[Senate Hearing 112-]
[From the U.S. Government Publishing Office]



 
TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES 
                  APPROPRIATIONS FOR FISCAL YEAR 2012

                              ----------                              


                        THURSDAY, APRIL 7, 2011

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:30 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Patty Murray (chairman) presiding.
    Present: Senators Murray, Collins, and Blunt.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                     Federal Housing Administration

STATEMENT OF HON. SHAUN DONOVAN, SECRETARY, DEPARTMENT 
            OF HOUSING AND URBAN DEVELOPMENT

               OPENING STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. Good morning. The subcommittee will come to 
order.
    And I want to thank everybody in advance for--we're going 
to really confine everything this morning. I have a leadership 
meeting this morning, as everyone knows. The elephant in the 
room of the Congress today is how we are going to come to 
agreement and avoid a shutdown. It's absolutely critical for 
families, for our country, for all of us to come to that 
agreement. So I will have to leave here shortly before 10:15 
a.m. So, I'm going to consolidate my opening statement. I know 
the Secretary's agreed to this as well, as well as Senator 
Collins. And we will get to the critical questions of the day 
and submit many for the record.
    So, Mr. Secretary, thank you for your understanding.
    Senator Collins, thank you for working with us as well. And 
I will make a short opening statement.
    This morning we are holding a hearing to get an overview on 
the Federal Housing Administration (FHA) and talk about the 
future of housing finance. And I again want to welcome 
Secretary Donovan back before this subcommittee to talk about 
these important issues.
    In the aftermath of the housing crisis, FHA has played a 
central role in making sure the Nation has a functioning 
mortgage market when the private market failed. It has served 
the role it was intended to play.
    Today's FHA insures around 20 percent of all mortgages 
being originated, and almost 40 percent of all new home 
purchases. The pivotal role that FHA is currently playing in 
the fragile housing market is important to keep in mind as the 
threat of Government shutdown looms.
    The Federal budget provides FHA with the commitment 
authority that allows the agency to insure loans. If a budget 
is not passed, FHA will be unable to endorse any new loans, so 
anyone who is planning to close on a home using FHA insurance 
will be out of luck. At a time when the housing market remains 
so fragile, this seems particularly irresponsible.
    The debate about the Government's budget is an important 
one, but we have to get on with the business of making 
decisions necessary to fund the Federal Government in a 
responsible manner, and I believe the time has come for a 
resolution. The consequences are too great for too many 
Americans and the Nation's economy to refuse to come to an 
agreement because of political agendas or pressure.
    But as we await a resolution to the fiscal year 2011 
budget, we have to continue to do our job in exercising 
oversight over the programs this subcommittee funds.
    For several years, this subcommittee has focused on the 
solvency of FHA's Insurance Fund. FHA has never received an 
appropriation to support its Insurance Fund, and I'm committed 
to making sure that it never does. This subcommittee has worked 
to provide FHA with the resources necessary to hire skilled 
staff and develop the technology necessary to oversee FHA's 
growing portfolio.
    And I want to applaud the efforts of the Administration 
under the leadership of Secretary Donovan, as well as former 
Commissioner Stevens, to bring a renewed focus on managing risk 
at FHA.
    Despite all of the reforms, the overall health of the 
housing market is critical to the continued stability and 
improvement of FHA's finances. We find ourselves at a critical 
moment: We continue to deal with the ramifications of the 
housing crisis, while trying to establish a better housing 
finance system for the future. This challenge is similar to 
that which FHA has focused on over the last few years. It's 
working to improve its financial position so it can deal with 
the fallout of past loans. At the same time, the Department is 
working to improve its future business and financial position 
by implementing reforms and creating a culture focused on sound 
risk management.
    Through all of this, FHA has worked to balance the need to 
mitigate risk with serving its mission of providing access to 
affordable and sustainable home ownership to under-served 
Americans.
    As we look to the future, we have to find the appropriate 
balance between strengthening and protecting the housing 
finance system from undue risk, while maintaining access for 
credit-worthy Americans to achieve sustainable home ownership.

                           PREPARED STATEMENT

    So, I look forward, Secretary Donovan, to your statement 
this morning and to questions.
    And I want to thank Senator Collins for her work on this, 
and turn it over to her for her opening statement.
    [The statement follows:]
               Prepared Statement of Senator Patty Murray
    This morning we are holding a hearing to get an overview on the 
Federal Housing Administration (FHA) and discuss the future of housing 
finance. I want to welcome Secretary Donovan back before the 
subcommittee to discuss these important issues.
    FHA--an institution born out of the Great Depression--has assisted 
millions of Americans in attaining home ownership.
    And in the aftermath of the housing crisis, FHA has played a 
central role in ensuring that the Nation had a functioning mortgage 
market when the private market failed. It has served the role it was 
intended to play.
        fha's role in the market and consequences of a shutdown
    Today, FHA insures around 20 percent of all mortgages being 
originated and almost 40 percent of all new home purchases.
    The pivotal role that FHA is currently playing in the fragile 
housing market is important to keep in mind as the threat of a 
Government shutdown looms.
    The Federal budget provides FHA with the commitment authority that 
allows the agency to insure loans. If a budget isn't passed, FHA will 
be unable to endorse any new loans. So anyone who was planning to close 
on a home using FHA insurance will be out of luck.
    At a time when the housing market remains so fragile, this seems 
particularly irresponsible.
    The debate about the Government's budget is an important one. But 
we must get on with the business of making the decisions necessary to 
fund the Federal Government in a responsible manner. The time has come 
for a resolution.
    The consequences are too great for too many Americans--and the 
Nation's economy--to refuse to come to an agreement because of 
political agendas or pressure.
    But as we await a resolution to the fiscal year 2011 budget, we 
must continue to do our job in exercising oversight over the programs 
we fund.
                            oversight of fha
    For several years, this subcommittee has focused on the solvency of 
FHA's Insurance Fund.
    FHA has never received an appropriation to support its Insurance 
Fund; and I am committed to ensuring that it never does.
    Yet in the wake of the housing crisis, FHA has sustained 
substantial losses. As a result, its capital reserve fund has fallen 
below the level of 2 percent mandated by the Congress.
    While this does not mean that FHA will require taxpayer dollars, it 
highlights the need for vigilant oversight of the agency's portfolio, 
which has increased dramatically in the last few years.
    In recognition of this task, this subcommittee has worked to 
provide FHA with the resources necessary to hire skilled staff and 
develop the technology necessary to oversee FHA's growing portfolio.
    I want to applaud the efforts of the Administration, under the 
leadership of Secretary Donovan, as well as Former Commissioner 
Stevens, to bring a renewed focus on managing risk at FHA.
    The Administration has moved quickly to institute significant and 
necessary reforms to the program.
    Among other reforms, FHA has:
  --Increased premiums to shore up its finances;
  --Set minimum FICO scores;
  --Increased down payment requirements for riskier borrowers; and
  --Stepped up enforcement so that lenders who aren't following the 
        rules can no longer participate in the program.
    In October of 2009, FHA also hired Bob Ryan as the agency's first 
Chief Risk Officer. The Administration recently announced that Mr. Ryan 
will serve as acting FHA Commissioner, and I am pleased that this role 
is being filled by someone who will continue to focus the agency on 
managing and mitigating risk.
                             housing market
    Despite all of these reforms, the overall health of the housing 
market is critical to the continued stability and improvement of FHA's 
finances.
    Improving jobs numbers and fewer new delinquencies are positive 
signs in the market.
    But the reality is that:
  --Millions of Americans are still in foreclosure and 30 percent of 
        all homeowners have not made a payment over the past 2 years;
  --Roughly 7 million borrowers are seriously delinquent and at risk of 
        foreclosure;
  --New and existing home sales continue to fall;
  --And home prices are declining in most markets--leaving nearly 27 
        percent of all mortgages in a negative or near-negative equity 
        position
    We have a long way to go before the market fully recovers. And it 
is critical that we continue to look for ways to address the needs of 
millions of Americans facing the prospect of foreclosure or who are 
underwater on their mortgage.
    We must work to increase opportunities for:
  --meaningful modifications;
  --achieving a fair and efficient foreclosure process; or
  --reasonable options for borrowers trying exit home ownership.
    I hope that there will be a global deal that will provide a way to 
work through the current inventory of delinquent or foreclosed homes 
that will also provide real relief to borrowers that have been wronged 
in the process.
     the housing market and government-sponsored enterprise reform
    The market also needs certainty about the new reforms and the 
future of the Nation's housing finance system.
    As we think about the future, we should draw on the important 
lessons from the recent boom and bust.
    This boom was fueled by overconfidence of lenders and investors in 
the perpetual appreciation of home prices, coupled with inadequate 
regulatory oversight.
    As a result, millions of Americans have lost their homes, and 
millions more who didn't participate directly in the market run-up have 
nonetheless seen their wealth eroded as home values declined.
    The Dodd-Frank Wall Street Reform and Consumer Protection Act began 
to address many of the failures of our system and its outdated 
regulatory structure.
    But it is clear that we must also address Fannie Mae and Freddie 
Mac so we no longer promote a system of private profit and public loss.
    However, reform must be approached thoughtfully, so that we don't 
undermine the fragile housing recovery.
    And in our effort to guard against another crash, we must be 
careful not to overcorrect and put home ownership out of reach for 
millions of Americans.
    As a first step, FHA released its report to the Congress on options 
for reforming the Nation's housing finance structure.
    This report presents three options that range from one with the 
Government's role limited to FHA, to one where the Government has a 
more significant presence in the market, though substantially reduced 
from the role it is playing today.
    Each of these options presents tradeoffs that we must consider--
tradeoffs between the level of appropriate risk for the taxpayer and 
the ability of individuals and families to obtain a mortgage.
           risk retention and qualified residential mortgage
    A similar debate is also occurring around the rule on risk 
retention recently proposed by FHA. This rule also includes the 
definition of a qualified residential mortgage (QRM), which will be 
exempt from risk-retention requirements.
    This rule ensures that lenders have an incentive to properly 
underwrite loans by requiring them to retain partial exposure to their 
performance.
    Under the proposed QRM definition, loans with a downpayment of 20 
percent or more would be exempt from this retention requirement.
    Ensuring that borrowers have more equity at stake in their home is 
an important goal.
    At the same time, many hardworking, creditworthy Americans will 
have a difficult time coming up with a 20-percent downpayment--
particularly in high-cost areas, like Puget Sound.
    So, I want to have a discussion today about the potential impact of 
this rule on the availability and affordability of mortgages in the 
future. Especially as we contemplate the role that FHA or other 
Government-supported institutions will play in the future.
                                closing
    We find ourselves at a critical moment--we continue to deal with 
the ramifications of the housing crisis while trying to establish a 
better housing finance system for the future.
    This challenge is similar to that which FHA has faced over the last 
few years. It is working to improve its financial position so it can 
deal with the fallout of past loans.
    At the same time, the Department is working to improve its future 
business and financial position by implementing reforms and creating a 
culture focused on sound risk management.
    Through all of this, FHA has worked to balance the need to mitigate 
risk with serving its mission of providing access to affordable and 
sustainable home ownership to underserved Americans.
    As we look toward the future, we must find the appropriate balance 
between strengthening and protecting the housing finance system from 
undue risk, while maintaining access for creditworthy Americans to 
achieve sustainable home ownership.
    I look forward to hearing from Secretary Donovan on these issues. 
And with that I turn it over to my partner in these efforts, Senator 
Collins for her opening statement.

               OPENING STATEMENT OF SENATOR SUSAN COLLINS

    Senator Collins. Thank you very much, Madam Chairman. Like 
you, I will submit my opening statement for the record and just 
make a few very brief comments.
    First of all, I wholeheartedly agree with your comments on 
the need for the Congress to resolve the budget crisis. It is 
the height of irresponsibility if Government is allowed to shut 
down, and would represent a colossal failure that would reflect 
poorly on everyone involved.
    And you're right about the impact on the housing market. 
The Secretary and I were talking prior to the hearing about the 
critical role that FHA is playing, and the fact that those 
pending mortgages would come to a screeching halt, and 
potential homeowners would not be able to close on their 
properties.
    The Department of Housing and Urban Development (HUD) faces 
many challenging responsibilities that include balancing the 
goal of strengthening responsible home ownership, while 
minimizing the financial risk to FHA and the taxpayer, and 
promoting long-term stability and motivating the private sector 
to reinvest in the housing market.
    Today in my questions I'm going to talk about my concern 
about HUD's oversight of FHA's Single Family Housing program. I 
do appreciate and recognize the progress that's been made in 
minimizing risk to this program, including the creation of a 
Chief Risk Officer position in 2009. But there, it is clear 
from a recent USA Today report that FHA has been slow to flag 
problem lenders and stop them, despite the withdrawal of 
approval from more than 1,500 approved lenders in the last 
fiscal year.
    The housing market is still very weak, and FHA is going to 
continue to play a critical role.

                           PREPARED STATEMENT

    Another issue that I want to explore today if we have time 
is what the impact on FHA will be if we dramatically change the 
role of the Federal Home Loan Mortgage Corporation (Freddie 
Mac) and the Federal National Mortgage Association (Fannie 
Mae). So, those are some of the issues I want to touch on. 
Again, I'll put my full statement in the record, with your 
consent. Thank you, Madam Chairman.
    [The statement follows:]
              Prepared Statement of Senator Susan Collins
    Chairman Murray, thank you for holding this important hearing to 
review the Federal Housing Administration (FHA) and to discuss the 
future of the housing finance market. It is a pleasure to see Secretary 
Donovan before our subcommittee again, and I join you in welcoming him 
to this hearing.
    The Department of Housing and Urban Development (HUD) faces many 
challenging responsibilities that include balancing the goal of 
strengthening responsible home ownership while minimizing the financial 
risk to FHA and the taxpayer and promoting long-term stability and 
motivating the private sector to reinvest in the housing market.
    FHA is largely financed by proceeds from the mortgage insurance 
premiums paid by homeowners. As we all know, home purchases provide an 
important economic stimulus, with benefits to local communities in the 
form of jobs and local development.
    Part of our discussion today will include the status of the Federal 
National Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac), which were originally established 
by the Congress to promote liquidity, affordability, and stability in 
the housing finance market. The future of FHA heavily relies upon the 
debate on how to reform Fannie Mae and Freddie Mac. This will be a 
critical discussion that will shape not only FHA, but also the future 
of the Nation's housing market.
    Recent news articles have highlighted the lack of recovery in most 
housing markets. Last week, according to Standard & Poor's (S&P) Case-
Shiller home price index, U.S. home prices in major cities across the 
Nation dropped 3.1 percent since January 2010. According to the 
chairman of the S&P Index Committee, ``The housing market recession is 
not yet over, and none of the statistics are indicating any form of 
sustained recovery.''
    These data are particularly concerning since FHA currently insures 
nearly $1 trillion in mortgages for the single-family home program. The 
agency's role has dramatically expanded since the beginning of the 
housing crisis. At the peak of the crisis, FHA accounted for less than 
4 percent of the single-family housing market; now it holds more than 
20 percent.
    Another important issue relates to HUD's oversight of the FHA 
Single Family Housing program. I recognize and appreciate that HUD has 
made progress in minimizing risk to this program, including the 
creation of a Chief Risk Officer position in 2009. A number of reforms 
have also been implemented to the mortgage insurance premium structure 
and eligibility requirements to help ensure the long-term economic 
viability of this program. For example, FHA withdrew approval from more 
than 1,500 FHA-approved lenders and imposed more than $4 million in 
civil penalties on noncompliant lenders in fiscal year 2010.
    While progress has been made, more needs to be done. Just last 
month, HUD's Office of Inspector General reported underwriting issues 
concerning FHA-insured loans. After reviewing 284 loans from 15 
lenders, the inspector general found nearly 50 percent of the loans 
were not underwritten in accordance to FHA requirements. As a result, 
HUD missed critical opportunities to recover losses of more than $11 
million.
    It is also troubling that FHA cannot meet its statutory requirement 
of maintaining a 2-percent capital reserve ratio. According to HUD's 
own data, the earliest FHA can reach this requirement is 2014. This is 
a major concern since the reserve ratio was intended to cover 
unexpected losses.
    I am eager to hear the administration's overall plan for 
revitalizing the financing of the housing market and for the future of 
FHA, Fannie Mae, and Freddie Mac. We must ensure that we limit 
taxpayers' exposure to additional financial losses in the housing 
market.
    Chairman Murray, I look forward to working with you and Secretary 
Donovan on ways to enhance and protect homeowners and to stabilize the 
housing market by reinvigorating the investments and participation of 
the private sector. These are not easy issues to resolve, but they are 
critically important to our Nation's long-term economic health.

    Senator Murray. Thank you very much. Both of our opening 
statements will be printed in the record.
    And with that, we'll turn it over to Secretary Donovan for 
opening remarks.

                SUMMARY STATEMENT OF HON. SHAUN DONOVAN

    Secretary Donovan. Thanks, Madam Chair. Thank you, Ranking 
Member Collins.
    And I want to just echo your concerns about the potential 
impact of a shutdown and the critical importance of resolving 
this. The President yesterday in remarks talked about the 
importance of FHA to the broader housing market, to individual 
Americans on the verge of closing a purchase of a home, or 
selling a home, and the critical role we play in the housing 
market today, and the potential significant risks that it would 
pose if we can't resolve this budget issue.
    And he talked about the fact that we have come a great 
distance. We have agreed to the original cuts that were asked 
for, proposed by Speaker Boehner, and that, really, what we are 
down to is politics in this debate. And we must resolve this in 
order to ensure that we can continue to do the people's 
business.
    In the interest of time, I will also submit my statement. I 
do just want to make a few comments beyond the concern about 
the potential shutdown--in particular, to thank you both, and 
your colleagues in the Congress for your leadership. Thanks to 
the partnership that we have had with this subcommittee and 
with the Congress, we have been able to put in place the most 
sweeping combination of reforms to credit policy, risk 
management, lender enforcement and consumer protection in the 
agency's history. And thanks to those, FHA is in a stronger 
financial position today.
    In the last year, we've taken 10 times more lender 
enforcement actions than FHA had taken in the previous 10 years 
combined. The agency has implemented a two-step credit score 
policy that requires borrowers with credit scores below 580 to 
contribute a minimum down payment of 10 percent. And with your 
help, FHA has increased premiums to bring back private capital, 
begin putting into place the cutting-edge modern financial 
services--IT environment--that FHA needs for the 21st century, 
and taken steps to increase staffing, which the fiscal year 
2012 budget would further.
    And I would note that it's our hope that the kind of 
flexibility that we've proposed for the Government National 
Mortgage Association (Ginnie Mae) in this budget--to use fees 
paid by Ginnie Mae's customers to address critical staffing in 
emerging issues, without requiring any additional congressional 
appropriations--could be a possible template for addressing 
critical FHA issues in the years to come.
    While we still need the Congress to pass FHA reform 
legislation that allows us to be prepared for any future 
crisis, the reforms we've already implemented have resulted in 
the fiscal year 2010 book of business being the highest quality 
on record. The average credit score of FHA borrowers has risen 
to 700. Total reserves have increased. And while foreclosure 
processing delays are certainly a factor, claim payments are 
much lower than projected by the independent actuary. As a 
result, in fiscal year 2012 we expect FHA and Ginnie Mae to 
generate more than $6 billion in receipts that will offset the 
Department's gross budget authority request of $47.8 billion 
and help to rebuild FHA's capital reserves--this in addition to 
the $9.8 billion in receipts FHA is projected to generate in 
fiscal year 2011.
    Indeed, Madam Chair, even with the decreased loan volume 
we've seen in recent months, we expect FHA to make 
substantially more money for the taxpayer this year than our 
actuary predicted and an even larger amount more than the 
Congressional Budget Office (CBO) predicted when they did their 
projections last year. And I'm very pleased to note, thanks to 
our work with CBO, that our offsetting budget receipts in 
fiscal year 2012, our estimates of those, are dramatically 
closer than they have been in years past.

                           PREPARED STATEMENT

    With that, let me stop, and make sure that we can get to 
your questions. Again, I thank you for the partnership that 
we've had in working together to make sure that FHA has the 
resources and the tools that it needs to fulfill its mission. 
Thank you.
    [The statement follows:]
                Prepared Statement of Hon. Shaun Donovan
                              introduction
    Chairman Murray, Ranking Member Collins, and members of the 
subcommittee, thank you for the opportunity to testify today regarding 
the Federal Housing Administration (FHA), in the context of the 
Department of Housing and Urban Development's (HUD) proposed fiscal 
year 2012 budget, and also with respect to FHA's key role in the Obama 
administration's efforts to both address the foreclosure crisis and to 
reform America's housing finance market.
    I was pleased to have the opportunity to testify before this 
subcommittee on March 6, 2011 to discuss in detail the Department's 
2012 budget, Creating Strong, Sustainable, Inclusive Communities and 
Quality Affordable Homes. As you know, the budget proposal works to 
``win the future'', and I look forward to discussing with you in my 
testimony how FHA will play a central role in that effort.
    I would be remiss if I didn't say a few words about David Stevens, 
the recently departed FHA Commissioner. Dave brought to the job a 
unique blend of private sector expertise and commitment to providing 
underserved communities access to our programs. The strong team that 
Dave and I were able to put in place was instrumental to ensuring that, 
in the midst of the worst economic crisis in decades, FHA was able to 
fill the gap left by the retreat of private capital, while also 
significantly strengthening FHA's financial position and toughening 
enforcement. I am delighted that Robert Ryan, our Deputy Assistant 
Secretary for Risk Management and Regulatory Affairs, will be serving 
as Acting Assistant Secretary for Housing and FHA Commissioner. While I 
anticipate the naming of a permanent Commissioner in the near future, I 
would like to assure the subcommittee that under Bob Ryan's leadership, 
there will be continuity in FHA's operations, based on the strong 
foundation laid down by Dave Stevens, including the bipartisan approach 
he consistently followed.
               overview of hud's fiscal year 2012 budget
    As I discussed when I last appeared before the subcommittee, we are 
in an economic environment that is significantly improved from when the 
President took office. An economy that was shrinking is growing again--
and instead of rapid job loss, more than 1.8 million private sector 
jobs were created in the last 13 months, including 230,000 private 
sector jobs in March. But we know there's still more work to be done to 
ensure that America and its workers can compete and win in the 21st 
century. And we have to take responsibility for our deficit, by 
investing in what makes America stronger and cutting what does not, and 
in some cases making reductions in programs that have been successful.
    HUD's fiscal year 2012 budget tackles these challenges head on:
  --by helping responsible families at risk of losing their homes and 
        by providing quality affordable rental housing;
  --by transforming neighborhoods of poverty to ensure we are not 
        leaving a whole generation of our children behind in our 
        poorest communities;
  --by rebuilding the national resource that is our federally assisted 
        public housing stock and ensuring that its tenants are part of 
        the mobile, skilled workforce our new global economy requires; 
        and
  --by leveraging private sector investments in communities to create 
        jobs and generate the economic growth we need to out-innovate, 
        out-educate, and out-build the rest of the world.
    As a downpayment toward reducing the deficit, the President has 
proposed a freeze on nonsecurity discretionary spending for the next 5 
years, cutting the deficit by $400 billion over 10 years and bringing 
this spending to the lowest share of the economy since President 
Eisenhower. HUD's fiscal year 2012 budget more than meets the 
President's goal--the Department's net budget authority of $41.7 
billion is 2.8 percent below the fiscal year 2010 actual level of $42.9 
billion. To maintain this commitment to fiscal discipline, we have 
protected existing residents and made the difficult choice to reduce 
funding for new units and projects, including cuts to the Community 
Development Block Grant, HOME Investment Partnerships, and new 
construction components of the Supportive Housing Programs for the 
Elderly (section 202) and Disabled (section 811).
    As discussed in more detail below, this budget balances the need 
for FHA and the Government National Mortgage Association (Ginnie Mae) 
to continue supporting the housing recovery in the year ahead and 
ensuring that underserved borrowers have access to home ownership, with 
affirmative steps to encourage the return of private capital to the 
housing market. I want to thank the members of the subcommittee for 
working with your colleagues to enact legislation (H.R. 5981) in the 
last Congress to reform FHA's mortgage insurance premium structure. 
With this authority, FHA announced a premium increase of 25 basis 
points last month. Because of these reforms and others, the current 
President's budget reflects estimated FHA offsetting budgetary receipts 
of $9.8 billion in fiscal year 2011, which will reduce the Federal 
deficit. This is far more than the $5.8 billion originally estimated by 
the administration for the current fiscal year. These changes are 
largely due to the premium increase and the policy changes we have made 
since the President's budget was published last February. While the 
ultimate receipts for fiscal year 2011 are subject to fluctuations in 
loan volume, FHA is on track to outpace both of these figures in the 
current fiscal year. Furthermore, in fiscal year 2012, the President's 
budget projects FHA and Ginnie Mae to generate, collectively, more than 
$6 billion in receipts that will help to rebuild FHA's capital reserves 
and offset the Department's gross budget authority request of $47.8 
billion.
    I am pleased to note that, as the members of the subcommittee are 
no doubt aware, the Congressional Budget Office (CBO) estimate of these 
offsetting budgetary receipts in fiscal year 2012 are quite close to 
those reflected in the President's budget--the magnitude of difference 
between CBO's estimate and the President's budget for fiscal year 2012 
is significantly smaller than in previous years at approximately $300 
million. I am hopeful this new estimate will make the development of 
the fiscal year 2012 HUD appropriations bill--a challenging task in any 
year, and particularly so in the current fiscal climate--somewhat more 
manageable. I look forward to working with the members of the 
subcommittee in that effort.
    Last, because winning the future also means reforming Government so 
it is leaner, more transparent, and ready for the 21st century, we are 
also continuing to reform the administrative infrastructure that 
oversees our programs. For example, the Transformation Initiative 
(TI)--important funding and programmatic flexibility the Congress 
provided beginning in 2010--is enabling HUD to establish the FHA 
Transformation project, which will give FHA cutting-edge, modern 
financial services information technology (IT) systems.
               responding to the evolving housing crisis
    Before describing in detail FHA's 2012 budget and the future of the 
housing market in which FHA will continue to play a central role, I 
believe it is important to take a brief look at the response of HUD and 
the administration as a whole to the housing crisis, both in its early 
stages and today.
    In the face of an economic crisis that experts across the political 
spectrum predicted could turn into the next Great Depression, the Obama 
administration had no choice but to step in with a plan to aggressively 
confront the economic crisis as soon as we took office, including 
taking steps to stabilize the housing market. The Federal Reserve and 
the Department of the Treasury helped keep mortgage interest rates at 
record lows with combined mortgage-backed securities purchases of 
almost $1.5 trillion. Because low-interest rates only matter if there 
are mortgages available at those rates, the administration also 
provided critical support for the Federal National Mortgage Association 
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 
Mac), while FHA and Ginnie Mae stepped in to play critical 
countercyclical roles in helping to stem the crisis and enabling a 
robust refinancing market to emerge.
    As reported in the Obama administration's March Housing Scorecard, 
since April 2009, nearly 13 million homeowners have been able to 
refinance their mortgages to benefit from lower-interest rates, saving 
them an average of $140 per month or $17.6 billion annually. In 
addition, the administration proposed, and the Congress enacted, a 
homebuyer tax credit to spur demand in the devastated housing sector. 
We also took significant steps to help families keep their homes--
through mortgage modifications and FHA's loss mitigation efforts.
    The results of these extraordinary actions are clear. Since April 
2009, more than 4.4 million borrowers have received restructured 
mortgages, including more than 1.5 million Home Affordable Modification 
Program (HAMP) trial modification starts, more than 775,000 FHA loss 
mitigation and early delinquency interventions, and more than 2.1 
million proprietary modifications under HOPE Now--more than twice the 
number of foreclosures completed in that time. Today, monthly 
foreclosure starts are down more than 30,000 per month from this same 
time 1 year ago. I would note that while the sharp decline may be 
partially attributed to servicer process reviews in light of 
foreclosure processing deficiencies, the number of homeowners entering 
delinquency in the first place was down significantly even before these 
reviews began. That said, this number may trend upwards as servicers 
revise and resubmit foreclosure paperwork in coming months,
    Additionally, FHA and HUD recently launched two programs to address 
the two most pressing problems facing the housing market, negative 
equity and unemployment.
  --In September 2010, FHA launched the FHA Short Refinance Option to 
        assist non-FHA borrowers to refinance their underwater 
        mortgages into sustainable fixed rate, FHA-insured mortgages. 
        This option provides an additional opportunity for lenders to 
        voluntarily offer principal writedowns and restructure loans 
        for some families who owe more than their home is worth. To 
        date, more than 400 applications have been submitted by a wide 
        diversity of lenders and four large servicers have announced 
        that they are finalizing development of the infrastructure that 
        is required to participate in this program and voluntarily 
        offer principal writedowns to select underwater borrowers, 
        which will benefit homeowners by reducing their monthly 
        payments and addressing negative equity, while also 
        significantly reducing the investors' risk of default.
  --As part of the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act (Dodd-Frank Act), the Congress provided HUD 
        authority and funds to assist unemployed and underemployed 
        homeowners struggling to make their mortgage payments via the 
        Emergency Homeowner Loan Program (EHLP). Last week, HUD 
        announced that five States--Connecticut, Delaware, Idaho, 
        Maryland, and Pennsylvania--have been approved to provide a 
        combined total of almost $200 million of assistance from these 
        funds. These States are expected to be ready to accept 
        applications as soon as next week to help eligible residents in 
        these States. HUD continues to responsibly develop additional 
        components of the program to serve the remaining 27 States that 
        have been awarded EHLP funds, and we will announce additional 
        details and program specifics for these States in the coming 
        weeks.
                     fha's fiscal year 2012 budget
    The number of borrowers who depend on FHA for access to mortgage 
financing has increased greatly during this economic recovery as access 
to private capital has contracted in the recent difficult economic 
period. In fiscal year 2012, HUD is requesting $400 billion in loan 
guarantee authority for the Mutual Mortgage Insurance Fund, which will 
provide an estimated 1.2 million single-family mortgages. In addition, 
HUD is requesting $25 billion in loan guarantee authority for the 
General and Special Risk Insurance Fund, which will enable FHA to 
insure an estimated 190,000 units in multifamily housing properties and 
an estimated 98,000 beds in healthcare facilities.
    As housing markets continue to be stressed, FHA is taking on 
business that is resulting in a portfolio of historically high borrower 
credit quality. These new loan guarantees and mortgage insurance 
premiums that they generate are providing net income that can be used 
both to offset claim expenses on the earlier books and to start 
rebuilding FHA's capital position.
FHA Multifamily Mortgage Insurance
    With more than one-third of all American families renting their 
homes, during this time of economic hardship for so many it is more 
important than ever to provide a sufficient supply of affordable rental 
homes for low-income families. Multifamily mortgage insurance programs 
make critical contributions toward the Department's mission of creating 
strong, sustainable, inclusive communities and quality affordable homes 
for all by expanding the supply of rental housing in areas where they 
are most needed, and by preserving the affordability and quality of 
both federally assisted and private unassisted rental housing. The role 
of FHA's multifamily mortgage insurance programs is especially 
significant in the current economic climate. Driven by low-interest 
rates, more constrained lending in the conventional mortgage market, 
and improvements in HUD business operations, demand for FHA multifamily 
programs has increased dramatically. At this time of unprecedented 
stress in the financial markets, FHA multifamily programs provide 
necessary liquidity so that apartment construction and rehabilitation 
can continue. FHA financing is often paired with low-income housing tax 
credits, rental subsidies for low- and moderate-income families, tax-
exempt bond financing, and/or other State and local resources to expand 
the offering of affordable units in areas where they are needed most. 
Multifamily mortgage insurance programs also contribute significantly 
to local revitalization efforts and economies by providing liquidity to 
uniquely sustainable projects located in centers of job growth, near 
transportation and other community opportunities.
    In 2008, FHA supported the development of about 49,000 rental 
homes. Now, however, conditions are very different, reflecting the 
sharp decline in fully private financing and most notably commercial 
mortgage-backed securities. In 2010 alone, FHA supported the 
development or refinancing of more than 150,000 rental units with a 
total dollar volume of nearly $11 billion--almost four times the level 
of 2 years earlier, and now almost 25 percent of the multifamily 
market. This activity is projected to increase further to $13.1 billion 
in 2011 and to be at a level of $12.8 billion in 2012. HUD estimates 
that these construction volumes will support up to 85,000 direct jobs 
annually.
    I'd like to thank the Congress for passing legislation last 
summer--H.R. 5872, the General and Special Risk Insurance Funds 
Availability Act of 2010--to increase FHA's commitment authority for 
our multifamily and healthcare facilities insurance programs. This was 
a key step to help facilitate the continued production and refinancing 
of multifamily properties and healthcare facilities. To ensure that 
these programs continue to operate responsibly despite the 
unprecedented demand, FHA simultaneously implemented the most 
significant reforms to its multifamily programs to strengthen 
underwriting guidelines and minimize financial risk to taxpayers while 
providing this critical support.
FHA-Insured Healthcare Facilities
    In fiscal year 2011, FHA is continuing to provide critical support 
to enable the construction and refinancing of acute-care hospitals, 
skilled nursing, assisted living, and board and care facilities. 
Additionally, these projects contribute to stimulating the local 
community economy where the project is based as well, expanding 
employment, and reducing healthcare capital costs. In fiscal year 2010, 
17 hospital facilities received commitments to advance their mission in 
communities throughout the country. For fiscal year 2010, the total 
construction expenditures for all hospital commitments amounted to $1.4 
billion, which HUD estimates will result in 15,465 new direct jobs that 
will be created during construction, with $3.9 billion of overall 
economic benefit. Following construction, fiscal year 2010 projects 
will generate estimated annual new economic activity of $1.4 billion 
and 8,464 new jobs.
    Demand for section 232 Residential Care Facilities (Skilled 
Nursing, Assisted Living, and Board and Care Facilities) has also 
increased. FHA considered 347 applications and issued commitments for 
318 facilities in fiscal year 2010. As of March 18, 2011, an additional 
241 insurance commitments have already been issued in fiscal year 2011 
for 232 program applicants serving the senior housing market. Through 
LEAN processing methods and high productivity from FHA staff members, 
this industry-generated volume is being addressed as responsibly as 
possible given staffing and capacity constraints.
Home Equity Conversion Mortgages
    In October, FHA launched the Home Equity Conversion Mortgages 
(HECM) Saver product. Designed as a second reverse mortgage option for 
senior home owners to tap into their equity, the HECM Saver product has 
lower upfront loan closing costs and is optimal for homeowners who want 
to borrow a smaller amount than that which would be available with a 
HECM Standard loan.
    HECM Saver has a nominal upfront premium of only 0.01 percent of 
the property's value. Under the HECM Standard option, the upfront 
premium remains at 2 percent. The mortgage insurance premium for both 
HECM Saver and HECM Standard is charged monthly at an annual rate of 
1.25 percent of the outstanding loan balance. The 2012 President's 
budget request estimates that these two programs will generate $304 
million in receipts.
    Borrowers using the Saver option have access to home equity in 
amounts that are between 10-18 percent less than would be available 
with the HECM Standard option. The reduction equity take-out for Saver 
substantially lowers risk to the FHA Insurance Fund, and thus permits 
the virtual elimination of the upfront premium charge.
    HECM Standard remains as an option for senior home owners who need 
to tap the highest-possible home equity to cover living expenses and/or 
healthcare costs, while continuing to live in their homes without 
having to make the mortgage payments required with a traditional 
mortgage or home equity loan.
Transformation Initiative
    Winning the future means reforming Government so it's leaner, 
transparent, and ready for the 21st century. While HUD programs already 
make a significant difference in the lives of ordinary Americans, this 
administration is also committed to making Government more efficient, 
more effective, and more accountable. The fiscal year 2012 budget 
provides up to $120 million for the TI Fund to support cutting edge 
research and demonstrations and technical assistance to our partners. 
In fiscal year 2010, thanks to the TI Fund, HUD began to fundamentally 
alter how we approached our investments in delivering technical and 
capacity-building assistance, conducting research demonstrations, and 
maintaining and upgrading our IT systems so that we can hold ourselves 
and our local partners accountable for the outcomes needed to achieve 
the Department's strategic goals.
            Twenty-First-Century Technology To Protect the Taxpayer's 
                    Investment
    In fiscal years 2010 and 2011, IT investments constituted the 
largest share of proposed TI project funding, $122.5 million was 
allocated for IT in fiscal year 2010 and $119 million was requested in 
fiscal year 2011. The Department's careful investment planning has 
prepared us to act responsibly to modernize our use of IT to meet 
today's mission challenges. Our intent is to fully leverage these 
resources to meet our transformation needs. Additional funding was not 
requested in fiscal year 2012 on the presumption that sufficient 
funding would be available to support these projects for fiscal year 
2012, between prior-year TI funding and the Working Capital Fund.
    One of the top-priority IT projects is the FHA Transformation 
project, which involves the development of a modern financial services 
IT environment to better manage and mitigate counterparty risk across 
all of FHA's insurance programs. The new tools will minimize the 
exposure of our insurance funds and support the restoration of the 
capital reserve ratio to congressionally mandated levels by enabling 
risk detection, fraud prevention and the capture of critical data 
points at the front-end of the loan life cycle. More simply put, FHA 
Transformation will enable HUD to identify trends, and seamlessly take 
action, before problems occur. This approach will protect consumers and 
the economy by ensuring that lenders adhere to safe underwriting 
standards. Importantly, FHA Transformation will also allow HUD to start 
the careful process of migrating relevant portions of our legacy 
applications, most of which were built in a 1970s era programming 
language, to a more cost-effective platform.
    In addition to prior-year TI fund transfers, in fiscal year 2012 
HUD will utilize $315 million in Working Capital funding to support 
HUD's transformation efforts, providing resources for the development 
of, modification to, and infrastructure for department-wide information 
technology systems.
Housing Counseling Assistance
    Each year, HUD awards grants to hundreds of local counseling 
agencies and State Housing Finance Agencies that offer a variety of 
services, which are especially critical in today's economic climate. 
HUD-approved counselors help clients learn how to avoid foreclosure, 
how to purchase or rent a home, how to improve credit scores, and how 
to qualify for a reverse mortgage. In 2009, HUD assisted more than 2.5 
million families through its housing counseling program, including 1.58 
million potential and current homeowners with issues pertaining to 
mortgages and financing of their homes. In 2010, HUD awarded $79 
million for housing counseling grants, a 27-percent increase over its 
2009 funding.
    In fiscal year 2012, HUD is requesting $88 million in Housing 
Counseling Assistance. The primary benefits of the program are to 
expand home ownership opportunities, improve access to affordable 
housing and preserve home ownership. With this level of funding, HUD 
anticipates serving as many as 318,187 low- to moderate-income 
families, as well as training approximately 4,400 counselors.
Salaries and Expenses--Flexibility To Respond in a Crisis
    As the subcommittee knows, HUD's salaries and expenses budget is 
divided into multiple sub-accounts, with limited transfer and 
reprogramming flexibility. While the Department has once again 
submitted this portion of the budget proposal in that structure, recent 
FHA and Ginnie Mae staffing needs have illustrated the challenges of 
proposing a personnel plan a full year and a half prior to the onset of 
the fiscal year. Events, including developments related to the housing 
crisis, can intervene and the Department needs the flexibility to 
respond. Accordingly, I hope that we can work with the subcommittee to 
strike an appropriate balance between the need for transparency and 
oversight of HUD's salary and expenses expenditures, and this need to 
be able to respond nimbly to changing circumstances.
    In the fiscal year 2012 budget, we have proposed to restructure the 
Executive Direction account by removing subfunction allocations to 
provide the Department with the flexibility needed to respond promptly 
to emerging issues or unanticipated needs as they arise throughout the 
year. Moreover, we would like to explore with your subcommittee, the 
possibility of providing additional administrative flexibilities in 
accounts funding salaries and expenses across the Department. Over the 
past 2 years, it has become clear to us that the administrative burden 
and lack of flexibility afforded by the current structure outweighs the 
potential management benefits.
            Ginnie Mae Budget Request for Salaries and Expenses as a 
                    Model
    Our budget request with respect to Ginnie Mae's staffing needs, 
provides an example of the kind of flexibility that can be achieved to 
enable greater capacity, service, and protection to taxpayers, without 
requiring additional appropriations. In light of Ginnie Mae's vastly 
increased market share (from 4 percent to more than 30 percent in the 
past few years) and a guaranty portfolio that now tops $1 trillion, the 
fiscal year 2012 request proposes to fund its personnel expenses 
through commitment and multiclass fees rather than through a separate 
appropriation for personnel compensation and benefits. This will allow 
Ginnie Mae to increase its staff level to strengthen risk management 
and oversight, and to move in-house some functions that are performed 
by contractors.
    Our budget proposal affords Ginnie Mae more flexibility in funding 
its critical personnel and administrative needs. Importantly, the 
Congress will retain its role in determining annual Ginnie Mae funding. 
However, with receipts accumulating in Ginnie Mae's program account, a 
ready source of funding will be available to help the agency fund both 
current needs along with contingencies that may arise in the future. In 
addition, the budget allows Ginnie Mae to increase the amount for 
salaries and expenses if its volume of guaranty commitments rises above 
a specified level. The budget proposes to allocate $100 for salaries 
and expenses for each $1 million of guaranty commitments exceeding $300 
billion. As Ginnie Mae's role in the housing finance market continues 
to grow, it is critical that the agency have this additional 
flexibility to be able to respond to market needs. This proposal 
positions Ginnie Mae to continue to effectively and responsibly bring 
global capital into the American housing finance system.
    With respect to FHA, we have requested a significant increase in 
staffing in the fiscal year 2012 budget--92 additional FTEs compared to 
fiscal year 2010 enacted levels.
                  review of fha's financial condition
Results From FHA Reforms to Date
    As you know from the Secretary's Annual Report to Congress on the 
Financial Status of the FHA Mutual Mortgage Insurance (MMI) Fund at the 
end of fiscal year 2009, the secondary reserves held in FHA's Capital 
Reserve account to support single-family loan guarantees had fallen 
below the required 2-percent level--to 0.53 percent of the total 
insurance in-force. At the same time, total reserves held in the 
Capital and the Financing accounts at that time were at an historical 
high of more than $31 billion. Total reserves grew again to more than 
$33 billion in fiscal year 2010. These funds are available to cover 
potential future losses on outstanding loan guarantees. The independent 
actuarial study for fiscal year 2010 indicated that these would be 
sufficient for even a stressed scenario of loan performance over the 
next 5 years. Even prior to the release of the fiscal year 2009 
actuarial review that indicated capital reserves had fallen below the 
statutory threshold, we took several steps to strengthen the fund. 
Today, I am pleased to inform you that tangible, measurable progress 
has been achieved and we continue to see improvements in the financial 
condition of the fund, while holding lenders more accountable, and 
reducing risk to taxpayers.
    Making that progress required FHA to put in place the most sweeping 
combination of reforms to credit policy, risk management, lender 
enforcement, and consumer protection in the agency's history. These 
reforms have strengthened its financial condition and minimized risk to 
taxpayers, while allowing FHA to continue fulfilling our mission of 
providing responsible access to home ownership for first-time 
homebuyers and in underserved markets.
    Specifically, FHA implemented a two-step credit score policy for 
FHA borrowers. Those with credit scores below 580 are now required to 
contribute a minimum downpayment of 10 percent, or have equity of 10 
percent at the time of refinance. Only those with stronger credit 
scores are eligible for FHA-insured mortgages with the minimum 3.5 
percent downpayment.
    To balance the need to provide access to our mortgage markets with 
the need to protect taxpayers from financial risk, we established FHA's 
first Office of Risk Management. With this new office and additional 
staffing, FHA is expanding its capacity to assess financial and 
operational risk, perform more sophisticated data analysis, and respond 
to market developments.
    Further, FHA has strengthened credit and risk controls--toughening 
requirements on FHA's Streamlined Refinance program, making several 
improvements to the appraisal process and to condominium policies, and 
implementing the two-step credit score policy discussed above. We are 
very grateful for the support that the Congress has provided to our 
efforts to reduce fraud and risk. Through the $20 million Combating 
Mortgage Fraud funds that the Congress granted HUD in fiscal year 2010, 
we have begun to implement several risk management and systems 
modernization reforms to incorporate modern risk and fraud tools and 
counterparty data consolidation. Additionally, FHA introduced policy 
changes and improved lender oversight and enforcement to increase the 
quality of FHA-insured loans.
    As a result of these actions, FHA finds itself in a stronger 
position today. In particular:
  --The quality of loans endorsed in 2009 and 2010--the years FHA has 
        done the most significant volume--is much improved. Fiscal year 
        2010 is the highest quality FHA book-of-business on record, and 
        fiscal year 2011 may prove to be even better.
  --The credit-score distribution for new insurance continues to 
        improve. The average credit score on current insurance 
        endorsements has risen to 700. And in the second-half of 
        calendar year 2010, average credit scores were equally strong 
        across refinance and purchase books-of-business.
  --Loan performance, as measured by early period delinquency and by 
        seasonally adjusted serious delinquency rates, continues to 
        show significant improvement from the high rates experienced in 
        2007 and 2008.\1\
---------------------------------------------------------------------------
    \1\ HUD's Annual Report to Congress Regarding the Financial Status 
of the FHA Mutual Mortgage Insurance Fund fiscal year 2010 can be found 
at http://www.hud.gov/offices/hsg/rmra/oe/rpts/actr/
2010actr_subltr.pdf.
---------------------------------------------------------------------------
  --FHA's seasonally adjusted 90+ day delinquency rate in December 2010 
        was 5.8 percent, compared to 7.45 percent in December 2009.
Summary of Fiscal Year 2010 Actuarial Review
    Total capital resources (combined Capital Reserve account and 
Financing account) in fiscal year 2010 increased by $1.5 billion to 
$33.3 billion. At the same time, the overall capital ratio held steady 
at 0.5 percent reflecting that more conservative economic forecasts and 
model changes offset the benefits of improved borrower credit profiles 
and increased premium income. On a stand-alone basis, had capital 
resources not been shifted from the forward loan accounts to HECM 
accounts to cover HECM budget re-estimates, the capital ratio of 
single-family forward loans (96 percent of the portfolio) would have 
increased from 0.42 percent in fiscal year 2009 to 0.79 percent in 
fiscal year 2010, demonstrating significant improvement in loan quality 
and underlying reserves. Without any additional policy actions, and 
incorporating conservative economic forecasts, the capital ratio for 
the entire MMI Fund is projected by the independent actuaries to exceed 
the 2-percent statutory requirement early in 2015. Furthermore, we have 
implemented a wide range of additional policy actions that are expected 
to strengthen the fund even more quickly than forecasted.
    While we are not yet completely out of the woods based on the 
evidence we're seeing, FHA is weathering the economic storm. And we're 
doing so, Madam Chairwoman, while simultaneously reducing financial 
risk to taxpayers and helping to create a firm foundation for the 
recovery of the housing finance system.
The Need for FHA Reform Legislation
    As discussed, within the existing authorities granted to us by the 
Congress, we have already begun the necessary process of making changes 
to FHA to ensure that it will be able continue its mission. Moving 
forward, we look to the Congress to pass FHA reform legislation that 
enhances our lender enforcement capabilities and risk management 
efforts that are critical to our ability to monitor lender performance 
and ensure compliance, among other things. Indeed, last year the House 
of Representatives passed an FHA reform bill, H.R. 5072, containing an 
array of changes along these lines, and, while similar legislation was 
introduced in the Senate, action on the bill was not completed. I urge 
the Congress to make passage of legislation along these lines a top 
priority in the 112th Congress. In addition to provisions strengthening 
FHA's lender enforcement ability, the 111th Congress bill also included 
technical clarifications that will allow third-party loan originators 
to close FHA-insured loans in their name. This third-party originator 
provision is particularly important to ensuring that several hundred 
community banks are able to continue originating FHA loans. 
Additionally, HUD is seeking congressional authority to extend FHA's 
ability to hold all lenders to the same standard and permit FHA to 
recoup losses through required indemnification for loans that were 
improperly originated and for which the error may have impacted the 
original loan decision, or in which fraud or misrepresentation were 
involved. We also hope to work with the Congress to give FHA additional 
flexibility to respond to stress in the housing market and to manage 
its risk more effectively. This will mean giving FHA flexibility to 
adjust fees and programmatic parameters more nimbly than it can today. 
FHA should also have the technology and talent needed to run a world-
class financial institution.
                     the future of housing finance
Toward a New System of Housing Finance
    Despite all of the efforts to date, there is much more to do. We 
must continue to take steps to facilitate the return of private capital 
to the housing finance system in a responsible way. Last summer, the 
Congress passed, and the President signed, sweeping financial reform 
legislation. Crucially, the Dodd-Frank Act provides vital protections 
for consumers and investors that will help end abusive practices in the 
mortgage market and improve the stability of the overall housing 
finance market.
    In keeping with our obligations under the Dodd-Frank Act, the Obama 
administration recently delivered a report to the Congress, Reforming 
America's Housing Finance Market, which provides a path forward for 
reforming our Nation's housing finance system. The report outlines 
steps that will be taken to wind down Fannie Mae and Freddie Mac and 
help bring private capital back to the market in a first loss position. 
Moreover, it describes how to fix fundamental flaws in the mortgage 
markets and better target the Government's support for a full range of 
housing that is affordable for its occupants, and lays out choices for 
longer-term reforms.
    Bringing private capital back into the housing finance system does 
not mean eliminating all Government involvement in housing finance. We 
believe that a Government role, targeted correctly, and with the right 
protections for taxpayers, should remain an important component of any 
future system. That is why all three of the reform options we lay out 
in the white paper include a strong, resilient FHA and solid consumer 
and investor protections.
    To that end, reforming and strengthening FHA is the first of four 
primary areas of reform to achieve a system with transparent and 
targeted support for mortgage access and housing affordability. The 
other crucial components of reform are a commitment to affordable 
rental housing, a flexible and transparent funding source for access 
and affordability initiatives, and strong measures to ensure that 
capital is available to creditworthy borrowers in all communities, 
including rural areas, economically distressed regions, and low-income 
communities.
The Importance of a Robust and Responsible Private Mortgage Market
    Today, FHA is the largest insurer of mortgages in the world, with a 
portfolio that today exceeds $1 trillion, and a history that includes 
insuring more than 39 million home mortgages and 52,000 multifamily 
project mortgages since 1934.
    But a critical component to further recovery of the broader 
economy, and to reducing the financial risk to taxpayers, is to 
facilitate the return of private capital to the housing finance system 
in a responsible way. This was a central goal of the administration's 
recently released report on Reforming America's Housing Finance Market, 
which proposed to wind down Fannie Mae and Freddie Mac, fix fundamental 
flaws in the mortgage markets, make the Government's support for 
affordable housing explicit and better targeted, and provide choices 
for longer-term reforms. The return of private capital is particularly 
important given that today, Fannie Mae, Freddie Mac, FHA, and Ginnie 
Mae collectively insure or guarantee more than 9 out of every 10 new 
mortgages.
    During the height of the housing boom in 2006, FHA-insured 
mortgages constituted less than 4 percent of the number of new home 
purchases. This was a significant decrease from FHA's historically 
traditional share of approximately 10-15 percent, and an indication 
that the private sector was aggressively extending credit. All too 
painfully, we learned that this extension was often irresponsible. As 
poorly underwritten subprime loans and other products that were 
securitized into private label securities (PLS) began to default at an 
alarming rate, their defaults led to losses throughout the private 
market and private capital vanished from the housing sector at an 
unprecedented pace--in 2006, more than $1 trillion of such mortgages 
were securitized into PLS; in 2010, that figure was less than $60 
billion.\2\
---------------------------------------------------------------------------
    \2\ Source: Inside Mortgage Finance, HMDA, and Mortgage Bankers 
Association.
---------------------------------------------------------------------------
    FHA's temporarily elevated market share of more than 20 percent of 
the overall loan volume (home purchases and refinances) is the result 
of our efforts to fulfill our mission to be a countercyclical 
facilitator of responsible capital liquidity in the housing sector at 
times when the private sector exits the market abruptly. As the 
subcommittee knows, FHA does not lend directly to homeowners, but 
instead insures lenders against losses that may result in the event of 
a borrower default, under the condition that lenders are required to 
abide by extensive documentation and underwriting guidelines to 
originate sustainable mortgages, as well as providing numerous loss 
mitigation opportunities to help borrowers avoid default or 
foreclosure.
    The most recent data shows that 60 percent of African-American and 
Latino homebuyers purchase homes with FHA backing.\3\ FHA thus plays a 
vital role in opening up access to home ownership for the underserved 
in our country.
---------------------------------------------------------------------------
    \3\ HUD analysis of 2009 Home Mortgage Disclosure Act data.
---------------------------------------------------------------------------
A Reformed and Strengthened FHA
    Strengthening and reforming FHA in a way that is healthy for its 
long-term finances and ensures that FHA is able to continue its mission 
of providing access to mortgages for low- and moderate-income families 
is a central component of broader systematic reforms. While FHA has 
already changed policy to require that borrowers with lower FICO scores 
make larger downpayments, FHA will consider other options, such as 
lowering the maximum loan-to-value ratio for qualifying mortgages more 
broadly. In considering how to apply such options, FHA will continue to 
balance the need to manage prudently the risk to FHA and the borrower 
with its efforts to ensure access to affordable loans for lower- and 
middle-income Americans, including providing access to home ownership 
for first-time homebuyers and underserved markets.
    FHA will take any steps for reform carefully to ensure that they do 
not undermine the broader recovery of the housing market. Similarly, as 
we consider changes in such areas as downpayments and loan-to-value 
ratios, we will make sure to retain the flexibility to respond to 
changing market conditions, so that we are able to manage risk, and 
maintain access, as effectively as possible.
    Some have expressed concerns that the increases to the monthly 
premium set to go into effect next month--on the order of $30 per month 
for the typical home-purchase borrower--and any increase in downpayment 
requirements have the potential to excessively restrict access to 
credit or perpetuate a dual credit market. We believe that the benefit 
to the financial health of FHA of the relatively modest premium 
increase is appropriately balanced with the need to maintain access, as 
the change remains affordable for almost all homebuyers who would 
qualify for a new loan. Similarly, we will strongly consider the impact 
on access with any proposal to increase downpayment requirements.
Proposed Rule for Qualified Residential Mortgage
    Last month, HUD joined with the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Federal 
Housing Finance Agency, the Federal Reserve, and the Securities and 
Exchange Commission to announce the consideration and release of their 
Notice of Proposed Rulemaking for section 941 of the Dodd-Frank Act, 
which sets proposed rules to implement the credit risk-retention 
requirements for asset-backed securities and sets a 60-day comment 
period where all stakeholders are able to comment and provide feedback. 
Following this comment period, the rule writers will consider all 
comments received before releasing final rules.
    The goal of the proposed rule is to provide clarity and rules of 
the road to the securitization markets. The proposed rule is one part 
of the administration's goal of bringing private capital back into the 
housing finance system.
    Getting this right is critical. With the financial crisis, we saw 
how bundling and packaging mortgages to sell on Wall Street with no 
accountability helped lead to the erosion of lending and underwriting 
standards that fed the housing boom and deepened the housing bust. The 
Dodd-Frank Act requires that securitizers or originators have ``skin in 
the game'' by retaining at least 5 percent of the credit risk and the 
rule proposed today sets out options to accomplish that mandate.
    Importantly, the rule seeks to define qualified residential 
mortgages--the loans that would not be subject to the risk-retention 
requirements. Much debate will center on the size of downpayments. 
While there is no question that larger downpayments correlate with 
better loan performance, downpayments only tell part of the story. 
That's why we have laid out two alternatives, one requiring a 10-
percent downpayment and another requiring 20 percent.
    We look forward to comments from stakeholders on the relative 
merits of these choices, so that we strike the right balance between 
managing risk and maintaining access to safe, responsible home 
ownership.
                               conclusion
    Madam Chairwoman, between our budget request and the Obama 
administration's proposals to reform the housing finance system, it is 
clear that FHA will continue to play a central role in the continued 
recovery of the housing market--particularly its ongoing commitment to 
provide access and affordability to low- and middle-income Americans. 
And as the reforms we have already made demonstrate, FHA has the 
capacity to perform this role in a way that minimizes risk to the 
taxpayer.
    I look forward to working with this subcommittee--and this 
Congress--to ensure that FHA has the tools it needs to fulfill that 
mission. Madam Chairwoman, thank you again for this opportunity to 
testify. I would be glad to respond to any questions.

                          GOVERNMENT SHUTDOWN

    Senator Murray. Thank you very much, Mr. Secretary. And we 
will put your entire statement into the record for all of our 
members.
    We've all been talking about it--obviously, this hearing is 
about writing the fiscal year 2012 appropriations bill--but we 
are all very concerned about finishing the fiscal year 2011 
budget, and the concern about the prospects of a Government 
shutdown. There are a lot of consequences, obviously. You 
mentioned a few.
    But I wanted to ask you specifically today--particularly 
for Americans hoping to buy a home with FHA insurance, what are 
the consequences if Government shuts down?
    Secretary Donovan. Quite simply, if there is a shutdown, 
FHA cannot endorse any further loans. Individual lenders would 
have the ability to continue to fund loans on their own. They 
would have to draw funding from their own balance sheets to do 
that, under the hope that they could then come back and insure 
those once the shutdown was ended.
    But unlike in the prior shutdown, when FHA represented a 
very small fraction of the market, given that we are endorsing 
close to $30 billion in loans a month, I am very concerned that 
a significant number of lenders would not choose to continue to 
close on those loans, and particularly, if there were any 
extended period that the shutdown continued, that both the 
costs of funding those loans and the potential risks of 
defaults or other issues with those loans would increase the 
pressure on lenders to stop funding loans during that period.
    Senator Murray. This is going to affect a lot of people. If 
you're hoping to sell your home because you're buying another 
one--it could impact you, too, obviously, if you are purchasing 
a home. Do we have any idea how many homebuyers would be 
affected by this?
    Secretary Donovan. The President spoke eloquently yesterday 
about the impacts on someone on the verge of buying their first 
home--80 percent of our loans went to first-time homebuyers 
last year--and also, about the impact on anyone in the process 
of selling their home--if you're planning to move, to take a 
new job in a different location. Multiply that by the millions 
of homeowners that depended on FHA financing last year. We 
represented 40 percent of all home purchases in this country 
last year. And so, the impact isn't just on individual 
families. It's on entire communities, and the international 
housing market.
    So, we do have real concerns, at a time when our market 
continues to be fragile, when our economy has shown real 
progress with 1.8 million private sector jobs created over the 
last 13 months. This is the worst time that we could introduce 
that uncertainty into this fragile housing market.
    Senator Murray. For any of us who have been there--known we 
have to move out by a certain date, and we're waiting for a 
closing to occur--this is a very, very stressful moment for 
many families. So, I'm very concerned about that.
    We also know that Federal funds support HUD and FHA's 
efforts to oversee its growing portfolio. That would, of 
course, be put on hold as well, correct?
    Secretary Donovan. That's correct.
    And I would also add, Madam Chair, that while the focus 
today is on FHA, we have millions of families who depend on our 
assistance--whether it's through vouchers, or public housing, 
or a range of our other programs--more than one-half of the 
residents of HUD-assisted housing are elderly or disabled. And 
our ability to provide funds for the operations of those 
units--the capital to do repairs on those units, and the jobs 
that that creates in construction, which is an industry that's 
been particularly hard-hit by the downturn--all of those are 
put at risk, because we simply can't provide any further funds. 
And so, while it may be a number of weeks that housing 
authorities could continue to operate, the lack of payments, 
particularly if there's an extended shutdown, would be very 
problematic for those families as well, and put millions of 
families at risk.
    Senator Murray. Okay. Thank you very much for outlining it. 
I think we need to understand what the consequences of this 
are, and that's been very helpful.
    I'm going to turn it over to Senator Collins, and then I 
have a few additional questions as well.
    Senator Collins. Thank you, Madam Chairman.
    First, let me associate myself with the Chairman's 
comments. I was thinking, having recently moved, that this 
affects not only the buyer of the house, the seller, the moving 
company--the ripple effects go on and on. And that's why we 
simply must resolve this issue.
    Mr. Secretary, I mentioned in my opening statement that I 
would like you to comment on what the role of FHA would be if 
Fannie Mae and Freddie Mac's roles were diminished, or the 
entities were privatized. Would that have an impact on the role 
played by FHA?
    Secretary Donovan. Absolutely. And I think our housing 
finance reform proposal that we laid out 2 months ago with the 
Department of the Treasury made clear that, in all cases, we 
foresee a smaller role for FHA, and a smaller role for Fannie 
Mae and Freddie Mac going forward; that, simply, we must take 
steps, as we've begun to do, to shrink the footprint of 
Government in the housing finance market. And in particular, 
the proposed increase in premiums that we have in the budget 
for 2012 is an important step, along with our endorsement of 
allowing the loan limits to step down on October 1, as they 
would currently do without further action by the Congress.
    So, having said that, in the context of believing that we 
need to work to reduce the footprint of both the Government-
sponsored enterprises (GSEs) and FHA, we lay out a set of 
options in the white paper, and in particular, if option 1--
which would have no additional ability for the Federal 
Government to provide mortgage insurance outside of FHA--were 
the path, then I think we would see a significantly increased 
role of FHA relative to other options. And in particular, in 
moments of crisis, it would be enormously important that FHA 
have the flexibility and the ability to step up even more 
significantly than it has done through this crisis. We've 
reached, as I said earlier, 40 percent of the purchase market. 
But in the kind of crisis that we've experienced, without a 
Fannie Mae or Freddie Mac, it would be absolutely critical that 
FHA could potentially go even further to ensure that the 
housing market is not further damaged by the kind of crisis 
that we've seen.

                              LOAN LIMITS

    Senator Collins. At your previous appearance before this 
subcommittee, you recommended a reduction in the loan limit 
from $729,750 to $625,000. There are several bankers with whom 
I've talked who believe that is still far too high if the goal 
of Government is to try to make housing more accessible to 
lower- and middle-income families. What is your response to 
that criticism?
    Secretary Donovan. The administration believes that we 
ought to work together with the Congress to design lower limits 
for FHA beyond the initial step on October 1.
    Having said that, it is absolutely critical that we do that 
in the context of what the housing finance system would look 
like more broadly. In other words, if we have a well-designed, 
targeted, explicit guarantee that would be available outside of 
FHA, I think it would be wise to look at a reduction of those 
loan limits that would go further than if we did not have an 
alternative mechanism for guaranteeing loans, either in a 
crisis or during more normal times in the market. Because, 
frankly, FHA would be called on, as I just said, to do more 
without some alternative form of explicit, targeted guarantee.
    And so, I think we can't, in the absence of coming to some 
agreement with the Congress about the broader solutions for the 
housing finance market, be too specific about what an FHA loan 
limit would look like, other than to say it should be lower 
than the $625,000 that we've talked about.
    Senator Collins. Thank you.
    Senator Murray. Senator Blunt.

                     STATEMENT OF SENATOR ROY BLUNT

    Senator Blunt. Thank you, Chairman, just a couple of 
questions quickly. I know we're on a timeframe here, and I 
appreciate that.
    So, what impact does it have on the housing market when 
you--this may be in your prepared statement, too, Secretary, I 
apologize if I've missed this already--if you lower this limit? 
How does that impact an already fragile housing market? Are you 
concerned about that?
    Secretary Donovan. What we have seen, in fact, is that 
there is a relatively small share of FHA's overall lending, 
significantly less than 10 percent, that is above that $625,000 
limit at this point. So, that initial step----
    Senator Blunt. Significantly lower than what?
    Secretary Donovan. Than the $625,000 limit which would go 
into effect--that lower limit that would go into effect on 
October 1. So, while it has some impact on FHA, the bigger 
impact would be on lending by Fannie Mae and Freddie Mac. And 
that would be an important step for us, to see if private 
capital were to return to that level of lending, and what kind 
of rates it would be at.
    As we just discussed, the much more significant impact 
would be to begin to look at going back down to significantly 
lower limits--$417,000 was the limit before. It was raised by 
the Housing and Economic Reform Act (HERA) up to the $625,000, 
then to be raised further after that.
    Really, what you're looking is more like about 20 to 25 
percent of our lending that's between that $417,000 limit and 
the $625,000 limit. So, that's really where I think we need to 
have a fuller discussion with the Congress about where we ought 
to go. And I would particularly mention that this will be 
important in higher cost markets; a much larger share of our 
lending in California, in certain metropolitan areas, like 
Seattle, is at that higher limit. And so, the localized impacts 
could go significantly higher than that 20 or 25 percent of our 
business that I talked about.

                          FHA PREMIUM INCREASE

    Senator Blunt. And in terms of the premiums--I know you're 
talking about FHA, raising the new premium structure--what's 
the likelihood that that structure will serve the purpose for 
the full budget year and beyond, or that you'll have to have 
another adjustment?
    Secretary Donovan. First of all, the impact of the 25-
basis-point increase is in the range of $30 a month. And given 
that interest rates remain very low, given that our Ginnie Mae 
securities, in particular, continue to be very attractive 
investments, I am not substantially concerned. We do expect 
some decrease in volume. As I've said, we do expect to see 
private capital return--mortgage insurers and others--to step 
up as we increase the premiums. But I don't think that it will 
have a major effect, and certainly not a significant effect, on 
the overall national market.
    I think it's very hard to say, Senator, today, without 
knowing the initial impacts that the combination of a change in 
loan limits and the premium structure--we've also seen Fannie 
Mae and Freddie Mac increase their pricing structure as well. I 
would really want to see what the impacts are, where the 
housing market is, through the critical summer period that 
we're going to be coming into, before I would say specifically 
whether we need to continue to increase premiums or not. At 
this point, given the actuarial review and where we are, I'm 
confident that this premium increase will help us rebuild the 
reserves to through 2012. Beyond that, I really would like to 
come back once we see the initial impact and have a fuller 
discussion with you.

                           PREPARED STATEMENT

    Senator Blunt. Okay, Madam Chairman, thank you.
    [The statement follows:]
                Prepared Statement of Senator Roy Blunt
    Thank you Chairman Murray and Ranking Member Collins for holding 
today's hearing. The topics for this hearing are extremely important 
and in the forefront of many people's minds.
    Also, welcome back Secretary Donovan and thank you for appearing 
before our subcommittee on behalf of the now acting commissioner, Bob 
Ryan. As we recover from the recent housing crisis, I look forward to 
serious discussions with you about our current housing finance system.
    Since the crisis, Federal Housing Administration (FHA) has become 
the lender of first resort for both homebuyers and homeowners who want 
to refinance. FHA alone now guarantees about one-third of all home 
loans, up from about 3 percent before the financial crisis. Like many, 
I have grave concerns that with an implicit guarantee from the Federal 
Government, this agency could be the next big bailout waiting to 
happen.
    FHA was to be self-sustaining and was founded to help low- to 
moderate-income borrowers achieve home ownership; so it is troubling to 
see this dramatic increase in lending authority. People with 
substantial borrowing power should not make up such a substantial 
portion of the FHA loan portfolio, and I am interested in hearing how 
you plan to address this unsustainable growth.
    Last year, FHA's capital-reserve ratio fell below the 
congressionally mandated level of 2 percent for a second year in a row. 
While I recognize that FHA is in a stronger fiscal position this year 
than it was in 2009, I would like to hear when these reserves will 
return to their mandatory levels and how FHA intends to keep these 
reserves from dipping below 2 percent in the future.
    I have serious concerns about the current vacancies in both the FHA 
Commissioner and the Federal Housing Finance Agency Director positions. 
In a still very fragile housing market, all agency oversight positions 
must be filled without disruption and I will continue to remind the 
President.
    Mr. Secretary, I know you realize how serious these issues are and 
I look forward to hearing your plans to keep FHA solvent and off of the 
backs of the taxpayers as we consider alternatives to the Federal 
Government's role in financing the housing market.

                     MUTUAL MORTGAGE INSURANCE FUND

    Senator Murray. Thank you very much.
    I think you answered my question that I was going to ask 
you about the independent audit on the Mutual Mortgage 
Insurance Fund (MMI Fund), and why you felt it was necessary to 
raise that premium again.
    Can you just give me a quick glimpse on how you determined 
the size of that increase, and just let us know what your 
thinking is on that?
    Secretary Donovan. Yes. We did very careful analysis of the 
impacts that we would see, both on the capital reserves, but 
also looked at what barrier it might pose to access to home 
ownership, and analyzed that across a range of income groups, a 
range of markets, and felt that 25 basis points was the right 
balance of helping to build our reserves and yet not impacting 
particularly under-served communities that we've seen have been 
particularly hurt by the downturn. And so, we felt it was the 
right balance.
    I also would just have to add a thank you to the 
subcommittee for working with us. It would not have been 
possible to implement that--a premium increase, which goes into 
effect on April 18--without the very strong partnership that we 
had with this subcommittee as well as your colleagues on the 
Banking Committee to get that passed very quickly and give us 
that flexibility. So, thank you again.
    Senator Murray. Okay. Over the last 2 years, FHA has 
implemented a series of reforms which you talked about in your 
written testimony. These changes will improve the quality of 
new loans being insured, but the MMI Fund problems right now 
stem from the loans that FHA endorsed in prior years--
particularly those that it took on in the height of the housing 
boom. So, the size of the losses facing FHA will be affected by 
the overall recovery of the housing market, which, as we know, 
continues to deal with foreclosures and depressed home values. 
In fact, the current discussion on the housing market is about 
the possibility of a double dip in home prices.
    Are you concerned about a possible double dip?
    Secretary Donovan. Certainly the data that we've seen over 
the last few weeks has raised concerns about where the market 
is going. We have seen declines in house prices pretty 
consistently over the last few months, as well as, after a 
number of months of increasing existing home sales, a decline. 
There is some information through pending home sales that we 
may see home sales start to trend up. And obviously, as we're 
entering the spring and the summer selling seasons, which are 
the strongest seasons of the year, we're going to be watching 
very, very closely.
    What I would say is, really, two things. First of all, 
rightly, as you point out, our ability to ensure that we 
continue to grow the capital reserve--there are many factors 
that we control. We've taken enormous steps forward--again, 
working with this subcommittee and the Banking Committee--to 
improve our enforcement. We need to continue to do that so that 
we weed out bad lenders and can enforce against problems that 
we've seen with our existing book.
    But beyond that, I think the most critical thing that we 
can do is to hold servicers accountable to helping those that 
can remain in their homes to do that. And frankly, what we have 
found in our investigations of FHA servicers is a consistent 
pattern of not helping borrowers soon enough in the process--
and that is a lose-lose situation. It's a loss for that 
homeowner, obviously--devastating impacts; it's a loss for that 
community, where homeowners who are paying their bills, are 
current on their mortgages, see their house prices decline even 
further; and it's a loss for the servicers and the investors in 
those loans, because they, where they could help that family 
recover and continue to see them pay, will end up taking deeper 
losses on those loans because they haven't helped those 
families stay in their homes.
    So, that's why I'm very focused, and working closely with 
my colleagues in the Administration, the State Attorneys 
General, to hold those servicers accountable and to make sure 
that we help families who can stay in their homes, stay in 
their homes. Mark Zandi has said that if we can help an 
additional 500,000 borrowers to stay in their homes, he thinks 
that could make the difference between a double dip and a 
stronger recovery in the housing market. So, that is a critical 
focus that I have in making sure that we hold not just FHA 
servicers accountable, but all servicers accountable.

                    LENDER OVERSIGHT AND ENFORCEMENT

    Senator Murray. I personally appreciate the focus you've 
put on oversight and enforcement that you've just talked about. 
We know that at the height of the housing boom, really, too 
many loans were poorly underwritten and putting people in 
unaffordable mortgages, and here we are.
    I know, I've watched carefully and seen that you've really 
increased the enforcement. I know the Mortgagee Review Board 
meets regularly now, and it's removed nearly 15 times as many 
lenders in the last 2 years than in the previous 9 years 
combined.
    Can you talk a little bit about how that enforcement has 
actually impacted FHA's financial standing and the performance 
of FHA lenders?
    Secretary Donovan. I think the most direct impact of that 
is that what we've seen is substantially improved quality of 
loans that we're making. As we've weeded out bad lenders, we've 
seen our early payment defaults decline substantially. And 
frankly, all of that comes back to benefiting the taxpayer. We 
have out-performed the predictions, as I said earlier, not just 
of our own actuaries, but dramatically out-performed the 
predictions that CBO had for the performance of our loans. And 
that is, I think, the most responsible thing that we can be 
doing, particularly given the context--as you said, the 
elephant in the room today is this broader budget discussion. 
And the President has talked about smart government. I think 
FHA is a very good example of how, through better managing 
government, we can ensure that we have benefits--not just to 
homeowners, but to taxpayers as well.
    Senator Murray. I very much appreciate that. Thank you.
    Senator Collins.
    Secretary Donovan. Thank you.

                            FHA UNDERWRITING

    Senator Collins. Thank you.
    Let me follow up on the issue of problem lenders and HUD's 
efforts to protect the FHA Insurance Fund from bad loans. I 
note that HUD has made enormous strides in this area in recent 
years, and I want to give you credit for that. But, 
nevertheless, the inspector general continues to have concerns 
regarding HUD's oversight of its underwriting program, despite 
the significant actions that HUD has taken.
    For example, there's a recent inspector general report that 
says the Department missed critical chances to recover up to 
$11 million in losses to the FHA's Insurance Fund on bad 
mortgage loans. And what was more troubling to me is the 
inspector general raised the concern that there are still 
systemic problems with the underwriting of FHA-insured loans, 
and the resulting costs for the Insurance Fund for loans that 
just never should have been insured in the first place.
    In the sample that the inspector general conducted, it 
found that lenders did not properly underwrite 140 of the 284 
loans reviewed--that's almost 50 percent--because they were not 
properly following FHA requirements. Similarly, there was a 
very recent story in USA Today that talked about a New York 
mortgage company that had been flagged in October 2007, and it 
says that HUD knew back then, or, FHA knew back then that this 
company, Cambridge Home Capital, posed a danger to homebuyers 
and repeatedly violated the agency's safe lending standards. 
Even so, FHA continued to approve mortgages for this company 
until June of this year, and that was nearly 3 years after the 
agency had flagged this company as being potentially 
fraudulent.
    What is being done to ensure that when FHA's early warning 
system, which is the database that flags problem lenders, 
identifies a lender, that there is swift action to prevent that 
lender from continuing to make more mortgages that are insured 
by FHA?
    Secretary Donovan. Senator Collins, first, let me just 
start by saying, I am very proud of the work that we've done to 
increase enforcement. And in fact, the partnership that we've 
had with our inspector general has been, I think, very strong. 
The inspector general report, the report that you talked about, 
was actually focused on lenders that we brought to their 
attention, and had identified as problem lenders through our 
systems, and I would just quote from Ken Donohue when he 
testified last May, that he had seen FHA do more in the last 
year than he had seen in all of the previous 8 years combined 
as inspector general. So, I think we've made substantial 
progress.
    And in particular, I would point to the fact that we have 
done more enforcement actions--I think, Madam Chair, you just 
cited this--15 times more enforcement actions in the past year 
than we'd done in the 9 previous years combined.
    Having said that, are we perfect? Do we still have a ways 
to go? We are not perfect. We still have a significant distance 
that I think we can go, and we should go, to strengthen those 
tools. And I would really point to two things: Too often today, 
our--what we call--postendorsement technical reviews, which are 
really one of our ways of catching these problems, are manual, 
or, we don't have the depth of automated systems that we need. 
One of the critical things that we worked with this 
subcommittee to do last year was to create the Transformation 
Initiative (TI).
    One of the two largest investments we're making with TI is 
to create a much more sophisticated set of systems within FHA 
that would allow us to have a structural way, a systemic way, 
of identifying potential fraud and poor underwriting much 
earlier in the process. So, I want to make sure that we 
continue to work together to invest in the state-of-the-art 
technology that will allow us to identify that fraud on a 
systemic basis earlier.
    The second thing I would say is, we still have limitations 
in our statutory authority to be able to go after some of the 
worst lenders, and in particular, to go after some of the 
principals. And it is frustrating to us, for example, that we 
can only terminate a branch, or a region of a lender, but not 
terminate the entire company from operating in FHA through our 
Neighborhood Watch system. That is one of the legislative 
changes that was proposed in legislation last year that we got 
close to getting done but we didn't get done. I would really 
like to make sure that we continue to work with the Banking 
Committee to get further authority to allow us to enforce more 
strongly.
    Senator Collins. Thank you.
    Secretary Donovan. Thank you.
    Senator Murray. Senator Blunt.

                        FHA COMMISSIONER VACANCY

    Senator Blunt. Yes. I have one more set of questions here 
that I hope will be pretty quick.
    Mr. Secretary, last month David Stevens, the FHA 
Commissioner, who'd only been on the job 6 or 7 months, I 
think, I think started last July, announced he was going to 
leave and become president of the Mortgage Bankers Association. 
You haven't had a permanent Director at the Federal Housing 
Finance Agency (FHFA) since 2008. I'd just like your comment. 
What are we doing here, and how is this hampering your efforts 
as Secretary, not having these positions filled--and when we do 
fill one, I think that was confirmable, and the person's 
confirmed, and then they come and go so quickly, as----
    Secretary Donovan. Yes. Actually, Commissioner Stevens was 
at FHA for closer to 2 years. He was a nominee right when we 
came into office. It took roughly 3 months for him to get 
confirmed. And so, he was there, and that is not atypical for a 
commissioner to stay for 2 years. And frankly, he was pretty 
clear, having worked in the private sector, that he would 
return there at some point. But I think the important thing 
there is that we have built a very strong team within FHA. With 
Dave's help, we brought in the agency's first ever Chief Risk 
Officer, Bob Ryan. The President asked Bob to be Acting 
Commissioner during this period. And I'm fully confident, with 
his work, the work of Vicki Bott, and Carol Galante's 
leadership, that there is a very, very strong continuity, and 
that while we will be nominating a successor in the coming 
weeks, I'm very confident that the work that we've done 
continues.
    On the FHFA post, to be frank, I think, we were frustrated. 
We had nominated an outstanding candidate in Joe Smith. And 
because of delays in the ability to get confirmed, he was asked 
to take on increased responsibilities in the State of North 
Carolina and made a decision when the last Congress ended in 
December that he would withdraw from the process, given the 
delays that we've had. And so, I think it's absolutely critical 
that we have a strong permanent nominee and leader at FHFA. I 
think Ed DeMarco's done a good job as Acting Commissioner. But 
the confirmation process there has really stood in the way of 
our being able to get a permanent leader at FHFA.
    Senator Blunt. Thank you.
    Chairman, I'm sure you're probably involved in these 
discussions to try to cut down the number of people that have 
to go through this process. I'm supportive of that and hope 
that we can give more attention to the people that we think 
absolutely need attention, and be less of an impediment to 
leadership in the Government generally----
    Senator Murray. I'll agree with that.
    Senator Blunt [continuing]. So, thank you, Chairman.

                          RISK-RETENTION RULE

    Senator Murray. Thank you.
    I just have a couple more questions. I wanted to ask you, 
as we continue to think about how to create a stronger, safer 
housing system--managing risk is going to be a central concern. 
And we have to be very careful not to overcorrect.
    Looking at the administration's proposed rule for risk 
retention and the definition of a qualified residential 
mortgage, I do have some concerns about the impact of a 20-
percent downpayment requirement. I get the skin in the game. I 
understand that. But when I think about the high cost of 
housing in my State, the idea of middle-class families trying 
to come up with 20 percent of a downpayment on a mortgage is 
really daunting. And I really worry that we're putting home 
ownership out of the ability of many middle-class Americans 
today with that.
    FHA demonstrated last year when it announced its new tiered 
downpayment system that credit risk is more than just about 
loan to value ratio--it's also about creditworthiness. So, the 
risk-retention rule calls for 20 percent. But I saw that you 
also have an alternative for 10 percent. Can you talk a little 
bit about why you put that out?
    Secretary Donovan. I think you've just made an eloquent 
case for why it's important that, as we are discussing this 
rule--it's a proposed rule--that we have a vigorous debate 
about the proper balance between downpayment requirements, and 
access and affordability. Home ownership has been, continues to 
be an important gateway to the middle class. And we've made, in 
our broader housing finance reform proposal, a strong case that 
FHA needs to continue to be a critical source of access to home 
ownership by insuring that first-time homebuyers, for whom a 
downpayment is typically the biggest barrier to home ownership, 
can continue to get access to the wealth building and the 
stability that home ownership can provide.
    So, there's no question the downpayments affect 
performance. But too often, I think, in this debate we focus on 
downpayments and don't focus on the other aspects of 
underwriting--whether it be credit history, whether it be debt-
to-income (DTI) ratios, the nature of the products that we're 
talking about--all of those are critical steps. And what we've 
learned from the crisis is, it's really when you start to layer 
risk--low downpayments with high DTIs, with poorly chosen 
products for that homeowner--all of those, when you layer them 
on top of each other, lead to exponential increases in risk. 
And so, we thought it was very important, as we put out the 
rule, to have an alternative in the preamble that focuses on a 
10 percent downpayment, rather than a 20 percent.
    Again, we want to make sure, as we finalize this rule, that 
we have this full and open debate. I do think it's important 
that, in particular, we ensure that we don't pull up the 
drawbridge, if you will, to those who can be successful 
homeowners in this debate.
    Senator Murray. Yes. And as you know, getting the 
downpayment, can be a huge barrier, but the question is, for 
many homeowners, were you able to make the mortgage payment 
every month? So, creditworthiness has to be an important part 
of that, and I appreciate your thoughts on that. And we'll 
continue to follow it.
    The same question can be asked about the GSE reform. Do we 
put in place so many barriers and changes that we don't allow 
average middle-class families to be able to get into the 
market? And you put forward three proposals on that. Are you 
thinking about that in the same context?
    Secretary Donovan. Absolutely. I think part of the question 
is really about what happens in a moment of crisis like we've 
been through, and ensuring that we can step up our response in 
a responsible way, just as I think FHA's been able to do 
through this crisis.
    But there's also a fundamental question about, what does 
our housing finance market look like in normal times? There's 
no question that we went too far.
    Senator Murray. Yes.
    Secretary Donovan. Seller-funded downpayments, all of the, 
frankly, crazy products that we saw. People making loans that 
we knew families couldn't afford on the day those loans were 
made. We have to get back to safer, saner products, there's no 
question. But we have to think about as well, as we've 
acknowledged, that relative to the crazy place that we were, 
the cost of housing finance is going to go up--we have to 
balance that, those increases in costs, the strengthening of 
underwriting standards, with really looking carefully at the 
data and understanding where we are confident that families can 
be successful homeowners. And I think we've had that experience 
in FHA, and that we really bring that to this debate as we will 
go forward.
    Senator Murray. Yes, and I appreciate that. I mean, we all 
know that we went too far, the market went too far. But we 
can't overcorrect and create a situation that makes it 
impossible for people to purchase homes. So, it is a tough 
balance, and I appreciate your thoughts on that.
    Senator Collins.

                          FDA'S RISK EXPOSURE

    Senator Collins. Mr. Secretary, I'm curious what the impact 
has been on FHA's risk exposure as a result of the increase in 
the higher mortgage limit that FHA is insuring. Has that 
increased the risk exposure for FHA?
    Secretary Donovan. Because the loans that we've made at 
these larger loan limits are relatively young--they're 
relatively new loans--it's too early to definitively say 
whether the performance of those loans is better or worse than 
other loans, and whether they would increase the risk exposure. 
There have been some faulty studies, frankly, that have looked 
at this.
    Our best estimate at this point, as we look at it--
obviously, with Bob Ryan's work as the first Chief Risk 
Officer, this is an issue he's looked carefully at--and the 
early data that we have shows that those loans perform roughly 
the same as the rest of the portfolio. So, I think it's fair to 
say that moving to those larger loans--particularly given that 
the highest-cost loans represent a relatively small share, as 
the loans that are above $625,000 represent only around 3 
percent of our lending--that we really haven't seen a 
significant change in our risk profile as a result of the 
higher loan limits. But, we should continue to look at that as 
these loans age.
    Senator Collins. Because they're pretty young loans.
    Secretary Donovan. Yes.
    Senator Collins. What percentage of FHA's insured loans are 
delinquent at this point?
    Secretary Donovan. Let me get specifics. What I will say is 
both our seriously delinquent share and our 30-plus day 
delinquencies have declined quite consistently over the last 
roughly 15 months. So, from the beginning of last year we've 
seen fairly significant declines. We're in the range of 8 
percent today--serious delinquency at 8.2 percent today.
    And I would just point out, we'd be happy to get you more 
data that looks at this in a range of ways. We analyze this by 
how recently the loans were made, as well. And one of the most 
encouraging things we see is, when we separate out recent 
originations, we see dramatically lower early payment defaults, 
and at just about every stage, as they age we've seen 
significantly lower defaults on newer loans.
    I would also point out that our defaults remain about one-
third of the performance of subprime loans. And so, while we do 
have somewhat higher serious default rates than, for example, 
prime loans in the GSE books, if you look at them compared to 
the subprime default rates, which are well more than 20 
percent--serious delinquencies--it's a dramatic difference, and 
that you can see the sort of consistent, safe underwriting that 
we've done coming through in that.

                         CAPITAL RESERVE RATIO

    Senator Collins. My final question, because I know that we 
do need to adjourn, concerns the capital reserve ratio. It's my 
understanding that the ratio is currently below the 
congressionally mandated level of 2 percent, and I know that 
last year HUD established a performance goal to restore the 
excess capital reserve ratio of the MMI Fund to the mandated 
level of 2 percent by the year 2014.
    Could you give us an update on whether you believe that at 
the end of this fiscal year you will improve over last fiscal 
year? And are you on track to reach the congressionally 
mandated level by 2014?
    Secretary Donovan. Based on everything that we know today, 
we are somewhat ahead of the path that was laid out in the 
actuarial review last year, which was to be able to get back to 
the 2 percent by 2014.
    The reason for that is because we have outperformed 
predictions that the actuarial review made in a range of areas, 
to the point where, as I said earlier, our projection is that 
our receipts would be about almost $10 billion this year. Our 
volume's down a little bit in the last few months. It may be 
that they come in somewhat lower than that. But that's 
substantially higher than what the actuary predicted and, as I 
mentioned, CBO. So, the indications are good.
    There are two cautions I would give to that. One is that we 
have seen a buildup in pending foreclosures, so we're not 
realizing claims on those. Because we've seen delays on behalf 
of lenders, particularly with the problems that we've found in 
servicing and in the foreclosure process, many lenders have 
gone back to re-look at those processes. So, I think it's fair 
to say we will see a jump in claims as those foreclosures 
proceed--at least some of them--in the coming months.
    I think the larger issue, though, is what we don't control. 
The single largest factor in the performance or where we are in 
the actuarial review in the capital ratio is the direction of 
home prices. We were relatively conservative in the projections 
that we used--they're independent projections, but I think they 
were relatively conservative--they predicted a more than 5-
percent decline this year in house prices.
    There's nothing that concerns me at this point in terms of 
the performance being worse than was projected in the 
actuarial. Having said that, if we do see a slowdown in the 
broader economy--whether it's the effects of what's happening 
overseas or other issues that would slow down the economy--a 
jump in interest rates, those kind of broader macroeconomic 
effects and the way that they affect house prices, is the 
single biggest variable that we, frankly, don't control with 
our actions at FHA, that could impact where we are on the 
capital reserve ratio.
    I don't want to get in the business of predicting or saying 
I'm absolutely confident that we'll be in a stronger position 
next year. All indications are that way, but there's lots of 
time between now and then for the market to evolve.
    Senator Collins. Thank you.
    Senator Murray. Thank you very much.
    And, Mr. Secretary, thank you so much for your statements 
this morning.

                     ADDITIONAL COMMITTEE QUESTIONS

    We will leave the record open for any additional questions 
to be submitted, and we look forward to your responses.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
              Questions Submitted by Senator Patty Murray
                   operation watchdog recommendations
    Question. Last month, the Department of Housing and Urban 
Development (HUD) Office of Inspector General (OIG) issued a report 
based on ``Operation Watchdog'', an initiative prompted by the Federal 
Housing Administration (FHA) concerns over increasing claim rates. This 
OIG focused its attention on Direct Endorsement (DE) lenders, and 
discovered instances where HUD failed to identify problems in 
underwriting resulting in claims paid on unqualified FHA loans. The OIG 
has recommended that FHA implement procedures to review riskier loans 
and that HUD seek administrative remedies to recover losses. I 
understand that one of the FHA legislative reforms being sought is 
indemnification authority against DE lenders, which would address part 
of the OIG's concern.
    How HUD is working to address the OIG recommendation?
     Answer. In recent years, FHA has significantly strengthened its 
ability to review and evaluate mortgagees' underwriting and servicing 
operations for compliance with HUD requirements. Even before Operation 
Watchdog was announced, FHA had been taking stock of its oversight and 
enforcement activities and had begun to initiate several changes to its 
policies and practices. Recent changes include:
  --The expansion of the Credit Watch Termination Initiative to include 
        DE mortgagees. This endeavor allows FHA to evaluate lender 
        underwriting performance on a quarterly basis and take action 
        to quickly terminate poorly performing lenders.
  --The development of comprehensive lender performance metrics and 
        reporting. These reporting capabilities significantly improve 
        FHA's ability to analyze and evaluate lender performance in 
        order to timely identify lenders whose performance poses 
        potential or actual risks to FHA.
  --The pursuit of statutory authority to require indemnification by DE 
        mortgagees. At present, FHA only has authority to request 
        rather than require indemnification from DE mortgagees. 
        Therefore, the Department has eagerly sought legislation that 
        would expand its authority to require indemnification from 
        these lenders.
  --A comprehensive overhaul of FHA's loan-level review procedures. 
        This effort has yielded improved risk-based targeting and 
        evaluation methodologies and better aligned the Department's 
        various loan review processes to more effectively identify 
        loans that do not comply with FHA's requirements.
  --The development of a comprehensive counterparty risk management 
        information technology (IT) solution. Employing state-of-the-
        art technologies and practices, these new IT tools will improve 
        HUD's risk analysis and recognition capabilities throughout the 
        FHA lending life cycle.
    In sum, FHA is executing substantial changes to its policies and 
procedures that are dramatically improving the Department's ability to 
identify and mitigate risks to its insurance funds, via the development 
of risk-based monitoring and analysis, implementation of strengthened 
oversight and enforcement mechanisms, and the acquisition and 
utilization of substantially improved technologies. FHA is ensuring 
that it possesses the tools necessary to conduct its business in ways 
that are consistent with industry best practices and appropriately 
protect the Department's insurance funds. These changes were underway 
long before the release of the Operation Watchdog audit report. 
Operation Watchdog merely validated that the improvements FHA is 
pursuing already are both necessary and appropriate.
     Question. Why does HUD lack the authority to recoup losses against 
these types of lenders and how will the legislation you are seeking 
address this?
    Answer. FHA-insured single-family mortgages are originated and 
underwritten through the DE process, which permits an FHA-approved DE 
lender to underwrite mortgages without FHA's prior review and submit 
them directly for insurance endorsement. High-performing DE lenders 
with acceptable default and claim rates may apply for approval to 
participate in the Lender Insurance (LI) Program, which enables them to 
endorse FHA mortgage loans without a pre-endorsement review by FHA. As 
of April 30, 2011, there were 1,859 active DE lenders. Of this total, 
687 were approved for participation in the LI Program.
    Current statutory authority at section 256(c) of the National 
Housing Act (12 U.S.C. 1715z-21) permits the Secretary to require 
indemnification if a mortgage approved by the Secretary pursuant to 
delegation of authority through the LI Program was not originated or 
underwritten in accordance with requirements established by the 
Secretary, and the Secretary pays an insurance claim within a 
reasonable period specified by the Secretary. If fraud or 
misrepresentation was involved in connection with the origination or 
underwriting, the Secretary may require the lender to indemnify the 
Secretary for the loss regardless of when an insurance claim is paid. 
This existing authority only applies to indemnification by LI lenders 
and does not include DE lenders that are not participants in the LI 
Program.
    Therefore, FHA is seeking to extend the Secretary's authority such 
that HUD can require indemnification by all DE lenders, not simply 
those approved for participation in the LI Program. The Secretary's 
existing indemnification authority only provides recourse for FHA to 
avoid or recoup losses through required indemnification for loans that 
were improperly originated or underwritten, or in which fraud or 
misrepresentation were involved, from LI lenders. As stated above, only 
687, or 37 percent, of DE lenders, are approved LI Program 
participants. Therefore, FHA would benefit from explicit authority to 
require indemnification from DE lenders, and thereby recover losses 
from the remaining 63 percent of lenders authorized to make 
underwriting and loan approval decisions on FHA's behalf. The current 
limitation on FHA's counterparty risk management authority with regard 
to DE lenders poses obvious and unnecessary risks to FHA's insurance 
funds. Extending the Secretary's authority to require indemnification 
by lenders to include all FHA-approved DE lenders will ensure that FHA 
will be able to mitigate losses arising from claims on inappropriately 
or fraudulently originated or underwritten loans.
            government national mortgage association hiring
    Question. The budget for fiscal year 2012 requests authority to 
alter the way we fund the Government National Mortgage Association 
(Ginnie Mae) salaries and expenses. Instead of receiving direct annual 
appropriations, the budget proposes to allow Ginnie Mae to fund its 
operations using fees it generates under authority provided in 
appropriations bills.
    I share the concern about ensuring that Ginnie Mae has the 
appropriate staff to monitor its growing portfolio, which is why the 
Senate bill for fiscal year 2011 proposed an increase above the 
President's budget request--which actually sought to reduce funding for 
Ginnie Mae staffing. However, I am not convinced that the proposal in 
the budget actually addresses all of the challenges with building 
Ginnie Mae's workforce. As I understand it, Ginnie Mae did not use all 
of the funding the Congress provided it last year, and it wasn't the 
first time Ginnie Mae lapsed funding. This suggests the problem isn't 
really a question of resources.
    What has been the problem with hiring at Ginnie Mae, and given that 
you didn't use all of the resources allocated to Ginnie Mae last year, 
how would this language address the challenge?
New Funding Structure
     Answer. The President's budget request for fiscal year 2012 
includes a proposal to fund Ginnie Mae with $30 million in personnel 
compensation and benefits, and other administrative expenses through 
collections of multiclass and commitment fees. The proposal is forward 
looking and is designed to provide Ginnie Mae with flexibility to 
accommodate a multiyear hiring initiative. The administration's 
proposal provides Ginnie Mae with certainty as to the level of funding 
that will be available in the next year and thus, Ginnie Mae will be 
able to staff to that level of funding. With the new funding structure, 
Ginnie Mae's hiring would not be hampered by the uncertainty and 
interruptions sometimes caused by insufficient appropriations or 
continuing resolutions.
    During the last few fiscal years, Ginnie Mae has sought an increase 
in its salaries and expense appropriation to increase our staff to 
better manage the housing crisis. Small increases were approved in 
fiscal year 2010 and fiscal year 2011 through reprogramming. However, 
in each of those years, a continuing resolution was in place holding 
agency expenditures to prior-year levels for part of the year making it 
very difficult for Ginnie Mae to take full advantage of the additional 
funds. In addition, even if reprogrammed funds are given in one fiscal 
year, there is no guaranty that the same reprogramming will be 
available the next fiscal year. Thus, in order to avoid beginning the 
next fiscal year at payroll higher than the base appropriated amount, 
Ginnie Mae has limited its hiring. The proposed funding structure will 
provide certainty as to the level of funding available and will allow 
Ginnie Mae to execute its multi-year hiring plan.
Lapsed Funds Due to Uncertainty
    In recent years, HUD has not had an approved budget at the 
beginning of the fiscal year and has had to operate under a continuing 
resolution. The lack of certainty as to the funding level for the year 
has hampered Ginnie Mae's ability to move aggressively on its planned 
hiring schedule in the past few years. Under a continuing resolution 
Ginnie Mae receives a fraction of the previous year's approved salaries 
and expense budget until a full budget is approved.
                  supporting community bank mortgages
    Question. According to estimates, nearly 70 percent of all mortgage 
originations flow through the big four lenders--JPMorgan Chase, Bank of 
America, Citigroup, and Wells Fargo. In the aftermath of the housing 
crisis hundreds of small, community banks have failed. Yet, community 
banks serve an important role and are an important part of a healthy 
market. In your testimony you refer to reforms that you are proposing 
that would assist small, community banks.
     Can you elaborate on the current problem, and how the reforms you 
are proposing would address it?
     Answer. FHA began requiring the submission of audited financial 
statements from Supervised Mortgagees (i.e., banks, thrifts, and credit 
unions) because without receiving audited financial statements from 
these institutions, FHA was not able to adequately assess their 
financial stability and possession of sufficient capital. To put 
supervised lenders on par with FHA's existing requirements for other 
lenders, and to avoid potential losses from undercapitalized 
institutions, HUD decided to begin requiring supervised entities to 
submit audited financials. The failure of 157 banks in 2010 testifies 
to the prudence of this policy change.
    For some small FHA-approved supervised lenders that originate low 
volumes of FHA loans the expense of obtaining an external audit of 
their financial statements is deemed too burdensome to justify their 
continued participation in FHA programs. Because many of these small 
supervised lenders are located in underserved communities that possess 
a limited selection of residential mortgage lending entities, small 
supervised lenders' relinquishment of FHA-approval may decrease access 
to FHA programs for some communities. Given FHA's present prominent 
role in the Nation's mortgage market, a reduction in the availability 
of FHA-insured mortgage credit could adversely impact the recovery of 
some States and communities. In order to accommodate the needs of such 
community banks, HUD issued a waiver in April 2011 of the new audited 
financial statement requirements for small supervised lenders. Small 
supervised lenders that meet the asset thresholds delineated by their 
Federal regulators (the current asset threshold being $500 million) 
will be permitted to submit a copy of their unaudited regulatory report 
(e.g., consolidated or fourth quarter Call Report or Report of 
Condition and Income, Office of Thrift Supervision Report, consolidated 
or fourth quarter Thrift Financial Report, Form 10-K, NCUA Supervisory 
Committee Audit) that aligns with their fiscal year end. These lenders 
will also be required to submit a report on their compliance with HUD 
program requirements.
    The accommodations afforded to small supervised lenders, including 
community banks, represent an appropriate balance between FHA's 
management of counterparty risk and the Department's continued 
commitment to ensuring the participation of community banks and other 
small lenders in its programs.
    Question. What other steps can be taken to make sure that small and 
community banks can compete for mortgage business?
    Answer. In addition to the measures to assist community banks 
described above, HUD is also seeking legislative changes that will 
expand the opportunities for small banks and other lenders to 
participate in FHA programs. Another option by which community banks 
and other small supervised institutions may participate in FHA programs 
is through a sponsored origination relationship. Sponsored originators 
are not subject to FHA lender approval, but are permitted to originate 
FHA loans by partnering with an FHA-approved underwriting mortgagee. 
Community banks that wish to continue originating FHA loans, but that 
do not want to be subject to FHA lender approval requirements and 
processes, may act as sponsored originators.
    Many community banks have cited their inability under the National 
Housing Act to close loans in their own names should they forfeit their 
FHA approval as a deterrent to their acting as sponsored third-party 
originators. FHA has proposed an amendment to 12 U.S.C. 1709(b), which 
has been included in comprehensive FHA Reform legislation, that would 
allow sponsored third-party originators to close loans in their names, 
addressing what has been a chief concern of small community banks in 
considering a switch in status from FHA-approved mortgagee to 
nonapproved sponsored third-party originator. The passage of FHA's 
proposed amendment (which passed the House last fall) would provide yet 
another sensible solution for small community banks, while enabling FHA 
to continue prudently managing its risk and mitigating losses to its 
insurance funds.
    Additionally, the passage of the proposed amendment to the National 
Housing Act would significantly expand access to FHA programs for small 
business lenders of all types without unnecessarily increasing the risk 
to FHA. FHA strongly encourages the Congress to pass the proposed 
amendment in order to protect FHA insurance funds and accommodate the 
interests of community banks and other small lenders.

                          SUBCOMMITTEE RECESS

    Senator Murray. And thank you again for everything.
    Secretary Donovan. Thank you. Get us a budget.
    Senator Murray. All right. Thank you.
    This hearing is recessed.
    [Whereupon, at 10:24 a.m., Thursday, April 7, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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