[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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