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

                       PERSPECTIVES ON THE HEALTH OF THE
                        FHA SINGLE-FAMILY INSURANCE FUND

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                DECEMBER 1, 2011

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-87

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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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 1, 2011.............................................     1
    Appendix:
        December 1, 2011.............................................    71

                                   WITNESSES
                           Thursday, December 1, 2011

    Caplin, Andrew, Silver Professor and Professor of Economics,
      Department of Economics, New York University...................    54
    Cunningham, Henry V., Jr., CMB, President and CEO, Cunningham and
      Company, on behalf of the Mortgage Bankers Association (MBA)...    56
    Donovan, Hon. Shaun, Secretary, U.S. Department of Housing and
      Urban Development, accompanied by Carol Galante, Acting
      Commissioner, Federal Housing Administration...................    13
    Scire, Matthew J., Director of Financial Markets and Community
      Investment, U.S. Government Accountability Office..............    52
    Sinks, Patrick, President and Chief Operating Officer, Mortgage
      Guaranty Insurance Corporation, on behalf of the Mortgage
      Insurance Companies of America (MICA)..........................    57
    Veissi, Maurice ``Moe'', 2012 President, National Association of
      REALTORS (NAR)................................................    59
    Wartell, Sarah Rosen, Executive Vice President, Center for
      American Progress Action Fund..................................    60

                                    APPENDIX

    Prepared statements:
        Caplin, Andrew...............................................    72
        Cunningham, Henry V., Jr.....................................    75
        Donovan, Hon. Shaun..........................................    89
        Scire, Matthew J.............................................   105
        Sinks, Patrick...............................................   125
        Veissi, Maurice ``Moe''......................................   138
        Wartell, Sarah Rosen.........................................   147

                  Additional Material Submitted for the Record

    Biggert, Hon. Judy:
        Written statement of Brian Chappelle, Partner, Potomac
          Partners LLC...............................................   164
        Written response to a question submitted to Sarah Rosen
          Wartell....................................................   173
        Written response to a question submitted to Matthew J. Scire.   174

                       PERSPECTIVES ON THE HEALTH OF THE
                        FHA SINGLE-FAMILY INSURANCE FUND

                                  ----------

                           Thursday, December 1, 2011

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Spencer Bachus
    [chairman of the committee] presiding.
        Members present: Representatives Bachus, Hensarling, Royce,
    Manzullo, Biggert, Miller of California, Capito, Garrett,
    Neugebauer, McHenry, Campbell, Pearce, Posey, Fitzpatrick,
    Luetkemeyer, Huizenga, Duffy, Hayworth, Renacci, Dold,
    Schweikert, Canseco, Stivers; Waters, Maloney, Gutierrez,
    Velazquez, Ackerman, Sherman, Capuano, McCarthy of New York,
    Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver,
    Ellison, Donnelly, Carson, and Carney.
        Chairman Bachus. The committee will come to order.
        Today, the committee meets to review the recently released
    Fiscal Year 2011 actuarial study of the FHA Mutual Mortgage
    Insurance Fund. I welcome Secretary Donovan, Acting FHA
    Commissioner Galante, and our other witnesses today.
        And I would like to take this opportunity to express to
    you, Secretary Donovan, on behalf of the people of Alabama,
    their regards and appreciation for your efforts during the
    tornadoes that struck Alabama. The response was excellent, and
    we appreciate your professionalism.
        Two years ago, this committee met to hear disturbing news
    that the FHA capital reserve ratio, which is the primary
    barometer for measuring the FHA financial solvency, had
    deteriorated to a level of .53 percent, which is well below the
    statutory requirement of 2 percent. Since then, things have
    gotten worse. The capital reserve experienced a further decline
    to .5 percent in 2010, and then on November 15th of this year,
    the independent actuarial study revealed the capital reserve
    ratio had fallen more than half and now stands at .24 percent.
        Having said that, we should also acknowledge that we have
    witnessed a historic housing market correction with the largest
    drop in home prices in history and the worst economic downturn
    since the Great Depression. With this background, it is not
    surprising that the FHA capital reserves have suffered. We also
    need to recognize that a substantial part of the problem
    results from legacy loans originated during the housing bubble
    prior to the economic downturn. Current loans have much higher
    credit scores and a markedly better performance.
        I am encouraged that the FHA has implemented some
    incremental reforms to shore up the insurance fund reserves and
    reduce risk, including the hiring of a Chief Risk Officer.
    However, I think our witnesses have acknowledged, these reforms
    are not enough.
        I share the concerns expressed in a November 7th GAO report
    that FHA has yet to implement a comprehensive risk assessment
    strategy. A separate GAO study released last week on Ginnie
    Mae, which guarantees the payment of principal and interest to
    investors and securities backed by FHA-insured mortgages, found
    that Ginnie Mae faces a risk of financial loss due to
    inadequate or failed internal processes because of limited
    staff, substantial reliance on outside contractors instead of
    Ginnie Mae employees, and the need for modernized information
    services.
        Both of these GAO reports, coupled with an independent
    actuarial study, all released within the last month, do not
    paint a picture of a government agency prepared for the 21st
    Century, let alone the immediate housing financial crisis.
        Finally, Mr. Secretary, let me reiterate that I share your
    and the Administration's opposition to any increase in FHA loan
    limits. The new levels of $729,500 at 100 percent government
    guarantee passed recently by Congress was not the right course
    of action for creating an environment where the private sector
    can compete on a level playing field with government-subsidized
    entities in our housing markets.
        I look forward to your testimony, as well as that of the
    other witnesses.
        At this time, I recognize Mr. Gutierrez for 4 minutes.
        Mr. Gutierrez. Thank you, Chairman Bachus, for holding this
    hearing, and I welcome Secretary Donovan and our other
    witnesses. I look forward to our discussion today on the
    Federal Housing Administration, the health of its single-family
    insurance fund, and the role that it continues to play in the
    housing market.
        We are going to get into the details today talking about
    actuarial studies and capital reserves. These are important
    issues that we must understand. What we know is that the FHA's
    capital reserve ratios have fallen and continue to be below the
    level required by statute. That is a fact we have to deal with.
    But the real questions that we have to ask today are why is
    this the case, and what can we do to ensure that the fund stays
    in the black going forward?
        I think we can dismiss some theories pretty quickly; for
    example, the idea that the FHA has acted irresponsibly under
    this Administration, or that it is actively trying to grow its
    way out of the problem. Those ideas are simply absurd, despite
    the talking points of some of my colleagues.
        Most of the loans that are hurting the FHA were made during
    the Bush Administration. The FHA, with the help of Democrats in
    Congress, has tightened its underwriting standards, raised
    annual insurance premiums, and increased downpayment
    requirements for borrowers with lower credit scores. If
    anything, these are all policies that have reduced the FHA's
    potential footprint in the market. Those are just facts.
        The fundamental problem is that we are still in the grips
    of a foreclosure crisis that is hurting American homeowners,
    the FHA's balance sheet and, indeed, our entire economy. I
    think that we have to focus on this fundamental issue in order
    to have a useful conversation about maintaining the health of
    FHA into the future.
        We also have to talk about where this Congress is putting
    resources. Are we spending the money to ensure that Americans
    have access to housing counseling to avoid foreclosure? I think
    not. Are we adequately requiring lenders to provide loan
    modifications for borrowers who are delinquent on their
    mortgages? I think we need to ask that question even more. Are
    we doing more to ensure that principal reduction is on the
    table of modification process?
        All of these things would improve the health of our housing
    market, improve the health of the FHA, and, most importantly,
    improve our economy, but I can't say that I think we have done
    enough to help American homeowners who are threatened by
    foreclosure or are underwater on their mortgages.
        The more loans we modify, the healthier the FHA funds will
    be. I hope that we spend time today talking about what the FHA
    and other agencies can do to hold servicers--and I want to ask
    the Secretary specifically about this--accountable, encourage
    more successful loan modification to keep families in their
    homes, and get our housing stock back on a steady growth. I
    look forward to the testimony today discussing how we can fix
    the problem. I thank you, Chairman Bachus, and I yield back the
    balance of my time.
        Chairman Bachus. Thank you, Mr. Gutierrez.
        And at this time, I recognize the vice chairman of the full
    committee, Mr. Hensarling, for 2 minutes.
        Mr. Hensarling. Thank you, Mr. Chairman.
        FHA is likely a disaster in the making. If we are not
    careful, it may become Fannie Mae and Freddie Mac, the sequel.
        At 400-to-1 leverage, 10 times the leverage that was
    employed by Lehman Brothers when they filed their bankruptcy,
    something is amiss. The capital reserve ratio is almost 90
    percent less than the statutorily required minimum--working in
    the third year in a row where the Mutual Mortgage Insurance
    Fund has been undercapitalized. If FHA was a private financial
    institution, likely somebody would be fired or fined, and the
    institution would find itself in receivership. Instead, what we
    have seen is an agency that has undertaken an expansionary
    strategy whose aggregate insurance in force has more than
    tripled since 2008. We have an agency that now guarantees
    mortgages up to roughly twice what they did just a few years
    ago, certainly an example of extraordinary mission creep.
        It is estimated that more than half of FHA's current
    insurance in force is on mortgages taken out by owners who have
    negative equity in their homes. FHA's seriously delinquent rate
    for September was 8.7 percent, up from 8.2 percent in June, at
    a time when many believe that we will see further erosion in
    home values.
        In February 2011, in the Administration's report to
    Congress, they said, ``FHA should return to its pre-crisis role
    as a targeted provider of mortgage credit access for low- and
    moderate-income Americans and first-time homebuyers.'' Before
    the taxpayers get soaked yet again, I hope that the
    Administration's actions will match their rhetoric.
        I yield back the balance of my time.
        Chairman Bachus. Thank you.
        Mr. Scott is recognized for 3\1/2\ minutes.
        Mr. Scott. Thank you very much, and, Secretary Donovan, it
    is good to see you.
        First of all, I want to start off by thanking you and HUD
    for the very valuable assistance you gave me in dealing with
    our home foreclosure situation in Georgia. Georgia is the
    epicenter of home foreclosure, and my district, which
    represents the suburban areas of the Atlanta metropolitan area
    where so many of the huge home subdivisions are particularly
    hit, that comes almost 2 years after we had the great flood. So
    our housing situation in that area is very serious, and in that
    regard, we put together a home foreclosure event with the
    assistance of HUD.
        And I really want to say thank you to a couple of people on
    your staff: Audrey Crutchfield--I think you may know her--and
    also Ed Jennings, who is a regional person. And when you thank
    them, I want you to encourage them to do it again with me,
    because this problem is still there.
        We were able to help save over 2,500 homes, but that is
    just a drop in the bucket. We need to get help down there very
    seriously, and if we start early enough, if we want to start
    this year, we could save 10,000 homes. We are particularly
    serious with the areas of that combined impact of high
    unemployment, people without jobs. We have a severe problem
    with a lot of elderly. There is no reason for us to have to put
    90- and 100-year-old elderly people out. Where are they going
    to go? How are they going to get help? We were able to save one
    of those fellow Georgians just this week, as you know. And we
    have kept them in their homes thanks to the good graces of one
    of our sheriffs there.
        This FHA was put together as a result of the Depression, in
    1934, and it was put together for these very pressing reasons.
    We need to do that despite the efforts last April, where I
    think the Congress cut $88 million. That is devastating to your
    Department.
        So there is a role that we are playing in these cavalier
    budget cuts that goes straight to the heart of where the
    greatest need is for the problem; if there ever was a need for
    us to look very gingerly and avoid these massive budget cuts
    that helped to exacerbate the very problems that I am talking
    about. And so, we want to get into that today, and I hope we
    can get a message across loud and clear that we need to reverse
    this rather disturbing trend to try to balance the budget on
    the backs of those areas of our service to the American people
    where they need the help the most and call upon those who can
    afford it, those multibillionaires and millionaires who are not
    paying their fair share, to help.
        This is a primary example of where we are. America is a
    great country, and just as we rose out of the ashes of the
    Depression and formed the FHA at that time, surely this is a
    time in which we can serve its great sterling purpose and
    strengthen the funding for HUD.
        So I appreciate your being here. Thanks again for your
    work, and let your folks know we look forward to working with
    them again next year. We are putting that home foreclosure
    event together as we speak, and hopefully we can contact your
    office. Thank you.
        Secretary Donovan. Thank you.
        Chairman Bachus. Mr. Royce, did you want a minute, or a
    minute-and-a-half?
        Mr. Royce. Thank you very much.
        Chairman Bachus. One-and-a-half minutes then.
        Mr. Royce. Very good. Thank you, Mr. Chairman.
        In 2008 and 2009, some of us were warning about the
    potential risk of this government agency heading toward their
    statutorily mandated 2 percent capital reserve ratio, and we
    had hearings like this one, and we were told at the time not to
    worry. The testimony was that the FHA was fine, and the reforms
    being made were going to prevent a taxpayer bailout. I remember
    we had, in October of 2009--then-FHA Director Stevens was here.
    He came before the committee, and his words were these: ``We
    will not need a bailout.''
        Secretary Donovan, in reviewing your prepared remarks, it
    is clear that you are laying out a very different scenario
    here. And given the actuarial report from 2011, I can see why.
    In that report, the capital reserve ratio is now one-quarter of
    1 percent, which is a fraction of the statutorily mandated 2
    percent. And this leverage ratio is really--it is about 244 to
    1. That would give pause, I think, to any regulator at this
    point.
        And so the obvious question that I think we hope to get
    answered as you lay out your plan is, what is next, Mr.
    Secretary? What is your solution for preventing a taxpayer
    bailout of FHA?
        I think it is clear that banking on a quick turnaround in
    the housing market, I think that rebound is not the safe way to
    bet. I think you need to lay out a scenario where we have a
    plan that moves us back from the brink that could lead to a
    bailout. I very much appreciate your being here, and I am
    looking forward to hearing your testimony here today. And I
    yield back the balance of my time.
        Chairman Bachus. Thank you.
        Mr. Green for 2 minutes.
        Mr. Green. Thank you, Mr. Chairman. I thank you and the
    ranking member for having the hearing.
        Thank you, Mr. Secretary, for appearing today, and I am
    hopeful that what you will present to us will help us to
    understand how the housing market can bounce back with the help
    of FHA.
        Your credit scores have gone up to 700, average credit
    score. You have been assisting in areas where the market, in
    general, does not receive a lot of help from other
    institutions. I think that we have to concern ourselves with
    the housing market in terms of the recovery, and I see FHA as a
    part of that recovery effort. So I thank you for appearing and
    trust that when you have completed your testimony, we will have
    greater insight into how FHA will play a meaningful role.
        And I yield back the balance of my time.
        Chairman Bachus. Thank you.
        Mr. Miller for 1\1/2\ minutes.
        Mr. Miller of California. Thank you, Mr. Chairman.
        Secretary Donovan, thank you for meeting with me this
    morning. We had a nice conversation beforehand, and we do need
    to look for ways to shore up the FHA insurance fund. Falling
    home prices are really the major reason you are in the
    situation you are in today, and until we reform the housing
    system, home values will continue to falter, people will lose
    money, and this economy will not turn around.
        But the housing market is a very, very complex marketplace.
    There is no doubt we need to look to try to bring the private
    sector back to fill the void that has been created out there,
    but until we do that, somebody has to step forward to make sure
    there is liquidity in the marketplace.
        That was the reason we formed the FHA and the GSEs, to do
    that, but many times what we do is very local. I told you about
    the situation we are facing in a part of my district, Chino
    Hills, about the people who are suffering from the Edison
    towers that were put in the right-of-way behind their homes.
    That was nothing to do with them, nothing to do with Edison.
    The State of California mandated ``X'' amount of renewable
    energy must be provided in the State of California, so they
    installed these 200-foot towers behind homes.
        The problem is that FHA does not lend in certain areas.
    Now, there are many FHA loans within that area right now
    because the homes are out of the right-of-way, but the towers
    have doubled in size, and now they are within a fall zone. And
    I know it is a gray area for you, but it is a very serious area
    for the people who have been impacted.
        I want to thank your staff for working with us on this
    issue, but it is something that we need to look at and ask,
    what is right? The people bought in good faith. They are not in
    a right-of-way, but what the State of California has mandated
    has put them in a very difficult situation, and it has impacted
    them in the pocketbook. Not only has the marketplace had a
    negative impact on them as falling prices have, but now what
    has been done to them for the betterment of the State, so-
    called, has had a really dire impact on their finances, and
    they are angry. They have a right to be.
        When we have an opportunity to do good, we need to look at
    that. And I would just encourage you to look at what you can do
    in that area. Whatever help you can provide these people, they
    would really appreciate it. It is through no fault of their
    own. They bought in good faith, they have lived there for years
    in good faith, and now they are being impacted by this. But I
    want to thank you, and it is a huge issue, and whatever you can
    do, I would appreciate it.
        I yield back.
        Chairman Bachus. Mr. Lynch for 1 minute.
        Mr. Lynch. Thank you, Mr. Chairman.
        I want to thank the witnesses for appearing before this
    committee, and helping us with our work. I want to hearken to
    the remarks of Mr. Royce of California. I was in on these
    meetings as well when we raised concerns about the capital
    ratio back in 2008, and we received direct assurances from FHA
    ``not to worry, we have our arms around this, we are going to
    handle this, we are not going to go below the statutory
    minimum.'' Then, they did. We called you back. I had meetings
    in my office. We had reassurances again that you were going to
    handle this. And here we are.
        Now, you have dug yourself in such a deep hole that you are
    going to need some funding, you are going to need a bailout, or
    you are going to need some drastic measures to dig yourself out
    of that hole, and that is a problem. There seems to be a
    pattern of denial that things were going to get better, and we
    are going to turn this thing around, and we didn't hear a peep
    to reverse this decline. And that is a problem because now the
    problem is significant, and it is going to be more difficult
    dealing with it now because we have allowed this shortage to
    accumulate.
        So I am just disappointed that we didn't have the
    acknowledgment that we had raised up here that we saw happening
    that wasn't reflected at the agency. And there were things that
    we could have done that would have been less destructive
    several years ago than the hand that we have to play now, and
    there are a lot of people in this country, a lot of homeowners,
    who are relying on--
        Chairman Bachus. Mr. Lynch is recognized for an additional
    15 seconds.
        Mr. Lynch. Thank you.
        We have to work together here. We can't have us raising
    concerns and the agency blowing us off and saying there is no
    problem, and then it is a mess, and then we have to do
    something drastic to correct it. We need to work better
    together, I guess. And I will be interested in hearing how you
    are going to come up with this money, all these resources, to
    fill in the shortfall.
        Thank you. I yield back.
        Chairman Bachus. Thank you.
        Mrs. Capito for 1\1/2\ minutes.
        Mrs. Capito. Thank you.
        I would like to welcome Secretary Donovan back to the
    committee as well, and I want to thank the chairman and the
    ranking member for the hearing today. Having sat through many
    of these hearings over the last several years, I think, as the
    speaker before me says, when a red flag is in front of us, we
    need to pay attention. I think we see a major red flag here
    with the decline in the capital ratio.
        In the Secretary's defense, I would say he has begun, or
    attempted anyway, improvements to the program like raising the
    annual premiums and other things that could be done, but we
    need to work hand in hand both legislatively and through
    regulation to try to improve what is a seriously declining and,
    I think, potentially dangerous situation.
        With the actuarial report saying that the mandated reserve
    ratio is down to .24 percent, it is time to more than just pay
    attention; it is time to take action. And so, I pledge to work
    with you as we have in the past. We did an FHA reform bill last
    year. I believe it didn't make it all the way through, and I
    think some of the ideas in that bill would be very useful in
    helping to alleviate this situation.
        Changes that are currently in practice, like tightening the
    underwriting standards, increasing premiums, and enhancing
    enforcement, I think are helping, but the statistics are
    showing that we are still in a seriously declining situation,
    and as we have heard repeatedly, and I would echo my voice in
    this, a bailout to the FHA is something that would be
    intolerable to the American people and certainly to this
    Congress.
        So I would like to thank the chairman for holding the
    hearing and welcome the Secretary today. Thank you.
        Chairman Bachus. Thank you.
        Mrs. Maloney for 2 minutes.
        Mrs. Maloney. Thank you, Mr. Chairman, and Mr. Ranking
    Member, and I am really honored to welcome all of the panelists
    today, particularly Secretary Donovan, and to say that New York
    is so proud of you. Thank you so much for your public service
    to our State and City, and thank you also for your public
    service for our Nation.
        This is a very important hearing because the FHA really
    represents a critical leg of the stool of housing finance. And
    I think it is safe to say that in the wake of the most recent
    financial crisis, we are all concerned about the FHA's ability
    to continue to insure mortgages.
        Over the last year, the FHA has insured $218 billion in
    single-family mortgages, helped more than 362,000 families
    avoid foreclosure through loss mitigation, and helped 440,000
    families refinance their mortgages to a lower rate. Some of
    these families who have benefited live in the district I am
    honored to represent, and they are very grateful.
        So the importance of FHA's role in the housing system
    really must be underscored. And FHA is really the only game in
    town right now because the private sector has largely
    disappeared from the market.
        However, I am concerned, and I join my colleagues who have
    expressed their concerns, that the actuarial report indicated
    that the FHA's Mutual Mortgage Insurance Fund capital ratio
    fell from .50 percent in 2010 to 24 percent in 2011. And I do
    know that there are a variety of reasons that led to that
    decline, including a decline in home prices, but I hope that we
    will see an uptick in that rate as the market stabilizes. And I
    believe the actuarial report, with a lot of hard work and help
    from the economy, that we can move toward the level of 2
    percent by 2014.
        In the meantime, I understand that FHA has undertaken a
    number of important steps to ensure the health of the fund by
    strengthening risk controls, underwriting controls, and
    enforcement; increasing premiums; and expanding loss-mitigation
    assistance to avoid unnecessary claims.
        So I look forward to your testimony. I particularly would
    like to hear your take on the legislation on FHA reform that
    has been presented by the Republican Majority, and again, I
    thank you for your efforts to help Americans stay in their
    homes and finance their homes. Thank you very much.
        I yield back.
        Chairman Bachus. Thank you.
        Mr. Garrett for 1 minute.
        Mr. Garrett. I thank the chairman for holding this very
    important hearing on FHA and its future viability, in light of
    the new actuarial report that just came out which raises real
    concerns. Unfortunately, as you know, Congress just decided to
    expand the role of the FHA even before they had the opportunity
    to study that report in depth.
        Mr. Secretary, you have been in your position for about 3
    years. Each year the actuarial report comes out, and each year
    it shows deterioration, gets worse and worse and worse with
    regard to the capital position. And as Mr. Lynch has already
    indicated, prior to that, each year you come here and basically
    you or your subordinates say things are fine, that we are in
    good financial condition, and that your projections show that
    things will get better year after year.
        However, as I say, if you look at those reports that come
    after you speak to us, things continue to deteriorate, they get
    worse and not improve. They erode. So when you come here now
    and tell us, don't worry, be happy, things are okay and
    improving, I have heard that record before, and I really wonder
    why we should believe that and why we should not anticipate
    that in a few months from now, this spring, you will be coming
    to Mr. Lynch and me and the rest of us saying you need to be
    bailed out.
        I add to that just one other comment. I have heard some
    comments at least out there from Mrs. Galante that even with
    this alarming situation, the FHA is not really going to make
    any other additional significant policy changes to better its
    fiscal position; rather, the answer is simply to grow its way
    out of it. And I really wonder, then, whether or not growing
    your way out of this problem is not only doing more damage to
    yourself, but also doing more damage to the private sector in
    freezing out private mortgage guarantors and the rest of the
    private sector by doing so.
        So I have a lot of concerns as to this track record to
    date, and also where we are going with this.
        I yield back.
        Chairman Bachus. Thank you, Mr. Garrett.
        Mr. Ackerman for 2 minutes.
        Mr. Ackerman. Thank you, Mr. Chairman, and I thank the
    ranking member for the hearing.
        Mr. Secretary, indeed we are all proud of you. Thank you
    for the great job you are doing under very difficult
    circumstances.
        I don't think the sky is falling. Unlike some of my
    colleagues, I think you are to be congratulated, not
    criticized, for the fact that your market share is expanding,
    or, as some people have said, exploding. Your agency has been
    designed for that purpose, to be countercyclical, to pick up
    the slack when there are no other lenders. That is your job,
    and that is your role, and you are doing it, and you are doing
    it quite well despite the fact--or I point out the highlight of
    the fact is that the quality of your borrowers has increased,
    as the audit indeed shows for the first time, being over 700 on
    the FICO scores. That is a very good sign and a very positive
    sign in very troubling times.
        There are some reasons to be concerned, and I think your
    testimony that we have seen so far is very, very realistic, and
    we have to figure out what to do if indeed the housing market
    continues to decline and prices decline anyway.
        My second point is basically during the years of the Bush
    Administration, they kind of branded themselves as the
    ownership society. Everybody had to own something, especially
    their house, and people found ways to market houses to people
    who were basically subprime borrowers. There were really no
    subprime loans, they were pretty tricky and some devious, but
    the borrowers were subprime.
        Now that we have highlighted that, I thought we had gotten
    away from some of the causation of the problem, but I find that
    an ad--and I have seen many like it--this is from one of the
    major newspapers in my region in New York--Cambria Heights:
    ``Foreclosure. One-family brick plus private driveway, full
    basement. Asking $163,000. No credit, bad credit okay. Won't
    last. Call quick.''
        Why are we still selling and marketing to people who have
    no credit and bad credit? This is not advertised as being out
    of your shop in any way, I don't want to advertise it, but this
    is still going on. People are being induced by lenders--not
    your agency, but by lenders to buy houses when clearly they are
    marketing it to people who can't afford it. No credit, bad
    credit. Who are they asking to buy houses? What do we do about
    that?
        And I will yield back the balance of my time because I do
    have some specific questions for you when that moment comes.
        Chairman Bachus. Thank you, Mr. Ackerman.
        And let me at this time acknowledge that Ms. Carol Galante,
    who is the Acting Federal Housing Administration Commissioner,
    is seated at the witness table with Secretary Donovan and is
    accompanying him today. We appreciate your presence and
    understand you are going to assist, if needed, the Secretary.
    And I have enjoyed our conversations over the past few months.
    So we welcome you to the hearing.
        Thank you.
        Mr. Neugebauer for 2 minutes.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        Chairman Bachus. We are having a little longer opening
    statements, but these are important matters, and I think it is
    important that those Members who wish to make an opening
    statement can do so.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        Mr. Secretary, it is good to have you here. The Mortgage
    Insurance Premium Fund report was issued, and it was a little
    ironic because it didn't paint a very pretty picture, but the
    summary said that it was actuarially sound. And I was pretty
    sure if I went to Webster's, that an entity that had less than
    one penny of equity--and, in fact, it is not less than one
    penny, it is less than a quarter of a penny in equity--with
    such a huge book of business would not be an entity that was
    probably actuarially sound.
        And I think the other thing that was troubling about that,
    and I think my good friend Mr. Garrett made the point, is when
    we go back, if you look at previous reports, and you look at
    the projections of where you thought you were going to be in
    the outyears, we have missed those every year.
        And the other piece of information there is that when you
    look deeper into the numbers here, and I am looking, that when
    you look at the single-family book of business, actually that
    reserve is even less than that. It is .12 percent. I was trying
    to decide how much of a penny that you could show to represent
    that. That is like 846-to-1 leverage, and obviously that is
    leverage that any other entity in this country that was
    regulated would be in some kind of either bankruptcy or
    conservatorship. So, one of the things, the challenges, here is
    how do we fix this? And I think that is an important piece of
    that.
        One of the problems, though, I think, even beyond being out
    of money at this particular point in time, is the fact that
    because we have crowded the private market out of the system
    here, you are getting a majority piece of the business, and so
    it is almost a self-fulfilling prophecy that if we were to take
    actions to reduce the amount of business that FHA is doing,
    reduce your market share back to traditional levels, you
    wouldn't have the new income levels to support the activities
    that you are in right now.
        So it is going to be interesting to hear from you how we
    bring FHA back to more traditional levels as far as market
    share and at the same time keep you from having to dip into the
    taxpayers' fund.
        And so, I look forward to the question-and-answer period
    where you and I can discuss that further. And thank you, Mr.
    Secretary.
        Chairman Bachus. Thank you.
        Ms. Hayworth for 1 minute.
        Dr. Hayworth. Thank you, Mr. Chairman.
        And, Mr. Secretary, as you may know, I am a co-chair of the
    nonpartisan Hurricane Irene Coalition here in the House, and my
    priority, as is theirs, is to ensure that we, and in our case
    the Hudson Valley, has the fullest possible access to the
    Federal funds that we need to recover from Hurricane Irene and
    Tropical Storm Lee.
        Over $400 million in disaster aid has been made available
    through the Community Development Block Grant (CDBG) program,
    but, as you know, my home county of Westchester is being denied
    this help as well as their normal CDBG funding due to an
    ongoing dispute with HUD over what can reasonably be described
    as minor, but punitive terms of a recent settlement that was
    made before the current county executive took office. And that
    is despite the fact that Westchester has assured funding in
    good faith for over 700 units of affordable housing in a county
    that has a limited amount of land, and we have a lot of open
    space, which is good for the environment.
        So, Mr. Secretary, I am asking as a member of the Hurricane
    Irene Coalition and as the Representative for a good part of
    Westchester County that you please work with Westchester County
    to provide the critical recovery funding that the county needs
    and deserves. And I thank you, sir, and look forward to your
    testimony.
        Mr. Chairman, I yield back.
        Chairman Bachus. I would like unanimous consent for the
    record to reflect that there is a nonpartisan caucus on Capitol
    Hill. So thank you.
        At this time, Mr. Dold for 1\1/2\ minutes.
        Mr. Dold. Thank you, Mr. Chairman. Certainly, I want to
    thank you for holding this hearing, and, Secretary Donovan,
    thank you for being here.
        I think we all share a common objective, which is a more
    sustainable and more effective mortgage finance system, and
    regardless of political party, most of us would agree that such
    an improved system should have three primary components: first,
    to promote the private sector as our primary mortgage financing
    source; second, to restore long-term stability to the housing
    sector, and third, to protect taxpayers from future bailouts.
        After already paying for over $100 billion in Fannie and
    Freddie losses, and with potentially hundreds of billions more
    in coming years, taxpayers also remain exposed to potentially
    large FHA losses because the FHA guarantees over $1 trillion of
    mortgages while maintaining only a tiny fraction of that number
    in insurance reserves and other resources.
        Solving this problem, I think, is absolutely critical for
    taxpayers, for current and future homeowners, and for our
    economy as a whole. And so I am concerned when I see additional
    solicitations coming out--and there is one over here that I
    just saw that is talking about trying to get additional loans
    with a FICO score of only 580--these are a concern for me. And
    I think what we have to do is come together to try to make sure
    we are shoring this up for the American taxpayer and for future
    homeowners.
        I look forward to your testimony here today. Thank you so
    much for being here, and I yield back.
        Chairman Bachus. Thank you.
        Are there any other Members on the Minority side or any
    other maybe ranking members-in-waiting who would like to make
    an opening statement? No? Okay.
        At this time, Mr. Schweikert is recognized for 1 minute.
        Mr. Schweikert. Thank you, Mr. Chairman.
        Mr. Secretary, I look forward to hearing the testimony. I
    am operating under two premises: one, that a shock in the FHA
    loan system would be horrible to the real estate market,
    particularly when you are from Arizona, but the second part of
    that premise is you are in violation of the law. Looking here
    at the statute that you shall maintain 2 percent, I look
    forward to learning why I am wrong in the way I am reading this
    statute.
        The second thing is also going to the actuarial report, and
    please forgive me if I missed it. I am trying to get a good
    definition and breakdown of properties and mortgages on your
    assets side. What is the breakdown? How much is actually held
    in REO properties, and how much is actually held in paper? And
    as my good friend Mr. Dold here just mentioned, this probably
    isn't you, this is maybe a correspondent lender, but when you
    get an email soliciting an FHA loan with a 580 FICO score, it
    makes you a little nervous. Of if you are going to grow your
    way out, do you grow your way out with higher-risk loans?
        Thank you, Mr. Chairman. I yield back my time.
        Chairman Bachus. Mr. Canseco is recognized for 1\1/2\
    minutes.
        Mr. Canseco. Thank you, Mr. Chairman, and thank you, Mr.
    Secretary, for being here today.
        Yogi Berra once said, ``It is deja vu all over again.'' The
    latest actuarial report on the state of the FHA's insurance
    fund is reminiscent of warning signs we saw from Fannie Mae and
    Freddie Mac last decade. Even though FHA has been below its
    statutorily required capital ratio for 3 years, it now has
    exposed taxpayers to over $1 trillion in liabilities, and the
    agency now guaranties almost one-third of new mortgages in the
    United States.
        Even a cursory look over the latest report brings into
    question many of FHA's projections about the health of the
    housing market and its ability to cope with future losses.
    Putting taxpayers in such a risky position is unacceptable, and
    it is a stark example of the consequences of the decades-long
    foray of government meddling in the housing market.
        Today's hearing is of extreme importance, and I look
    forward to hearing from our witnesses on this matter. And I
    yield back the balance of my time.
        Chairman Bachus. Thank you.
        Without objection, if any Members want to submit written
    statements, they will be made a part of the record.
        If there are no further opening statements, at this time I
    would like to welcome Secretary Donovan and Mrs. Galante. The
    Secretary has a hard stop of 12:30, but I understand that the
    Commissioner can stay longer if Members have questions.
        And so at this time, Mr. Secretary, you are recognized for
    8 minutes.

       STATEMENT OF THE HONORABLE SHAUN DONOVAN, SECRETARY, U.S.
      DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY
          CAROL GALANTE, ACTING COMMISSIONER, FEDERAL HOUSING
                             ADMINISTRATION

        Secretary Donovan. Thank you, Chairman Bachus, and members
    of the committee for this opportunity to testify on the status
    of the FHA MMI Fund and the Fiscal Year 2011 actuarial report.
    But before I begin, I want to say a quick word about Ranking
    Member Frank, who announced his retirement this week. Given
    that he has never been exactly the retiring type, I am sure
    that the Congressman will continue to be the passionate and
    effective advocate for families on Main Street that he has
    always been.
        Mr. Chairman, this report arrives in a significantly
    different environment from the one that we faced upon taking
    office. Then, our economy was shedding over 800,000 jobs a
    month, housing prices had fallen for 30 straight months, and
    foreclosures were surging to record levels month after month.
    Today, nearly 13 million homeowners have refinanced their
    mortgages since April 2009, putting nearly $22 billion a year
    into the hands of families and our economy. And with recent
    changes from FHFA, more refinances are on the way.
        Today, because we provided responsible families
    opportunities to stay in their homes, the number of families
    falling into foreclosure is down 45 percent since early 2009.
    More than 5.3 million mortgage modifications have been started
    since that time. Central to this progress has been the FHA,
    which has undertaken the mission that Congress set for it after
    the Great Depression by taking over 1 million loss-mitigation
    actions to help families keep their homes, and helping 2.25
    million first-time homebuyers realize the dream of
    homeownership, 56 percent of all first-time homebuyers in the
    last 2 years and 60 percent of African-American and Hispanic
    homebuyers last year alone. And as the actuarial report we
    discuss today finds, while we have been through the second
    worst housing downturn in the history of the country, FHA,
    unlike many other institutions, retains a positive fund
    balance, and the current book of business is strong.
        Specifically, the actuarial reports insurance on loans
    booked since January 2009 posts an estimated net economic value
    of $18 billion, with the new 2012 book of business expected to
    add $9 billion alone. It reports that although the capital
    reserve account is $4.7 billion, FHA's total reserves stand at
    $33.7 billion, $400 million more than in 2010.
        That the FHA has been able to weather this storm thus far
    to date is no accident. Indeed, with the partnership of
    Congress and this committee, we have been able to put in place
    the most sweeping reforms to credit policy, risk management,
    lender enforcement, and consumer protections in FHA history,
    reforms, as this actuarial report makes clear, that have
    produced real results. With your help, we have been able to
    increase premium rates 3 times under this Administration,
    yielding significant added revenue to the fund. We have also
    put in place a two-step FICO floor, which required those with
    low credit scores to contribute a minimum downpayment of 10
    percent. Only those with stronger credit scores have remained
    eligible for FHA-insured mortgages with the minimum
    downpayment. This approach is based on FHA data that clearly
    shows that the success of a borrower depends on a combination
    of factors that include the loan to value, but not that alone.
        The changes we have made have significantly improved the
    quality and performance of FHA loans. Where nearly half of FHA
    borrowers had credit scores below 620 in 2007, today the
    average FHA credit score across all borrowers is over 700 for
    the first time in FHA history. For home purchase loans
    originated in early 2011, early payment default rates are less
    than one-sixth what they were in early 2018, and for streamline
    refinance loans they are one-twelfth of what they were at the
    peak before President Obama took office.
        We have taken other steps to protect the fund as well,
    including critical enhancements to lender enforcement,
    withdrawing the approval of over 1,600 lenders to participate
    in FHA programs, more than 4 times the number during the entire
    tenure of the previous Administration. With these actions, we
    are sending lenders a very clear message that if you don't
    operate ethically or transparently, we won't do business with
    you, and we will not hesitate to act.
        Mr. Chairman, the collective impact of these efforts cannot
    be overstated. Indeed, were it not for these reforms, many of
    which this committee has helped make possible, FHA would be
    seriously in the red today. And on the strength of these new
    books of business, not only does the actuarial report find the
    fund retains positive capital today, it projects that FHA
    should be able to rebuild reserves to the congressionally
    mandated 2 percent threshold quickly once markets across the
    country exhibit sustained growth. Indeed, using base case
    projections based on Moody's Analytics forecast, the actuary
    expects capital reserves to reach 2 percent again in 2014,
    sooner than was projected just last year.
        Of course, for all this progress, very serious challenges
    remain. Like any other organization in the housing-finance
    sector, the actuary finds that FHA's finances are very closely
    tied to home prices, which have been broadly stable since we
    took office, but weaker than expected in 2011. In particular,
    it found that FHA's older books of business underwritten during
    the bubble years of 2000 to 2008 will continue to produce
    substantial losses of more than $26 billion. It reports as many
    as half of the highest-risk loans insured at the peak of the
    housing bubble will ultimately result in a loss for the FHA,
    with more than one out of every four loans insured in 2007
    resulting in insurance claim and losses of close to $10 billion
    for the 2008 book of business alone.
        That is why we continue to pursue additional reforms that
    protect the taxpayer, support the housing market, and meet the
    FHA's historic mission of helping underserved borrowers. In the
    very near future, we expect to publish an indemnification rule
    to hold lenders in FHA's lender insurance program responsible
    for loans that were improperly originated or in which fraud or
    misrepresentation were involved. In addition, we will soon
    publish a rule that reduces allowable seller concessions to
    protect the MMI Fund from risks associated with inflated
    appraisal values.
        Now that we have these actuarial results, we are carefully
    examining a range of additional steps to further strengthen the
    fund, including enhancements to our loss-mitigation protocols
    and whether additional premium increases are necessary. We
    expect to announce these next steps in our proposed Fiscal Year
    2013 budget, and we will work with Congress as we have
    throughout.
        We must also continue to shrink government's footprint, a
    key goal of the Administration's White Paper on the future of
    housing finance, and a process that I am pleased to report has
    already begun at FHA through our premium increases and
    underwriting changes. Indeed, while FHA's volume grew
    dramatically during this crisis, in 2011, FHA loan volume was
    down 34 percent from its peak in 2009.
        FHA's current market share of mortgages is 14 percent and
    declining for the first time since 2006. During these uncertain
    times, as we carefully manage the balance between helping the
    market recover and working to bring private capital back, this
    represents important progress.
        And so, Mr. Chairman, while none of us can predict what the
    future will hold, what we do know is that these new loans we
    are making are the strongest in FHA history. But given the
    continuing fragility of the market, we must continue to be
    vigilant and prepare to take additional steps to protect the
    taxpayer. As it has been since the outset of this
    Administration, that remains our goal today.
        Thank you.
        Chairman Bachus. Thank you, Mr. Secretary.
        [The prepared statement of Secretary Donovan can be found
    on page 89 of the appendix.]
        Chairman Bachus. Mr. Secretary, the Obama Administration's
    White Paper entitled--and you referred, I think, to that
    without naming it--``Reforming America's Housing Finance
    Market'' that was released in February indicated that the goal
    was to encourage the return of private capital and to reduce
    the risk to American taxpayers, but looking at the Fiscal Year
    2011 actuarial report from FHA, it assumes that the FHA market
    share--it assumes a market share of no less than 20 percent all
    the way to Fiscal Year 2018.
        Do you know why this is? And won't that elevated level of
    FHA participation in the housing finance market discourage the
    return of private capital to the housing financial sector?
        Secretary Donovan. Mr. Chairman, you are exactly right. The
    report laid out a series of steps, not just for FHA, but for
    Fannie Mae and Freddie Mac as well, to shrink their market
    share. The most critical steps there were to increase the cost
    of FHA insurance and the guarantees that Fannie Mae and Freddie
    Mac provide to encourage more private capital to come in, and
    we have started down that path. As you know, with authority
    granted by this committee, we have raised premiums 3 times.
    They now stand at the highest level in FHA history. And, in
    fact, it has begun to have results. As I just mentioned, we
    have seen our market share shrink from about 17 percent last
    year to 14 percent this year, and the latest quarter shows it
    continuing to shrink.
        In addition, we proposed in the President's proposal for
    the budget compromise that was reached this summer to increase
    premiums for Fannie Mae and Freddie Mac. I know that you have
    supported that as well, and that is a step that we are working
    on with FHA.
        In addition, we proposed, and we continue to believe, that
    loan limits not just for the GSEs, which have come down, but
    for FHA need to come down and return to their more historic
    levels so that we can ensure that private capital does return.
    So we have started on those steps, but we will continue to take
    steps going forward to make sure that we do everything we can
    to bring private capital back to the market.
        Chairman Bachus. Thank you.
        The Fiscal Year 2012 funding bill that the President just
    signed and, of course, the Congress passed, reinstated the high
    loan limits for FHA. And, of course, I did not support that,
    and I don't think the President or the Administration supported
    that. First, I would like your comments on that. And second, it
    didn't include Fannie and Freddie. So my real concern, or
    another concern I have, is what effect will that have on
    business flowing to FHA from Fannie and Freddie?
        Secretary Donovan. We stated publicly in the White Paper
    that you have referenced that we believed that the loan limits
    should have been allowed to expire, and I think if you look at
    my public statements, consistently, as I have said today, we
    continue to believe that the loan limits must come down.
        I do think you point out something important, which is that
    the effect of having for the first time in history higher loan
    limits on FHA compared to Fannie Mae and Freddie Mac could
    produce the results that would have more business come to FHA
    than we have expected, particularly on the purchase side. We
    will need to see what happens there. And part of what we are
    looking at in terms of future steps is how we should price
    premiums and other policies. And I mentioned in my testimony
    that we expect in our budget proposal for 2013 to have specific
    proposals about how we move forward with these loans.
        Chairman Bachus. Thank you. I do think that could cause
    problems, and I think you agree.
        Secretary Donovan. Mr. Chairman, if I could, one important
    point I want to make here is that those high-balance loans, the
    loans above our old loan limits, represent about 2 to 3 percent
    of our loan volume in terms of dollars--I am sorry, in terms of
    number of loans and about 6 to 7 percent in terms of dollar
    volume. And the evidence we have, albeit early evidence, is
    that those loans are lower risk than other loans that we are
    making. And so, therefore, I don't think the issue is that
    those loans pose a significant risk to the taxpayer or the
    fund. The real issue is about how we encourage private capital
    to come back while making sure that we continue to support the
    market through this crisis.
        Chairman Bachus. Thank you. I agree.
        Mr. Gutierrez?
        Mr. Gutierrez. Thank you.
        Secretary Donovan, we have seen in the press--The American
    Banker: ``Banks Likely to Gain FHA Relief Under Foreclosure
    Servicing Settlement''--that the FHA is potentially playing a
    role in the robosigning settlement between the servicers and
    the State attorneys general. It sounds like the FHA might be
    letting servicers off the hook for breaking FHA rules and
    failing to work with borrowers to keep them in their homes by
    waiving the FHA's right to deny a servicer's claim and enforce
    a penalty for an improperly conducted foreclosure.
        Can you comment on this? And do you think this kind of
    settlement would be appropriate?
        Secretary Donovan. Congressman, I want to make sure this is
    absolutely clear: It is exactly the opposite. We began an in-
    depth investigation of the servicing practices of our larger
    servicers. We found significant problems with the way that they
    were handling servicing, specifically their loss mitigation as
    well as other steps, the robosigning and other problems that
    you all have heard so much about, and began discussions with
    fellow agencies as well as State attorneys general, who also
    found similar problems with the way loans were being handled.
    And so the discussions that we have been having are about
    holding those servicers accountable for those practices, and,
    first of all, making sure that the taxpayer is compensated.
        And, in fact, one of the things that can help the FHA fund
    to recover to a higher capital level is to recover where--not
    only on servicing, but on origination and other places where
    mistakes were made, where loans were originated or serviced
    against FHA requirements, as well as to get help to borrowers.
        So any release that we would provide would be in exchange
    for significant penalties as well as to help homeowners who
    were wronged by those practices. That is what we are pursuing.
        Mr. Gutierrez. And that is why I raised the question, and
    maybe American Banker just got it wrong. It is not like they
    always get it right.
        I want to ask you this question because that is our
    responsibility. If a mortgage servicer, a bank, an originator
    of the loan didn't help the American family stay in the home,
    and did not go through all of the mitigation, and didn't or did
    robo, or didn't do anything, just let it sit out there, then
    you could simply say, yes, you can make an insurance claim; am
    I right? They can make an insurance claim, but if you find they
    didn't follow the rules, you can simply deny the claim and then
    penalize them 3 times the total cost--
        Secretary Donovan. That is correct.
        Mr. Gutierrez. Are you still committed to carrying that and
    having that as a powerful tool when we deal with the mortgage
    servicers?
        Secretary Donovan. Absolutely.
        Mr. Gutierrez. Because I think it is important that we all
    understand that the insurance is insurance, but you have to
    follow the rules of the insurance. And we know that they didn't
    follow the rules in many cases, and that is why we have the
    pending litigation across the country.
        I believe that kind of settlement is important because it
    sends a message that just because you have an FHA-insured loan,
    it doesn't mean you are going to get the money. Because what we
    have found--and I don't know if you have any evidence of this
    and I would like to hear your comments--in just the normal
    practice of reviewing is that homes stay out on the street and
    the banks do nothing to keep people in the homes. They don't
    mitigate. They simply send you a letter and then you send them
    money and then they want on and then they are going to
    foreclose. They don't help anybody. And secondly, they simply
    leave the homes.
        In Chicago, for example, the city council had to pass
    legislation against the banks saying, well, if you are just
    going to have all these abandoned properties out there, we are
    going to charge you for boarding them up and for keeping them
    clean and we are going to have to fine you. We found that. Do
    you find the same situation to be true across the country?
        Secretary Donovan. As I said earlier, Congressman, we have
    found significant problems with servicers not following our
    requirements on loss mitigation. And I am proud to say that FHA
    has been a leader in correcting those and ensuring that we help
    families stay in their homes.
        Mr. Gutierrez. And I am with you. I support you. I think
    you are at the helm and are doing a good job. I just want to
    raise this issue because I know what you have done on loss
    mitigation. I congratulate you and I thank your staff for
    keeping American families in their homes. But I also want to
    say to all of those mortgage servicers out there that you are
    going to continue to penalize them, as they try to submit a
    claim and they didn't follow the loss mitigation and they
    didn't follow the procedures, you are going to deny that claim
    and you are going to try to go after them for 3 times the
    amount.
        Thank you so much.
        Mr. Huizenga [presiding]. The gentleman's time has expired.
    With that, Mr. Miller of California is recognized for 5
    minutes.
        Mr. Miller of California. Thank you, Mr. Chairman.
    Secretary Donovan, I am glad to hear that you are holding
    lenders accountable. When they don't use reasonable
    underwriting standards and do their job, they should bear the
    loss. I am also, I guess, relieved to hear that my argument
    that the loan limits in high-cost areas are safer loans. But
    you have justified that they are. But there is no doubt we want
    to get the private sector money back into the marketplace. That
    has been the goal all along. And the drop in recent conforming
    loan limits identified by many economists is a test for the
    private sector to see if they are willing to step forward and
    fill the void. Do you have any evidence the private market is
    filling this void created by this at this point?
        Secretary Donovan. I think there is some evidence that that
    is beginning to happen. Certainly there have been, in the jumbo
    loan space, some securitizations, some steps forward. Mortgage
    insurers are, some of them at least, coming back into the
    market more. And I do think that we need to continue to take
    steps that I talked about before to ensure that we encourage
    it. I think it is clear that we certainly haven't returned to a
    fully healthy market at this point and that we need to continue
    to take steps to encourage private investments to come back.
        Mr. Miller of California. Some have made the argument to
    get everybody out of it on the government side. If the private
    sector was the only game in town in 2007 without a government-
    backed entity, what would have happened?
        Secretary Donovan. I think it is important to recognize
    that Congress established FHA to be a countercyclical force. So
    the fact that our market share grew in the wake of the crisis
    was not, as some may have suggested today, a plan on behalf of
    this Administration or something that we took affirmative steps
    to take.
        Mr. Miller of California. But if you hadn't been there,
    what would have happened?
        Secretary Donovan. I think it is clear that had we not been
    able to step in and provide liquidity in the market, the
    housing crisis would have been deeper, there would have been
    more significant declines in home prices, more foreclosures,
    and frankly more losses for the taxpayer.
        Mr. Miller of California. And the taxpayers own homes, last
    time I checked.
        Secretary Donovan. To be clear--and this is a critical
    point in this hearing today--the actuary predicts the loans we
    made from 2000 to 2008 will lose $26 billion for the taxpayers.
    Loans we have made since 2009 will make $18 billion for the
    taxpayers. So it is very important to recognize that the threat
    to the fund is from those legacy books of business and what we
    need to do is ensure that we minimize the losses from those. It
    is not a problem of the new loans that we are making, which are
    predicted to be profitable, even under the most dire economic
    circumstances predicted in the various models that the actuary
    looked at.
        Mr. Miller of California. If we, as some would like to do,
    end all government guarantees today, how would that affect the
    overall U.S. economy, in your opinion?
        Secretary Donovan. I think we have been clear in our White
    Paper which does advocate shrinking the government footprint,
    but we have to do that in a careful, measured way.
        Mr. Miller of California. As the private sector backfills.
        Secretary Donovan. So that the private sector can come in,
    and not to expect that is going to happen overnight. And I
    think consistently in a range of proposals that we have seen,
    that is something that Congress understands and that is
    generally understood, is that this will be a process that will
    take place over time and not something that we can expect,
    given the depth of the crisis to happen immediately.
        Mr. Miller of California. What are the barriers you see as
    it applies to the private capital we are entering into the
    market, in the secondary market for home loans today?
        Secretary Donovan. Clearly, confidence and a stronger
    economic recovery overall is a critical step. That is why the
    President has been so focused on getting the American Jobs Act
    passed. That is why as part of the American Jobs Act, he
    proposed a project rebuild that would specifically deal with
    the overhang of foreclosed properties, put 200,000 construction
    workers back to work fixing up those properties, but also
    ensure that they actually--rather than depressing home values
    in their communities, they help to raise home prices by getting
    fixed up and being resold. That is a critical step that we can
    take.
        A second one I would say is to remove some of the
    uncertainty that is holding back lending today. And that is
    another reason why we have been pursuing these discussions
    around robosigning and other problems. We have to resolve those
    and get clear, fair, strong rules of the road in place that
    require servicing and other steps to be taken that really make
    sure that it is clear what the responsibilities of the lender
    and a servicer are going forward, rather than the lack of
    clarity that we had that led us into the crisis.
        Mr. Miller of California. Thank you very much. I yield
    back.
        Mr. Huizenga. At this point, Mrs. Maloney of New York is
    recognized for 5 minutes.
        Mrs. Maloney. Thank you. Obviously, saving more loans from
    going into foreclosure is key to reducing losses to the FHA
    insurance fund. And a New York Times editorial--I believe it
    was this weekend--that I read stated that there are 14.7
    million American homeowners underwater on their mortgages.
    Unfortunately, 1.6 million will likely lose their homes to
    foreclosure. But the editorial states that there are at least
    1.6 million who have had a temporary setback in their lives,
    whether it is a health condition or a loss of a job, and that
    their homes can be saved if a loan modification is done.
        The key to making this happen is the servicers reaching the
    borrowers to advise them of their options, particularly loan
    modifications. And I know from a recent OGR hearing from
    another committee on which I serve that the GSEs are doing a
    lousy job of borrower contacts. Fortunately, HUD has a
    regulation on its books since 1992 requiring servicers to make
    face-to-face contact with the borrowers after the 90th day of
    delinquency.
        And I must say, in New York what has been the most helpful
    is when we have these conferences with the borrowers, with the
    people in need, with government services and try to put people
    face to face to help them stay in their home and to help the
    borrowers keep the houses and really to save the American
    taxpayers money. What more can we do to really enforce that
    regulation of forced face-to-face contact, of working to help
    the people stay in their homes? Are you enforcing that
    regulation? And could you give us some insights into why the
    servicers are not responding, why they don't work to help them
    stay in their homes? We get reports all the time when people do
    lose their homes that the servicers never even contacted them.
    They just came in and foreclosed on them. So should we try to
    give them an economic incentive so that they would work harder,
    have face-to-face contact, try to work it out? What can we do?
    Why are they not doing it? And are you enforcing that
    regulation?
        Secretary Donovan. Congresswoman, I think partly this goes
    back to the discussion we began with Congressman Gutierrez,
    which is we did find substantial problems in lenders not
    meeting our requirements for reaching out to borrowers, for
    offering them the right tool to be able to stay in their homes.
    So we have both through enforcement measures and technical
    assistance, working closely with those lenders, we are
    enforcing those regulations and have seen improved results. At
    this point, not only have we reached about 1.2 million
    homeowners to help them stay in their homes through loss
    mitigation activities, but we have improved the success of it
    to the point where 2 years, later 95 percent of those
    homeowners are still in their homes. So we are making progress.
    I think we can go further. We continue to push.
        We are also, through servicing settlement discussions that
    we are having, looking at requiring write-downs that you talked
    about and improved modifications that would help more families
    stay in their homes.
        The last thing I would say though is housing counseling is
    a critical piece of the puzzle here. What we see is that recent
    evidence shows a homeowner is twice as likely to be able to
    stay in their home if they get housing counseling assistance,
    if they get that face-to-face help from a housing counselor.
        We were very disturbed when $88 million was cut from HUD's
    budget last year. We were able to work with the Appropriations
    Committee this year to get, not all of that funding, but a
    significant portion of that funding restored. And we have been
    working closely--and I give Carol real compliments here--to
    improve our housing counseling operation. We have cut the
    amount of time to get funding on the streets by 83 percent
    through our competitive processes. We already have our housing
    counseling notice out and available for the 2012 funds we just
    got. So we are really trying--we are doing a lot to improve
    that process, and that funding will be critical as well.
        Mrs. Maloney. I totally support your funding request, and
    it has been part of our recovery.
        Also, could you comment either in writing or in the brief
    time I have left on the economic development programs that HUD
    has? I know the focus is housing. But particularly when I was
    on the city council, your 220 program would help build sort of
    economic models. I know at that time, it even made money. Can
    you talk about that program? Is it still around? Is it working?
    Is it helping with economic development?
        Mr. Huizenga. The time has expired, but go ahead and answer
    that question.
        Secretary Donovan. I would be happy to follow up afterwards
    with more specifics on the program. We do continue to have that
    program available. I would also say, in the project rebuild
    portion of the Jobs Act that the President proposed, we propose
    to expand our neighborhood stabilization activities that have
    been so successful in the residential area to include up to 30
    percent that could be used for commercial and nonresidential
    buildings or properties to support economic development as
    well, particularly in neighborhoods that have been hardest hit
    by the housing crisis. And that is an important tool as well.
        Mr. Huizenga. With that, Mr. Garrett from New Jersey has 5
    minutes.
        Mr. Garrett. I thank the Chair, and again, I thank the
    panel for being here. And I want to thank the panel also and
    Mrs. Galante, who testified before the Senate Banking
    Committee, if I am not mistaken, speaking for the
    Administration, opposed the recent increase or maintaining the
    level of FHA loan limits. I agree with you on that. And if I
    understood your testimony correctly, I appreciate that. My only
    regret, as I said before, was that the Congress went ahead with
    their decision on this prior to totally digesting the entire
    report that you all had there, as far as the condition of the
    fund right now.
        First of all, just a basic question. So you might want to
    say, look at the FHA, you are saying in two books, the old book
    and the newer book. And the old book is the one where you are
    losing money on it; it is bad. And the newer book is a good
    book and you are making money on it. So things will be good as
    that book goes forward. Is that basically a summary?
        Secretary Donovan. Congressman, I want to be clear about
    this, because I think it has come up in other comments as well.
    We have significant concerns about the level of the reserves at
    this point.
        Mr. Garrett. I understand that.
        Secretary Donovan. The actuary does predict that the fund
    will stay positive. But there is a serious risk and we need to
    take steps to protect against it.
        Mr. Garrett. I guess my question is, if things are getting
    better based upon the new book--in other words, you are saying
    you are going to be able to make money on the new book, why
    don't you just significantly increase the size of your new book
    or why isn't the private sector entering into that market
    sphere? If you are able to make money on it, why isn't the
    private sector able to make money on it? And why are they
    leaving it all to you if it is such a good book?
        Secretary Donovan. Specifically, I believe--and it goes
    back to the comments I made earlier--that there are a series of
    barriers to the private sector reentering that include a lack
    of clarity around enforcement, servicing, potential buy-backs,
    and a range of steps that need to be clarified and established
    so that more private capital does come in. I would be clear--
        Mr. Garrett. I only have 2 minutes.
        Secretary Donovan. Our market share is declining and that
    is important evidence, I think, that the steps that we are
    taking to shrink our footprint are beginning to have a real
    effect.
        Mr. Garrett. Let me get into another issue and get into the
    weeds on an accounting issue that I talked about. I am a member
    of the Budget Committee and one of the areas we are looking at
    is how the FHA is scored. Currently, even though the GSEs and
    FHA are both part of the government and you both are taking on
    risk, they are scored differently. The scoring on the GSE book
    is scored by including the market risk of holding loans, while
    the FHA book, on the other hand, is scored under the Federal
    Credit Reform Act, which does not include the market risk. What
    this means from a practical point of view is that the GSE book
    looks better than it does with less volume, and the FHA book
    looks better than it does with more volume. Some have
    insinuated this has been done on purpose by the Administration
    and have opposed a change of the rule because it basically
    makes the GSEs look better as they shrink down and makes the
    FHA look better as they increase.
        On this accounting rule, do you support rectifying this
    difference and assuring the taxpayers are provided some
    transparency as to the actual risk tat you incur and are taking
    through these programs?
        Secretary Donovan. First of all, Congressman, we obviously
    follow the law in terms of Federal credit reform and it is up
    to Congress to determine how we--
        Mr. Garrett. And what is your recommendation to Congress? I
    only have a little bit of time.
        Secretary Donovan. I think you are talking about the fair
    value accounting that CBO has recommended.
        Mr. Garrett. Right.
        Secretary Donovan. We believe there are a number of steps
    in CBO's way of looking at this that are important. We have in
    fact begun to incorporate different changes to our modeling in
    a number of those. There are portions of it, however, that we
    really don't think apply to FHA.
        Mr. Garrett. Why is that?
        Secretary Donovan. Simply because our cost of credit and a
    range of other things are different from the way--essentially
    what they are recommending is that we look at it as if we sold
    off FHA to the private sector and how would it be modeled and
    valued.
        Mr. Garrett. And is that the fair way of--
        Secretary Donovan. The fact is that there are many things
    that are different about the way the business operates, both in
    terms of the need for return on capital. We don't have a need
    for a return on equity. That would overstate the costs. There
    are a number of other things that are just different about the
    way we operate. We are not a profit-oriented institution. We
    don't have shareholders that need a return, and those portions
    of it simply don't make sense for the way you look at FHA. And
    frankly, they are not required by the law.
        Mr. Garrett. Right. I understand that it is not required.
    That is why we need to change the law and that is why we are
    looking for you to give encouragement to Congress in order to
    make those changes. I see my time is up.
        Mr. Huizenga. With that, Ms. Velazquez for 5 minutes.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Welcome, Mr. Secretary.
        Secretary Donovan. Thank you.
        Ms. Velazquez. Let me take a moment to thank you for your
    leadership and your foresight in dealing with this massive
    housing disaster that you were confronted with. And I want to
    thank you on behalf of the 13 million families who have been
    able to keep a roof over their heads and everything that you
    are doing to assist those who are at risk of foreclosure,
    representing the 99 percent of this country.
        So my question is, Mr. Secretary, during the housing
    bubble, the FHA insured less than 500,000 mortgages. After less
    than 5 years, FHA's obligation has expanded to cover over 1.7
    million mortgages, more than a threefold increase. Did the FHA
    take any steps to prevent private lenders from shifting the
    risk of underperforming loans to the FHA and therefore
    taxpayers?
        Secretary Donovan. It is a very important question. And we
    were very concerned when we came into office that risk
    management was not strong enough at FHA, that we had not taken
    sufficient steps to make sure that we weren't going to get
    those very same subprime lenders that had caused such damage to
    shift over to FHA. And so we appointed the very first chief
    risk officer in the history of FHA. We have created a whole
    organization, risk management organization under that chief
    risk officer that has taken important steps. We instituted a
    whole set of underwriting changes which have improved the
    quality of our book. We have also taken substantial steps to
    increase our enforcement. I mentioned more than 1,600 lenders
    we have excluded from doing business with FHA, more than 4
    times the number of lenders that the prior Administration had
    penalized in its entire 8 years. And so, we have taken a whole
    series of steps and others that are critical along those lines.
    And I really do think that is a big reason why the performance
    of our loans has been so much better over the last 2 years.
        Ms. Velazquez. Thank you. According to the HUD report, the
    MMI fund is expected to become solvent and will return to the
    congressionally mandated 2 percent capital ratio by 2014. Mr.
    Secretary, is this projection based on home values increasing
    over the next few years? And if that is the case, how would the
    FHA protect taxpayers if home values do not rise as expected,
    causing the MMI fund to seek help from Treasury?
        Secretary Donovan. Very, very important. And just to be
    specific, the actuarial report predicted that home prices would
    decline in 2011 by 5.6 percent, and then would begin to rise
    about 1 percent, 1.3 percent next year. And that is sort of the
    base case that it projected on. And based on that, it projected
    that we would recover to the 2 percent capital ratio by 2014.
    Obviously, none of us has a crystal ball, and there is a real
    risk that home prices could perform worse than that, and the
    actuary looks at a whole range of scenarios there.
        To ensure that we have protection against that, we are
    looking at a series of steps. I laid out five different steps
    in my written testimony, including premium increases, and
    further steps on lender enforcement. But I think it is very
    important for the committee to understand the balance here.
    Given that the actuary predicts that under any economic
    scenario that they look at, the new loans that we are making
    are profitable, given that our premiums are already at the
    highest level that they have been in the history of the FHA and
    given that the losses are really coming from old books of
    business, we have to balance any premium increases or other
    steps that we might take on new loans against both the fairness
    of that, given that they are already profitable, and the fact
    that it has some risk to the housing market more broadly by
    limiting the number of people who might purchase homes and
    pushing home prices down further.
        So what we need to look at as well is how do we recover
    what we should be recovering from the older loans? And that
    means increased lender enforcement and other steps that we are
    looking at as well.
        Mr. Huizenga. The gentleman's time has expired. With that,
    Mr. Neugebauer from Texas for 5 minutes.
        Mr. Neugebauer. Thank you. Secretary Donovan, it is good to
    see you again.
        Secretary Donovan. You, too.
        Mr. Neugebauer. I want to go back to something I said in my
    opening statement. And maybe in the conversation you and Mr.
    Garrett were having, I think you all were talking about market
    share. But what I want to talk about is something you were just
    alluding to, which is that your new business is priced
    differently than your old business was because it turns out
    your old business probably wasn't priced appropriately because
    you didn't have enough money to cover that. And so now, the
    fund levels would be much worse than they are today if you
    hadn't had the fairly substantial increase in market share.
    Would you say that is true?
        Secretary Donovan. I think there is no question that the
    quality of the new loans that we are making has helped balance
    losses on the old loans. As I said earlier, the Congress set us
    up to be countercyclical, and so this is not something that we
    intended. In fact, we are working to shrink our market share,
    and that is beginning to have an effect. But certainly, those
    new loans are balancing losses from those older books.
        Mr. Neugebauer. Providing the profit and the cash flow to
    sustain the losses on those. And so one of the questions that I
    wanted to ask you about you--putting these new risk management
    tools in place, it raised your guarantee fees. Are you doing
    locational risk analysis? Because obviously, there are pockets
    where if you are looking at--as you said, the studies showed
    maybe a 5 percent additional decline in prices. But there are
    other areas of the country that, as I am sure you looked at--
    that probably could actually have more than a 5 percent
    decrease, further decrease in prices. So when you are looking
    at making loans in those areas, are you saying--are you
    increasing the G fee or are you saying, you know what, we may
    not want to be making 97 percent loans in that area because of
    a downside. Is that a part of your risk management?
        Secretary Donovan. Yes. Congressman, I would love to be
    able to have a way of knowing what is going to happen in the
    individual housing markets and the national housing market. If
    you know someone who could help us do that with precision, that
    would be a wonderful tool. The truth is that there are not
    great ways of knowing what is going to happen a year out or 2
    years out at the national level, much less at the local level.
        We work with appraisers. We have very clear appraisal
    techniques. We have been trying to improve those to try to get
    to real market value and to look at the kind of things that you
    are talking about. Certainly, we have gone to a disaggregated,
    more geographically specific set of home price indicators in
    the modeling. That is one of the improvements that we have
    made. But the truth is--and nobody is able to do this, to get
    to very precise, geographically specific pricing. The most
    important thing we can do--and this is what we did do--is to
    look at the risk factors for a particular borrower and to raise
    to 10 percent the downpayment requirement for riskier
    borrowers. And frankly, what we have seen since we did that is
    that our early payment defaults have declined by two-thirds in
    those riskiest loans. So the evidence is that the policy is
    really having a good effect.
        Mr. Neugebauer. Let's just go to the fact that your
    assumption--and I think it is kind of one of your best-case
    scenarios in the study was that you thought there would be an
    additional 5 percent decline in housing prices, right?
        Secretary Donovan. Actually, it predicted that it would be
    5.6 percent this year. Since that was done in June, we have
    another quarter of data and it is actually better than was
    predicted by the actuary. So it is likely at this point that
    5.6 percent isn't quite as bad. But that was a prediction for
    this year.
        Mr. Neugebauer. Yes. So if you predicted that you are going
    to have a 5 percent decline in housing prices and you are
    making 97 percent loans, aren't we setting people up to being
    underwater? And when you talk about predicting the future of
    some of these locational issues, there are historical data that
    can show you what the inventory levels are in many of these
    locations, how long it takes to foreclose on properties in
    different jurisdictions. And to me, that is an important part
    of the risk analysis. But what you are saying is, we don't do
    that? Yes or no? We don't do that?
        Secretary Donovan. What we are clearly looking at is what
    are the risks of different factors in underwriting. Downpayment
    is a critical piece, but it is one of a number of factors, and
    what we see on the performance of our high LTV loans--because
    we have excluded the highest-risk borrowers from doing that--is
    very, very strong performance. Early payment defaults are far
    lower for the highest credit score borrowers with high LTV than
    10 percent downpayments with lower credit score borrowers.
        So I would be happy to share with you more of the data. But
    what we are basing this on is real experience in realtime. And
    the performance there is strong enough. The other thing I would
    just say is--
        Mr. Huizenga. The gentleman's time has expired. I will let
    you very quickly finish.
        Secretary Donovan. I will just finish. We looked back at
    last year. If we had even gotten rid of the highest LTV loans
    on purchases, our estimate is that 10 percent of the borrowers
    in the entire country would not have been able to buy a home.
    So what we are balancing here, to be clear, is making as safe
    loans as possible but also not trying to do anything that would
    threaten the housing recovery. And frankly, anything that would
    hurt the housing recovery would do much more damage to the
    taxpayer not only at FHA but at the GSEs and elsewhere. And
    that is really the balance that we are trying to maintain.
        Mr. Huizenga. Thank you. The gentleman's time has expired.
    Mr. Ackerman from New York for 5 minutes.
        Mr. Ackerman. Thank you. I want to probe, if I can, for a
    moment and reflect on the philosophical differences within the
    committee as far as the role of the public sector and the
    private sector which I think is indicative of the same
    discussion in the country. There are those who would believe
    that the government or the public sector should play very
    little or no role in many aspects of public life, housing in
    particular in this case. It should be left up to the private
    market. And I think that is very reflective of our votes and
    our attitudes and our approach to things.
        That being said, how much money do you make?
        Secretary Donovan. Me personally? You mean FHA? Or do you
    mean me personally?
        Mr. Ackerman. On your day job.
        Secretary Donovan. I would say I make a fair salary. It is
    under $200,000.
        Mr. Ackerman. It is about what we make, right?
        Secretary Donovan. Yes.
        Mr. Ackerman. And if you took a bonus from somebody, you
    would go to jail?
        Secretary Donovan. We do have certain very, very small
    awards we can make to employees. I am not one of those who can
    get one of those bonuses. Yes.
        Mr. Ackerman. So there is no incentive for you to gobble up
    business from other sources, is there? Other than getting an
    ``attaboy.''
        Secretary Donovan. Based on the discussions of the
    committee today, I would say there are lots of incentives for
    me not to do more business.
        Mr. Ackerman. But there are no financial remunerations?
        Secretary Donovan. Absolutely not.
        Mr. Ackerman. So you have no motivation for stealing
    clients or customers from the private sector and gobbling up
    their book of business, right? You have no reason to crowd them
    out of the market? You have no reason to see that their market
    share is less and your market share is larger, do you?
        Secretary Donovan. None that I know of, Congressman.
        Mr. Ackerman. And it is quite conceivable that in the
    private sector, people could get bonuses in exponential
    amounts, thousands of percentages if they wanted, larger than
    your salary?
        Secretary Donovan. In fact, one of the problems I believe
    that led us into this crisis is that there was lots of
    compensation to mortgage originators to make bad loans.
        Mr. Ackerman. And even in Fannie and Freddie before they
    were in conservatorship, they could get bonuses also?
        Secretary Donovan. They could.
        Mr. Ackerman. And yet, your business remained stable and
    you didn't get into any financial trouble and you didn't need a
    bailout while they did and had to be taken under the public
    wing and given taxpayer dollars to be steady?
        Secretary Donovan. Thus far, although we continue to be
    vigilant, given the risks.
        Mr. Ackerman. How come you did so well when they did so
    poorly in the private sector and those who are now under
    conservatorship?
        Secretary Donovan. I think the main factor is that FHA
    continued to make plain vanilla 30-year fixed-rate fully-
    documented loans. It is why our market share shrunk to about 2
    percent.
        Mr. Ackerman. And you have no problem with your market
    share shrinking? You don't take it personally?
        Secretary Donovan. That is what Congress intended us to do,
    from my understanding.
        Mr. Ackerman. That is part of your mandate?
        Secretary Donovan. When the private market is operating
    correctly, that we would need to do very limited business. That
    is correct.
        Mr. Ackerman. So when you were established back after the
    Depression for the purpose of expanding into the brink, into
    the breach when there was a crisis within the system and you
    expanded to fill that role, those who said, Oh, my God; look
    what they are doing; they are stepping into the breach; and
    that is a dangerous place for them to be, how terrible, you
    were really fulfilling your role and your mission and your
    obligation, were you not?
        Secretary Donovan. We believe so, yes.
        Mr. Ackerman. And you would be very, very happy to have a
    smaller market share and remain stable and ready to fill that
    breach again once the problem has been resolved within the
    housing market?
        Secretary Donovan. More than that, I believe we are taking
    affirmative steps to reduce our market share.
        Mr. Ackerman. I want to thank you and your agency for doing
    the great job that you are doing and for standing ready to be
    the professional firemen that you are and withstanding the
    criticism of the people who say that you are preventing the
    good Samaritans from coming in and fighting the fire.
        Secretary Donovan. Thank you.
        Mr. Ackerman. Thank you very much. I yield back the balance
    of my time.
        Mr. Huizenga. Thank you. With that, Mr. Posey from Florida
    for 5 minutes.
        Mr. Posey. Thank you, Mr. Chairman. Thank you for coming,
    Secretary Donovan. First of all, I would probably be remiss if
    I didn't compliment Buzz Osley in your Orlando office.
        Secretary Donovan. Thank you.
        Mr. Posey. He has been a great asset to our office. He has
    been a great asset to educating the public in my district on
    how to stay out of trouble and, if you are in trouble with your
    mortgage, how best to handle it. Great, great job down there
    helping educate the public and mitigate losses.
        Secretary Donovan. Thank you. I will let him know.
        Mr. Posey. A couple of questions. What are you doing to
    prosecute the fraud that you have discovered that helped put us
    in this undesirable position we are in now?
        Secretary Donovan. We are working very closely with the
    Department of Justice. We obviously don't do the prosecuting
    ourselves. The Department of Justice represents us. We have
    active cases against a range of lenders. A good example of that
    is TBW, which was not only one of the larger FHA lenders but
    also a large Fannie Mae and Freddie Mac lender. We discovered
    working closely with our Inspector General serious problems,
    including fraud, in the work that they were doing with FHA
    lending.
        Mr. Posey. Just because time is limited, I am going to ask
    if you would send me a memo and brief me on the number of cases
    and scope of it.
        Secretary Donovan. Absolutely.
        Mr. Posey. And then, I will follow up with you on that.
        Do you see any needed improvement in the REO process?
        Secretary Donovan. One thing I would just mention related
    to the enforcement is we have legislative changes that we would
    like to pursue with the committee that we would love to work
    with you on to improve our ability to go after lenders and kick
    them out of the program when they are not doing their job. So
    that is an important next step.
        Mr. Posey. You will get 100 percent from both sides of the
    aisle on that, I promise you.
        Secretary Donovan. And we have worked well with the
    committee on that.
        Mr. Posey. Back to REO. I only have 3 minutes.
        Secretary Donovan. On REO, we are working closely with
    Fannie Mae and Freddie Mac. We asked for ideas from the public
    for new things that we could do to improve our REO processes.
    We expect by the first quarter of next year to be able to
    implement some new pilots around our work on REO to improve
    those processes.
        Mr. Posey. If you issue any bulletins on that, I would like
    to be kept in the loop. On paper, it is a pretty attractive
    process. On the ground, in reality, it is devastating. It is
    very inefficient. It causes you greater losses than you would
    sustain otherwise, and harms neighborhoods to a much greater
    degree than would otherwise happen if that process were
    streamlined, more effective, and allowed more people to
    participate in this. As I say, on paper it really looks good,
    but I think on the ground level, from my observation at least,
    it needs to be vastly improved and can't even wait a year for
    that.
        What effect do you think it would have to make FHA loans,
    full recourse loans?
        Secretary Donovan. I think you could argue about the amount
    but there is no question they would be substantially more
    expensive. And in exchange for that, I think there would be
    some potential improvement in performance. Various people have
    modeled it in different ways. It is hard to predict how
    significant that would be.
        Mr. Posey. If you have any data on that in your office, I
    would appreciate it if you would send that to me, if anyone has
    prognosticated what would happen there.
        And I wonder if there is some way you might even make the
    awareness. I heard it said by many people, the point made by
    many people and most recently by former Senator Gramm that we
    hear a lot of people are upside down in their mortgages. And he
    compares that to somebody driving a new car off the car lot.
    The second they drive off, if they financed their car, they are
    upside down in their car, too. That doesn't mean it makes good
    sense to abandon the car and go buy another one.
        I just wonder if there is some way you might initiate that
    in your education program. I know there are so-called financial
    advisors telling people, ``Hey, if you are underwater, walk
    away.'' And that really doesn't help anybody at the end of the
    day. If people would hang in there a little bit better
    probably, like they do their with automobile, just view it a
    little bit differently. I just think there is a negative
    propaganda being perpetrated to a large part of the population
    and no positive information coming from the other way to put it
    into proper perspective, more reality.
        I am sure you have read the book, ``Reckless
    Endangerment''--that would have been a good title for a former
    Congress. But the authors of that book believe that the worst
    of this market is still ahead of us. We have been unable to get
    anybody from the Department of the Treasury to tell us whether
    or not they think we have bottomed out, to give us any real
    information. The people that we think are the most
    knowledgeable cannot give us that information. I would
    appreciate any insight that you have.
        I see my time is up. Thank you, Mr. Chairman.
        Secretary Donovan. I would be happy to follow up.
        Mr. Huizenga. With that, Mr. Capuano from Massachusetts for
    5 minutes.
        Mr. Capuano. Thank you, Mr. Chairman.
        Secretary Donovan, do you have any idea approximately how
    many loans FHA currently has up there right now?
        Secretary Donovan. The total value of our portfolio--
        Mr. Capuano. The number of loans.
        Secretary Donovan. --is over $1 trillion. The exact
    number--
        Mr. Capuano. The number of loans.
        Secretary Donovan. It is right about 7 million.
        Mr. Capuano. About 7 million. I am just curious. Of these 7
    million people, these are all first-time home buyers, is that
    correct?
        Secretary Donovan. Not all of them are first-time home
    buyers. There is refinancing also available. That is a much
    smaller share of our business.
        Mr. Capuano. So 90 percent of them are first-time home
    buyers?
        Secretary Donovan. Our estimates are that of all the first-
    time home buyers who bought homes last year, about 56 percent
    used an FHA mortgage. So it is not only a huge share within our
    program; it is a huge share of the overall.
        Mr. Capuano. So vast bulk of all FHA mortgages are first-
    time home buyers, people getting into the market, mostly young
    people for obvious reasons. I am just curious. I know that you
    don't know the answer. But I would like at some point for some
    of your people to take a look to see how many of them, if it
    wasn't for FHA, could afford a 50 percent downpayment and then
    afford to carry a mortgage over a 5-year period? And I ask that
    question because, and correct me if I am wrong--I know you have
    the staff back there who probably have great history in their
    minds--before FHA, wasn't that the typical mortgage in America:
    50 percent down and a 5-year repayment period?
        Secretary Donovan. That was very typical before FHA. And
    still in many countries around the world, those are the types
    of terms.
        Mr. Capuano. And the creation of FHA instituted the 30-year
    mortgage which we now come to take as a given, and they
    instituted the practice of limited downpayments, 20 percent, 10
    percent, now down to 3.5 percent, whatever the number might be.
    Is that a fair historical memory?
        Secretary Donovan. That is right.
        Mr. Capuano. I ask that because I am not against the
    private market but that was what the private market did when
    there was no government involvement. The private market
    basically disallowed most people in this country--my guess is
    of the 7 million mortgages you have now, very few of them would
    ever have been able to put 50 percent down and pay a mortgage
    back at the rates that would have been required over a 5-year
    period. Very, very few of them, which is why homeownership has
    gone up in this country. I think it is a fair debate that we
    are currently having as a society where the level of
    homeownership should be. But I don't think anyone has the
    audacity to suggest that you go back to the 30 or 40 percent
    that it was before the FHA.
        And I say that because all this discussion about somehow
    you have done something wrong is ridiculous if you believe that
    homeownership and middle class go together. I guess I do. And
    those who don't should turn to their own constituents and tell
    them to sell their house and rent.
        The other thing I am concerned about--and I think you are
    as well--are some of the issues relative to the capital
    requirements, the reserve account. And I actually think that it
    is long overdue and well done to tie downpayment requirements
    and other requirements to FICO scores--not that I think FICO
    scores are the holy grail but you have to have something, and
    they are as good as anything. So I actually think it is a good
    thing. Just out of curiosity--I think you have already said it
    but I want to be clear--have the repayment levels improved now
    that you have increased the FICO score requirements?
        Secretary Donovan. Our early payment defaults have dropped
    by two-thirds.
        Mr. Capuano. So they have improved? Defaults have gone down
    as you have increased the FICO requirements?
        Secretary Donovan. The other thing--and I have to thank the
    committee for this--the most serious problems we had, the worst
    loans were seller-funded downpayment loans. And those alone are
    estimated to be responsible for about $14 billion in losses and
    that was stopped by this committee just in the beginning of
    2009.
        Mr. Capuano. Is it also a fair conclusion that in the
    average home, the more valuable homes that you are allowed to
    do, the ones that are closer to your cap are the ones that have
    a lower rate of default? Is that a fair conclusion?
        Secretary Donovan. Given that we haven't been doing those
    larger loans for very long, it was raised as we went into the
    crisis by Congress, we don't have definitive data but the early
    default performance suggests that those larger loans actually
    perform somewhat better.
        Mr. Capuano. So that it would be fair as we are--because
    again I haven't heard any disagreement from you that the idea
    is to get the capital reserve up back where it is supposed to
    be so that everybody could feel better about this and the fact
    that you have raised these standards and narrowed down some of
    the scopes of who could get in, and you are raising that
    number, it would be fair I would think to do this statutorily
    to say--not just for you but for the next HUD Secretary, the
    next Congress to say, if those capital levels go down, then we
    will automatically trigger some of the things that you have
    already instituted. And if we do that and you continue on the
    course that you are on, kind of tightening it up when the
    reserves go low--not to get you out of the market but because
    no one wants a bailout, no one wants you to default, no one
    wants problems with FHA, we want you to be stable. Why
    shouldn't we just do this statutorily in some general way,
    exactly the types of things you have done and maybe a few more
    things as well?
        Mr. Huizenga. The gentleman's time has expired. I will
    allow a very brief response.
        Secretary Donovan. I would be happy to follow up. I think
    the only thing we need to be careful of is the balance between
    recovering on old loans that were the problem versus putting
    increased costs on new borrowers. And given that our premium
    levels are already at the highest level, I think making sure
    that we maintain that balance not just focusing on the
    underwriting of new borrowers but also what we are doing on old
    loans around enforcement is critical as well.
        Mr. Huizenga. All right. The Chair will make a historical
    note that the FHA was created in 1934, according to the memo in
    front of me. And we will now go to Congressman Schweikert from
    Arizona.
        Mr. Schweikert. Thank you, Mr. Chairman. I am glad someone
    had the memo. Forgive me for doing this, but there are just so
    many questions I would love to run through, Mr. Secretary. So
    we will try to pretend to do the lightning round. First off--
    and I think there may be an informational correction from the
    last bit of exchange of testimony. FHA is not restricted to
    first-time home buyers, correct?
        Secretary Donovan. That is correct.
        Mr. Schweikert. The way the last dialogue went, if someone
    was listening, they would think they would have to be a first-
    time home buyer and I want to make sure it is on the record
    that it is not that way. Also, you are talking about
    performance particularly on the higher end of your LTV, your
    loan limit performing pretty darn well. If we are walking into
    this environment where some of our regulators are actually
    doing the Qualifying Residential Mortgage (QRM) and the
    qualifying mortgage definitions, isn't that going to ultimately
    continue to inhibit or drive more business to FHA and stymie
    the creation of a private label in the S market?
        Secretary Donovan. Just to be clear, first of all, I think
    we were talking about large balance loans rather than in terms
    of the performance, rather than LTV.
        Mr. Schweikert. I was just using that as an example of
    loans that are performing well. So that would actually be--if
    you and I were going to go out and start our own private label
    mortgage, you and I are going to start a securitization
    business, that is probably where we would go first because we
    know it is performing well. But if I have a Qualifying
    Residential Mortgage and I have risk retention and all these
    other things over here, how am I ever going to compete with
    FHA?
        Secretary Donovan. There is no question that there is an
    important balance that needs to be struck in the QRM between
    making sure that we don't repeat the mistakes of the past but
    at the same time creating a robust private market. So I think
    you raised an important tension. But for FHA, we have a range
    of mechanisms, including our premium levels and other
    underwriting, that have allowed us--and loan limits of course,
    which have allowed us to ensure that the private market can
    function very well.
        Mr. Schweikert. Actually, that is really not true. You have
    your G fee, your fees and you do have loan limits. But because
    of the current loan limits, which my understanding is you
    weren't particularly thrilled with, there is no private market
    out there. Now a lot of that is there are uncertainties within
    Dodd-Frank and those mechanics. Please understand, I have had
    an FHA loan. I have sold--my brokerage firms over the years
    have probably sold hundreds, if not thousands of them. So it is
    not my opposition there. It is just it is sort of the mission
    creep in many ways, you are a huge portion of the market today.
        Mr. Secretary, has your legal staff thrown out any warnings
    or concerns about the fact that you are well beyond this
    statutory 2 percent and any sort of recourse that either you,
    in your capacity, or as an agency, hold by violating the law
    right now?
        Secretary Donovan. We have had a lot of discussions with
    the legal staff. My concern is not just on the legal side. It
    is on the business side that we need to take significant steps
    to make sure that capital reserve gets rebuilt. Just in terms
    of the specifics of the law, my understanding is that it
    requires that if FHA goes below the 2 percent, there be a plan
    put in place to ensure that the fund recovers as quickly as
    possible. Those are the steps that we have described. Those are
    the additional steps that I talked about that will be in our
    2013 budget. All are parts of what is required by the law to
    put in place steps that will help the fund recover.
        Mr. Schweikert. Mr. Secretary, why I am a little disturbed
    is because as I go back to previous years' testimony, it sounds
    very similar. We are going to build the plan. Please
    understand, I don't want there to be a shock to FHA where all
    of a sudden some legal opinion comes and you could have to stop
    writing loans or do this or that because I don't think the real
    estate market can handle that.
        I want to bounce to something Mr. Posey said just because I
    think there might have been an exchange error there. And I
    think he touched on, what do you think would happen if FHA
    loans were full recourse, would that help your credit quality,
    would that also help us in some way where for many of us that
    have a concern, if someone gets an FHA loan--so I have what,
    3.5, maybe 5 percent down and I somehow am able to get either a
    credit line or stacking a second instrument behind that, there
    is absolutely no equity--in many ways, you are incentivized to
    walk away from the loan. Should that trigger recourse on my
    first mortgage or deed of trust?
        Mr. Huizenga. The gentleman's time has expired. I will
    allow the Secretary to answer.
        Secretary Donovan. I would actually need some clarification
    on the question. I am not sure I am clear. I would be happy to
    follow up afterwards.
        Mr. Schweikert. Mr. Chairman, may I have unanimous consent
    for 30 seconds?
        Mr. Huizenga. Without objection, it is so ordered.
        Mr. Schweikert. Right now, an FHA loan is nonrecourse,
    correct?
        Secretary Donovan. Yes.
        Mr. Schweikert. If I go and put a second loan behind that
    in most places, other than Texas--it is still nonrecourse. But
    I have chewed up what little equity was built in there and
    actually made it even more likely that I am going to default or
    there is going to be a higher loss ratio on it. Has there ever
    been discussion of policy on, if I stack up, if I use what
    little equity I have in the property that the first should
    become recourse?
        Secretary Donovan. I have not heard extensive discussion of
    that. There has certainly been a significant amount of
    discussion about whether to allow second liens, how to ensure
    we don't get the same kinds of problems that we have had in
    terms of the stacking of debt in first, seconds, thirds in many
    cases. That has clearly been a significant problem and I think
    it is important that we have policies that ensure that doesn't
    happen going forward.
        Mr. Huizenga. The gentleman's time has expired.
        Mr. Schweikert. Thank you, Mr. Chairman, and thank you to
    the committee for your tolerance.
        Mr. Huizenga. On behalf of the committee, you are welcome.
        With that, Mrs. McCarthy from New York for 5 minutes.
        Mrs. McCarthy of New York. Thank you, Mr. Chairman. Thank
    you for having this hearing. And thank you for spending so much
    time with us, Secretary Donovan. This is a great concern for
    all of us on both sides of the aisle because we are dealing
    with an awful lot of constituents at home who are trying to get
    modified mortgages. I think there is only one--I am not going
    to mention the name--bank that has been working with us and
    they are the only ones that have actually modified a number of
    mortgages that we have been asked to help.
        But something that I wanted to ask you about, especially
    what has been in the paper, with our veterans coming home from
    Afghanistan and Iraq and coming home to find that their house
    is in foreclosure when we have passed legislation to make sure
    that wouldn't happen. What can you be doing to protect these
    veterans coming home? Even though we have laws, but obviously--
    to me, whatever is the highest fine that you can give to these
    particular banks, it should be. And it should be.
        Secretary Donovan. Yes. These examples are shameful. And we
    have worked closely where we have found examples of that in
    FHA. We have worked closely with the Department of Justice.
    They have brought a series of cases. I would be happy to follow
    up to get you background information on not only cases they
    brought but where they have won judgments against companies for
    that.
        The other thing I would add, though too, is in addition to
    examples on the foreclosure, we have many, many servicemembers
    who are being hurt by being underwater and the inability--
    particularly when they are asked by the country to relocate to
    another base and they are stuck in a house that is underwater,
    they can't sell it, it hurts their credit rating, there is work
    that the Department of Defense has done, a set of programs that
    Congress has established that are very helpful in terms of
    making sure servicemembers aren't hurt by being underwater
    where they need to move as well. So that is another step that
    we could take that is very important.
        Mrs. McCarthy of New York. If there is anything that you
    think that we need to be doing even more so, please let us know
    because those who are defending this country and coming home--
    those who are lucky enough to come home uninjured, we can't let
    this one go.
        Secretary Donovan. I couldn't agree more.
        Mrs. McCarthy of New York. Certainly, an awful lot of our
    constituents, through no fault of their own--they had a good
    credit rating, they bought a home. I live on Long Island. A
    starter home used to be around $500,000. Now, it is about
    $430,000 but that is still an awful lot of money for a young
    couple to get together to be able to do that.
        So, I thank you again for the FHA loans. But also, I agree
    with Mr. Gary Miller from California. Unless we somehow come up
    with getting this housing market going again through the real
    estate and building, our economy is not going to come back to
    the way that we want it. And I hope that you are looking at--I
    know a number of legislators here have given you different
    ideas, pieces of legislation that we have written to jump-start
    that, and I hope that we--I was hoping that we could actually
    do it sooner than later, but this session is almost over.
        But the question I want to ask you is, your testimony
    states that the default rate on FHA loans has been relatively
    stable throughout this year due to a number of factors, and I
    know you touched upon it. But can you discuss the overall state
    of the housing market relative to the stable default rates and
    anticipated rebuilding of FHA's Mutual Mortgage Insurance Fund
    for 2012?
        Secretary Donovan. I think what is critical there is we
    have seen a substantial decline over about a year, year-and-a-
    half, leading into this year. We have seen stabilization and
    even a small increase in delinquency rates in FHA, but also
    across-the-board. I think that the kind of slowdown that the
    economy had in the late summer really impacted that to some
    degree and saw it come up somewhat, but they remained stable
    and substantially lower than we had seen historically.
        And I think most importantly there, the decline of about 45
    percent in the number of people falling into foreclosure has
    been a combination of both lower overall serious delinquency
    rates as well as the more than 5 million modifications, loan
    modifications, that I had talked about earlier in my testimony.
    Those have been key pieces.
        Mrs. McCarthy of New York. My time is short. I know the
    President had mentioned, and it is something that I had
    mentioned years ago, that people who go into foreclosures from
    unemployment or whatever, to try to rent the homes to them
    until things got better. My time is going to be up, but I hope
    that you are working on that.
        Secretary Donovan. We did institute increased forbearance
    for unemployed homeowners in FHA. We required--we went from a
    minimum of 4 months to a minimum of 12 months forbearance. We
    did the same thing with Treasury programs, and we hope that the
    rest of the market will follow us on that. It is very, very
    important.
        Mrs. McCarthy of New York. Thank you for your service.
        Mr. Huizenga. With that, Mr. Canseco from Texas for 5
    minutes.
        Mr. Canseco. Thank you, Mr. Chairman, and thank you, Mr.
    Secretary, for being here today. In your testimony, your
    written testimony, you mentioned that over the past 3 years,
    FHA has made homeownership possible for 2.27 million first-time
    buyers. How many of these first-time homebuyers used the $8,000
    homebuying tax credit included as part of the 2009 stimulus
    bill for their downpayment?
        Secretary Donovan. Given that the tax credit is claimed
    after closing, we don't have precise estimates of how many
    families used the tax credit, so I can't give you a specific
    answer on that.
        Mr. Canseco. But you mentioned earlier in your testimony
    that downpayment is a critical piece in the risk analysis; is
    that correct?
        Secretary Donovan. Correct.
        Mr. Canseco. Does the FHA categorize using this $8,000 tax
    credit as a self-funded downpayment loan, which data shows are
    3 times as likely to default as other loans?
        Secretary Donovan. In fact, we were very aware of that
    history when we established our policy. What we said was we
    banned any use of the tax credit as a loan or something else
    that would be go directly towards reducing the downpayment. We
    allowed the tax credit to be used to increase the amount of
    downpayment, but we did not allow any homebuyer to monetize
    that tax credit, to go out and borrow against it or do anything
    else. The downpayment had to come from their own funds or from
    family in a way that any other loan would be required. So we
    made sure to specifically avoid the experience that you are
    talking about with the tax credit.
        Mr. Canseco. So given that the $8,000 tax credit could have
    come after the finalization of all of the documents, you can't
    really follow that $8,000, whether it went to make up for that
    $8,000 that went into the downpayment?
        Secretary Donovan. Let us be clear about this. When a
    family closes, they are required to have a $10,000 downpayment
    for an FHA loan. We check to make sure that is coming from
    allowable funds, a bank account they may have, a family
    member--so we would check. If they go and then get a refund
    from their taxes at the end of the year of $8,000, all that
    does is replenish funds, savings that they may have. So it
    actually puts the homeowner in a better position relative to
    repaying their loan, not worse.
        Our job was to make sure at closing that those funds were
    coming only from allowable funds, not, for example, by going
    out to a scam artist or some local lender and saying, well, I
    am going to get this tax credit; lend me the money to do that.
    So that was our requirement.
        Mr. Canseco. So your answer is that this tax credit did not
    go into the seller-funded downpayment assistance?
        Secretary Donovan. It is a completely different phenomenon.
    Just to be clear, the risk with the seller-funded downpayment
    was that you basically had the seller of the home raise the
    price--we often saw bogus appraisals--and effectively get to
    zero downpayment or worse. Here the requirement was that they
    have that downpayment in their own cash, in different family--
    anything that would be traditionally allowable. So we were very
    specific about the way that tax credit could be used.
        Mr. Canseco. So FHA estimates that the capital reserve fund
    could withstand an additional decline in housing prices up to 4
    percent and remain positive. Does this mean that the housing
    price declines in excess of 4 percent will trigger a taxpayer
    bailout of FHA?
        Secretary Donovan. To be clear about that, the expectation
    in the actuary was a 5.6 percent decline this year, and our
    estimate--and this is only an estimate, there are many other
    factors--is that everything else staying equal, an additional 4
    percent decline next year could trigger the need for additional
    assistance.
        But that is before any changes or other steps we might
    take. For example, and I lay out five different things we could
    do in my written testimony, premium increases or a series of
    other steps that would add capital to the fund and help to
    avoid that.
        Mr. Canseco. Does the recent increase in loan limits for
    FHA encourage private capital to get back into the markets?
        Secretary Donovan. It does not. And that is why we laid out
    in our White Paper our position, the Administration's position,
    that the loan limits ought to step down. On the other hand, I
    do think it is important to point out that they do not, based
    on early data, put the fund at greater risk.
        Mr. Huizenga. The gentleman's time has expired.
        Mr. Canseco. Thank you very much.
        Mr. Huizenga. Mr. Sherman from California for 5 minutes.
        Mr. Sherman. Thank you.
        I do want to reemphasize your last comment, and I know you
    gave a similar response to Gary Ackerman, and that is this
    increase does not put the FHA fund at greater risk. If
    anything, as I understand your data, it should help the FHA
    absorb some of the risk that it absorbs on loans of less than
    $625,000.
        One concern that people have is, are the FHA reserves
    adequate? We obviously prefer that they be higher, but it is my
    understanding that those reserves would not be exhausted if we
    ended up this year with a 5.6 percent decline in national home
    prices, and then there was a 4 percent decline next year. Is
    this right? And do you predict a 4 percent or greater decline
    in home prices next year? Please tell me no.
        Secretary Donovan. I will tell you that what our
    independent data that was used for the actuarial predicted was
    a 5.6 percent decline. It appears we got third quarter data
    yesterday from FHFA and Case-Shiller it appears likely that the
    decline this year will be smaller than that 5.6 percent. It is
    now year under year just under 4 percent, and their
    prediction--again, Moody's Analytics prediction--is for a 1.3
    percent increase next year in home prices. So I will tell you
    that is the base case that the actuarial is run off of.
        Mr. Sherman. So the predictions have been more gloomy than
    actuality over the last several months, and if the predictions
    hold, the FHA will not need an infusion of Federal funds?
        Secretary Donovan. Under the base case, that is correct. I
    will note, however, that obviously we can't predict the future;
    that the predictions last year, the performance this year has
    actually been somewhat worse than was predicted by Moody's last
    year, and that is why we are evaluating a series of steps that
    we could take and that we expect to be included in our 2013
    budget.
        Mr. Sherman. You ought to be planning for everything, but
    the best estimate is home prices will go up infinitesimally
    next year, and if they even go down by 4 percent, FHA will not
    need money from this Congress.
        One thing I think we tend to agree on here is we want to
    give consumers as much choice as possible. Another thing I
    think we all agree on is we want the Federal Government to take
    as little risk as possible and the private sector to take as
    much of that risk as possible. And I would like to see Fannie
    and Freddie's conforming loan limit in high-cost areas raised
    to $729,000 because then you may, in many of those cases, have
    private mortgage insurance.
        As I understand the current situation, if somebody gets an
    FHA loan, the Federal Government is on the hook for the first
    dollars lost. If, instead, that loan was privately mortgage
    insured and Fannie and Freddie, then the private sector is on
    the hook for the first losses. Do I have that right?
        Secretary Donovan. That is correct.
        Mr. Sherman. And so, if we can give consumers in high-cost
    areas like Los Angeles a chance to use Fannie and Freddie, that
    opens additional doors to them, and those doors would involve
    less of the risk being absorbed by the Federal Government than
    an FHA-insured loan.
        Secretary Donovan. I am not sure if you were here earlier.
    I did talk about the fact that we have never had a situation
    where FHA loan limits were actually higher.
        Mr. Sherman. I remember when they were lower.
        Secretary Donovan. And overall, I would just restate our
    position that we do think we need over the long term to bring
    those loan limits down to more historical levels for FHA.
        Mr. Sherman. While increasing them for Fannie and Freddie,
    I would hope, because the one way you can get a double-dip
    recession is to see a decline in values, a precipitous decline
    in values, of homes in the 10 high-cost areas of the country.
        With that, I yield back.
        Mr. Huizenga. Thank you.
        And at this time, the Chair recognizes himself for 5
    minutes.
        I want to say thank you to a couple of my colleagues who
    are allowing me to jump ahead here before I have to take off.
    My background is real estate, as well as a few of the others
    who are here, and when I was in real estate back in the early
    1990s and into the late 1990s, FHA loans were extremely
    difficult to get, they were very unusual, and were sort of the
    last resort, because they did go to those who were underserved.
    And I am glad to hear your position. I hope that it is a clear
    position you have shared with the Senate, who has pushed this
    increase on the FHA loan limits, and I encourage you to
    continue to do that and talk with them as we are trying to
    readjust this.
        I do have one quick question on page 3 of the report that
    you had given us talking about the underserved borrowers part
    of that. There is a note that 56 percent of all first-time
    homebuyers in 2010, according to the National Association of
    REALTORS, were FHA buyers. Am I reading and understanding that
    correctly?
        Secretary Donovan. That is their estimate, that is correct.
        Mr. Huizenga. So do you believe that 56 percent of all
    first-time homebuyers are underserved buyers?
        Secretary Donovan. What I would say is that we have a dual
    mission, as far as I understand Congress' creation of FHA, in
    normal times to serve underserved borrowers, but that in times
    of crisis, where there is a lack of private capital, for FHA to
    act as a countercyclical force and to be able to serve a
    broader group. And I think that is, in fact, what has happened
    during this crisis, and I think the fact that it is 56 percent
    of first-time buyers is to some degree a result of that lack of
    private capital.
        So I would certainly expect and, in fact, would hope that
    number would go down and return to a more normal level, but
    that certainly is not a level that I believe is the right level
    over a longer term and in normal times.
        Mr. Huizenga. I would hope so as well. And the
    countercyclical element rule for FHA, I think, leads logically
    to the next question: should all of these first-time
    homebuyers, these sub-700 credit score buyers--I think that it
    was noted that 580 was a score that was out there--be in a
    position to be buying homes?
        Secretary Donovan. We would be happy to spend some time
    with you showing the performance data. I think the fundamental
    question is if they are buying a home they can afford with a
    product that is going to be safe and sustainable, and they
    demonstrate that they can be successful homeowners, that is
    what we are looking at. And certainly, the performance we have
    seen, the improved performance, tells us that by and large,
    they can be successful homeowners.
        Mr. Huizenga. I think that is the fear that a lot of us
    have in this current economy with the job situation as it is
    that that may be more risky, which goes back to a number of
    questions about requirements for reserves and those kinds of
    things.
        And you had--I believe it was Mr. Ackerman who had asked
    you a question and talked a little bit about bailout for FHA.
    Your exact quote was, ``We don't need one thus far.'' On page
    13, you are making the claim that the current underwriting and
    premium structures have created an actuarially sound basis for
    growing capital at a rapid rate in the economy.
        I, for one, am pleased that it sounds like it is going to
    be an easy pledge from all of us on this committee to say there
    won't be an FHA bailout. I don't know how sure you are of that,
    but I guess I am looking for some reassurance that the FHA is
    not going to need that government assistance, because that is
    what a lot of the concern is that a number of us have on this
    committee.
        Secretary Donovan. It is my concern as well, and we have
    been working very hard to do everything we can to make sure
    that we protect the taxpayer.
        To be clear, the new loans that we are making, even under
    the most severe economic scenarios that the actuary looked at,
    would remain profitable. So fundamentally, what we are talking
    about here is a risk; if the economy and the housing market
    performed worse than expected in the actuarial, that is the
    risk that could push FHA's capital reserves into the negative.
    I can't tell you here today that is a zero risk, because it is
    not.
        Mr. Huizenga. But doesn't that sort of go counter to your
    argument that the FHA is needed for countercyclical, and if you
    guys are that rock solid, why isn't the private sector stepping
    in? Some of us suspect it might be some of the regulators that
    have been clamping down on amounts of loans that banks are
    holding and those types of things. But I think you are seeing
    sort of that ``push me/pull you'' aspect to some of my concern
    at least.
        My time has expired.
        Secretary Donovan. Briefly, I would say I think we agree
    that we need to encourage private capital to come back, and the
    fact that our market share is now shrinking is evidence, I
    believe, that the steps that we are talking on premiums and on
    underwriting are, in fact, moving in that direction.
        Mr. Huizenga. Thank you.
        And with that, Ms. Waters of California for 5 minutes.
        I believe the chairman had also made a commitment to you
    because you had missed your opening statement that there would
    be some additional time, and I will let the next person in the
    Chair take care of that. So at this point, let us go with 5
    minutes, and then ask for additional time.
        Ms. Waters. Thank you very, very much.
        I am appreciative for Secretary Donovan and the time that
    he is putting in on this very, very important issue today.
        I would like to remind the committee that we saw this
    coming last year when the capital reserve level fell to .53
    percent. In response, I worked across the aisle with then-
    Ranking Members Capito and Bachus on the FHA Reform Act, which
    passed the House on a bipartisan vote of 406-4. Although that
    bill wasn't signed into law, parts of it, most notably the
    provisions that allowed FHA to raise the annual and upfront
    premiums, were enacted separately. These provisions were the
    most important pieces from my bill because they were designed
    to give FHA the resources they would need to raise their
    capital reserve levels. However, the provisions on FHA being
    able to police fraud were likewise important, and I am
    disappointed that the Senate didn't take up my bill.
        However, Secretary Donovan has taken advantage of the
    flexibility we were able to get signed into law last year, and
    FHA has tightened its lending standards. The average FICO score
    of FHA borrowers has risen from 620 to 700. In addition to more
    creditworthy borrowers, the recently extended higher loan
    limits will help FHA to strengthen its reserves.
        There has been a lot of speculation in the press about
    whether or not FHA needs a bailout, and I am certain that you,
    Secretary Donovan, may have gotten questions to that effect
    from Members on both sides of the aisle. But I just want to be
    clear that FHA remains the only source of mortgage credit for
    most Americans today.
        Investors are still reluctant to enter the mortgage market
    after being burned by originator misrepresentations and fraud
    during the run-up to the financial crisis, conflict of interest
    problems continue to plague mortgage servicers, and just last
    month, one private mortgage insurer filed for bankruptcy.
        In the wake of these problems and uncertainty, FHA has
    taken on a larger market role. That role has helped the middle
    class. There are millions of working, creditworthy, middle-
    class borrowers who would not be able to buy a home or to
    refinance an existing mortgage if not for the availability of
    FHA mortgage insurance. FHA is singlehandedly holding up our
    mortgage market. And I must reiterate time and time again that
    we must support it.
        To be clear, I do oppose any attempt to use the current
    challenges facing FHA as an excuse to dismantle, defund or
    otherwise destabilize this critical housing program. Now is the
    time to strengthen FHA, not to weaken it. And I am more than
    willing to work with my friends on both sides of the aisle to
    find ways to make FHA stronger, better, and more effective in
    providing homeownership opportunities to all Americans.
        If I may continue, I would like to ask a few questions of
    the Secretary.
        The FHA has made changes to the downpayment requirements
    for borrowers with FICO scores of 579 and lower, 10 percent
    downpayment, and prohibits loans for borrowers with FICO scores
    below 500. Has this change helped contribute to the strong
    economic value of the current book of business? Is the new
    premium structure better aligned with market conditions?
        Secretary Donovan. First of all, Congresswoman, thank you
    for all your work with us on the FHA bill that you talked
    about. We do continue to believe that many of those provisions
    that weren't passed that were part of the bill are critical to
    allowing us to continue to increase enforcement and other
    steps. So thank you for your work on that. We look forward to
    continuing to partner with you on it.
        Specifically on your question, the answer is yes, we have
    seen a roughly two-thirds reduction in early payment defaults
    in that class of loans, and that really, I think, is a result
    of the underwriting changes that we talked about.
        Ms. Waters. HUD set underwriting minimums that combine
    credit score and downpayment requirements to balance risk
    management, with broad access to housing credit for borrowers
    who have historically met FHA credit quality standards.
        Could you comment on the impact this has had on FHA's
    current book of business?
        Secretary Donovan. What we see is between the last 2 years,
    the actuary predicts about an $18 billion positive net worth
    for those two books of business, so $18 billion of benefit to
    the taxpayer from those two books.
        I would also say the work that we have done to look at what
    would happen if we removed the option for lower-risk borrowers
    to get higher LTV loans, we think we could lose as much as
    about 10 percent of all the buyers last year. And that is the
    concern that we have in terms of risk to the housing recovery:
    If we were to restrict credit too much, it might actually
    perversely hurt the taxpayer by increasing the losses that we
    would see on loans that were made in 2008 and before that.
        Dr. Hayworth [presiding]. May I have unanimous consent for
    another minute-and-a-half for the ranking member? Without
    objection, it is so ordered.
        Ms. Waters. Thank you very much.
        Mr. Secretary, could you comment on the steps HUD has taken
    to increase enforcement of FHA lender policies, eliminate
    approval for loan correspondence, and increase net worth
    requirements for lenders wanting to underwrite FHA loans?
        Secretary Donovan. Absolutely. I think one of the first
    steps that we took was to really create a strong risk
    management team and culture at FHA, created the first-ever
    Chief Risk Officer position in the history of FHA. We also
    increased net worth requirements for lenders that hadn't been
    increased in quite some time. We stepped up dramatically both
    the investigations that we were doing, the share of loans that
    we were reviewing, and consequently we have seen 4 times more
    lenders removed from the FHA rolls during the period of this
    Administration than in the entire 8 years of the prior
    Administration. And we have worked actively with our partners
    at the Department of Justice to bring cases against the worst
    offenders and have been successful in a number of those as
    well.
        Ms. Waters. Thank you very much. I think you have done a
    great job, and, again, I appreciate all of the attention that
    we paid to FHA and the way that you perceive it even without
    all of the legislation that we would have liked to have had
    passed.
        I yield back the balance of my time.
        Secretary Donovan. Thank you.
        Dr. Hayworth. The Chair recognizes Mr. Hensarling for 5
    minutes.
        Mr. Hensarling. Thank you, Madam Chairwoman.
        Mr. Secretary, in the 2011 actuarial study that I guess was
    released last month, if I read it correctly, we have
    approximately $1.2 billion in value supporting insurance in
    force of about $1.9 trillion on the single-family MMIF; is that
    correct?
        Secretary Donovan. It is actually not correct, Congressman.
    There is a total of $33.7 billion in reserves that are held
    against the book. That is actually the highest level of
    reserves in the history of FHA. And contrary to what was
    predicted last year, those total reserves actually--
        Mr. Hensarling. I was talking about just the single-family.
        Secretary Donovan. This is single-family that I am focused
    on. I think you are focused on--there are two reserve accounts:
    the capital reserve account; and the financing account. The
    financing account is the piece that I believe that you are
    focused on, and that is only excess reserves that are--I am
    sorry, the capital reserve account is only excess reserves that
    are held above and beyond expected losses. So I think, and this
    is very important, the total cash reserves that we are holding
    against that book is a total of $33.7 billion.
        Mr. Hensarling. But the insurance in force, $1 trillion; is
    that correct?
        Secretary Donovan. It is over $1 trillion, that is correct.
        Mr. Hensarling. Now, in that report I think, if I quote you
    correctly, ``With economic net worth being very close to zero
    under the base case forecast, the chance that future net losses
    on the current outstanding portfolio could exceed capital
    resources is close to 50 percent.'' I am under the impression
    that study was based upon June and July data; is that correct?
        Secretary Donovan. It was based on both predictions for
    house prices and the latest data as of June, that is correct.
        Mr. Hensarling. And the serious delinquency rate has
    increased from June to September; is that correct? My data
    shows that we now have 50,000 more serious delinquent FHA loans
    in September as compared to June.
        Secretary Donovan. As the portfolio grows, obviously the
    number typically increases. As with, I think, all types of
    loans, there was a slight increase in the serious delinquency
    rate at the end of the summer.
        I would also say, though, home prices have performed better
    than expected since the June 30th predictions, given that home
    prices are the single most important factor in predicting the
    value of the fund; that it is likely that, in fact, the
    actuarial understates the capital reserves relative to what has
    happened since June 30th as a result.
        Mr. Hensarling. So, Mr. Secretary, am I to assume you are
    more optimistic than the statement that was included?
        Secretary Donovan. Optimism is not something that I think
    is relevant here, frankly, given the scale of the capital
    reserves. This is a serious issue. There are serious risks to
    the fund. We need to take further steps to protect the
    taxpayer, and we will continue to do that.
        Mr. Hensarling. You obviously have discretion, and I--one,
    let me say I appreciate the comments that you have made with
    respect to the conforming loan limits with respect to FHA and
    what I would view as mission creep. I understand, again, that
    you have the discretion to increase insurance premiums. I know
    it has been done once or twice. But I think now the annual
    premium for a 30-year loan with a 95 percent LTV is 1.15. I
    think statutorily, if I am correct, you have the authority to
    increase that to 1.5 and have chosen not to do so given the
    precarious state of the MMIF. Why have you chosen not to do
    that?
        Secretary Donovan. As I said in my testimony, that is
    something that we are actively looking at. Given that we have
    just gotten this actuarial review, we are actively evaluating
    that, and we expect in our 2013 budget proposal to propose
    additional steps.
        But I would say, Congressman, understand that the balance
    here is we are now charging the highest premiums in the history
    of FHA, and under any economic scenario, even the most dire,
    the actuary predicts that new loans that we are making will be
    profitable. And so while increasing fees for new borrowers is
    an option, it is also critically important, and we could use
    the help of the committee in further enhancing our enforcement,
    to maximize recoveries on old loans. Those are what are really
    driving the losses, 2008 and prior books of business. And we
    must balance changes that we make to new loans with focusing on
    enforcement and recovering on the loans that really are causing
    the problem.
        We can't go back and unmake those loans. Unfortunately,
    they were made. But we can do as much we possibly can to
    enforce and recover on those loans, and that is where we need
    the help of the committee as well.
        Mr. Hensarling. Thank you.
        I see my time has expired.
        Dr. Hayworth. The Chair recognizes Mr. Lynch for 5 minutes.
        Mr. Lynch. Thank you, Madam Chairwoman.
        I want to thank the Secretary and Mrs. Galante for your
    patience and your willingness to help the committee with its
    work.
        The question for me is not whether FHA is needed. Of
    course, it is needed, and it will be needed for the foreseeable
    future. The question is whether or not FHA is operating in a
    way that will be sustainable without a massive taxpayer
    bailout. That is what I worry about.
        I have a very, very good report here that I am going to
    refer to. It is by the GAO Director of Financial Markets and
    Community Investment, Matt Scire. He is going to be on the
    second panel sometime this evening, I expect. But he does a
    very good job at this. And according to the GAO analysis, there
    is $4.7 billion in the end-of-year balance in the fund's
    capital reserve account. You are saying there is $33 billion in
    that account.
        Secretary Donovan. Actually, the $33.7 billion is combined
    between the financing account and the capital reserve account.
        Mr. Lynch. But it is the one that is historically used in
    this committee and, when your predecessors came up, was always
    the capital reserve account. It is historic here. And based on
    earlier testimony by your predecessors, we have always gone by
    this account. And now you are saying we are combining it with
    another account?
        Secretary Donovan. It is two different things, Congressman.
        Mr. Lynch. Because if we could deplete a $33 billion
    account, and you are not willing to say that we will not
    deplete a $33.7 billion account, then we have a serious
    problem, because you are saying that we are not going to go
    negative on this account. Are you talking about the $33 billion
    account, or are you talking about the $4.7 billion account?
        Secretary Donovan. The total cash reserves is what I was
    talking about. In other words, we are holding against expected
    losses those reserves. And I was just correcting the--I think I
    didn't want to leave the impression with the committee that
    somehow we were only holding $4.7 billion against potential
    losses.
        Mr. Lynch. So let us talk about the ratio of reserves, the
    capital reserve ratio. Statutorily, it is supposed to be 2
    percent. You are at .24 percent; is that correct?
        Secretary Donovan. That is correct.
        Mr. Lynch. Okay. Here is the problem. Under the Fed's
    analysis when they give us the number of homes underwater, the
    number of homes in arrears, the number of homes in default and
    in foreclosure, they tell us a very different story than the
    actuary is telling us, that we are going to remain positive
    next year. And the actuary told us and this committee in 2008,
    2009, and 2010 not to worry, things are going to be okay. And
    we watched that account go from $22 billion in 2007 to $4.7
    billion at the end of 2010.
        What I am saying is, I know you are working as hard as you
    can to do the right thing here, no question about that. We are
    trying to do the same thing. Congress hates surprises. We hate
    surprises. So when someone tells us things are going to be okay
    next year, and then you report once a year, this actuarial
    review, and we get terrible news that things aren't all right,
    as a matter of fact, year after year it is getting worse and
    worse, that creates a tension between what we are expected to
    do by our constituents and what is happening here with FHA.
        So here is my problem. You are required under the National
    Housing Act to report this actuarial review, to conduct it and
    publish it once a year. My problem is that in this market, that
    is too long a period of time. We are going to get surprised one
    way or the other. Now, it may be a pleasant surprise, and it
    may sustain what the actuary is saying, or it may be something
    that is very negative and we are going to be in a calamitous
    situation.
        What I filed back in 2009 was to ask FHA to conduct their
    actuarial review every 6 months, semiannual, rather than
    waiting a full year and we don't have time to react, and we get
    terrible news and it puts us at a real disadvantage here in
    Congress.
        I can understand when we had $22 billion in that account,
    we didn't need a review every year. Now we are at .24 percent
    on that capital reserve ratio. We are at a precipitous point,
    and it might be the European debt crisis, the sovereign debt
    crisis there that tips this economy the wrong way, and then we
    are in trouble.
        I am just asking you, would you support an enhanced--the
    name of my bill was the Enhanced FHA Oversight Act, and what we
    are looking for is we are looking for this data--
        Dr. Hayworth. The gentleman's time has expired.
        Mr. Lynch. We are looking for the data twice a year rather
    than just once a year. Would you support that?
        Secretary Donovan. Congressman, first of all, let me just
    say I don't think you have heard me here say today that you
    don't need to worry that everything is going to be fine. I have
    said consistently that we need to be vigilant because none of
    us can predict where home prices are going to go--
        Mr. Lynch. Exactly. So what I am saying is if we get the
    information every 6 months instead of once a year--
        Secretary Donovan. Look, it is up to the committee to
    decide and the Congress to decide what the legal requirements
    are. What I will tell you is we are running these numbers far
    more than annually. We are running them on a regular basis--
        Mr. Lynch. Then, there should be no problem with giving
    us--
        Dr. Hayworth. The gentleman's time has expired. You can
    continue your questions in writing, sir. And I thank the
    Secretary for having remained with us past his hard stop of
    12:30.
        I am calling on Mr. Stivers. The Chair recognizes Mr.
    Stivers of Ohio for 5 minutes.
        Mr. Stivers. Thank you, Madam Chairwoman. Mr. Secretary, I
    am always worried being that my seniority is so low, that by
    the time I get to question you, we know you have been here a
    long time. So I appreciate you hanging in with us and I
    appreciate your candor today.
        We are all concerned about the actuarial report. I would
    like to ask you a couple of structural questions about FHA and
    then ask some questions about your five recommendations, if
    that is okay.
        First, you referred to your Chief Risk Officer a little
    while ago, and that is a position that Congress allowed you to
    fill last year. And my understanding is that position was
    filled, and then the person has left.
        Has that position been filled? Is it filled currently?
        Secretary Donovan. And I apologize, Congressman, I do need
    to depart. But actually, our Chief Risk Officer has been
    promoted to a senior advisor to me directly. We have just
    brought on another senior advisor for risk. We have 15
    positions that we filled in that office this year. So we are
    strongly working to fill out and complete that risk
    organization.
        Dr. Hayworth. And with thanks to the Secretary, Mrs.
    Galante will remain to answer further questions.
        Mr. Stivers. Mrs. Galante, have you read the GAO report on
    risk mitigation? One of the things it says is that there is no
    comprehensive strategy on risk mitigation, and it calls for
    three specific actions to be taking place. In fact, it also
    says that the two important parts of the Agency, the single-
    family housing quality control activities and the Office of
    Risk Management activities, are still separate as of the date
    of this report. Has that changed since then?
        Mrs. Galante. Congressman, I have read the report, and I
    have commented on the report for the GAO. We generally think
    the GAO did a very good assessment of the progress that we have
    been making over the past couple of years integrating the risk
    office into the overall FHA operations. And so, we are working
    on a number of the recommendations that they had. Some of them
    were well in progress by the time the GAO report was done.
        Mr. Stivers. And I would ask you to--I would say that some
    kind of comprehensive risk-mitigation strategy is really
    important, and I would ask you to relay to the Secretary who
    has left, that it is important and that you need to make it a
    top priority. When you don't have a comprehensive risk-
    mitigation strategy, you are never--you are going to be playing
    Whac-A-Mole all the time, and it is just not smart unless you
    move in that direction.
        I do want to talk about some of the five solutions that the
    Secretary had listed in his testimony. Since last year, you
    have had the ability to raise loan limits, and you have done it
    a couple of times, but you have never tiered the rate, so you
    still have one rate. You don't look at the risk of the
    customer; you don't have a minimum number rate and look at the
    risk of a customer and go up further. Do you need further
    ability from Congress to do that? Because I don't think you do.
        And one of the things the Secretary talked about that I
    really wanted to talk to him about is he talked about the
    conforming loan limits being higher than he wants them to be.
    He also has the ability to raise the fees on those mortgages,
    in particular above the old conforming loan limits in a tiered
    way, and even though he said those don't raise risk, it makes a
    lot of sense to raise those limits to encourage the private
    market.
        Is that something that is under consideration? Because I
    have asked this question before, and it has always been under
    consideration, and nobody seems to do anything about tiering
    the fee increases.
        Mrs. Galante. Again, just to be clear, you are talking
    about premium increases in our case?
        Mr. Stivers. That is correct.
        Mrs. Galante. And the answer is all the options--
        Mr. Stivers. I am talking about tiering premium increases.
    Are you seriously considering it to the point that you would
    actually do it? Because you have considered it apparently in
    the past.
        Mrs. Galante. I will just say we are--all the options are
    on the table, including some kind of tiering. I think the
    Secretary alluded to that. Particularly given the higher loan
    limit that we have, there are some opportunities there, and we
    are looking at them.
        Mr. Stivers. Please tell us if you need further authority,
    because obviously you are limited to 1.5 percent. If you need
    more authority or want the ability to do more, let us know. And
    that is my final question: Do you require any congressional
    authority to take any of the five steps that you requested? It
    looks like you want more authority on lender termination, but I
    can't tell if that is Congress that grants that to you,
    because, frankly, I am a freshman, and it is unclear to me, and
    I am not familiar with everything yet. I am still learning.
        Mrs. Galante. There are several provisions that were in the
    FHA reform bill that we would like that additional authority to
    seek indemnifications from certain types of lenders that we do
    not have the authority now.
        Mr. Stivers. Can you answer in writing to me about the
    specific authorities you require from Congress, because it
    looks like my time has expired. I yield back. Thank you for the
    time today.
        Mrs. Galante. Absolutely. I am happy to do that.
        Dr. Hayworth. The Chair recognizes Mr. Scott of Georgia for
    5 minutes.
        Mr. Scott. Thank you very much.
        Just listening to the testimony, and just gathering in what
    we have heard today, it seems like HUD is--you are sort of
    caught in a catch-22. You have a situation where, as a result
    of your falling reserves in your capital fund, you probably
    will become more vulnerable to defaults. These defaults have to
    be covered because of the Federal guarantee that we offer to
    the lenders, they have to be covered, and that is done through
    the taxpayers. And then, in the final analysis, it means that
    if your funds are out, then Treasury has to step in. And at the
    same time, the Secretary has pointed out that the key, the real
    key, to turning this around and stopping the bleeding and the
    defaults is home counseling, homeowners counseling, and yet in
    April, this Congress slashed the money for you to provide the
    counseling; $88 million, slashed all of it.
        So when we look at this, there seems to be a mixed priority
    here in Congress. Given that, what impact has this slash of the
    $88 million had? Because I can tell you this from firsthand
    experience, I agree with the Secretary, the most critical
    weapon we have to turn all of this around is getting that
    counseling to the struggling homeowner.
        We forget how complex and complicated dealing with this
    whole issue is for your average homeowner. They refuse to
    answer the 1-800 number because a lot of them are scared, and
    when you don't have accurate information and intelligence, you
    do nothing. And so, when we had our homeowners' event, being
    able to get the borrowers under one roof with the lenders under
    one roof, but I found that the key ingredient that helped us
    more than anything else was having those HUD counselors there.
    We found out, for example, having FHA there, and you had a HAMP
    program from Treasury, that if they qualified with the FHA
    program, then the banks immediately would come together with
    HAMP because they would support that.
        And so my question to you is, you, in September, in your
    attempt to make up for some of this, put in about $10 million
    in unspent funds from the previous year to be utilized for this
    home counseling program. But despite this move, you have
    expressed concerns over the gap in funding going forward for
    the 2011 period. So my question then is what level of funding
    would HUD actually need in order to operate your nonprofit
    housing counseling program effective for this year coming up,
    2012?
        Mrs. Galante. Thank you for raising the issue of housing
    counseling. We agree it is a very important one, and we were
    fortunate with the appropriations bill that just passed that
    some level of housing counseling dollars in the conference
    committee was approved for, I think it is $50 million. So we
    didn't get the $88 million, but we were able to--or we are able
    to provide for Fiscal Year 2012 some level of counseling
    dollars to housing counseling agencies. And I am actually
    really happy you asked that because the notice of funding
    availability for Fiscal Year 2012 was posted today.
        Mr. Scott. And so, it is a done deal. We have the money for
    2012?
        Mrs. Galante. We have some money for 2012, yes.
        Mr. Scott. Is it sufficient?
        Mrs. Galante. We originally asked for more, and we think we
    could effectively use more. And I would also say we are doing
    everything in our power to make sure that the housing
    counseling program, not just for the grantees, but for the
    administration of it, is as effective as it can be, and so we
    certainly could use additional funds for that program if they
    were available.
        Mr. Scott. And some HUD-approved housing
    counseling agencies have been inundated with new
    clients with every new Federal program. Wouldn't it be
    beneficial if HUD could contract directly with these housing
    counseling agencies in assisting delinquent homeowners with
    qualifying mortgage workout solutions?
        Mrs. Galante. A number of these housing counseling agencies
    are directly helping borrowers get through their processes with
    servicers. They are very effective in helping people through
    the loan modification process.
        Dr. Hayworth. The gentleman's time has expired.
        Oh, Mrs. Galante, I am sorry, do you want to finish that
    answer?
        Mrs. Galante. I think I finished.
        Dr. Hayworth. I thought so, too.
        The Chair recognizes Mrs. Biggert of Illinois for 5
    minutes.
        Mrs. Biggert. Thank you, Madam Chairwoman.
        And, Mrs. Galante, it is nice to see you here.
        Can you talk a little bit about the QM and the QRM rules?
    As they are being currently promulgated by the regulators, do
    they have the potential to drive more business to the FHA at
    the exclusion of the private market, or will it--might the
    private market be able to increase in this area?
        Mrs. Galante. I think, as we have discussed on some prior
    occasions, the QRM rules still in process, multiple Federal
    agencies looking at what it will be. One of the aspects that
    was in the proposed QRM rule was higher retention levels for
    loans with higher downpayments, and there is a concern that
    will drive more business to the FHA.
        Obviously, we don't know what the rule is going to be, so
    we don't know what the ultimate impact will be. But we are
    concerned and are monitoring that as we are part of the
    discussions on QRM.
        Mrs. Biggert. Would there be anything that would be put in
    there that could ensure that the private market will have
    access, or is it just because of the way that they are drawn?
        Mrs. Galante. Again, I am not close enough to all of the
    negotiations on the QRM negotiations on what is ultimately
    going to come out, so I think it is difficult for me to answer
    that.
        Mrs. Biggert. And then, FHA has estimated that the capital
    reserve fund could withstand an additional decline in house
    prices, and talk about 4 percent beyond the baseline decline,
    without experiencing a negative capital situation. Does that
    mean that a decline in excess of 4 percent would result perhaps
    in a taxpayer-funded bailout of FHA? Would you need more money?
        Mrs. Galante. I appreciate that question, and the answer is
    this: Without any other kinds of policy changes, with no
    premium increases, if house prices again got to a much worse
    point than they are today, or than we project they will be
    today, then there will be--there is a possibility that we would
    need some additional support. But we are doing everything in
    our--and that is part of this five-point plan we are talking
    about. We are going to do everything in our power to look at
    actions that we can take to ensure that we avoid that
    situation.
        Mrs. Biggert. Thank you.
        And I think most of my other questions have already been
    asked, so I will yield back.
        Dr. Hayworth. The chairman recognizes Mr. Green from Texas
    for 5 minutes.
        Mr. Green. Thank you, Madam Chairwoman.
        I thank the witness for staying with us, and I would like
    to explore a line of questioning that will help us better
    understand what FHA has done and continues to do with the
    economy.
        Let us start with loan originations. These FHA loans, tell
    us quickly, please, where--meaning in what facility--are most
    of them originated? Would that be a bank?
        Mrs. Galante. Yes. So, again, FHA is insurance, and private
    lenders are actually the ones that are originating the FHA
    loans.
        Mr. Green. Now, most of them today are originated with
    banks; is this correct?
        Mrs. Galante. Yes. There are financial institutions; banks
    are certainly part of it.
        Mr. Green. So banks benefit from it. Banks don't do this
    for free, they do it for a fee, true?
        Mrs. Galante. Certainly. Yes.
        Mr. Green. A loan-origination fee?
        Mrs. Galante. Certainly, yes.
        Mr. Green. And banks then hire people who do this type of
    work?
        Mrs. Galante. Correct.
        Mr. Green. My point is that there is a broader impact on
    the economy than just the person buying the home. The banks
    benefit; REALTORS benefit because REALTORS help persons buy
    homes. They assist with the homebuying process. Purveyors of
    products, they benefit when a home is built. And, by the way,
    builders benefit because they will build more homes if homes
    are selling. The purveyors of products, washing machines, and
    dryers, and stoves and carpet, all of these things go into
    homes, they benefit. The benefits go far beyond the simple
    purchase of the home. That is--and actually not the genesis of
    the process, because the builder constructed the home
    understanding that there was a market for it to be sold in. And
    then, of course, we have the manufacturers of products that
    benefit.
        So at a time when we need this countercyclical force, FHA
    is serving a meaningful, needed purpose. It not only helps us
    with selling the home, but the home becomes so important to
    other industries associated with the homebuying process and
    with the construction of the home.
        FHA is, in my opinion, an entity that, if it did not exist,
    we would probably try to create it or something similar to it,
    because it did not come into existence on a whim. There were
    some severe problems that we were contending with in the 1930s,
    and FHA was produced and gave us this exotic product known as a
    30-year loan. I think we can attribute that to FHA, because at
    the time a 30-year loan was anathema, it was not commonplace;
    it is something that we have now. And we think little of the
    notion of getting one, but at one time it was very difficult to
    get a 30-year loan, if not impossible, because you had big
    balloons, and you had to refinance, and people of little means
    or modest means, middle-income Americans, they didn't get homes
    to the extent that they do today. So FHA serves a meaningful
    purpose.
        Do you have empirical evidence to support the actual impact
    that you have had in the area of homes being sold by REALTORS,
    the impact on builders, the impact on manufacturing, the impact
    that goes beyond the simple purchase of the home, which is
    important; but do you have empirical data that deals with those
    other industries and how they are impacted?
        Mrs. Galante. That data certainly exists. I don't have the
    multiplier effect specifically in front of me, but absolutely
    there is no doubt that what you described is the case, and many
    of the data support that. I know for new construction, for
    example, you could essentially assume long term, a certain
    number of jobs per house built.
        So there is no doubt that there are many, many industries
    involved in providing jobs and economic benefit to communities
    as part of not just homeownership or new home purchase, but
    also just as a matter of refinancing. You can put additional
    money in people's pockets if you refinance at today's low
    interest rates, for example. And that also puts more money in
    people's pockets to spend on needed goods and services.
        Mr. Green. With my last 5 seconds, let me just say quickly
    that this service that is rendered has helped to keep
    unemployment that is high from being even higher, because if we
    didn't have you with this 56 percent of first-time homebuyers--
        Dr. Hayworth. The gentleman's time has expired.
        Mr. Green. Thank you, Madam Chairwoman. I am grateful.
    Thank you.
        Dr. Hayworth. The Chair recognizes Mr. Cleaver for 5
    minutes.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        Mrs. Galante, I am in and out, and I actually hope somebody
    already raised this issue, because I think it is extremely
    pertinent to this conversation.
        One of the former Chairs of this committee, Henry Gonzalez
    helped create the Cranston-Gonzalez National Affordable Housing
    Act. And they created this, the 2 percent capital reserve
    ratio, and it was designed to strengthen the firm.
        One of the things that has not been discussed here today, a
    lot has been said about the capital ratio being below 2
    percent, and so one of my pains is that many of my colleagues,
    perhaps on both sides, are not aware of the fact that there is
    a separate cash fund, and it was put in place to address the
    unexpected losses in the MMI Fund. I think that is maybe $33
    billion?
        Mrs. Galante. That is correct.
        Mr. Cleaver. If everything I am saying is close to
    correct--even correct it further if it needs correction--but
    what I am interested in is that fund is growing, and if that is
    true, then maybe this committee could benefit from having a
    contextual discussion from you about this, because I see them
    as inextricably connected, and we have not connected it in this
    discussion today.
        Mrs. Galante. Yes. So again--
        Mr. Cleaver. And correct me gently.
        Mrs. Galante. This is complicated, and it is easy for
    people to mix things up in this case, but I just want to say
    again, total capital resources available to FHA today is the
    $33.7 billion, which consists of a financing account which is
    where we pay our claims out of, where we, so to speak, transfer
    funds into to actually pay expected claims.
        The capital reserve account is the additional account, but
    it is part of that $33.7 billion, but it is a piece that is
    specifically supposed to be for unexpected claims above and
    beyond the expected ones that we transfer into the financing
    account.
        So that is the total capital resources available to FHA
    today.
        And the capital reserve ratio is actually based on yet
    another calculation of the total insurance in force and the
    expected economic value, so of that--of the book of business
    and the--minus the potential claims over time. So it is kind of
    two different calculations that you have to keep in mind.
        Mr. Cleaver. But we have more funds there today than we had
    last year at this time.
        Mrs. Galante. That is correct.
        Mr. Cleaver. That is so relevant to the discussion. I find
    it painful that my colleagues were not able to get that
    information out.
        I actually have no other questions, but it would be my hope
    that somehow we are able to get some kind of discussion or some
    information to Members about Gonzalez-Cranston, or is it
    Cranston-Gonzalez?
        Mrs. Galante. Cranston-Gonzalez.
        Mr. Cleaver. I apologize to Mr. Cranston, but I do think it
    is relevant, and we need to get some information out. Is there
    any--do you have any ideas on how we can get members of this
    committee aware?
        Mrs. Galante. Again, we are happy to continue to have
    conversations, have individual meetings, have dialogues, and
    work sessions. We do produce the annual report to Congress. We
    also produce quarterly reports that are delivered that go into
    some pretty good detail.
        Mr. Cleaver. Do you think Members are reading those?
        Never mind. I was speaking out of turn.
        Dr. Hayworth. The gentleman's time has expired.
        The Chair would like to thank Mrs. Galante for remaining
    with us, and with that, the Chair notes that some Members may
    have additional questions for the 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.
        Mrs. Biggert [presiding] The Chair now calls the second
    panel.
        I would like to welcome the second panel and thank you for
    your patience. I don't think we expected that to go quite that
    long. But we will start right away. And I would like to
    introduce the panel: Mr. Matthew Scire, Director of Financial
    Markets and Community Investment, U.S. Government
    Accountability Office; Dr. Andrew Caplin, professor of
    economics, Department of Economics, New York University; Mr.
    Henry Cunningham, Jr., CMB, president and CEO of Cunningham and
    Company, on behalf of the Mortgage Bankers Association; Mr.
    Patrick Sinks, president and chief operating officer of the
    Mortgage Guaranty Insurance Corporation, on behalf of the
    Mortgage Insurance Companies of America; Mr. Moe Veissi, 2012
    president, National Association of REALTORS; and Ms. Sarah
    Rosen Wartell, executive vice president, Center for American
    Progress Action Fund.
        And thank you all for being here. Without objection, your
    written statements will be made a part of the record, and you
    will be recognized for a 5-minute summary of your testimony. We
    will start with Mr. Scire. You are recognized for 5 minutes.

     STATEMENT OF MATTHEW J. SCIRE, DIRECTOR OF FINANCIAL MARKETS
    AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Scire. Thank you. Madam Chairwoman, and members of the
    committee, thank you for the opportunity to be here today to
    discuss FHA's mortgage insurance program. Since 1934, FHA has
    been an important player in the mortgage market, especially for
    first-time home buyers. FHA insures these loans under its
    Mutual Mortgage Insurance Fund. Recently HUD released the
    results of its latest independent actuarial review finding that
    the capital ratio used to measure the financial soundness of
    the fund had declined to 0.24 percent, well below the statutory
    minimum of 2 percent. This is the third consecutive year that
    HUD reported not meeting the minimum capital ratio.
        Let me start by describing the reasons for the capital
    ratio's steep decline since its peak in 2006. Put simply, the
    ratio declined because the economic value of the fund dropped
    sharply at the same time that the insurance-in-force grew. This
    rapid growth in the amount of all loans FHA insures was due to
    the growing demand for FHA mortgage insurance. By the end of
    2011, FHA had outstanding insurance that was almost 4 times the
    level it had at the end of 2006.
        We previously reported that the sharp decline in the fund's
    economic value was due to several factors, including more
    pessimistic forecasts for house prices which would result in
    higher claims and more pessimistic assumptions about losses.
    HUD attributes last year's drop-off in its estimate of the
    fund's economic value to further declines in home prices which
    resulted in higher than expected defaults, claims, and losses
    on claims. Also, HUD points to changes in the model itself.
    These include accounting for loans that had previously been
    seriously delinquent and assuming that loans likely affected by
    delays in the foreclosure process would result in claims in
    2012. From a budgetary perspective, the worsening expectations
    for loan performance ultimately resulted in HUD recognizing a
    $10 billion increase in the reestimated cost of the program for
    2009 and a similar amount for 2010.
        The capital reserve account has also seen declines in
    recent years. If this account, which now stands at $4.7
    billion, were to be depleted, FHA would require additional
    Federal funds to cover its costs on outstanding insurance.
        Last month, we reported a number of challenges that FHA
    faces given its rapid growth. To its credit, FHA has taken some
    important steps. It raised premiums, tightened underwriting,
    raised requirements of its lenders, and put in place more risk-
    based approaches to manage its growing workload. Also, with
    approval of Congress, FHA created the Office of Risk Management
    and Regulatory Affairs to bring focus to risk assessment and
    management.
        However, the efforts of this office have been limited by
    staff resources and leadership turnover, and its efforts to
    assess risk and similar efforts by the Office of Single Family
    Housing have not been integrated. Here we think there is more
    that FHA can do to put in place an integrated and timely
    process for assessing and managing risks, particularly risks
    linked to its rapid growth. Further, the Office of Single
    Family Housing continues to face human capital challenges but
    has not done all it could to identify and put in place the
    skills and resources that it needs. Also, it can do more to
    plan for likely turnover in staff, a pressing challenge given
    that half of its headquarters staff and nearly two-thirds of
    its field staff are eligible to retire in the next 3 years.
        Returning to FHA's fund, we continue to believe that FHA
    can do more to measure its financial condition. In particular,
    past reviews have relied on a single economic forecast to
    determine compliance with a 2 percent capital ratio
    requirement. However, this approach does not fully account for
    the variability in future house prices and interest rates and
    therefore may tend to overestimate the fund's value. Last year,
    we recommended that FHA use an alternate approach known as
    stochastic simulation to estimate the fund's capital ratio for
    purposes of assessing compliance. This approach uses hundreds
    of different economic paths and offers the prospect of more
    reliably estimating the fund's value.
        Twenty years ago when the 2 percent capital ratio was first
    mandated, the Congress required that FHA reach the 2 percent
    threshold in 10 years. Today, it may be appropriate for the
    Congress to specify the time period by which it expects FHA to
    return the capital ratio to 2 percent, taking into account
    FHA's statutory operational goals and role in supporting the
    mortgage market.
        GAO is committed to providing Congress with effective
    oversight of the FHA program, including its efforts to rebuild
    the fund's capital ratio. We look forward to supporting this
    committee's efforts.
        This concludes my opening remarks. Thank you again for the
    opportunity to speak today. I will be glad to take any
    questions you may have.
        [The prepared statement of Mr. Scire can be found on page
    105 of the appendix.]
        Mrs. Biggert. Thank you so much. Dr. Caplin, you are
    recognized for 5 minutes.

     STATEMENT OF ANDREW CAPLIN, SILVER PROFESSOR AND PROFESSOR OF
        ECONOMICS, DEPARTMENT OF ECONOMICS, NEW YORK UNIVERSITY

        Mr. Caplin. I would like to thank you all for permitting me
    to testify regarding FHA's Mutual Mortgage Insurance Fund. My
    message is somber and is intended as a call to arms. The
    situation is serious and the risks great. These risks are not
    being properly accounted for in the actuarial report. There is
    a far higher probability than currently projected that a large
    bill will be due taxpayers, that FHA-backed home buyers will
    face foreclosure, and that Congress will be called upon to
    significantly recapitalize FHA's insurance fund. History will
    judge us poorly if we bury our heads in the sand. Time is most
    definitely not on our side.
        There are two crucial steps FHA can take to better account
    for the risks it faces and thereby safeguard its Mutual
    Mortgage Insurance Fund. The first is to fill a profound gap in
    the actuarial review. This makes it impossible currently to
    answer basic questions such as: one, what proportion of recent
    FHA-backed borrowers has already defaulted; two, how many such
    borrowers remain at serious risk of default; and three, how
    many of those who are still at risk are likely to ultimately
    default?
        The centrality of these questions is evident. The answers
    determine the risks that FHA programs pose to taxpayers and
    their role as guarantors. They determine the probability that
    FHA-backed homebuyers will face the trauma of foreclosure. They
    determine the probability the Congress will be asked to
    recapitalize FHA's insurance fund. They determine the likely
    timing and size of any such request or requests.
        The fact is that the actuarial report does not answer these
    questions. Rather than projecting the success and failure of
    FHA-backed borrowers, it projects the performance of FHA-backed
    mortgages. This results in downward biased loss projections.
    Work initiated some 2 years ago with Joe Tracy, Executive Vice
    President and Senior Advisor to the President of the Federal
    Reserve Bank of New York, suggests this bias may be highly
    significant.
        While it sounds like a narrow technical issue, the
    distinction between projecting borrower performance and
    projecting mortgage performance is of highest practical
    significance. In recent years, the FHA's streamlined refinance
    program has been in high demand. In this program, FHA-backed
    mortgages can be refinanced to prevailing lower rates without
    any new underwriting. I regard this as an excellent program.
    The problem is not with the program but rather with the
    actuarial report which treats each such refinance as if it
    extinguished FHA's insurance obligation. In truth, there is no
    cancellation of the underlying insurance and little in the way
    of additional fees to FHA. By lumping refinancing together with
    prepayments in which FHA's insurance obligation is
    extinguished--for example, following a successful home sale--
    the actuarial report overestimates FHA's past and future
    success rates.
        My ongoing work with Joe Tracy suggests that the resulting
    underestimation of losses is significant. In this period of
    falling rates and housing market trauma, streamlined
    refinancing appears to have been the most prevalent method of
    repayment. How could it be otherwise? There has been a
    significant incentive to refinance as rates on standard FHA-
    backed mortgages have tumbled. In the meantime, there has been
    little opportunity for successfully selling recently purchased
    homes and moving. If our preliminary findings on mortgage
    payment determinations hold up to further work, as we expect
    they will, default rates on recent FHA mortgages will stay at
    elevated levels for years after they are currently projected to
    decline.
        Joe's and my slow progress on our research results from
    difficulties in gaining access to FHA data. This has forced us
    to seek and ultimately to find alternative data sources. FHA
    would have been far better served had we been able to
    contribute to their work on risk assessment and risk
    mitigation. Yet, IFE alone has access to FHA data. I propose
    that HUD instruct IFE immediately to reestimate the loss model
    linking together FHA mortgages that are refinanced one into
    another. By itself, asking for the model to be rerun is not
    enough. The current monopoly not only produces low transparency
    but also reduces our understanding of FHA risks. To allow this
    to continue is to invite tragedy.
        I propose, therefore, that Congress supply HUD with the
    additional resources it requires to make data available to
    outside researchers, including the Federal Reserve Bank of New
    York. Risk assessment will be dramatically enhanced once
    additional teams are encouraged to participate. The resulting
    improvements will help FHA retain its reputation for helping
    homebuyers while safeguarding taxpayers.
        The eyes of history are on us. It is time to act.
        [The prepared statement of Dr. Caplin can be found on page
    72 of the appendix.]
        Mrs. Biggert. Thank you so much. Mr. Cunningham, you are
    recognized for 5 minutes.

    STATEMENT OF HENRY V. CUNNINGHAM, JR., CMB, PRESIDENT AND CEO,
       CUNNINGHAM AND COMPANY, ON BEHALF OF THE MORTGAGE BANKERS
                           ASSOCIATION (MBA)

        Mr. Cunningham. Thank you, Madam Chairwoman, and members of
    the committee.
        FHA is at an important crossroads today. Since the onset of
    the financial crisis, FHA has played an important
    countercyclical role in our Nation's mortgage market.
    Considered irrelevant just a few short years ago, the agency is
    now providing much needed liquidity during a period marked by
    the prolonged retreat of private capital. I think it is fair to
    say the housing recovery, although very fragile, would not have
    taken place without FHA. However, FHA single-family programs
    haven't been immune to the historic disruptions that have
    roiled our markets and that is why we are here today. The
    actuarial report is sobering and calls for a fresh look at
    FHA's fiscal health and the role it plays in our housing
    finance system.
        First, I want to take a few minutes to examine the steps
    this committee and FHA put in place that have allowed the
    agency to better manage its risk exposure. In 2008, Congress
    passed the Housing and Economic Recovery Act. That legislation
    terminated the failed seller-funded downpayment assistance
    programs that were responsible for the disproportionate level
    of FHA's defaults. It also permitted FHA to raise premiums, a
    tool FHA has used twice in the last 2 years. During that
    period, FHA has taken other important administrative actions
    designed to protect its financial stability.
        These include the following: increasing downpayment
    requirements from 3.5 percent to 10 percent for less
    creditworthy borrowers; eliminating FHA's approval of loan
    correspondence; raising lender net worth requirements; re-
    examining reverse mortgage policies; and finally, establishing
    the Office of Risk Management. MBA recommended these steps and
    commends HUD and FHA for taking these necessary measures in
    order to reduce taxpayer exposure and strengthen FHA for the
    long term.
        These measures are working. They are allowing FHA to
    weather the economic downturn and are putting it on track to
    raise its capital reserves above the 2 percent level mandated
    by the statute. The change in premiums alone has been largely
    credited by the actuaries for raising FHA's total cash plus
    investments by $7.7 billion.
        While these steps have proven successful, FHA is not out of
    the woods. The actuarial report found nearly a 50 percent
    chance that FHA's capital ratios could slip below zero,
    potentially requiring a capital infusion from the Treasury.
    Another recession or a drop in home prices could be a tipping
    point that causes greater losses for FHA.
        So what can we do to help FHA emerge healthy? We can start
    by getting the Qualified Residential Mortgage rule right. As it
    is currently proposed, the rule would require a 20 percent
    downpayment to obtain the QRM while FHA requires just a 3.5
    percent downpayment. The QRM definition appears to conflict
    directly with the efforts by Congress and the Administration to
    reform the housing finance system. It would make it more
    difficult for private capital to re-enter the housing finance
    market, and it would lead to overutilization of FHA's programs.
        Another key component of putting private capital on the
    front lines is to revitalize a secondary mortgage market. MBA
    has put forward a suggested framework for a limited but clearly
    defined government role in the single family and multi-family
    mortgage markets.
        Our recommendations carefully balance the government's
    ability to ensure liquidity with the need to protect taxpayers
    from the credit and interest rate risk associated with mortgage
    finance. It is a plan that promotes the return of private
    capital while limiting the government's footprint in mortgage
    finance, helping the market function efficiently while
    protecting taxpayers.
        Madam Chairwoman, MBA believes the tools FHA has put in
    place, the strong leadership at HUD, and continued
    congressional focus on issues like the QRM in housing finance
    reform will help FHA emerge from this downturn and allow it to
    continue playing its important role in the mortgage markets.
        Thank you for the opportunity to testify today.
        [The prepared statement of Mr. Cunningham can be found on
    page 75 of the appendix.]
        Mrs. Biggert. Thank you so much.
        Mr. Sinks, you are recognized for 5 minutes.

       STATEMENT OF PATRICK SINKS, PRESIDENT AND CHIEF OPERATING
    OFFICER, MORTGAGE GUARANTY INSURANCE CORPORATION, ON BEHALF OF
           THE MORTGAGE INSURANCE COMPANIES OF AMERICA (MICA)

        Mr. Sinks. Thank you, Madam Chairwoman. I am pleased to be
    here representing the Mortgage Insurance Companies of America
    to discuss FHA's actuarial soundness. Since private mortgage
    insurance and FHA operate in similar markets historically, MICA
    has offered the industry's insight into FHA's financial
    condition and suggested ways to improve its operation.
        MICA was one of the few members of the housing sector which
    advocated for the 1990 reforms to FHA that mandated a 2 percent
    capital ratio in the actuarial report that is the subject of
    today's hearings.
        I would like to make two basic points: first, FHA is on the
    brink of becoming a subsidized program and steps must be taken
    immediately to put it on track to financial soundness; and
    second, while FHA and private MI serve similar markets, the
    historic balance between the government and the private sector
    has been destabilized in recent years. The balance should be
    restored to bolster the FHA and allow private capital to serve
    the market to its full capacity. Returning the FHA to actuarial
    soundness and returning the FHA and the private sector to their
    historical norms are not mutually exclusive goals and in fact
    can be achieved in tandem.
        We believe the committee should focus on two significant
    points made by the actuarial study. They are as follows: First,
    although press reports have focused on the fact that the
    capital ratio of the entire Mutual Mortgage Insurance Fund is
    at 0.24 percent, the capital ratio for the traditional single
    family program is half that, 0.12 percent. This is a ratio of
    846 to 1. A small, much smaller reverse mortgage program is
    boosting the overall capital ratio of the FHA to the 0.24
    percent.
        Second, according to the HUD report to Congress, within
    just a single-family program, there is only $1.2 billion of
    economic net worth supporting just over $1 trillion of
    insurance-in-force. This should be of concern since the FHA
    insures 100 percent of each loan so its potential loss exposure
    is the full $1 trillion.
        There are three reforms to FHA that would help return it to
    actuarial soundness. They are as follows: First, FHA must build
    capital and therefore it should raise its premium immediately.
    It can be done without new legislation. FHA should raise the
    annual premium to the maximum allowed under current law.
    Further, to ensure that the FHA provides a greater cushion for
    the taxpayer, it should be required to keep premiums at this
    higher level until the capital ratio returns to 2 percent and
    for several years thereafter.
        Second, by statute, FHA's minimum downpayment is 3.5
    percent, while private MIs are generally at 5 percent. In view
    of the market realities today of falling and stagnant home
    prices, FHA's minimum downpayment requirements should be
    increased to 5 percent.
        Third, the way FHA's loan limits are calculated skews them
    so they are as high as possible, exposing the FHA to greater
    loss. Two specific changes need to be implemented in this
    regard: One, since currently FHA uses house price data going
    back to 2008 rather than the most currently available data to
    get the area limit, FHA should use the most currently available
    house price data in setting its limits so that they are
    realistic given the change in house prices over time.
        Two, current law requires that the FHA limit for a county
    in an MSA is set at the median house price for the highest
    priced county within the entire MSA. The law should be changed
    so that FHA is no longer required to target its limits to the
    highest priced county within an MSA.
        Finally, part of the answer to ensuring the long-term
    viability of the FHA and providing protection to the taxpayer
    is to restore the balance of the FHA in the private sector to
    its historical norms. This has been a goal expressed by
    Secretary Donovan. One means of accomplishing this is to
    eliminate the fees charged by the GSEs on top of the MI
    premium. As noted in the HUD report to Congress, these fees
    made privately insured loans more expensive than comparable FHA
    loans. If the GSEs believe that they need more credit risk
    protection, they can require deeper MI coverage. This would be
    less expensive to the borrower and safer for the taxpayers. In
    fact, since the crisis began, the private MIs have paid $28
    billion in claims and receivables to the GSEs, reducing
    taxpayer loss by 15 percent. In addition to restoring this
    balance, the FHA and the private MIs should work more closely
    together complementing each other's strengths to ensure that
    the low downpayment market is served in an efficient and
    consistent manner.
        In conclusion, we believe that, like in 1990, FHA is at a
    crossroads and there are actionable steps Congress can take to
    put FHA on the road to actuarial soundness, allow the private
    sector to take a greater role, and further protect the
    taxpayer.
        Thank you very much. I will be happy to answer any
    questions.
        [The prepared statement of Mr. Sinks can be found on page
    125 of the appendix.]
        Mrs. Biggert. Thank you, Mr. Sinks. Mr. Veissi, you are
    recognized for 5 minutes.

     STATEMENT OF MAURICE ``MOE'' VEISSI, 2012 PRESIDENT, NATIONAL
                     ASSOCIATION OF REALTORS (NAR)

        Mr. Veissi. Thank you, Madam Chairwoman, and members of the
    committee. Thank you for the opportunity to offer our views on
    the importance of the Federal housing mortgage insurance
    program. My name is Moe Veissi. I am the 2012 president of the
    National Association of REALTORS. But more importantly, I am a
    practicing real estate professional with more than 40 years
    experience as a REALTOR and broker-owner of Veissi Associates
    in Miami, Florida.
        The 1.1 million members of the National Association of
    REALTORS represent a broad array of housing and industry
    professionals who are committed to making the American Dream
    possible. In front of you is the written text. And I wanted to
    chat with you for my balance of the 5 minutes about FHA and how
    important it is to the housing community of America, not just
    from the financial and economic standpoint that we talk about
    but, more importantly, independently how it knits the fabric of
    the American community together.
        We have found and have evidence that folks who own a home
    live in their home longer, their marriages stay together
    longer, their kids get better educated, and they go on to
    profit from better jobs. There is significantly less time spent
    in front of the TV. There is less teen pregnancy. I can go on
    and on and on. Homeownership in America knits the fabric of
    America together. Anytime you do anything to diminish
    homeownership in America, you diminish the moral character and
    the promise of America to Americans today.
        Some of the things that weren't talked about but questions
    asked, were, what happens when a home is sold? Let me tell you
    what happens when a home is sold in America. Number one,
    $60,000 of additional money is spent in the first 18 months
    from the time that home is closed. That is new roofs,
    landscaping, painting, furniture, carpeting. And every time two
    homes are sold, one brand-new job is created. So in America,
    with our prospects of about 4.5 million sales this year, we
    will generate over 2.2 million jobs.
        When FHA was first promulgated in 1934, it wasn't a matter
    of doing something specifically for the mortgage market or even
    insuring mortgages. What it was thought of to be was an
    institution available to provide money for homeowners who
    didn't have the money to repair homes during the Great
    Depression and afterwards. But what it really was thought to be
    was a job creation bill. And that was because they figured on
    that time, what we are going to do is we are going to create a
    few bucks for the folks who didn't have the money to repair
    their homes. Now we will. And that is exactly how it came
    about.
        You diminish America's opportunity in any capacity,
    especially today when we are just beginning to remove ourselves
    from one of the most horrendous housing situations that the
    country has ever seen, and you do that at peril to destabilize
    the recovery of the American housing market. We anticipate that
    probably in 2012, we will see an appreciation rate of about 1.2
    percent. After that, we will see a better appreciation rate.
    That comes from our economists at the National Association of
    REALTORS.
        We also anticipate, frankly, that some of the areas in the
    country that were overbuilt--one of which was Miami with a
    tremendous amount of vertical development--may, according to
    our chief economist, see in 2012 one of the few places in
    America that will appreciate in double-digit figures for that
    year. And we have seen things in my travels across the country,
    the Phoenix-Scottsdale area and to the Las Vegas area, that
    REALTORS there are beginning to tell us, the market is moving.
    It is not just the light at the end of the tunnel. It really is
    a diminishment of the existing inventory that exists today. And
    that is a great indicator. Do something to create a problem
    with that, diminish that, kill that, worry--not just the
    industry but the consumer and the prospects of America today to
    buy and create homeownership, and I think you diminish the
    economic prospect of America itself. Of the last eight
    recessions, six--six fully have come out because you have a
    robust and a very rounded and energetic real estate economy.
        In conclusion, NAR believes in the importance of the FHA
    mortgage and insurance program and believes that FHA shows
    tremendous leadership, strength, and vitality during this
    crisis. We wholeheartedly support the FHA program and we stand
    ready to work with Congress to enhance FHA's mission, service,
    and purpose.
        Thanks for the opportunity.
        [The prepared statement of Mr. Veissi can be found on page
    138 of the appendix.]
        Mrs. Biggert. Thanks so much. Ms. Rosen, you are recognized
    for 5 minutes.

      STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE PRESIDENT,
                CENTER FOR AMERICAN PROGRESS ACTION FUND

        Ms. Rosen Wartell. Thank you, Madam Chairwoman. Let me
    start by reflecting that it is actually remarkable that FHA has
    not yet required any supplemental support given that yet so
    many other mortgage invested institutions have needed help. FHA
    has so far weathered the worst housing collapse arguably in
    history while serving primarily low- and moderate-income
    borrowers and playing a key countercyclical role that has
    prevented a more devastating overcorrection in the housing
    market. Without FHA, one could estimate at least a million
    homeowners might not have had access to mortgage credit in the
    wake of the crisis, which would have further chilled housing
    demand, depressed prices, and exacerbated the downturn.
        FHA's ability to play this role is a function of its
    government insurance model where stronger books of business
    help cover losses from weaker periods. FHA faces significant
    losses ahead from loans that it insured in the years
    immediately prior to the financial crisis, especially a large
    number of loans with seller finance assistance. But its more
    recently insured loans are projected to have significant
    economic value.
        The capital reserves of the MMI fund, beyond the expected
    losses, are nonetheless uncomfortably low. More than anything
    else, FHA's solvency depends upon whether and the extent to
    which housing prices continue to fall in the next 2 years. As
    we have heard the actuaries say, absent further adjustments
    FHA's capital reserves can likely withstand a further drop in
    house prices over the next 2 years, larger than most forecasts.
    But even if house prices continue to fall and the cushion is
    insufficient, FHA still has tools to bolster its reserves by
    further adjusting premiums or tightening underwriting.
        I would argue that FHA should focus on premiums and should
    consider charging higher premiums on higher value loans in its
    unusually large market at the current time.
        Low interest rates leave room for borrowers to absorb
    slightly higher fees without creating an affordability barrier
    to access. In contrast, higher underwriting standards,
    especially higher downpayment requirements on top of the
    currently already tightened standards, could make it difficult
    for a broader swath of homeowners to obtain mortgages, putting
    further downward pressure on housing demand, continued weakness
    in house prices and potentially creating further risk to the
    MMI fund.
        Other longer-term policies could also strengthen FHA.
    Congress should consider structural reforms such as that
    proposed by the bipartisan Millennial Housing Commission in
    2002 to make FHA a more nimble but disciplined government
    corporation with independent oversight of its performance and
    serving underserved markets and meeting financial targets but
    with greater flexibility in product, design, and personnel to
    meet those needs. Risk sharing is another way that FHA could
    limit its risk exposure while improving its operations. Full
    insurance coverage is necessary at times to attract capital
    during downturns for untested products and to serve underserved
    markets. But the government may be able to reduce its risk and
    expand its markets by taking advantage of a risk partner's
    assessment and mitigation capabilities.
        Finally, let me note that FHA's role in the housing finance
    system of the future very much depends on how policymakers act
    on other policy issues, particularly how they wind down the
    Government-Sponsored Enterprises and build a new housing
    finance system in their place. If you strip all government
    backstop from the conforming market, FHA will likely be forced
    to maintain or even grow its current inflated market share and
    sustain its first loss risk. If the government maintains an
    explicit guarantee on select types of conforming mortgages,
    standing behind private capital and charges for it so that it
    can hold actuarially sound reserves against its guarantee, FHA
    would be able to return to a more manageable share of the
    market when prices stabilize.
        I also share the concerns expressed by Mr. Cunningham that
    the current QRM proposal could unnecessarily drive business and
    risk to FHA that could well be served by the private sector.
        In closing, I note that if the recent crisis taught us
    anything, it is the imperative to closely monitor the business
    practices and the actuarial health of our essential financial
    institutions, as this committee has appropriately chosen to do
    today. Congress and FHA officials together have the tools
    available to ensure that FHA continues to play its essential
    role while protecting the taxpayers.
        Thank you.
        [The prepared statement of Ms. Rosen Wartell can be found
    on page 147 of the appendix.]
        Mrs. Biggert. Thank you so much. You all must be well-
    seasoned witnesses because you have all held right to the 5
    minutes, and we really appreciate it this afternoon.
        I ask unanimous consent to enter into the record written
    testimony from Brian Chappelle of Potomac Partners LLC. Without
    objection, it is so ordered.
        We will now turn to questions from the Members. We will
    adhere to the 5 minutes. And I will recognize myself for 5
    minutes.
        Mr. Caplin, you have concerns that FHA is understating
    their losses. Can you explain your concerns and to what extent
    FHA is understating their losses?
        Mr. Caplin. Yes, I am very concerned that they are
    understating it. It is to do with something that looks
    technical but is incredibly important today. The technical
    point is that they are measuring losses on mortgages. So when
    you hear about the 2009 book of business, that means the
    mortgages that have been refinanced into 2009. That does not
    mean the people who first bought a home in 2009. So when you
    hear that there is a much better book of business in 2009, that
    mixes together people who are purchasing new in 2009 and those
    who have refinanced into 2009. It is not surprising that those
    who couldn't refinance are doing worse because there is a
    qualification criteria in order to refinance, which is that you
    have to be current.
        The big deal is that many terminations of mortgages that,
    in fact, do not cause cancelation of the FHA mortgage
    obligation are treated exactly the same as if they gave rise to
    a cancellation of that obligation. That means that there is an
    absolutely incorrect assessment of the risk of future default.
    It is simply flat out wrong. It is understated because every
    time anybody streamlined refinances, they get counted as a
    mortgage termination that ends FHA's insurance obligation. It
    does not.
        Mrs. Biggert. Thank you so much for that. I appreciate it.
        Mr. Cunningham, do you think that the QRM definition
    adheres to the Administration's GSE White Paper?
        Mr. Cunningham. I think that the QRM, as proposed,
    requires--I don't think the White Paper anticipated or didn't
    indicate any particular downpayment requirements. So I think
    that the White Paper didn't anticipate that. I think the rule,
    as proposed, has gone beyond that.
        Mrs. Biggert. So it really just popped up after the White
    Paper came out?
        Mr. Cunningham. It was after the White Paper came out. The
    regulators collectively proposed the rule that you see before
    you today.
        Mrs. Biggert. Is the Mortgage Bankers Association concerned
    about the QRM?
        Mr. Cunningham. We are concerned about the QRM and are
    equally concerned about the QM. We think that both of those
    should be considered together. We actually think that the QM is
    a better starting place. The concept of a borrower qualifying
    for a mortgage is certainly a way to promote sustainable
    homeownership. So I think that it is important to have a bright
    line test for qualifying a borrower. If you don't have a bright
    line test, you are going to have lenders that are going to be
    more conservative, denying homeownership for a lot of potential
    homebuyers.
        Mrs. Biggert. Thank you. And Mr. Sinks, is it your belief
    that private capital stands ready to get into the market space
    when the government vacates?
        Mr. Sinks. Yes, it is. We believe we have the capacity to
    fulfill the space that will be left by the FHA. There is plenty
    of capital in the industry today. And we also know that--there
    is a lot of discussion about new entrants coming into the
    industry. I think once there is greater certainty around--as
    Mr. Cunningham said--the resolution of QRM and the resolution
    and the future of the GSEs, then we will most definitely see
    capital back to the MI industry and therefore we will have
    capacity.
        Mrs. Biggert. Thank you. Mr. Scire, are there private
    sector alternatives to the FHA insurance for homebuyers,
    particularly at the higher end of the market? Do we have the
    alternatives now? Or are there alternatives that should be?
        Mr. Scire. We haven't really done the work to take a look
    at what that part of the market looks like, so I really can't
    answer that question. I would be glad to look into it, though,
    for you.
        Mrs. Biggert. Okay. Thank you.
        Ms. Rosen Wartell--I am sorry. I think they left the second
    part of your name off up there. Fannie and Freddie had been
    bailed out by the taxpayer to the tune of over $180 million to
    date. What potential exposure do taxpayers have to bail out
    FHA?
        Ms. Rosen Wartell. As I mentioned in my testimony earlier,
    I think that there are steps that FHA has the ability to take
    that could well prevent any exposure. And if there ends up
    being short-term exposure, much of that has the ability to be
    repaid from revenue that could be earned over time from these
    very strong books of business that FHA has. So as Secretary
    Donovan said, no one should be comfortable, given the limited
    cushion.
        Mrs. Biggert. Thank you. I am going to have to yield back.
    I am over my time. Thank you. Mr. Green from Texas, you are
    recognized for 5 minutes.
        Mr. Green. Thank you, Madam Chairwoman. And I thank the
    witnesses for appearing. So as not to allow your testimony to
    be misconstrued at some later point in history, is it correct
    to say that not one of you has concluded that FHA should be
    eliminated? If you are in agreement with me, would you kindly
    extend a hand into the air? I know it is something that you
    might not ordinarily do at a hearing, but we do this in court
    with something called voir dire. So if you would, if you think
    that FHA has a meaningful role in the housing market, kindly
    raise a hand, please.
        All right. For the record, please let it reflect that all
    of the witnesses have concluded that FHA has a meaningful place
    in the housing market.
        If you think that FHA has been a benefit in stabilizing and
    helping with the recovery that has not been completed--I
    understand that we are not there--but do you agree that FHA has
    been a benefit in helping us to get through this downturn in
    the market in that it has acted as a countercyclical force? If
    you agree with this, would you kindly extend a hand into the
    air?
        Let the record reflect that all of the parties agree that
    FHA has been a countercyclical force in helping us with the
    recovery.
        Now, friends, I am doing this because I have been here long
    enough now to know that later on, there will probably be some
    talk of FHA going away. I don't think that this is what your
    testimony was intended to convey. As a matter of fact, Mr.
    Veissi, your testimony showed the importance of FHA, which is
    what I attempted to do earlier as well. And also, it indicates
    the multiplier impact on jobs. A great number of jobs are
    created not by FHA itself but when houses are sold, you go
    beyond just the buyer and the seller to all of the various
    other industries that are associated with the selling of a
    home.
        Finally, let me ask this: The QRM, important. The QM,
    important. Do you have a number that you have given
    considerable thought to that you would like to share today? I
    don't want to put you on the spot, Mr. Cunningham. But this
    appears to be an area where you have some degree of expertise.
    Where are you on the QRM?
        Mr. Cunningham. I am not sure I understand your question.
        Mr. Green. What percentage would you conclude would be a
    good number?
        Mr. Cunningham. As I indicated, I think honestly the QM,
    the Qualified Mortgage, is the better place to start. Focus not
    on hard guidelines that might be mandated or legislated that
    could necessitate change in the future but rather focus on the
    borrower, qualifying a borrower for the mortgage that they are
    applying for.
        Mr. Green. I am available to hear other comments because I
    may not have the opportunity--yes, Mr. Veissi, with the
    REALTORS?
        Mr. Veissi. I want to make sure that we understand that the
    downturn in the real estate--at least I understand the downturn
    in the real estate market was not because we produced a bad
    product or we had bad people buying. It was because we had
    horrible underwriting standards and significantly little
    oversight. You can take a look at a VA mortgage today with the
    lowest foreclosure rate across-the-board, and they require zero
    down. Look, the reality is, if you have a qualified individual
    who is willing to commit to make the payments and they are
    reasonably invested in that, that is exactly where you go. That
    is where you go.
        Mr. Green. As a matter of fact, there are some persons who
    cannot afford a downpayment but are paying rent that exceeds
    what a mortgage would be. And they would be a good risk. But
    the question is, how do you get to them in a systematic way,
    such that you don't find yourself underwriting loans that may
    cost taxpayers some money in the future?
        Yes, Ms. Rosen?
        Ms. Rosen Wartell. May I comment on the QRM? I will note
    that the statute did not include a downpayment--it listed a
    numbers of factors as relevant to the characters of QRM
    exemption and it did not list downpayments. And there is a deep
    concern that by setting a particular downpayment threshold, you
    bifurcate the market and create less liquidity in one market,
    raising the prices and essentially diminishing availability for
    the borrowers who have those lower downpayment amounts which
    will drive business to FHA. So I would argue that almost
    regardless of the threshold, you will have that market
    bifurcation effect.
        Mr. Green. I thank all of you. My time has expired. I am
    one of those who is of the opinion that we can mend FHA, that
    it has a meaningful role. There is no need to move to some far
    extreme such that it will no longer be effective and in effect
    not exist.
        Mrs. Biggert. The gentleman's time has expired.
        Mr. Green. And I thank you for being here today, witnesses.
        Mrs. Biggert. The gentleman from Florida, Mr. Posey, is
    recognized for 5 minutes.
        Mr. Posey. Thank you, Madam Chairwoman. I would like to
    thank everyone on the panel. You are all very informative. I
    think you all brought some good information to us. There is not
    any of you who didn't enlighten me significantly.
        Mr. Sinks, did I understand you to say that you think there
    currently exists a market sufficient to replace FHA if FHA was
    to vaporize tomorrow?
        Mr. Sinks. We are not advocating that the FHA vaporize, but
    we do believe that they have a role and if they return to their
    historical norm in terms of that role, there is enough private
    capital in the private MI industry to support the market.
        Mr. Posey. Has it always been there?
        Mr. Sinks. Certainly, in recent times it has, yes.
        Mr. Posey. Then why did they even go to FHA if there were
    private alternatives available?
        Mr. Sinks. I think it is a combination of factors. Back in
    2007 and 2008, the private industry lenders and mortgage
    insurers tightened up their underwriting guidelines, and the
    FHA was able to step in and pick up that part of the role. As
    time has moved on, one of the things we have experienced now,
    as I mentioned in my testimony, on the conventional loan side,
    which is the loans that go to the GSE, they have loan level
    price adjustments in their pricing. And as a result of that,
    the FHA becomes a better execution, so more consumers are going
    to FHA. In addition, the downpayment requirement, the
    difference of 3.5 percent at the FHA versus 5 percent that is
    generally with the MIs--
        Mr. Posey. Ah, so there is a difference. A downpayment does
    make a difference then?
        Mr. Sinks. Yes, sir.
        Mr. Posey. So it doesn't sound like really truly we have a
    market that is willing to step in and pick up at the more
    reasonable downpayment level than actually.
        Mr. Sinks. That is correct.
        Mr. Posey. I thought I heard you say that right. And what
    you said apparently isn't exactly what you meant. But thank
    you.
        Mr. Veissi, if the FHA's more minimal downpayment program
    was eliminated, what do you think would happen to the market?
    We have people who are suggesting we raise FHA downpayments to
    20 to 30 percent in an effort to make the loans more secure
    when, as you just mentioned, and an example I often use, VA has
    a 2.5 percent loss ratio, the lowest of anybody that I know of,
    and most of their loans are zero downpayment. But should the
    FHA low downpayment program go away, what do you think the
    impact would be on the market?
        Mr. Veissi. If we are talking the 20 percent down, we have
    done some statistical analysis. We figure that probably it
    would take the normal homeowner--the new first-time homebuyer
    somewhere between 9 and 14 years to save enough money to make
    that 20 percent downpayment. In the fragile recovery period
    that we are in today, you would literally devastate the real
    estate market by doing something like that. FHA has done an
    enormous amount of good for not just the real estate market
    today but for the first-time homebuyer in these last 4 or 5
    years. About 75 percent of all first-time homebuyers last year
    made that purchase through FHA. I can tell you because I do
    this every day, and I travel the country and speak to our
    people every day, that trying to extract a loan from a
    conventional bank is like trying to beat up a rock and get
    blood out of a turnip. It just ain't happening. So unless there
    is another alternative way and we have beat this one to death,
    especially during these tight times, you are going to see the
    real estate recovery really stagnate. And that is enormously
    important to understand. Do that, and you really will wrench
    out the recovery and probably the economic recovery of this
    country.
        Mr. Posey. Thank you. That is a good world perspective on
    it actually. Mr. Cunningham, your thoughts on the same thing?
        Mr. Cunningham. I agree with those comments exactly. I
    think that FHA has played an important part in our fragile
    housing recovery. I think it provides stability in the housing
    market, liquidity in the housing market. I think that the
    proposals for QRM, if we could eliminate the debt-to-income
    requirements and loan-to-value and focus on QM, I think that
    would be a significant move in the right direction. I think
    that it is very important for us to provide a government role
    in housing to provide liquidity in the marketplace.
        Mr. Posey. So generally, the consensus, I think, is that we
    don't agree with the concept that the best way to eliminate a
    large inventory of housing is to make it more difficult to buy
    them?
        Mr. Cunningham. Correct.
        Mr. Posey. Thank you. Thank you, Madam Chairwoman.
        Mrs. Biggert. Thank you. The gentleman from North Carolina,
    Mr. McHenry, is recognized.
        Mr. McHenry. I just wanted to ask broadly--my colleague on
    the other side of the aisle asked a few broad questions of the
    panel. I just want to start by asking whether anyone on the
    panel would say that FHA having as large a role in the mortgage
    marketplace is a healthy thing. Would any of you volunteer to
    say that? Okay. All right. So we are not talking about--there
    is not a discussion on this committee about eliminating FHA.
    There is a discussion about fixing it. And you know some of us
    look at FHA and say, when FHA is playing such a large role in
    the mortgage marketplace, perhaps there is something severely
    wrong with the mortgage marketplace, right? Which everybody on
    the panel--I think you would think, obviously, right? It is
    sort of a reality here. So to Mr. Sinks, with the temporary
    conforming loan limits being raised, then October 1st, they
    went back down under law; and then this Congress acted--I voted
    against this measure on the House Floor--I think it was bad
    policy to raise the loan limits back up. So we saw a month of
    activity when the loan limits went back down. Did you see the
    private sector filling in where FHA could no longer serve?
        Mr. Sinks. Yes.
        Mr. McHenry. Okay. That is a very elaborate answer.
    Fantastic. It is a wonderful answer. I love that.
        Mr. Sinks. If I may, the announcement that the loan levels
    are going to drop, typically what happens in the lending
    community is they will start making those adjustments prior to
    the effective date. So even though the effective date was
    October 1st, we were seeing lenders in August and September
    making those changes. So, it is a definitive yes.
        Mr. McHenry. So you saw the private capital filling in,
    right?
        Mr. Sinks. Yes.
        Mr. McHenry. And was that a healthy thing? Did you think
    that that was a positive?
        Mr. Sinks. Yes. We believe that was positive.
        Mr. McHenry. I ask this, I know it is a very simple and
    basic question, but there is a lot of debate here. We heard
    from Secretary Donovan. We have heard from the Administration.
    They said, it was a healthy thing that the loan limits went
    back down. Let me just ask broadly of the panel, is that a good
    thing, that the loan limits go back down for FHA?
        Mr. Cunningham. I would contend that it is not. And I will
    use North Carolina as an example. I have offices scattered
    across North Carolina. We have--and I have a loan officer in
    Charlotte who has been anxious about the FHA increase back to
    the old limit. And in Charlotte, that would mean increasing
    from $270,150 to $303,000. But that amount of increase, he has
    a potential three borrowers waiting in the wings on the FHA's
    mortgagee letter that are proposing to buy a house that
    otherwise could not buy a house.
        Mr. McHenry. Why? Why couldn't they buy it?
        Mr. Cunningham. Downpayment.
        Mr. McHenry. How much downpayment do they have?
        Mr. Cunningham. How much downpayment? I don't know exactly
    how much they have.
        Mr. McHenry. Okay. So this is less about FHA, your example,
    than about the failure of the rest of the mortgage market?
        Mr. Cunningham. It is actually--
        Mr. McHenry. My time is limited, sir. So let me just go
    across the panel.
        The loan limits going back down, is that a better thing or
    a worse thing, in your opinion? If we could just go very
    briefly. I have 1 minute.
        Mr. Scire. I think it is an appropriate thing for the
    Congress to weigh in on this as to what is the market segment
    in which it expects FHA to operate.
        Mr. McHenry. Okay.
        Mr. Caplin. The risk assessment is not at an adequate level
    to provide an answer.
        Mr. Veissi. Anything that would impact a downpayment and
    condense the amount of prospective purchasers or the ability
    for them to get mortgaging would devastate the real estate
    market, especially now.
        Mr. McHenry. Okay.
        Ms. Rosen Wartell. When there is not only availability of
    mortgage insurance but funding and capital for access that is
    provided to the secondary market, then FHA's market share
    should be significantly smaller.
        Mr. McHenry. Yes. Okay. I appreciate your testimony and
    your answers on this. I think that the key thing to understand
    was that FHA and our fellow housing programs were intended for
    the least among us, not the greatest among us. And when FHA is
    stepping in, in very high home value areas and subsidizing very
    high-net-worth individuals, we are simply giving a subsidy to
    folks who could otherwise get lending elsewhere, not those who
    are at the margins who are struggling to get into a $100,000 or
    $200,000 house.
        Mrs. Biggert. The gentleman's time has expired. The
    gentleman from California, Mr. Sherman.
        We are approaching a vote and also another committee coming
    into this room. So this will be our last questioner.
        Mr. Sherman. Thank you.
        In reference to the gentleman from North Carolina, he comes
    from a State without a high-cost area in the State. And so, it
    is very easy for him to vote against a bill that would prevent
    a major recession from hitting Los Angeles. But I assure him
    that if a recession starts in Los Angeles, it will reach to
    North Carolina.
        Mr. McHenry. Would the gentleman yield?
        Mr. Sherman. 20 seconds.
        Mr. McHenry. I appreciate that. I certainly understand your
    perspective on it. But when we are talking about Federal
    policy, subsidizing a $500,000 house is very different than
    helping somebody who is trying to get--
        Mr. Sherman. You have never seen a $500,000 house in the
    San Fernando Valley. I assure you, it is smaller and the people
    who live in it are more working class than those in the
    $250,000 houses in much of North Carolina. And that is why
    having a law that distinguishes between your State and mine is
    necessary. And if you want to see every home in Los Angeles
    drop by $100,000, and think it won't hit North Carolina, we are
    an interconnected economy.
        I will also point out that this increase, as temporary as
    it is, affecting only roughly 10 markets around the country, is
    not subsidizing the borrowers at over $625,000. Before this
    panel came in, we heard from the Secretary of HUD, who
    testified that the loans in amounts between $625,000 and
    $729,000 outperformed the other loans. They subsidize the FHA's
    other work. So the people in my district are happy not to see a
    collapse in home prices and are happy to pay insurance premiums
    that help subsidize what goes on in North Carolina.
        Mr. Veissi, I think you already have it on the record. But
    if we define ``qualifying residential mortgage'' as requiring
    in all cases a 20 percent downpayment, what happens to home
    prices nationwide?
        Mr. Veissi. We have the physical evidence that shows that
    you could affect home prices across-the-board as much as a 15
    percent downturn.
        And I just want to comment for just a second. Real estate
    is local in nature. It is not across-the-board. You made great
    mention of the fact that prices in California are not the same
    as Sevierville, Tennessee, or Houston, Texas, or even Miami,
    Florida. And you have to be sensitive to the fact that real
    estate is uniquely different in location, from place to place.
        Mr. Sherman. So that would be location, location, and
    location being relevant to real estate?
        Mr. Veissi. Yes.
        Mr. Sherman. And I would also add to your 15 percent
    comment, we heard from the earlier panel that if we saw
    anything over a 4, 5, or 6 percent decline in home values in
    this country, that would cost FHA--would use up its reserves.
    And God knows what it does to Fannie and Freddie. But a 15
    percent decline in home values nationwide would do more to
    increase the Federal deficit than anything I can think of. And
    I have been called a liberal Democrat, so I can think of a lot
    of things.
        The other comment I would make is that, like Mr. Veissi's
    responses, if we could increase in the high-cost areas Fannie
    and Freddie, wouldn't that open the door to private mortgage
    insurance taking some of the risk, diminishing the Federal
    risk, reducing FHA's role, all the things that some of our
    colleagues are talking about? Not that I am not grateful for
    the FHA. But if we could do Fannie and Freddie?
        Mr. Veissi. I think anytime you give private money real
    comfort in knowing that there exists parameters you are going
    to have them come back into the marketplace wholesale and be
    more competitive on that level. And then, FHA will take a much
    smaller portion of the marketplace. I think that goes without
    saying. Plus, what you heard from the testimony this morning
    was that the higher-cost loans had a lesser amount of
    foreclosure than those even in the smaller places.
        Mr. Sherman. We may have expensive homes, but we do pay our
    mortgages. And the final thing I want to point out is this idea
    that there was no harm, no foul. People prepared for this in
    high-cost areas, like the area I represent--the gentleman from
    North Carolina does not--and completed their transactions and
    their sales in the summer. They were ready to go for a few
    months. But if we had not gotten that higher FHA, you would
    have seen a spiraling down in prices.
        And for the record, Mr. Veissi is nodding. I yield back.
        Mrs. Biggert. Thank you. And just for the record, Mr.
    Scire, are there controls on how much money FHA can draw down
    from the Treasury?
        Mr. Scire. So if FHA were to use up the amounts that are in
    the capital reserve account, they would, in consultation with
    OMB, draw on permanent indefinite authority to make up whatever
    difference would be required to replenish what is needed for
    the financing account through the capital reserve account. So
    this permanent indefinite authority provides whatever
    appropriated dollars might be needed in order to make the
    capital reserve account whole.
        Mrs. Biggert. So there is no limit?
        Mr. Scire. No.
        Mrs. Biggert. Thank you.
        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.
        Again, thank you. Thank you for your patience, and thank
    you for being here. You have been very helpful, I think, in
    bringing your testimony to us, and we thank you so much. And
    with that, this hearing is adjourned.
        [Whereupon, at 2:08 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                December 1, 2011

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