuring that money flows into the domestic housing market.
    In 1970, our corporation pioneered the MBS, mortgage-backed 
securities. We created the first mortgage-backed security and 
spearheaded the development of the TBA market. As you know, the 
TBA market, forward trading of MBS, allows borrowers to lock in 
interest rates on their mortgage before they actually close 
their loan. These markets create substantial liquidity that 
gives lenders consistent access to capital. Effectively 
recycling capital allows lenders to finance 30-year fixed-rate 
mortgages at reasonable rates for their borrowers.
    Through our organization, the U.S. Government attracts 
private capital into the U.S. housing market and finances 
government-insured products without raising the national debt, 
while minimizing taxpayer exposure. In fact, Ginnie Mae, in 
contrast to many other MBS entities, earned a profit each year 
during the housing downturn. In Fiscal Year 2011, it is 
expected to be our best year ever, as mentioned before, making 
approximately a billion dollars.
    This performance can be attributed to our business model. 
The corporation does not buy or sell securities or loans for 
investments. Our conservative approach to management rests on 
our solid, inherently risk-adverse business model, the 
foundation of which is a simple pass-through security backed by 
government-insured loans issued by private lenders. Our program 
is designed so that the capital of the lenders who issue Ginnie 
Mae securities is available to assume losses before Ginnie Mae 
or the taxpayers are exposed to loss. Having lenders act as 
issuers of the securities has the added benefit of ensuring the 
lenders actually have skin in the game. This provides an 
incentive for lenders to originate well-performing loans. The 
extra layer of capital is critical to mitigating taxpayer risk.
    As the market fluctuates, and lenders face increased risk, 
we have made several changes to strengthen our risk-management 
practices. These include increasing net worth requirements, and 
establishing capital and liquid asset requirements for all 
issues across all of our business lines. The liquid asset 
requirements are especially important to ensure our 
counterparties have the ability to meet their payment 
obligations.
    As we continue our programmatic adjustments, and as 
Congress deliberates ways to reform housing finance to better 
suit the current conditions, it is critical we get this right. 
The proposed QRM regulation recognizes that risk retention is 
an important part of creating a sustainable housing finance 
system. Issuers and originators must have an incentive to make 
sustainable loans. Without it, we risk another crisis. Our 
challenge is to craft a balanced approach that protects 
borrowers and allows a robust flow of capital.
    I appreciate this opportunity to share comments on the 
initial discussion draft which are contained in my written 
testimony. I wanted to note that the legislation includes a 
provision that gives the CFO of Ginnie Mae the ability to offer 
independent views on matters concerning Ginnie Mae. While we 
understand the committee's desire to maintain a close review of 
our financial condition, we respectfully believe this provision 
is not necessary. We are a relatively small agency. My staff 
and I are directly responsible to inquiries from Congress and 
from this committee, and HUD Office of the Inspector General 
provides independent oversight.
    To the extent the committee believes additional oversight 
may be necessary, I would recommend that the focus be placed on 
the role of the agency's chief risk officer, because the major 
risks to Ginnie Mae center on the capacity of its issuers to 
meet their obligations to investors and the deterioration of 
their value-to-servicing portfolio. Thus, potential problems at 
Ginnie Mae are likely to be identified through our risk-
management practices and issue-monitoring activities long 
before it impacts our financial condition.
    Chairwoman Biggert and Ranking Member Gutierrez, our 
housing finance market remains fragile. Congressional action, 
Administration effort, and government programs would help to 
address the economic and housing upheaval, provide needed 
liquidity, and help keep the market from complete collapse.
    While Ginnie Mae has been a stabilizing force in the 
housing market, the Administration believes a meaningful reform 
is needed so private investors can return, and I hope my 
testimony today has contributed to greater understanding of 
Ginnie Mae and the value it contributes to our housing finance 
system. I am committed to strengthening this unique 
organization so that it continues to make a sound contribution, 
and I welcome the opportunity to work with Congress on this 
effort. I look forward to answering any questions you might 
have. Thank you.
    [The prepared statement of Mr. Tozer can be found on page 
59 of the appendix.]
    Chairwoman Biggert. Thank you.
    We will now turn to questions from members, and I will 
yield myself 5 minutes.
    Mrs. Galante, the Administration estimates from last year, 
you said that if the required payment rose to 5 percent, then 
300,000-plus homebuyers would be locked out. Do you know how 
that figure was determined?
    Ms. Galante. Yes. This was based on homebuyers that we 
financed last year, and, if they had to provide a higher 
downpayment, how many of them would not have qualified.
    Chairwoman Biggert. Was this a study that was done of all 
homebuyers or--
    Ms. Galante. No. Thank you for letting me clarify this. 
This was just of borrowers who were FHA borrowers. We looked at 
the particular characteristics of those buyers this past year 
and did a quick analysis of how many of them would not have 
qualified if they would have had to pay a 5 percent 
downpayment.
    Chairwoman Biggert. Okay. Could you submit that data or the 
study so that we could have GAO look at that for further 
review?
    Ms. Galante. Sure, we can provide that information to you.
    Chairwoman Biggert. Thank you.
    This was kind of what I was asking the Senator about the 
QRM. First of all, how would the higher downpayment 
requirements in the QRM impact FHA?
    Ms. Galante. Yes. Thank you for the question.
    This is obviously a challenging topic at this point in 
time, and I want to say that where we are, just to be clear 
where we are in the process, is that absolutely no decisions 
have been made about what the downpayment requirements will be. 
There was a published rule for comment, and the comments were 
due August 1st, and many, many comments were received.
    Chairwoman Biggert. But let us say it was decided that the 
downpayment should be 20 percent. How would that affect FHA?
    Ms. Galante. Again, it is difficult to predict how this 
rule, if it were put into effect, would affect FHA. I do want 
to say, again, it was a rule around risk retention for 
financial institutions making loans that will be sold to 
investors and ensuring that those lenders had some skin in the 
game with respect to risk retention. And so it is a very 
different apples and oranges with FHA.
    Chairwoman Biggert. Okay. Do you have any estimate, any 
guess how it would affect; would there be more borrowers, or 
would there be less or would it be the same?
    Ms. Galante. Again, I really do not have any particular 
estimate on that that I could provide you.
    Chairwoman Biggert. Okay. Then, Ms. Trevino, some of the 
concerns raised in the FHA and RHS discussion draft deal with 
the preservation of institutional knowledge currently in place 
at the RHS. Should that be moved to HUD? I know you don't want 
that to go through, but let us assume that it did, or are you 
using that in your working group where you said that these 
agencies are working together?
    Ms. Trevino. Chairwoman Biggert, thank you for that 
question.
    I believe that we currently work together very well. I 
believe it would be very premature to propose this type of 
move. Currently, Rural Housing Service addresses the needs of 
rural America very efficiently. We believe that those are the 
concerns of the country right now, and that is the efficiency 
of our programs and the cost-effectiveness of our programs.
    Chairwoman Biggert. You have the working group. Was that 
just formed recently?
    Ms. Trevino. Yes, ma'am.
    Chairwoman Biggert. And why was that formed?
    Ms. Trevino. The one on single family or the rental policy? 
The whole idea is to work in synergy with the other housing 
programs across the Federal Government. We do not believe at 
Rural Housing Service that horizontal integration of housing 
programs across the Federal Government are always the answer. 
We believe that when the consumers are as complex as our rural 
consumers, that horizontal integration is just one way to look 
at it, and there are better ways to look at how we provide 
services.
    I would like to give you an example: in the private sector, 
I think you have all heard of the company Apple and iTunes. 
They are one of the best companies in the world at being able 
to predict environmental dynamics and being able to determine 
what their customers require, and we believe that at Rural 
Development, we do that. Apple could have done what all their 
competitors do, and they could have gone out there and created 
a great computer. They could have had a great operating system. 
They could have done a software that allowed them to--
    Chairwoman Biggert. Okay. And I agree that is a great 
company that has done a lot. So what do you see or predict for 
housing services?
    Ms. Trevino. We believe that you would upset the synergy 
that currently exists. We don't believe that in an area like 
rural America that is as complex as it is, that having this 
type of integration is the answer.
    Chairwoman Biggert. Okay. Thank you. My time has expired.
    The gentleman from Illinois.
    Mr. Gutierrez. Thank you.
    Mrs. Galante, you mentioned that a 5 percent downpayment 
requirement on FHA loans would have prevented 345,000 families 
from buying homes had it been in place this past year. You are 
3\1/2\ now, proposed 5 percent. Can you give us more detail on 
the impact this proposal might have on the broader housing 
market? Are there any indications, any, that the private market 
is ready to pick up the slack?
    Ms. Galante. Yes. Thank you for the question.
    Again, this is a traditional--I want to say traditional 
role for the FHA, to provide financing opportunities for low- 
and moderate-income buyers, and we have been providing this 
type of financing with 3 percent or 3\1/2\ percent 
downpayments, I think, since 1953. So this is a core 
constituency of the FHA, core customer of the FHA, and they 
would clearly be impacted if we went to a flat across-the-board 
5 percent minimum downpayment.
    And I do want to also stress that what we are asking for is 
just that it not be an absolute minimum standard requirement. 
We do have flexibility today, and we use that flexibility to 
look at the combination--as I said in my testimony--of FICO 
score and downpayment, and that is a much better predictor, and 
as a result of that, we have required higher downpayments for 
those with very low FICO scores. So it is not that we can't 
provide that flexibility and think that we should.
    Mr. Gutierrez. How has business been recently over at the 
FHA?
    Ms. Galante. To some other questions that were asked of the 
earlier panelists, I would say this: We obviously rose to a 
peak in the market where we were 30 percent or more of mortgage 
financing.
    Mr. Gutierrez. What were you in the last 12 months?
    Ms. Galante. I was just going to say, but over the last 12 
months, we actually have come back down to, I think, around 17 
percent of the market. So we are still fairly robust, but we 
have started to scale back under the current scenarios and 
under the current rules and conditions.
    Mr. Gutierrez. How much has the FHA cost the Federal 
Government during--the American taxpayer during the last 10 
years?
    Ms. Galante. Again, the FHA is self-sustaining, and is--we 
charge--
    Mr. Gutierrez. I wanted to see if there was a difference, 
because every time I come to one of these meetings, I put a 
bet, and I always win it, that Fannie Mae and Freddie Mac are 
going to get mentioned at least half a dozen times. So I am 
well on the way, and by saying that, I might have messed up my 
bet, but I won't, because they can't help themselves. Fannie 
Mae and Freddie Mac will be mentioned again and again.
    So unlike Freddie and Fannie, you don't lose any money?
    Ms. Galante. That is correct. We have a robust--
    Mr. Gutierrez. And recently you have had up to 30 percent 
of all the mortgages that are being issued in America?
    Ms. Galante. That is correct. Again, we--
    Mr. Gutierrez. And if we raised it to 5 percent, 345,000 
families would not have gotten a loan from your agency?
    Ms. Galante. Again, if you use those--that as a predictor 
from last year's borrowers, you use that as a predictor, yes.
    Mr. Gutierrez. And I know that Senator Isakson said that it 
was critically important to the economy that we get 
construction started once again. First we have to obviously be 
able to sell homes. People have to be able to get mortgages.
    Let me ask you one other question. How about rentals? How 
are we doing on--because there are a lot of people who can't 
own a home, but they--how are we doing with developing so that 
people will create rental units for people to--
    Ms. Galante. Yes. Actually, the FHA multifamily and health 
care programs have grown significantly in this past few years, 
partly because there hasn't been capital in the private market 
available for those facilities as well, and so we have been 
producing over 100,000 units a year with the financing that FHA 
has been able to provide.
    Mr. Gutierrez. Last question. I have 19 seconds, and I 
promised I wouldn't go over. So you are about 17 percent today?
    Ms. Galante. That is correct.
    Mr. Gutierrez. What were you 5 years ago?
    Ms. Galante. I don't know that exactly.
    Mr. Gutierrez. What historically have you been?
    Ms. Galante. Historically, before this crisis, it was 2 or 
3 percent, I think.
    Mr. Gutierrez. So you went from 2 or 3 percent to up to 
over 30, and you are back down to 17 percent?
    Ms. Galante. That is correct.
    Mr. Gutierrez. All right. We need to keep you working. 
Thank you.
    Chairwoman Biggert. The gentleman yields back.
    The gentleman from Virginia is recognized.
    Mr. Hurt. Thank you, Madam Chairwoman.
    And building on, following up on his question actually, do 
you believe that your market share--and maybe could you just 
talk about this in the context of a couple of things. Do you 
believe the market share that you all currently occupy is 
larger than what FHA was designed to handle? And can you talk 
about that market share in the context of, certainly, I think, 
of an opinion of a majority on this committee who believes that 
we want to see more private capital in the system, not less, 
and is the market share that you occupy crowding out private 
capital? Can you just talk on that subject generally?
    Ms. Galante. Yes, thank you. That is a very important 
question, and I would say this: We have been on record before, 
and I will go on record again, that we certainly do not believe 
that the FHA should be 30, 40 percent of the market. That we do 
want the private capital to come back into the market is one of 
the reasons that in the White Paper on the future of housing 
finance we supported the expiration of the higher mortgage loan 
limits for the Economic Recovery Act. And so we are--we think 
that is a first step in stepping back FHA's role in the market, 
and we think that is an important thing to do.
    What the right percentage is of a sustainable FHA for the 
future, what is the exact percentage it should be? It certainly 
ought to be at less than 30 percent. We use in our modeling--I 
think we could be sustainable if it were 10, 15 percent of the 
market, but we are not looking to stay up higher than those 
numbers.
    Mr. Hurt. But did you say that before 2008 it was less than 
5 percent?
    Ms. Galante. Yes, I believe that is correct.
    Mr. Hurt. Do you believe that is--can you explain why that 
is too little?
    Ms. Galante. I am not saying that it is too little. I am 
just saying we can expand and contract as we are needed. We are 
there to provide a countercyclical approach in the marketplace, 
so it is not that it is not okay if it is down at 2 or 3 
percent. It is that we can handle probably on a sustainable 
basis something higher than that when it is necessary.
    Mr. Hurt. Okay. And in this second question I would like to 
hear from each of you because of your expertise in this area. 
It has been observed, it has been opined that we are not really 
going to see a true housing recovery in this country until we 
hit the bottom. I would love to hear each of you speak to the 
question as to whether or not we have hit that bottom and why 
or why not.
    Ms. Galante. Sure. Thank you again for the question.
    This is one of those moments where I guess I wish I were an 
economist, and I am not. I don't know whether we have hit the 
bottom. I think we see some very mixed signals. We have seen 
some house pricing increases in the past 3 months. We think 
that is a positive sign. So I think we are still in a fragile 
place, but we do think things are slowly improving.
    Mr. Hurt. Thank you.
    Ms. Trevino. I have to say that in rural America things 
seem to lag, and you are going to see things happen in rural 
America anywhere from 6 months to 2 years later. So, we may not 
have seen the worst of what the economy is going to do, and yet 
again we are seeing some good numbers coming up. And so we are 
very encouraged that we are going--that it is kind of an up-
and-down cycle.
    We believe that in rural America it is a little different 
than in urban America. Folks who lose their homes there are 
going to be because of family circumstances, such as divorce or 
a complete loss of jobs. And so we are not seeing as much of 
the housing market effect in rural America that we saw in urban 
America, but, again, they do tend to lag, so I couldn't tell 
you.
    Mr. Hurt. Thank you.
    Mr. Tozer. Basically from my perspective, we may be closer 
to the bottom than we may think. The reason I think so is that 
I have heard from numerous money managers. Being in the 
position at Ginnie Mae, I talk to a lot of the major money 
managers around the country, and they really are looking now at 
potentially buying blocks of real estate. I always look because 
my background is in capital markets. Whenever you start seeing 
smart money coming in, it looks like you are maybe getting 
close to the bottom. Again, I am saying ``close'' because I 
don't think we have hit bottom, but we are probably getting 
close, knowing that a lot of the money managers are looking 
very seriously at buying real estate, and you see it in the 
REALTOR numbers. I think last month approximately 30 percent 
of all the transactions were cash, which indicates to me it is 
probably being bought by people who are buying the property as 
an investment. So that leads me to believe that maybe there is 
some glimmer of hope that we may be getting closer to the 
bottom than maybe we think, but who knows? Wall Street has been 
wrong before.
    Mr. Hurt. Yes, thanks.
    Chairwoman Biggert. Thank you.
    I would ask particularly Ms. Trevino and Mr. Tozer, if you 
are seeing evidence of that or have the numbers for how close 
or what is happening in the market, I would really like you to 
submit that. Thank you.
    Mr. Cleaver, you are recognized for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. Let me begin 
maybe with Mr. Tozer. Would you say that the fact that FHA 
loans increased from 2 to 3 percent up to 30 percent represents 
some kind of either increase in fraud or loosey-goosey 
requirements or underwriting standards?
    Mr. Tozer. No. My feeling is, again, when FHA hit the 30 
percent market share was a point that private capital had been 
really shook up from the perspective of the problems and a lot 
of other aspects, private labor markets and so forth, to the 
point where people were reluctant to invest in loans that were 
not guaranteed by the U.S. Government, and so because of that, 
Ginnie Mae picked up a large market share. But I don't think 
people were drawn to the FHA program because of the 
underwriting standards. It is more the fact of lack of private 
capital because of the amount of losses taken in the private-
label market.
    Mr. Cleaver. If we raised the downpayment requirements to 
3\1/2\ to 5 percent, do we have any empirical evidence that the 
private sector will pick it up?
    Mr. Tozer. In today's market right now, it is probably 
somewhat limited as far as the availability because of the 
healing factor that is going on right now in the private 
sector, but I really can't speak to the magnitude. There is 
interest. The private sector always finds a price for things, 
but the question is, I think it is probably limited as far as 
the availability today just because of the healing process that 
the private sector is going through right now.
    Mr. Cleaver. I am going to shamelessly say that my cousin, 
who actually lives in Congresswoman Waters' district, is 
president-elect of the California REALTORS Association. I was 
out there a week ago and had a chance to talk to him about real 
estate and how houses are being sold in California. His concern 
was that if we raise the downpayment requirement, that it is 
going to hurt the industry, and the industry is already in a 
depression. Do any of you see that differently?
    Mr. Tozer. Again, I really can't speak to it, because, 
again, my responsibility is kind of the capital markets side, 
but to understand how it plays out and what you are seeing at 
the primary market, I really don't have the expertise to talk 
about it from that perspective, to understand what the impact 
would be.
    Ms. Galante. So, again, I would just say that for some 
borrowers the ability to have the 3\1/2\ percent downpayment 
and not being locked in to having to put down 5 percent is a 
huge difference in terms of their ability to qualify. And FHA 
needs to look closely at the underwriting of every borrower, 
and if, again, their credit score is too low, then you may want 
to require a higher downpayment. But that combination is, 
again, just a much better predictor of a person's success, and 
so we really feel strongly that we don't want to be just locked 
in to it must be 5 percent and above, and, again, historically 
FHA has been serving that underserved borrower, and we want to 
be able to continue to do that when circumstances allow for it.
    Mr. Cleaver. But we could exclude, by raising the 
downpayment, individuals who could, in fact, afford with 
standard underwriting procedures homes, but could not come up 
with a downpayment, particularly in a recession?
    Ms. Galante. That is correct, yes.
    Mr. Cleaver. Ms. Trevino, do you agree with that?
    Ms. Trevino. Yes, Congressman, thank you, and I do agree 
with what has been said. In rural America, we are not going to 
see the type of private-sector involvement in terms of making 
rural loans, and therefore the ability for us to continue a no-
down-payment program that we have is essential. Rural Americans 
make on the average $10,000 less than their urban counterparts, 
and very seldom can afford that downpayment, so we would have a 
huge loss of homeowners or new homeowners in the future if we 
required that.
    Mr. Cleaver. Thank you.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. Thank you.
    The gentleman from New Jersey is recognized for 5 minutes.
    Mr. Garrett. I thank the Chair, and I will begin where the 
Chair was asking Ms. Galante, with regard to the numbers that 
you said, that if we raised from 3\1/2\ to 5 percent, you said 
it was 300 what?
    Ms. Galante. Three hundred forty-five thousand. Again, 
estimate based on if those were the same borrowers that we 
would be approaching going forward.
    Mr. Garrett. Sure. And so when you say it is an estimate, 
in reality, did you actually scrub the numbers? If I was one of 
those categories in that list, did you scrub my asset list to 
see whether or not I actually had the additional funds to go to 
pay that extra money?
    Ms. Galante. So, again, thank you.
    I do want to be clear. This is not a long-term, 
longitudinal, robust study. This was an estimate based on a 
scan of--
    Mr. Garrett. But it is not--let us be clear, it is a 
statistical analysis of how many people had the 3.5 who applied 
for that, and how many would be at the 5 percent; not really 
going back and saying, of the ones you looked at, do you, Scott 
Garrett, have--if I was going to buy a half-a-million-dollar 
house, 3\1/2\ to 5 percent, I would need another $7,500 
roughly, right, to go to that? You didn't go in and say, Mr. 
Garrett, do you have all the additional $7,500, or can you 
secure that someplace else, so you could come up with that 
number, or did you do that?
    Ms. Galante. We did not. And, again, I would be happy to 
provide you the level of work that went into that estimate.
    Mr. Garrett. So in reality you don't know, and because--and 
just using that scenario, hypothetically, for somebody to go 
from 3\1/2\ to 5 percent, $7,500, having just gone through this 
with my own house, that is the cost of a new furnace, for 
example. For that individual you really want to make sure that 
individual has not only the wherewithal to pay the mortgage 
each month on that half-a-million-dollar house that he is 
buying, but also the upkeep of the house. He should be able to 
afford all the other things. So he should be able to afford 
that extra $7,500 if next week, tonight, you find out that your 
furnace goes, your hot water heater goes and that sort of 
thing.
    So that is all part of the equation. So we really don't 
have the data to say how many people lost out, would lose out, 
if we go from 3\1/2\ to 5 percent.
    Ms. Galante. Again, it is a rough estimate. We did look at 
the reported assets that were in the loan file at the time the 
loans were made. We do do full underwriting, so we do have full 
information on these borrowers.
    Mr. Garrett. One of your statements was, ``we were trying 
to serve the underserved borrower.'' One of my questions is, 
who is that? Is the underserved borrower the person who is 
trying to buy a million-dollar house really? Because if you are 
borrowing $750,000, you may be buying then a million-dollar 
house. Is that really what the intention or the purpose of the 
FHA is to provide that person? Because as I said in my opening 
statement, that person is making a quarter of a million 
dollars. Do you really see that as your role?
    Ms. Galante. This is an important issue, and we have been 
clear, again, in the White Paper that we support lowering the 
limits back to the traditional FHA formula for setting loan 
limits.
    Mr. Garrett. So what would that be?
    Ms. Galante. It varies by regional jurisdiction, and I just 
will say this: The reform bill before us would take that 
methodology that we use right now, which is based on a median 
income for a county in a standard, in an MSA, so in a region, 
and drill it down even further to just county by county.
    Mr. Garrett. You heard the opposition to that.
    Ms. Galante. Right, and we do have some concern with the 
impact of that. But just going back to where it has 
traditionally been, 125 percent of the median for the area, 
will be a step back for FHA in the marketplace.
    Mr. Garrett. Let me ask you a question we dealt with over 
in the Budget Committee. CBO, the Congressional Budget Office 
scores Fannie and Freddie--yes, I will bring them up today--by 
including market risk when they evaluate them, when they score 
them. Do you believe that we should be scoring market risk also 
with FHA? And, if so, how do we accomplish that? Is that 
something you can do by yourself, or is that something that you 
should encourage Congress or the Administration to do?
    Ms. Galante. This is a very interesting question. I 
actually did look at the CBO study, and I would say this: The 
concept of fair value accounting is really based if you are 
looking at liquidating a company and how you account for that 
company. So FHA is controlled, as you know, by the Federal 
Credit Reform Act and accounting standards for that. We do look 
at and are continuing to improve our models for looking at 
underlying economic risks, so what is happening, what are the 
trend lines in the marketplace, what is happening with house 
prices. So when we do our actuarial studies of what kind of 
losses we might take, we are every year getting more and more 
sophisticated about how we do that statistical--
    Mr. Garrett. So you will get market risk in there?
    Ms. Galante. So we will get economic factor risks. And when 
you say market risks, the Federal accounting rules, we don't 
apply, for example, what it would cost if we were borrowing 
private capital because we are not, in fact, borrowing private 
capital. So it really doesn't make sense, in our view, to take 
it to that extent. We do agree that it is important from an 
actuarial basis to be understanding market and economic risks 
that are happening in the marketplace.
    Mr. Garrett. I yield back. I see my time is over. Thank 
you.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from California, Mr. Sherman, is recognized 
for 5 minutes.
    Mr. Sherman. Picking up on the questioning of the gentleman 
from New Jersey, he has experience in many things, but not 
buying a home in the Los Angeles area, and I think that there 
is only--I am aware of one bipartisan piece of legislation that 
Congress could take in the next month or two that would help 
avoid a double-dip recession, and that is legislation to 
maintain the qualifying loan limit. If we don't keep the 
$729,750 in the Los Angeles area, there will be a precipitous 
decline in the value of all properties as those properties 
where you need a 729 loan all of a sudden drop by $100,000, and 
the homes a few miles away that are more modestly priced will, 
in turn, drop by $100,000. And whether that means a double-dip 
recession only in 10 major areas in this country, or whether it 
means a double-dip recession for the entire country is an 
economic experiment that I don't want to carry out on the 
American people.
    If we see a decline in effective demand for housing, that 
is to say not just new families who want a home, but families 
who can qualify, we are going to see a precipitous decline in 
the price of housing, the value of housing again.
    Ms. Galante, all my questions are for you. You are the 
winner.
    Ms. Galante. Thank you.
    Mr. Sherman. There was a time when the private sector could 
provide loans in excess of the conforming loan limit without 
the involvement of Fannie, Freddie, Ginnie Mae, and FHA. Our 
financial system is broken right now. It remains broken. Is 
there any current evidence that the marketplace is prepared to 
service loans above the conforming loan limit? And I don't 
mean--Malibu homes will do just fine. If you need $20 million 
to buy a home in Malibu, you probably own a bank, but the loans 
in that 417- to 625-, 625- to 729-, is there any evidence that 
the private market is right now able to step in with reasonable 
rates and reasonable terms?
    Ms. Galante. I appreciate the question. And let me just 
say, we obviously are in a difficult time, and making these 
judgments about where the market is going, where the housing 
market is going, and whether private-sector capital will come 
back in at specific places is difficult to make. Again, our 
judgment has been that for the FHA, at this point in time, the 
step back from the higher limits to what they traditionally 
have been is something that can be done without major impact.
    Mr. Sherman. Are you speaking also as to qualifying loan 
limits for Fannie and Freddie, or is your focus just on the 
FHA?
    Ms. Galante. My focus is just on the FHA.
    Mr. Sherman. Okay. I would like to move on. Ignoring the 10 
high-cost areas in the country, is the Administration concerned 
that lowering the formula from 125 to 115 is going to make home 
ownership unavailable and hurt the housing market?
    Ms. Galante. Are you talking about the formula in the FHA 
reform bill?
    Mr. Sherman. Yes.
    Ms. Galante. We are concerned that the elimination of the 
national floor and going to a county-by-county assessment in 
particular could have a major impact on how low the formula 
would drive the maximum FHA loan limits down considerably in a 
number of places.
    Mr. Sherman. The whole purpose of the 5 percent retention 
was to make sure that the private sector had skin in the game. 
These are private-sector experts, not just people buying a 
mortgage pool. And now that private-sector expertise with skin 
in the game could be the originator, probably could also be the 
private mortgage insurer.
    The proposed QRM rule would exempt FHA-insured loans from 
the risk retention requirements, but it would not exempt loans 
insured by private mortgage insurance. Private mortgage 
insurance is private capital and is an alternative to the FHA. 
Unlike the FHA, private mortgage insurers place private capital 
in the first loss position rather than the taxpayer. Shouldn't 
the Federal housing policy ensure that private mortgage 
insurance, which relieves the taxpayer of risk, is not 
disfavored compared to government alternatives in the QRM 
rules?
    Ms. Galante. Let me just say that the QRM is still under 
advisement with an interagency--
    Mr. Sherman. That is why I asked the question, to make sure 
that those writing those rules get your input on this important 
question.
    Ms. Galante. Yes. Thank you, and we will--I know we are 
taking all of those comments under advisement.
    Mr. Sherman. They want to hear from you. Do you have an 
answer to my question?
    Ms. Galante. Because we are in that rulemaking progress, 
process number 1 and number 2, I should just be clear that I am 
not the main point person for HUD on the QRM. Mr. Ryan is 
leading that effort. And, again, we are one voice of a number 
of voices as part of that rulemaking process.
    Mr. Sherman. Thank you. I will also have some questions for 
the record. Thank you very much.
    Chairwoman Biggert. Perhaps Mr. Ryan could respond for the 
record?
    Ms. Galante. Thank you.
    Chairwoman Biggert. The gentlelady from California is 
recognized for 5 minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman. We have 
returned to work, and you got right on it with one of the most 
important issues of our time, what is going to happen in this 
housing market, and in particular what is going to happen with 
FHA, and, of course, what is going to happen in the whole 
discussion about loan modifications, and how are we going to 
make sure that FHA is financed in ways that it can carry out 
its mandate, etc.
    I suppose I could ask a thousand questions, but I am really 
interested in hearing from any of you who would like to 
volunteer, what do you know about the rumors about the 
Administration's ideas about what to do with the housing market 
relative to homeowners who are underwater, who can't get loan 
modifications, who find themselves languishing in kind of a no-
person's-land here with the banks appearing to--and the 
servicers, rather, not moving very aggressively on loan 
modifications. At the same time, no principal write-downs 
taking place, no real refinance program. Can you help me? What 
do you know about any of this? It is unfortunately bogging this 
country down with a crisis that seems to have no end. What can 
you share with us, Mrs. Galante? What do you know about any of 
this?
    Ms. Galante. Yes. Let me just say this: You are absolutely 
correct. There are a number of programs for loan modification 
and other opportunities for homeowners who are in crisis. FHA, 
for example, just recently extended our forbearance agreements 
for people who are unemployed from 4 months to 12 months to 
help those in that difficult situation.
    So there are a number of things that we are doing, and 
there are people being helped, but we are also concerned that 
we want to be looking at every opportunity to do more. We have 
a short refi program which is specifically for underwater 
homeowners. It has, again, not been utilized as much as we 
would like. So we will continue to look for opportunities to 
improve the loss-mitigation efforts and to help homeowners 
retain their homes, and we are actively working on those 
concepts.
    Ms. Waters. Where do you stand with the discussion by 
attorneys general, the Attorney General of New York in 
particular, who would like to sue these institutions that have 
evidently been involved in less than honorable tactics, and 
where does that put FHA? Do you have FHA-financed insurance 
properties that you consider have been a victim of these 
practices?
    Ms. Galante. Thank you for a very important question. FHA 
and HUD, as you may know, have been actively involved in 
conversations with the major servicers on ensuring that they 
follow--FHA actually has standard loss-mitigation procedures 
that are required of servicers, and when they are not following 
them, we have actions that we can take against those lenders. 
And we are in active conversations, as you might know, with the 
attorneys general across the United States on some of these 
issues, and some of that work comes from some initial work that 
FHA did in bringing forth some of the situations that we found 
in our reviews of these lenders. So I am not in a position to 
talk any more about those conversations at this point, but we 
hope to be able to do that soon.
    Ms. Waters. Thank you very much, Madam Chairwoman. I yield 
back.
    Chairwoman Biggert. Thank you.
    The gentlelady yields back.
    The gentleman from Texas. Thank you for being with us, Mr. 
Hinojosa. You are recognized for 5 minutes.
    Mr. Hinojosa. Chairwoman Biggert, I want to thank you for 
holding this hearing today and for permitting me to participate 
in the hearing. I commend all that you and Ranking Member 
Gutierrez are doing to help improve the housing situation in 
our United States.
    On July the 18th, I introduced H.R. 2573, the Rural Health 
Care Capital Access Act of 2011. The bill would provide 
critical-access hospitals the opportunity to apply for cost-
efficient financing to expand, update, and renovate their aging 
facilities.
    Senator Herb Kohl of Wisconsin introduced a companion 
measure in the Senate, S. 1431. The amendment allowing 
critical-access hospitals to qualify for the Section 242 
insurance program expired July 31st. Both pieces of legislation 
would permit these critically important hospitals to qualify 
for the Department of Housing and Urban Development Section 242 
Mortgage Insurance Program, so if Congress were to fail to pass 
either bill and again extend the Department of Housing and 
Urban Development Section 242 Mortgage Insurance Program, no 
additional critical-access hospitals would be eligible for 
HUD's mortgage insurance program.
    Secretary Galante, would you explain on page 11 of your 
written testimony, for everyone's benefit, what critical-access 
hospitals are, and tell us their purpose, tell us how they 
benefit communities, and lastly the number of them that have 
benefited from HUD's Section 242 Hospitals Mortgage Insurance 
Program.
    Ms. Galante. Yes. Thank you very much for the question.
    So critical-access hospitals are hospitals in rural 
communities that are permitted under HHS rules for Medicare 
reimbursements to operate facilities that have services and get 
paid for those services that traditional hospitals would be 
capped at the amount that they could receive. And the reason 
for that, as an example, they could provide extended care to an 
elderly--frail, elderly person where normally the Medicare 
would require that person to be moved. Since there isn't an 
easy place to move that person, these critical-access hospitals 
can get higher reimbursements on an ongoing basis, and that is 
the piece of--the exemption to allow that to happen is what 
expired on July 31st. So it is important that those hospitals 
be able to have that income to qualify for financing under our 
242 FHA program.
    So these, again, are providing very critical services in 
very rural communities, and the FHA is financing the 
rehabilitation or perhaps a new wing, that type of thing, of 
those hospitals. And I do want to be clear. Again, like other 
FHA programs, these financings do not cost the taxpayer money. 
They are self-financing, essentially, with the fees that are 
charged for these hospitals, but it enables them to do these 
important renovations, provides jobs in the community, 
significant community benefits from that perspective as well. 
And I believe we have insured about 26 of those hospitals over 
the past number of years, and there are a number in the wings 
that would appreciate this ongoing opportunity.
    Mr. Hinojosa. Thank you for answering my questions. I 
represent deep south Texas all the way to central Texas, and 
much of my district is rural; 125 communities and three-fourths 
of the geographic area is rural. So this is something very 
important. And as you well know, Texas is suffering right now, 
having lost about 1,400 homes in the last 3 days to fires in 
central Texas up around Bastrop County and the surrounding 
area. And so the questions I am asking are very important to 
rural America, and we need the Administration to help us so 
that these two bills that I mentioned both in the House and the 
Senate can pass and be available for those counties that need 
your help.
    Madam Chairwoman, I wish to acknowledge Ms. Tammye Trevino 
for all she has done and continues to do to improve housing 
conditions, to provide funding for USDA rural housing programs. 
My area has benefited a great deal, and we want to thank you 
for what you have done.
    Ms. Trevino. Thank you, Congressman. I appreciate the 
comment.
    Mr. Hinojosa. Madam Chairwoman, with that, I yield back.
    Chairwoman Biggert. The gentleman yields back, and without 
objection, I ask unanimous consent that the following 
statements be submitted for the record: a statement from the 
Mortgage Bankers Association dated September 8th, 2011; a 
statement from the National Low Income Housing Coalition dated 
September 8th, 2011; and a statement from the Community 
Associations Institute dated September 8th, 2011.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    And with that, I would like to thank the witnesses for 
being here. I really appreciate it, and I think it will be very 
helpful as we go forward considering FHA and the draft 
legislation. And with that, I thank you again, and this hearing 
is adjourned.
    [Whereupon, at 4 p.m., the hearing was adjourned.]




                            A P P E N D I X



                           September 8, 2011





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