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



 
TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES 
                  APPROPRIATIONS FOR FISCAL YEAR 2013

                              ----------                              


                        THURSDAY, MARCH 8, 2012

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:06 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Patty Murray (chairman) presiding.
    Present: Senators Murray and Collins.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                     Federal Housing Administration

STATEMENT OF HON. CAROL GALANTE, ACTING FEDERAL HOUSING 
            ADMINISTRATION COMMISSIONER AND ASSISTANT 
            SECRETARY FOR HOUSING, DEPARTMENT OF 
            HOUSING AND URBAN DEVELOPMENT

               OPENING STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. Good morning, and welcome to Acting Federal 
Housing Administration (FHA) Commissioner Carol Galante. We 
appreciate your coming today and your testimony. You have 
assumed this role at a very pivotal time for both the market 
and FHA. And we really want to thank you for your service and 
coming today.
    Back in early 2007, this subcommittee held a hearing on FHA 
that raised questions about its role and relevance as its 
market share had fallen to around 3 percent. At that time, home 
prices were on a seemingly unstoppable climb, and based on the 
belief that home prices would continue to rise, credit was 
flowing freely.
    Millions of Americans became homeowners, many through 
exotic mortgage products that required very little 
documentation, and included attractive offers like interest-
only payments and no down payments. FHA's traditional 30-year 
fixed mortgage, which required documentation and underwriting, 
simply could not compete.
    But the promises made to homeowners and investors alike 
were too good to be true. When the risks associated with these 
mortgages began to materialize, it was far too late. And when 
defaults and foreclosures skyrocketed, the impact was felt not 
only by defaulting homeowners, but by entire communities that 
watched their home values plummet, investors who bet on these 
products and lost, and older Americans who saw their pensions 
disappear.
    FHA quickly stepped in after the crash to ensure a 
functioning mortgage market, the primary function for which it 
was designed during the Great Depression. There is no question 
that stepping into the faltering housing market exposed FHA to 
greater risk, but it took on this risk in order to support the 
broader housing market, and without its support, the cost of 
the market and to taxpayers today would likely be far higher.
    So, today we are not asking about FHA's role and relevance. 
FHA now supports nearly 30 percent of the purchase market, and 
almost 16 percent of all loans, including refinances. And its 
value has been made clear over the past few years. Instead we 
are now asking how we protect the taxpayer from the risks 
associated with its increased role in the market, and how and 
when do we scale back FHA's presence in the market?
    FHA's fiscal soundness depends in large part on broader 
market and economic conditions. As Secretary Donovan testified 
last week, the biggest factor in the health of FHA's Mutual 
Mortgage Insurance (MMI) Fund is the direction of home prices. 
While we are seeing signs that the housing market has hit 
bottom and is starting its climb back up, risks remain. With 
over 22 percent of mortgages in the United States underwater, 
elevated levels of foreclosures, and an extensive shadow 
inventory of properties, the path of home prices remains 
uncertain.
    I look forward to having this discussion about the 
potential risks that remain in the market, and what steps can 
and should be taken to strengthen the market and FHA.
    This week, the President announced changes to the FHA's 
Streamline Refinance Program that will make it easier for 
existing FHA borrowers to benefit from low interest rates. And 
in February, the administration released a plan to further aid 
the market by creating opportunities for homeowners to 
refinance into more affordable mortgages. It has also pushed 
for a greater use of principal write-downs.
    These proposals offer opportunities to make mortgages more 
affordable for homeowners, while at the same time putting money 
back into their pockets, and in some cases, giving them a 
chance to build equity once again.
    These proposals are not written without their own risks and 
costs. Allowing conventional borrowers to refinance into FHA 
loans adds risks to FHA, even if not directly to the MMI Fund. 
Under the administration's proposal, this cost would be covered 
by a financial crisis responsibility fee paid by banks. In 
addition to the financial risks, policies such as principal 
write-downs also raise concerns about moral hazard. In 
evaluating these proposals, we must have an understanding of 
what is currently holding the market back from a stronger 
recovery, and if the long-term benefits of public intervention 
outweigh the shorter term costs.
    The administration is looking at ways also to address the 
growth in the number of Government-owned properties. FHA along 
with Fannie Mae (the Federal National Mortgage Association) and 
Freddie Mac (the Federal Home Loan Mortgage Corporation) own 
about one-quarter of 1 million foreclosed properties. These 
properties are costly for the Government to manage and 
contribute to the decline of home prices.
    As we look for ways to address the shadow inventory, 
millions of Americans are unable to find affordable housing. 
According to a study released by the Department of Housing and 
Urban Development (HUD) last year, over 7 million Americans pay 
more than 50 percent of their income on housing, which 
represents a 20-percent increase in worst case housing needs 
between 2007 and 2009.
    So, I am glad to see FHA, along with the Federal Housing 
Finance Agency (FHFA), the conservator of Fannie Mae and 
Freddie Mac, is looking at converting real estate-owned (REO) 
properties into rental housing. I am interested in hearing from 
Acting Commissioner Galante on the interest this proposal has 
garnered, as well as the challenges and benefits that are 
associated with it.
    While much of FHA's fiscal soundness depends on the overall 
market, there are measures that FHA can take to improve its 
financial standing. The administration recently announced 
premium increases to provide additional funding to the MMI 
Fund. In addition, the budget also includes proposals to 
increase premiums for its Multifamily and Healthcare Programs. 
Similar to its single-family business, FHA's presence in these 
areas has grown in recent years, and these premiums should help 
strengthen the General and Special Risk Insurance Fund.
    Amid the discussions about solvency of the funds and FHA's 
future in the market, this subcommittee cannot lose sight of 
FHA's day-to-day operations, so I will be asking critical 
questions, including: Does FHA have the appropriate staff to 
manage its portfolio? Does it have the tools it needs to assess 
and manage risk? And does it have the means and authority to 
protect taxpayers from fraudulent lenders and excessive losses?
    In recent years, this subcommittee has worked to provide 
FHA with the resources to increase its hiring, support a new 
risk office, and invest in much needed technology upgrades. In 
a constrained budget environment, Federal employees and 
administrative expenses are often the first items to be cut, 
but in the long term, costs resulting from weak oversight are 
bound to outweigh any savings that would result from cutting 
FHA's workforce.
    And as we climb back from this housing crash, we must also 
remember the lessons learned from the rise and the fall of the 
housing market. We must have soundly underwritten mortgages and 
a process that is fair and transparent from the moment a 
potential homeowner applies for a mortgage, all the way through 
loss mitigation or foreclosure.
    This crisis has also taught us the importance of having a 
balanced national housing policy, one that includes both rental 
and homeownership opportunities. At the same time, we must be 
careful not to over correct, as is happening today, and close 
the door to homeownership for hardworking, responsible 
Americans.

                           PREPARED STATEMENT

    I believe we should continue to strive for a market in 
which Americans who work hard, provide for their families, and 
pay their bills have an opportunity to own a home. And I think 
FHA will continue to be a part of that vision.
    So, I look forward to hearing from Mrs. Galante.
    [The statement follows:]
               Prepared Statement of Senator Patty Murray
    Good morning, I want to welcome Acting Federal Housing 
Administration (FHA) Commissioner Carol Galante to the subcommittee 
today to talk about FHA. Ms. Galante, you have assumed this role at a 
pivotal time both for the market and FHA and I want to thank you for 
your service.
                  fha's role in supporting the market
    Back in early 2007, this subcommittee held a hearing on FHA that 
raised questions about its role and relevance, as its market share had 
fallen to around 3 percent. At that time, home prices were on a 
seemingly unstoppable climb. And based on the belief that home prices 
would continue to rise, credit flowed freely.
    Millions of Americans became homeowners--many through exotic 
mortgage products that required little documentation, and included 
attractive offers like interest-only payments and no down payment. 
FHA's traditional 30-year fixed mortgage, which required documentation 
and underwriting, simply could not compete.
    But the promises made--to homeowners and investors alike--were too 
good to be true. When the risks associated with these mortgages began 
to materialize, it was far too late. And when defaults and foreclosures 
skyrocketed, the impact was felt not only by defaulting homeowners, but 
also by entire communities that watched their home values plummet, 
investors who bet on these products and lost, and older Americans who 
saw their pensions disappear.
    FHA quickly stepped in after the crash to ensure a functioning 
mortgage market, the primary function for which it was designed during 
the Great Depression.
    There is no question that stepping into the faltering housing 
market exposed FHA to greater risk. But it took on this risk in order 
to support the broader housing market, and without its support, the 
cost to the market and to taxpayers today would likely be far higher.
    So, today, we are not asking about FHA's role and relevance. FHA 
now supports nearly 30 percent of the purchase market and almost 16 
percent of all loans, including refinances. And its value has been made 
clear over the past few years. Instead, we are now asking: How we 
protect the taxpayer from the risks associated with its increased role 
in the market, and how and when do we scale back FHA's presence in the 
market?
        fiscal soundness of fha's mutual mortgage insurance fund
    FHA's fiscal soundness depends in large part on broader market and 
economic conditions. As Secretary Donovan testified to last week, the 
biggest factor in the health of FHA's Mutual Mortgage Insurance (MMI) 
Fund is the direction of home prices.
    While we are seeing signs that the housing market has hit bottom 
and is starting its climb back up, risks remain. With over 22 percent 
of mortgages in the United States underwater, elevated levels of 
foreclosures, and an extensive shadow inventory of properties, the path 
of home prices remains uncertain.
    I look forward to having a discussion about the potential risks 
that remain in the market, and what steps can and should be taken to 
strengthen the market and FHA.
                    new proposals to aid the market
    This week, the President announced changes to the FHA Streamline 
Refinance Program that will make it easier for existing FHA borrowers 
to benefit from low interest rates.
    And in February, the administration released a plan to further aid 
the market by creating opportunities for homeowners to refinance into 
more affordable mortgages. It has also pushed for greater use of 
principal write-downs.
    These proposals offer opportunities to make mortgages more 
affordable for homeowners while, at the same time, putting money back 
into their pockets and in some cases giving them a chance to build 
equity once again.
    These proposals aren't without their own risks and costs. Allowing 
conventional borrowers to refinance into FHA loans adds risk to FHA--
even if not directly to the MMI Fund. Under the administration's 
proposal, this cost would be covered by a Financial Crisis 
Responsibility fee paid by banks.
    In addition to the financial risks, policies such as principal 
write-downs also raise concerns about moral hazard. In evaluating these 
proposals, we must have an understanding of what is currently holding 
the market back from a stronger recovery, and if the long-term benefits 
of public intervention outweigh the short-term costs.
    The administration is also looking at ways to address the growth in 
the number of Government-owned properties. FHA, along with Fannie Mae 
and Freddie Mac, own about a quarter of a million foreclosed 
properties. These properties are costly for the Government to manage 
and contribute to the decline of home prices.
    As we look for ways to address the shadow inventory, millions of 
Americans are unable to find affordable housing. According to a study 
released by HUD last year, over 7 million Americans pay more than 50 
percent of their income on housing, which represents a 20-percent 
increase in worst case housing needs between 2007 and 2009.
    So, I am glad to see that FHA, along with the Federal Housing 
Finance Agency, the conservator of Fannie Mae and Freddie Mac, is 
looking at converting real estate-owned (REO) properties into rental 
housing.
    I am interested in hearing from Acting Commissioner Galante on the 
interest this proposal has garnered, as well as the challenges and 
benefits associated with it.
                       support for fha operations
    While much of FHA's fiscal soundness depends on the overall market, 
there are measures that FHA can take to improve its financial standing.
    The administration recently announced premium increases to provide 
additional funding to the Mutual Mortgage Insurance Fund.
    In addition, the budget also includes proposals to increase 
premiums for its multifamily and healthcare programs.
    Similar to its single-family business, FHA's presence in these 
areas has grown in recent years, and these premiums should help 
strengthen the General and Special Risk Insurance Fund.
    Amid the discussions about solvency of the funds and FHA's future 
in the market, this committee cannot lose sight of FHA's day-to-day 
operations. So, I will be asking critical questions, including: Does 
FHA have the appropriate staff to manage its portfolio? Does it have 
the tools it needs to assess and manage risk? And does it have the 
means and authority to protect taxpayers from fraudulent lenders and 
excessive losses?
    In recent years, this committee has worked to provide FHA with the 
resources to increase its hiring; support a new Risk Office; and invest 
in much-needed technology upgrades.
    In a constrained budget environment, Federal employees and 
administrative expenses are often the first items to be cut, but in the 
long term, costs resulting from weak oversight are bound to outweigh 
any savings that would result from cutting FHA's workforce.
                                closing
    And as we climb back from the housing crash, we must also remember 
the lessons learned from the rise and fall of the housing market.
    We must have soundly underwritten mortgages and a process that is 
fair and transparent from the moment a potential homeowner applies for 
a mortgage all the way through loss mitigation or foreclosure.
    This crisis has also taught us the importance of having a balanced 
national housing policy--one that includes both rental and 
homeownership opportunities.
    At the same time, we must be careful not to overcorrect--as is 
happening today--and close the door to homeownership for hardworking, 
responsible Americans.
    I believe that we should continue to strive for a market in which 
Americans who work hard, provide for their families, and pay their 
bills, have an opportunity to own a home.
    And I think that FHA will continue to be part of that vision.
    I look forward hearing from Ms. Galante and with that I turn it 
over to Senator Collins.

    Senator Murray. And with that, I turn it over to Senator 
Collins for her opening statement.

                 STATEMENT OF SENATOR SUSAN M. COLLINS

    Senator Collins. Thank you very much, Madam Chairwoman. And 
thank you for holding this hearing on FHA and the future of the 
housing finance market. I join you in welcoming Acting 
Commissioner Carol Galante before our subcommittee this 
morning.
    I want to begin my remarks by commending the 
administration's new protections for our Active Duty military 
servicemembers and veterans based on the recent settlement with 
the Nation's largest banks. It is appalling to think that 
lenders were taking advantage of the very people protecting our 
Nation. While not every lender was culpable, obviously, the 
fact that any of them were doing this is totally unacceptable.
    While the administration has made several announcements 
regarding existing housing programs, the administration has yet 
to present a comprehensive plan to stabilize the housing market 
and to reinvigorate private sector participation.
    HUD faces many challenges in balancing the goal of 
strengthening responsible homeownership while minimizing the 
financial risk to the FHA and, thus, the taxpayers. Ultimately, 
FHA should play a more limited role in the mortgage market and 
help encourage the private sector to reassert its primacy.
    Since its inception, FHA has provided mortgage insurance 
for more than 39 million single-family home mortgages, and 
53,000 multifamily mortgages. This program finances nearly 30 
percent of home purchase loans and about 10 percent of 
refinance loans nationwide.
    FHA continues to partner with current and prospective 
homeowners during these difficult economic times. In addition 
to helping FHA program participants refinance to take advantage 
of lower interest rates, FHA also assists non-FHA homeowners in 
refinancing untenable mortgages. When financially sound, FHA is 
an essential component of the recovery of the housing market.
    The weakening of our housing sector over the past several 
years has had a tremendously negative impact on far too many 
families and communities throughout the Nation. The housing 
market recession is not yet over, and a sustained recovery is 
still uncertain. The Federal Reserve recently reported that on 
average, national housing prices had fallen 33 percent from 
their peak in 2006. Underscoring the Federal Reserve's view 
that housing prices remain under pressure, Standard & Poor's 
Case-Shiller Index for U.S. home prices is down 4 percent from 
last year. This is particularly troubling since FHA currently 
insures over $1 trillion in mortgages.
    The agency's role has dramatically expanded since the 
beginning of the housing crisis. Prior to the crisis, FHA 
accounted for less than 4 percent of the single-family housing 
market. HUD now estimates that FHA accounts for nearly 16 
percent of the overall market share.
    It is also troubling that for the third consecutive year, 
FHA has not met its statutory requirement of maintaining a 2-
percent capital reserve ratio. Further, the budget indicates 
that FHA could have required as much as $688 million from the 
Treasury in order to remain solvent. Fortunately, it has, in 
essence, been bailed out by the recent foreclosure settlement 
agreement.

                           PREPARED STATEMENT

    These are not easy issues to resolve, but they are 
critically important to our Nation's long-term economic health, 
and to the housing needs of many American families. I remain 
concerned that we must reform our present housing finance 
programs, but in doing so, we must remain ever mindful to limit 
the taxpayer's exposure to additional financial losses.
    Thank you, Madam Chairman.
    [The statement follows:]
             Prepared Statement of Senator Susan M. Collins
    Chairman Murray, thank you for holding this important hearing on 
the Federal Housing Administration (FHA) and the future of the housing 
finance market. I join you in welcoming Acting Commissioner Carol 
Galante before our subcommittee this morning.
    I want to start by commending the Administration's new protections 
for our active military servicemembers and veterans based on the recent 
settlement with the Nation's largest banks. It is appalling to think 
that lenders were taking advantage of the very people protecting our 
Nation.
    While the Administration has made several announcements regarding 
existing housing programs, they have yet to present a comprehensive 
plan to stabilize the housing market and reinvigorate private sector 
participation.
    The Department of Housing and Urban Development (HUD) faces many 
challenges in balancing the goal of strengthening responsible 
homeownership while minimizing the financial risk to FHA and the 
taxpayer. Ultimately, FHA should play a more limited role in the 
mortgage market and help encourage the private sector to reassert its 
primacy.
    Since its inception, FHA has provided mortgage insurance for more 
than 39 million single-family home mortgages and 53,000 multifamily 
mortgages. The program finances nearly 30 percent of home purchase 
loans and about 10 percent of refinance loans nationwide.
    FHA continues to partner with current and prospective homeowners 
during these difficult economic times. In addition to helping FHA 
program participants refinance at lower interest rates, FHA also 
assists non-FHA homeowners in refinancing untenable mortgages. A 
financially sound FHA is an essential component in the recovery of the 
housing market.
    The weakening of our housing sector over the past several years has 
had a tremendous impact on families and communities throughout the 
Nation. The housing market recession is not yet over, and a sustained 
recovery is still uncertain. The Federal Reserve recently reported that 
on average national housing prices have fallen 33 percent from their 
2006 peak. Underscoring the Federal Reserve's view that housing prices 
remain under pressure, Standard & Poor's Case-Shiller index for U.S. 
home prices is down 4 percent from last year.
    This is particularly concerning since FHA currently insures over $1 
trillion in mortgages. The agency's role has dramatically expanded 
since the beginning of the housing crisis. Prior to the crisis, FHA 
accounted for less than 4 percent of the single family housing market; 
HUD now estimates that FHA accounts for nearly 16 percent of the 
overall market share.
    It is troubling that for the third consecutive year, FHA has not 
met its statutory requirement of maintaining a 2-percent capital 
reserve ratio. Further, the budget indicates FHA could have required as 
much as $688 million from Treasury in order to remain solvent, had it 
not been bailed out by the recent foreclosure settlement agreement.
    These are not easy issues to resolve, but they are critically 
important to our Nation's long-term economic health. I remain concerned 
that we must reform our present housing finance programs. In doing so, 
we must remain mindful to limit taxpayers' exposure to additional 
financial losses.
    I look forward to working with you on these important issues.
    Thank you.

    Senator Murray. Thank you very much. With that, we will 
turn to you for your opening statement, and appreciate your 
being here again today. Thank you.

                SUMMARY STATEMENT OF HON. CAROL GALANTE

    Ms. Galante. Thank you, Chairman Murray and Ranking Member 
Collins, for the opportunity to testify on the fiscal year 2013 
budget request for the Federal Housing Administration. 
Encompassing HUD's Single Family, Multifamily, and Healthcare 
Financing Programs, as well as HUD's Housing Counseling 
Program, our office is critical to ensuring more Americans have 
the opportunity to realize or maintain the economic security of 
the middle class.
    And the work this administration has done is going a long 
way to create an economy built to last. Three years ago, with 
the housing market collapsing and private capital in retreat, 
we took decisive action to address the crisis and lay the 
groundwork for recovery.

                 FEDERAL HOUSING ADMINISTRATION REFORM

    Since the start of this administration, FHA has helped 
nearly 2.8 million families buy a home, and over 1.7 million 
homeowners refinance into stable, affordable loans. And with 
your help, we have taken the most significant steps in FHA's 
history to reduce risk to the taxpayer and reform FHA 
practices. We have ensured that FHA has the flexibility 
necessary to price its products appropriately for current risks 
and market conditions, and we have transformed FHA's risk 
management system to better align with the needs and realities 
of the 21st century mortgage market. These reforms have 
contributed to the most profitable books of business in FHA's 
78-year history.
    Still, FHA continues to be strained by loans originated 
before this administration took office. That is why we continue 
to take action to strengthen FHA's MMI Fund. Our budget 
reflects the implementation of the 10-basis-point increase to 
FHA's single-family annual mortgage insurance premiums, as well 
as an additional 25-basis-point increase to annual premiums for 
jumbo loans. With these changes, FHA is projected to add $8.1 
billion in receipts to the Capital Reserve account in 2013.
    In addition, in the past week, FHA has announced two 
premium changes: An increase in our up-front mortgage insurance 
premium by 75 basis points, and an adjustment in premiums for 
Streamline Refinance loans. FHA's Streamline Refinance allows 
current FHA borrowers who are current on their mortgages to 
refinance their homes, which at today's low interest rates, can 
result in $3,000 in annual savings for the typical borrower and 
bolster their ongoing ability to pay, thereby lowering their 
risk to FHA.
    Those changes to our premiums not included in the budget 
are expected to produce an additional $1 billion in budget 
receipts this fiscal year and next, above what is already 
projected in the President's budget.
    We also continue to take significant steps to strengthen 
accountability for FHA lenders, including the recent servicing 
and origination settlements with some of the Nation's largest 
mortgage lenders, which will provide FHA with over $900 million 
to compensate for losses resulting from their serious 
violations of FHA requirements by these lenders. And we are 
seeking expanded authority via legislation that will further 
enable us to protect the MMI Fund.
    While FHA will continue to play an important role in 
supporting the housing recovery in the year ahead, we are 
committed to reducing the Government's footprint over time. 
With FHA's loan volume already down 34 percent from its peak in 
2009, and our market share declining to its current level of 
15.6 percent, we have set the stage for private capital to 
return, while ensuring that FHA remains a vital source of 
financing for underserved borrowers and communities.
    While additional risks clearly remain for FHA as the 
economy continues to recover, the significant reforms and 
strong enforcement efforts undertaken by this administration 
are yielding sound and profitable businesses, positioning FHA 
well for the future.
    Despite FHA's important work throughout the crisis, there 
remain sectors of the housing finance market where additional 
liquidity is still needed. One of those areas is in small 
building finance for rental homes. Nearly one-third of the 
Nation's renters live in small properties of 5 to 49 units, but 
these properties are at risk of disinvestment because they can 
be expensive to finance. That is why, as part of the 
President's budget, HUD is seeking authority to facilitate 
lending to small multifamily properties through minor changes 
to our Risk Share Program, and we look forward to working with 
Congress on this initiative.

                           HOUSING COUNSELING

    Critical to ensuring success of much of FHA's work is 
housing counseling, and we are making significant improvements 
to HUD's program. Not only did we get our NOFA (Notice of 
Funding Availability) on the street within days of the fiscal 
year 2012 budget passage, but we plan to announce grant awards 
next week.
    And we are also well on our way to setting up a new Office 
of Housing Counseling. In recognition of the hard work of 
housing counselors last week, the White House and HUD honored 
them in a Champion of Change Award. I was honored to 
participate in this event and meet with people who are tackling 
this Nation's issues head on.
    Finally, as we look to make all of our programs more 
efficient and effective, the FHA Transformation Initiative will 
enable us to replace outdated systems with modern technology. 
These efforts will allow FHA to better assess risk, monitor 
market trends, and ensure that FHA programs are available for a 
long time to come.

                           PREPARED STATEMENT

    And so, Madam Chair, this budget reflects this 
administration's belief that the recovery of our housing market 
is essential to the restoration of our economy by targeting 
resources where they are most needed, while ensuring the 
protection of taxpayer interests. HUD's Office of Housing is 
doing its part to create housing and communities built to last.
    Thank you.
    [The statement follows:]
                Prepared Statement of Hon. Carol Galante
    Chairman Murray, Ranking Member Collins, and members of the 
subcommittee, thank you for the opportunity to testify today regarding 
the fiscal year 2013 budget request for the Federal Housing 
Administration (FHA).
    When this administration took office, the economy was on the brink. 
Only weeks before this administration took office, the Nation was 
losing 753,000 jobs a month, our economy had shed jobs for 22 straight 
months, house prices had declined for 30 straight months, and consumer 
confidence had fallen to a 40-year low and dramatic steps were taken to 
prevent a complete financial meltdown. Today, an economy that was 
shrinking is growing again--and instead of rapid job loss, more than 
3.7 million new private sector jobs have been created in the last 23 
months, and national unemployment has fallen to a near 3-year low.
    And, because the Obama administration moved to keep interest rates 
low and restore confidence in the housing market more than 13 million 
homeowners have refinanced their mortgages since April 2009--putting 
nearly $22 billion a year in real savings into the hands of American 
families and into our economy. As financing options tightened for 
millions of Americans due to uncertainties in the credit markets, the 
Federal Housing Administration played a critical role in returning 
stability to the housing market by providing access to credit to the 
millions of families seeking to purchase a home during the worst 
housing market in generations. This countercyclical role is part of 
FHA's core mission, and it remains vital as we take further steps to 
strengthen the housing market.
    Today, because we provided a range of solutions to responsible 
families fighting to hold on to their homes, more than 5.6 million 
families have been able to reduce their payments and modify their loans 
to more sustainable terms and foreclosure notices are down nearly 50 
percent since early 2009. The resources we provided for communities 
struggling with concentrated foreclosures have enabled them to fund 
better uses for almost 100,000 vacant and abandoned properties through 
our Neighborhood Stabilization Program. Most important of all, because 
of our commitment to economic growth and recovery, our economy has 
added private sector jobs for 23 straight months, totaling 3.7 million 
jobs.
    But we know there's still more work to do to ensure that America 
can create an economy built to last. The fiscal year 2013 budget for 
the Department of Housing and Urban Development (HUD) tackles these 
challenges head on. And, as part of HUD's efforts, FHA is continuing 
its efforts to help responsible families at risk of losing their homes 
and providing quality affordable rental housing to some of our Nation's 
most vulnerable families. The President's fiscal year 2013 budget also 
reflects the reality that we cannot create an economy built to last 
without taking responsibility for our deficit. The caps set by the 
Budget Control Act of 2011 promise over $907 billion in total 
discretionary cuts over the next 10 years, and every department shares 
a responsibility to make tough cuts so there's room for investments to 
speed economic growth. Indeed, the overall HUD budget makes tough 
choices in order to contribute to deficit reduction in a substantial 
way.
    The HUD budget provides $44.8 billion for HUD programs, an increase 
of $1.4 billion, or 3.2 percent, above fiscal year 2012. This program 
funding level (i.e., gross budget authority) is offset by $9.4 billion 
in projected FHA and Ginnie Mae receipts, leaving net budget authority 
of $35.4 billion, or 7.3 percent below the fiscal year 2012 enacted 
level of $38.2 billion. Today, I would like to discuss FHA's 
contributions to the HUD budget and the overall housing market with you 
in more detail.
                  responding to the market disruption
    This administration entered office confronting the worst economic 
crisis since the Great Depression--as mortgages were sold to people who 
couldn't afford or understand them, while banks packaged them into 
complex securities that they made huge bets on, leaving American 
homeowners with the tab. And, while the largest factors contributing to 
this crisis were market driven, the American people have turned to 
Congress and the administration for leadership and action in righting 
our Nation's housing market.
    HUD remains firmly committed to working together with communities 
and individuals to cope with these unprecedented challenges. The 
Federal Housing Administration and Government National Mortgage 
Association (GNMA) continue to have a significant impact on the 
Nation's economic recovery. The activities of the Federal Government 
are critical to both supporting the housing market in the short term 
and providing access to homeownership opportunities over the long term, 
while minimizing the risk to taxpayers. FHA has stepped up to face 
these unprecedented challenges, playing an important countercyclical 
role in the housing market today.
    Three years ago, as credit markets froze, FHA remained one of the 
few vehicles available for homeowners to obtain financing through 
purchase and refinance loans. As a result, FHA's market share grew. 
This increase in volume reinforced the need for FHA to strengthen 
credit policy and risk management practices and make lenders 
accountable. FHA has also taken steps to adjust its premium structure 
and improve recoveries on its Real Estate Owned (REO) portfolio. These 
efforts combined are intended to ensure that the Mutual Mortgage 
Insurance Fund (MMIF) has sufficient resources to account for its 
growth, while also supporting the housing market. And as a result of 
these efforts, the books of business originated since this 
administration took office reflect higher credit quality than FHA 
historical averages. Yet, we know that there is much work to be done.
    While the number of homeowners at risk of losing their home is down 
significantly, there are still too many families that face hardships 
and are underwater, and unaffordable monthly payments put them at an 
increased risk of default, dragging down markets, reducing labor 
mobility and consumer spending alike. That is why FHA is also taking 
steps to ease the process whereby FHA borrowers can refinance into new 
FHA insured loans and take advantage of today's low interest rates, and 
will work with Congress and other stakeholders to allow non-GSE 
homeowners who are underwater to refinance into a separate FHA 
refinance program.
    And in areas where the housing crisis has hit the hardest, 
foreclosures, large volumes of vacant properties, and resultant blight 
and abandonment, continue to drag down property values and destabilize 
communities. That is why FHA is working with its Federal partners at 
Treasury and the Federal Housing Finance Agency to develop programs to 
convert REO properties to rental properties. By reducing vacancy rates 
and lowering the overhang of foreclosed properties, this initiative has 
the potential to stabilize both house prices and neighborhoods, 
contributing to a more rapid recovery for communities struggling to 
emerge from the recent recession.
    Overall, the efforts of FHA have been integral in providing 
liquidity in a time of market constriction, keeping people in their 
homes and addressing the shadow inventory.
              overview of the fha fiscal year 2013 budget
    FHA has insured over 40 million mortgages through its Single 
Family, Multifamily and Healthcare programs since its inception in 
1934. In exchange for adherence to strict underwriting, application and 
servicing requirements established by HUD and the payment of mortgage 
insurance premiums, FHA-approved lenders are able to file a claim with 
the FHA if a borrower defaults on their mortgage loan.
    FHA, directly and through its partners in the housing counseling 
industry, has played a key role in mitigating the effect of economic 
downturns in the real estate market. Due to FHA's traditional 
countercyclical role, the volume of FHA insured loan products increased 
substantially beginning in 2009 and, while FHA loan volumes have 
decreased since that peak, the pressures on FHA and its borrowers have 
also increased due to the economic downturn.
    In fiscal year 2013, HUD is requesting $400 billion in loan 
guarantee authority for the Mutual Mortgage Insurance Fund (MMIF), 
which will provide an estimated 0.8 million single-family mortgages, 
and $25 billion in loan guarantee authority for the General and Special 
Risk Insurance Fund (GI-SRI), which will provide an estimated 156,000 
units in multifamily housing properties and an estimated 80,600 beds in 
healthcare facilities.
    The need for this investment is clear as FHA has played a critical 
role in stabilizing the Nation's mortgage market. At a time when 
liquidity and access were needed most in the housing market to 
facilitate the recovery of the broader economy, FHA stepped in to 
ensure that mortgage capital continued to flow. However, FHA's expanded 
role is and should be temporary and, to that end, FHA is taking steps 
in all of its business lines to encourage the return of private capital 
into the mortgage market while balancing the need to remain a 
supportive mechanism for all types of housing moving forward.
FHA Multifamily and Healthcare Mortgage Insurance Programs
    FHA Multifamily and Healthcare Mortgage Insurance Programs operate 
under FHA's GI-SRI Fund. These programs encourage critical mortgage 
financing opportunities that strengthen communities by addressing 
specialized financing needs including insurance for loans to develop, 
rehabilitate, and refinance multifamily rental housing, nursing home 
facilities and hospitals.
    FHA has steadily provided liquidity in the market during times of 
economic constriction. Combined with historically low interest rates, 
FHA has seen exponential growth in this area. Commitments for FHA 
insured multifamily housing and healthcare facilities rose from $4.3 
billion in fiscal year 2008 to $17.5 billion in 2011. FHA's multifamily 
and healthcare programs have helped private lenders fill the gap left 
with the shrinkage of the conventional finance resources. And while 
this market seems to be rebounding, we continue to expect high levels 
of mortgage insurance activity for the remainder of fiscal year 2012 
and through fiscal year 2013, albeit below the peak in 2011. As of 
September 2011, the FHA's portfolio of multifamily and healthcare loan 
guarantees had an unpaid principal balance of $76.4 billion on 12,666 
loans and counting.
    Given this unprecedented increase in the number and dollar volume 
of loans insured under GI-SRI, the fiscal year 2013 budget also 
includes premium increases for FHA's General Insurance and Special Risk 
Insurance programs that serve market rate multifamily properties and 
healthcare facilities. These changes, the first premium increase in 10 
years for these programs, are intended to ensure that FHA products are 
priced appropriately to compensate for FHA's risk and encourage the 
return of private capital to our mortgage markets. The proposed 
increases range from 5 basis points for 223(a)(7) refinancing to 20 
basis points for 221(d)(4) new construction or rehabilitation activity. 
Premiums for affordable housing projects (such as those with HUD rental 
subsidies and low-income housing tax credits, as well as those insured 
under FHA risk-sharing programs) will not be increased.
    With the proposed premium increases, FHA Multifamily and Healthcare 
loans will be priced more appropriately to encourage the return of 
private capital while, at the same time, continuing to ensure 
sufficient levels of available capital in these sectors. The increase 
in premiums also reflect new realities--the Multifamily annual book of 
business is five times greater than it was just 3 years ago, and the 
risk profile has changed dramatically. FHA's multifamily apartment 
portfolio is now more than 50 percent market rate by unit count and 70 
percent by unpaid principal balance (UPB), which adds a new component 
of risk, and a need to take steps to ensure the future viability of the 
portfolio. With interest rates at a record low the existing portfolio 
loans could remain in FHA's portfolio longer than the average 
timeframes and will need to be managed prudently. FHA will publish the 
proposed increased in the Federal Register in the next 30-60 days and 
welcomes feedback during the comment period.
    During this period of increased activity, FHA has also taken steps 
to reduce the processing time of loan applications. The Office of 
Multifamily Housing has centralized processing of Section 223(a)(7) 
loans to the Office of Affordable Housing Preservation which allows 
Multifamily Field Office staff to work on the increasingly complex 
transactions in their pipeline. Additionally, Multifamily Housing and 
Healthcare have initiated a queue and early warning screening system in 
order to more efficiently manage workload and provide greater 
transparency to lenders and borrowers regarding the status of their 
loan applications. Finally, FHA is conducting monthly performance 
dialogues with field staff to discuss progress toward meeting 
processing goals and identify proactive solutions to address 
performance deficiencies in order to ensure that every effort is taken 
to reduce processing times and get funds into communities.
    This process is already producing results. Survey results 
demonstrate that staff morale has improved significantly in the offices 
participating in the pilot roll out of this new process. HUD staff feel 
encouraged to come up with new and better ways of doing things and 
these offices are processing applications for multifamily insurance 
more efficiently and effectively. Offices that had a large backlog of 
applications have begun to methodically clear out older applications. 
For instance, our Denver office went from having 30 applications that 
were older than 90 days in their pipeline to having only 24 overdue 
applications. In Chicago, 100 percent of the 223(a)(7) loans were 
processed in less than 30 days and 50 percent of its 223(f) 
transactions in less than 45 days in January.
    In addition, as part of the efforts of FHA's Multifamily and 
Healthcare programs to strengthen communities by addressing specialized 
financing needs, HUD is seeking authorization to extend support for 
Critical Access Hospitals and Small Multifamily Buildings (5-50 units).
    We are appreciative of the Congress' longstanding support for 
Critical Access Hospitals by amending section 242 to permit these 
important facilities to be eligible for FHA insurance. The most recent 
amendment to the statute expired on July 31, 2011, and without action 
to once again to extend the authority under section 242 to allow these 
hospitals to be eligible, no additional Critical Access Hospitals will 
be endorsed for FHA insurance. We are grateful to the bipartisan group 
of Senators that has co-sponsored S. 1431, which would provide this 
important extension for 5 additional years and we hope that the House 
(where H.R. 2573 would also extend the critical access authority) and 
Senate will pass this language this year.
    Additionally, as part of the fiscal year 2013 budget, HUD is 
seeking authority to facilitate lending to small multifamily properties 
which are an important provider of affordable, but unsubsidized, 
housing for low- and moderate-income families. According to the 2010 
American Community Survey, nearly one-third of renters live in 5- to 
50-unit buildings. These buildings also tend to have lower median rents 
than do larger properties: $400 per month for 5-49 unit properties as 
compared to $549 per month for properties with 50 of more units. 
Because they are expensive to finance, particularly in this 
environment, these properties are at risk of divestment. We look 
forward to working with Congress to ensure the availability of these 
unsubsidized, affordable housing units.
    The efforts of FHA's Multifamily and Healthcare programs are 
essential in achieving the Department's mission of strong, sustainable, 
inclusive communities and quality, affordable housing and services for 
all Americans.
FHA Single Family Mortgage Insurance Program
    The MMIF is the largest fund covering activities of FHA, and is 
used to pay the claims associated with FHA insured single family 
mortgage loans. Since 1934, mortgage insurance provided by FHA has made 
financing available to neighborhoods and geographic areas facing 
economic uncertainty and to individuals and families not adequately 
served by the conventional mortgage market. Over 30 percent of all FHA-
insured homebuyers are minorities, with 60 percent of all African 
American and Hispanic homebuyers relying on FHA insured mortgage 
financing to purchase their homes. In the last year, over half of all 
African Americans and 45 percent of Hispanics who purchased a home did 
so with FHA-insured mortgage products. In addition, 75 percent of 
first-time homebuyers use FHA insured financing.
    The fiscal year 2013 budget request will enable FHA to continue its 
mission of providing access to mortgages for low- and moderate-income 
families and to play an important countercyclical role in the 
stabilization and recovery of the Nation's housing market. By 
facilitating the availability of credit through a variety of FHA-
approved lenders, including community banks and credit unions, FHA has 
helped over 2 million families buy a home since President Obama took 
office.
    Due to reduced liquidity in the conventional mortgage market, FHA 
saw a surge in activity, reaching a peak in 2009. However, FHA's loan 
volume has declined 34 percent from its peak in 2009, and its market 
share is decreasing for the first time since 2006, thereby laying the 
ground work for private capital to return to the single family market. 
Today, FHA's total market share is 15.6 percent, down from 17 percent 
in 2010 and over 21 percent in 2009.
            Strengthening FHA Mutual Mortgage Insurance Fund and Paving 
                    the Way for Private Capital To Return
    While FHA's portfolio has grown in recent years, the fund has also 
experienced significant losses. The books of business in the few years 
before 2009 have largely driven the high number of claims to the MMIF. 
This was driven by overall economic and unemployment trends as well as 
by the combined effects of, unscrupulous and non-compliant practices on 
the part of lenders, and a seller-funded downpayment assistance program 
that allowed many borrowers to obtain mortgages without a meaningful 
down payment. As a result, the books of business FHA insured prior to 
the start of this administration have severely impacted the health of 
FHA's MMIF. But thanks to our efforts since taking office, I can say 
that the long-term outlook for FHA and the MMIF are now much better 
than they were in 2009.
    The change in trajectory in the performance of FHA-insured loans is 
no accident. Immediately upon taking office, this administration acted 
quickly and aggressively to protect FHA's MMI Fund and to ensure its 
long-term viability. We have taken more steps since January 2009 to 
eliminate unnecessary credit risk and assure strong premium revenue 
flows in the future than any administration in FHA history. Indeed, the 
gains FHA has experiences since 2009 are the result of systematic 
tightening of risk controls, increased premiums to stabilize near-term 
finances, and expanded usage of loss mitigation workout assistance to 
help homeowners avoid foreclosure, stricter lender enforcement, and 
improved recovery strategies for FHA's REO portfolio.
    And, we continue to take steps to further strengthen the fund. In 
the 2013 budget we announced a 10-bps annual premium increase on all 
FHA insured loans to comply with the requirement passed by Congress 
late last year, as well as an additional 25 bps annual premium increase 
on ``jumbo'' loans making the total increase for these larger loans 35 
bps. And just last week, we announced a 75-bps increase in FHA's 
upfront mortgage insurance premium that will further increase receipts 
to FHA by over $1 billion in fiscal years 2012 and 2013, beyond the 
receipts already included in the President's budget submission, while 
having minimal impact on consumers.
    In addition, we have also taken significant additional steps to 
increase accountability for FHA lenders. Via a final rule which took 
effect on February 24, 2012, we clarified the basis upon which FHA will 
require indemnification from lenders participating in our Lender 
Insurance program, making clear the rules of the road for lenders and 
giving FHA a solid foundation for requiring indemnification by lenders 
for violations of FHA guidelines. And we continue to seek expanded 
authority via legislation that will further enable us to protect the 
MMI Fund from unnecessary and inappropriate losses associated with 
lenders who violate our requirements. Specifically, FHA is pursuing 
authority to hold our Direct Endorsement (DE) lenders to the same 
standards as our Lender Insurance (LI) lenders by instituting required 
lender indemnification for DE lenders who do not following FHA 
requirements. Current FHA only has this authority for LI lenders. 
Additionally, FHA is seeking authority to take enforcement actions 
against all lenders on a broader, geographic basis rather than just at 
the branch level. This authority would allow FHA to address systematic 
risk to the MMIF.
    Recently, we announced another step to hold lenders accountable for 
their actions via the settlements with some of America's largest 
lenders. Through these settlements, FHA will receive over $900 million 
compensation for losses associated with loans originated outside of FHA 
requirements, or for which FHA's servicing requirements were violated.
    Despite the unprecedented efforts of this administration to alter 
the trajectory of FHA, considerable risks remain. The FHA MMI Fund has 
two components: The Financing Account, which holds enough money to 
accommodate all expected losses on FHA's insured MMI portfolio as of 
the end of the current fiscal year; and the Capital Reserve Account, 
which is required to hold an additional amount equal to 2 percent of 
the insurance in force. Since 2009, the fund's capital reserve ratio 
has been below that 2-percent level.
    The President's budget always includes estimates regarding the 
status of the Capital Reserve at the end of the current fiscal year. 
This estimate is based on estimates and projections of future economic 
conditions, including house prices and other economic factors which may 
or may not come to pass. The 2013 budget estimate for the FHA Capital 
Reserve account does not include the almost $1 billion of added revenue 
over the remainder of fiscal year 2012 and fiscal year 2013 from the 
additional premium increases announced this week or the proceeds from 
FHA-approved lenders under the terms of the mortgage settlements. With 
these additional revenues accounted for, the Capital Reserve is 
estimated to have sufficient balances to cover all future projected 
losses, as long as economic conditions do not significantly worsen. 
Moreover, the budget estimates that FHA will add an additional $8 
billion to the MMI Capital Reserve account in 2013, and return to the 
congressionally mandated capital reserve ratio of 2 percent by 2015.
Office of Housing Counseling
    HUD's Housing Counseling Assistance program was developed over 40 
years ago at a time of severe divestment in housing, unaffordable 
interest rates, high unemployment, and irresponsible lending practices. 
Over time, this program has evolved in depth and complexity, as have 
the issues that it has had to address. Today, housing counseling is 
more critical than ever as homeowners seek assistance to navigate the 
many hurdles associated with obtaining a modification. We know that but 
for the work of counselors, many homeowners wouldn't have received 
assistance at all and would likely have lost their home to foreclosure. 
And it is critical for the many first-time homebuyers looking to secure 
financing in a market where credit and underwriting standards have 
dramatically tightened. Housing counseling also assists renters to 
budget, save, repair their credit, avoid scams, and access unbiased 
information about housing and financial choices. Last year, HUD housing 
counseling grants resulted in direct assistance to approximately 
186,000 households and leveraged additional non-Federal funding so that 
HUD-approved housing counseling agencies could educate and counsel 
nearly 2 million American households last year.
    It is tragic that public and private support for housing counseling 
has been shrinking at a time of great need. We hear anecdotally that 
housing counseling agencies are laying off skilled, trained housing 
counselors as traditional sources of funding such as charitable 
contributions from financial institutions has diminished. Yet recent 
studies confirm the value of HUD-approved housing counseling. Research 
evidence documents the role of housing counseling in reducing mortgage 
delinquency and foreclosure, on helping first-time buyers access and 
sustain homeownership, and on the special role of counseling related to 
HECM reverse mortgages. Most studies have found that pre-purchase 
counseling leads to positive results, reducing delinquency anywhere 
from 19 to 50 percent, although one study reported no impact.
    HUD-approved housing counseling is also effective in the context of 
mortgage delinquency and default. A nationwide Urban Institute study by 
Mayer, et al., (2010) of the foreclosure mitigation counseling program 
(which uses the HUD housing counseling program infrastructure as a 
base) found that borrowers in foreclosure were 70 percent more likely 
to get up-to-date on payments if they received the counseling. The same 
Urban Institute study showed that homeowners who received a mortgage 
modification to resolve a serious delinquency were 45 percent more 
likely to sustain that modification if it was obtained with the help of 
counseling.
    Today, HUD approves, monitors, and supports more than 2,600 
counseling organizations. Through the new Office of Housing Counseling, 
HUD will support a network of agencies and counselors, trained and 
certified to provide tools to current and prospective homeowners and 
renters so that they can make responsible choices to address their 
housing needs in light of their financial situation. Further, the 
Office of Housing Counseling will work to make this network accessible 
throughout the country to those who need objective and reliable 
information in order to make sound housing and budget decisions, 
especially those with low to moderate incomes or otherwise underserved, 
or those at risk of housing loss or homelessness.
    For fiscal year 2013, HUD requests $55 million for the Housing 
Counseling Assistance Program which is expected to inform over 186,000 
households about their housing choices in the areas of purchase or 
refinancing of their home; rental housing options; reverse mortgages 
for seniors as part of required Home Equity Conversion Mortgage (HECM) 
counseling; foreclosure prevention; loss mitigation; preventing 
evictions and homelessness; and moving from homelessness to a more 
stable housing situation. These funds will also be used to launch the 
Office of Housing Counseling which was created as part of the Dodd-
Frank Wall Street Reform Act.
    The majority of the funds requested in the budget, nearly $45.5 
million, are expected to be distributed competitively to support direct 
provision of a holistic range of services that are appropriate for 
local market conditions and individual needs. An additional $6 million 
will be used to strengthen the quality of housing counseling through 
training grants which will ensure that individual counselors and 
organizations develop the knowledge and capacity to meet the new 
certification requirements which HUD must implement under Dodd-Frank. 
The remaining $3.5 million will be used for administrative contracts 
and support geared towards streamlining internal HUD processes and 
enhancing oversight.
    Last fiscal year, Congress appropriated $45 million for this 
program. I am proud to tell you that we expect that the awards for the 
portion of those funds used for grants will be announced next week, 
ahead of the aggressive schedule set by the Fiscal year 2012 
Appropriations Act. This will ensure that these funds get into the 
hands of the counseling agencies that need them as quickly as possible.
  fha as part of the administration's efforts to bolster the housing 
                                 market
    The increase in FHA's market share is directly tied to its 
countercyclical role in the recent economic crisis. In addition, FHA is 
playing a critical role in the administration's work in tackling 
ongoing foreclosure challenges. Between April 2009 and December 2011, 
more than 5.6 million mortgage modifications were started--including 
more than 950,000 permanent HAMP modification saving households an 
estimated $11 billion in monthly mortgage payments and nearly 1.2 
million FHA loss mitigation actions and early delinquency 
interventions.
    Between April 2009 and December 2011, more than 5.6 million 
mortgage modifications were started--including more than 950,000 
permanent HAMP modification and nearly 1.2 million FHA loss mitigation 
actions and early delinquency interventions--saving households an 
estimated $11 billion in monthly mortgage payments.
    As part of the administration's commitment to help responsible 
homeowners stay in their homes, we have actively sought to use our 
current programs and authorities to make homeownership sustainable for 
millions of American families. Examples of our efforts include:
  --FHA Streamline Refinance.--An option that allows borrowers with 
        FHA-insured loans who are current on their mortgage to 
        refinance into a new FHA-insured loan at today's low interest 
        rates without requiring additional underwriting, permitting 
        these borrowers to reduce their mortgage payments. This program 
        benefits current FHA borrowers--particularly those whose loan 
        value may exceed the current value of their home--and by 
        lowering a borrower's payment, also reduces risk to FHA. To 
        help more FHA borrowers take advantage of this program, this 
        week FHA announced an adjusted premium structure for these 
        loans, reducing premiums for all Streamline Refinance 
        transactions that are refinancing FHA loans endorsed on or 
        before May 31, 2009, to further incentivize refinance activity. 
        These changes--reducing the upfront mortgage insurance premium 
        for these loans to 1 bp and the annual to 55 bps--will ensure 
        that borrowers benefit from a net reduction in their overall 
        mortgage payment while still ensuring FHA has the resources to 
        pay any necessary claims. This change to the premium structure 
        of Streamline Refinances is also consistent with the annual 
        premium that these borrowers were subject to when their loans 
        were originated.
      And, because we see potential for more widespread use of this 
        product, FHA will make changes to the way in which streamline 
        refinance loans are displayed in the Neighborhood Watch Early 
        Warning System (Neighborhood Watch) to reduce lender concern 
        about the potential impact associated with taking 
        responsibility for loans they have not underwritten, making 
        them more willing to offer these loans to borrowers who are 
        current on mortgages already insured by FHA.
  --Short Refinance Option.--In 2010, FHA made available an option that 
        offers underwater non-FHA borrowers, who are current on their 
        existing mortgage and whose lenders agree to write off at least 
        10 percent of the unpaid principal balance of the first 
        mortgage, the opportunity to refinance into a new FHA-insured 
        mortgage.
      To protect FHA's MMI Fund, a line of credit in the amount of $8 
        billion has been set up to cover losses the fund might incur as 
        a result of the FHA Short Refinances having a higher than 
        normal default rate. The funds, from the TARP program, are 
        available in the event any of the short-refis go into default. 
        To date, there have been no claims filed for the short-refis 
        and the program has not used any of the TARP funds.
  --Homeowner Bill of Rights.--As another critical component to the 
        recovery of the housing market, the President has also put 
        forward a Homeowner Bill of Rights--a single, straightforward 
        set of commonsense rules that families can count on when 
        they're shopping for a mortgage, including the right to a new, 
        simple, clear form for new buyers that gives people confidence 
        when they're making the most important financial decision of 
        their lives. And those rights shouldn't end when homeowners get 
        the keys to their new home. When Americans lose their job or 
        have a medical emergency, they should know that when they call 
        their lender, that call will be answered and that their home 
        won't be sold in foreclosure at the same time they are filling 
        out paperwork to get help.
      FHA servicing standards will be updated to incorporate the 
        principles in the Homeowner Bill of Rights.
  --REO to Rental.--A glut of vacant foreclosed properties continues to 
        drag down property values and meanwhile, rental rates are 
        rising as those who lose their homes to foreclosure seek rental 
        housing, creating an unprecedented imbalance of supply and 
        demand between the purchase and rental markets. This problem 
        requires a creative, innovative mode of addressing the 
        inventory of unoccupied homes in our communities. When there 
        are vacant and foreclosed homes in neighborhoods, it undermines 
        home prices and stalls the housing recovery. The administration 
        began tackling this issue through the Neighborhood 
        Stabilization Program (NSP) and our efforts have expanded our 
        efforts through the REO to Rental initiative.
      As part of the administration's effort to help lay the foundation 
        for a stronger housing recovery, the Department of Treasury and 
        HUD have been working with the FHFA on a strategy to transition 
        REO properties into rental housing. Repurposing foreclosed and 
        vacant homes will reduce the inventory of unsold homes, help 
        stabilize housing prices, support neighborhoods, and provide 
        sustainable rental housing for American families.
      With about a quarter of a million foreclosed properties owned by 
        HUD and the GSEs, this August, HUD joined with the Federal 
        Housing Finance Agency (FHFA) and Treasury to issue a Request 
        for Information (RFI) to generate new ideas for absorbing 
        excess inventory and stabilizing prices. In all, about 4,000 
        submissions were received and, over the past several months, 
        the interagency task force has been reviewing the submissions 
        and formulating strategies based on the best practices gathered 
        from the RFI. Throughout this process, the task force has 
        continuously met with industry members, community groups, and 
        other key stakeholders to make sure they are heard in the 
        strategy development process. Ultimately, we expect a range of 
        strategies to emerge; however the most commonly discussed 
        centers around selling REO properties to buyers who will 
        convert and market them as rental units.
      Last week, Fannie Mae announced the first pilot program as part 
        of the RFI, releasing details on its plan to sell homes that 
        are part of its tenant in place portfolio. This is the first of 
        a several collaborative efforts to clear the Nation's shadow 
        inventory, an effort that FHA is an active part of. We plan to 
        learn and leverage all we can from this initial pilot as we 
        work towards conducting a series of additional pilots 
        throughout the rest of the year.
  --Broad Based Refinance.--Last, the President has called on Congress 
        to open up opportunities to refinancing for responsible 
        borrowers who are current on their mortgage but whose loans 
        aren't backed by FHA or the GSEs. Under the proposal, borrowers 
        with standard non-GSE, non-FHA loans will have access to 
        refinancing through a new program run through FHA.
      The program will be simple and straightforward. Any borrower with 
        a loan that is not currently guaranteed by the GSEs or insured 
        by FHA can qualify if they meet the following criteria--each of 
        which is designed to help reduce risk to the taxpayer:
    --They are current on their mortgage: Borrowers will need to have 
            been current on their loan for the past 6 months and have 
            missed no more than one payment in the 6 months prior.
    --They meet a minimum credit score. Borrowers must have a current 
            FICO score of 580 to be eligible. Approximately 9 in 10 
            borrowers have a credit score adequate to meet that 
            requirement.
    --They have a loan that is no larger than the current FHA loan 
            limits in their area: Currently, FHA limits vary 
            geographically with the median area home price--set at 
            $271,050 in the lowest cost areas and as high as $729,750 
            in the highest cost areas.
    --The loan they are refinancing is for a single family, owner-
            occupied principal residence. This will ensure that the 
            program is focused on responsible homeowners trying to stay 
            in their homes.
    --They are currently employed. To determine a borrower's 
            eligibility, a lender need only confirm that the borrower 
            is employed.
      Borrowers will apply through a streamlined process designed to 
        make it simpler and less expensive for both the borrower and 
        the lender. The President's plan includes additional steps to 
        reduce program costs, including:
    --Establishing loan-to-value limits for these loans. The 
            administration will work with Congress to establish risk-
            mitigation measures which could include requiring lenders 
            interested in refinancing deeply underwater loans (e.g., 
            greater than 140 loan-to-value) to write down the balance 
            of these loans before they qualify. This would reduce the 
            risk associated with the program and relieve the strain of 
            negative equity on the borrower.
    Cost-Savings to the Borrowers Who Participate in This New 
Program.--Given today's record low interest rates, we estimate that on 
average, borrowers who participate in this program would reduce their 
monthly payments by between $400 and $500 a month.
    Option To Rebuild Equity in Their Homes Through This Program.--All 
underwater borrowers who decide to participate in this refinancing 
program through the FHA outlined above will have a choice: They can 
take the benefit of the reduced interest rate in the form of lower 
monthly payments, or they can apply that savings to rebuilding equity 
in their homes. The latter course, when combined with a shorter loan 
term of 20 years, will give the majority of underwater borrowers the 
chance to get back above water within 5 years, or less.
    To encourage borrowers to make the decision to rebuild equity in 
their homes, we are proposing that the legislation provide for 
incentives to borrowers who chose this option. Possible incentives 
include paying for closing costs or a lower MIP. To be eligible, a 
participant in this option must agree to refinance into a loan with a 
term of no more than 20 years and with monthly payments roughly equal 
to those they make under their current loan.
    A Separate FHA Fund.--The broad-based refinance program will have a 
separate fund that is funded through premiums established and direct 
funding provided under this program with its net cost offset by the 
financial crisis fee. The program's premium structure will be designed 
in a way to ensure that homeowners have the incentive for lower monthly 
payments through the program. By maintaining a separate fund and 
funding source for this program the broad-based refinance will not be 
contingent on appropriations action and will have no impact on FHA's 
MMI Fund.
    Expanded refinance options for homeowners with non-GSE and non-FHA 
loans, along with changes to the FHA Streamline Refinance, create a 
critical patchwork of refinance programs for responsible borrowers who 
are current on their mortgage loans. Through the efforts of HUD and its 
administration partners, working together with Congress, we can ensure 
that every family can have the opportunity to take advantage of today's 
historically low interest rates. This will save homeowners thousands of 
dollars a year, and as a result provide much needed payment relief and 
further strengthen the economy.
                               conclusion
    Madam Chairman, this budget reflects this administration's belief 
that the recovery of our housing market is essential to the restoration 
of our economy and that FHA is critical to restore health and 
confidence to the housing market in particular. By targeting resources 
where they are most needed, making tough choices in order to do more 
with less, and ensuring the protection of taxpayer interests, FHA's 
Single Family, Multifamily, Healthcare and Housing Counseling Programs, 
are ensuring more Americans have the opportunity to realize or maintain 
the economic security of the middle class. And the work this 
administration has done has established a strong foundation upon which 
we will construct an economy built to last.
    Thank you.

      FEDERAL HOUSING ADMINISTRATION--STREAMLINE REFINANCE PROGRAM

    Senator Murray. Thank you very much for your testimony.
    Let me start by asking you about earlier this week when the 
President announced changes to the FHA Streamline Refinance 
Program. FHA borrowers can already do streamline refinances, 
but the changes would reduce the costs.
    Specifically, any borrower who is current on their mortgage 
and has a mortgage that was originated before June 2009 would 
pay an up-front premium, I understand, of .01 percent, and an 
annual premium of .55 percent? Normally borrowers would have to 
pay the current up-front premium of 1.75 percent and an annual 
premium of 1.25 percent.
    This change has the potential to help borrowers enjoy the 
benefits of lower interest rates, but we are all focused on 
solvency of the MMI Fund. So, I am concerned about the impact 
of that change on that fund.
    So, first of all, I wanted to ask you, who will benefit 
from this change, and how many you would expect to benefit? And 
second, what effect do you think that will have on the MMI 
Fund?
    Ms. Galante. Thank you for the question.
    So, there are a large cohort of borrowers who will benefit 
from this. Something in the magnitude of 2.5 million borrowers 
are eligible under those criteria that you mentioned. And these 
are people who are already paying 55 basis points on an annual 
basis for their mortgage insurance premium, so they will 
continue to pay the same amount and receive the full benefit, 
essentially, of a reduction in interest rate from wherever they 
are today, which obviously varies, but somewhere between 6.5 
percent down to today's rates of around 4-plus percent.
    So, there is significant benefit to them in monthly 
savings. Again, these are borrowers that already need to be 
current on the mortgages, so they are good, paying borrowers at 
this point in time. However, we all know that everyone is under 
stress in this economy, and if we can help those borrowers put 
some additional money in their pocket, we believe that over the 
long term, that strengthens their ability to continue to pay 
their mortgage payment, and does not cost FHA anything to get 
that essentially additional layer of security that they will 
continue to pay.
    So, the only cost to this, really, would be the assumption 
that there were some people who would have refinanced at the 
higher mortgage insurance premiums, and we will not receive--
there is an opportunity cost for not refinancing those people 
at the higher mortgage insurance premium. But in the mix, it is 
a very low amount to pay for that extra so-called insurance 
that doing the Streamline Refinance Program will benefit.
    And with our other changes, the 75 basis points up front 
for all other borrowers combined, we will net between fiscal 
years 2012 and 2013 an additional $1 billion in premium 
increases.
    Senator Murray. So, you do not see an impact on the MMI 
Fund, or you think it will benefit the MMI Fund.
    Ms. Galante. I think, long term, it will benefit the MMI 
Fund. And with the up-front premiums that we are charging for 
the balance of borrowers, again, we believe we are going to 
net, in addition to what is already in the President's budget, 
$1 billion in budget receipts.
    Senator Murray. Okay. When you announced the policy change, 
you also said some lenders are resistant to doing streamline 
refinances because they are concerned about how those loans 
might impact their performance assessments that are done 
through the Neighborhood Watch System. This system compares the 
performance of a lender's loans with other similar lenders.
    And so, to ease those lenders' concerns, the new policy is 
to exclude those loans from the compare ratio. I certainly want 
to see more borrowers take advantage of low interest rates, but 
I also want to make sure we are monitoring FHA lenders. So, how 
can you ensure us that lenders will still be held accountable 
for poor performance?
    Ms. Galante. Right. So, a very good question. And they will 
continue to be held accountable. Whoever originated that loan 
is still accountable for the origination. If there was fraud or 
there was a problem in that original origination of that loan, 
that lender can still be held accountable under our 
indemnification processes.
    So, we do not think that that change will have a material 
effect on our ability to monitor lenders for their origination 
errors.

     FEDERAL HOUSING ADMINISTRATION--MUTUAL MORTGAGE INSURANCE FUND

    Senator Murray. Okay. The most recent quarterly report to 
Congress on the MMI Fund shows an increase in early period 
delinquencies for Streamline Refinance mortgages. That raises 
some concerns about the current proposal. However, the report 
does note that changes to the program have been made requiring 
lenders to certify income and employment at the time of 
refinance.
    Can you explain the changes that you made to the program 
requirements and what impact you expect that to have on the 
performance of Streamline Refinance loans going forward?
    Ms. Galante. So, when the Streamline Refinance was first 
being used in the beginning of this crisis, there were not some 
of the controls that you just mentioned on the program. Putting 
those controls in, we believe, will significantly help the re-
default ratio of those loans.
    It is true that people who are being refinanced because 
they are under some kind of stress, even though they are 
current on their mortgage, may have a slightly higher default 
ratio than other people. But on the other hand, we are going to 
be better off if they do not ultimately default because we have 
lowered their interest rate. If we can help them stay out of 
default by lowering their interest rate and putting more money 
in their pocket, ultimately, we are going to benefit from that.
    Senator Murray. Okay. When the Secretary was here last 
week, we spent a bit of time talking about the health of the 
MMI Fund and the current expectation that an appropriation will 
not be needed to cover the re-estimate.
    In the past few weeks, there have been a lot of numbers 
released on the MMI Fund related to all the various settlements 
and premium increases. And I understand that the settlements 
have not been filed in court, so these numbers still are not 
final. But if you could, can you give us just a walk through on 
what has happened and where we see these, including the premium 
increases in various settlements, and the impact on the MMI 
Fund?
    Ms. Galante. Right. So, the budget projection in the 
President's budget was that if there were no additional policy 
changes and MIP (mortgage insurance premium) increases, and no 
additional funds through enforcement actions, and the economics 
that the projections were based on stayed the same and the 
volume stayed the same, that we could need to draw $688 million 
from Treasury.
    Given the policy changes in the premiums, which will 
generate, as I said, over fiscal year 2012 and into fiscal year 
2013, more than $1 billion of receipts, and the approximately 
$900 million that comes from the settlement negotiations, those 
two things obviously take away the need for the $688 million 
and leave us in the plus category to some degree.
    Now, all of this is based on assuming that there is not any 
major change in our volume from the projections that were in 
the President's budget, or from some other worsening of 
economic conditions.
    So, there is still some risk, and we do not pretend that 
there is not. But it is much less likely given the policy 
changes that we have put into place.
    Senator Murray. Okay. Thank you very much.
    Senator Collins.
    Senator Collins. Thank you, Madam Chairwoman. I want to 
follow up on the very issue that you were just discussing with 
Senator Murray. It does appear that the FHA, contrary to the 
projections in the President's budget, will narrowly avoid 
requiring funds from the Treasury in this fiscal year. But 
there are circumstances under which these steps that have been 
taken, such as the increase in mortgage insurance premiums and 
the funds from the settlement, might not be sufficient to keep 
the FHA from requiring an infusion of cash from the Treasury.
    You mentioned broader economic issues. But if you could be 
more specific on what could cause the Treasury, to be needed 
after all, despite the insurance premium increase and the 
settlement funds.
    Ms. Galante. So, I think the major issue is if house prices 
decline and they decline significantly from the projections 
both under the President's budget and from our actuarial, which 
had different projections. So, there is a range here.
    But the fact is, everyone is at risk of where house prices 
are going relative to the whole economy. We are starting to see 
some stabilization there. We are starting to see some good 
signs. But we have seen the beginning of some good signs 
before, and so we do not want to take that for granted, that it 
is just absolutely going to turn the corner here.
    So, we are continuing to do everything that we can, 
including increasing premiums, including additional enforcement 
actions. The settlements that you have seen are not necessarily 
the end of FHA's enforcement actions to keep lenders 
accountable.
    We are also making changes in our REO processes, as has 
been widely publicized. Again, if we can recover more dollars 
as we dispose of our REO, if we can stabilize the housing 
market through those kinds of actions, all of that will 
ultimately help the MMI Fund.
    So, we are going to continue to monitor this very closely. 
We are going to continue to take additional actions that we 
need to take to keep the fund healthy.

                        MORTGAGE INSURANCE FEES

    Senator Collins. But it seems that the administration is 
going in contrary directions when it comes to fees and mortgage 
premiums. On the one hand, you are increasing the premiums, but 
as part of the FHA's Streamline Refinance Program, you are 
actually substantially reducing fees and premiums.
    Now, I recognize that that is great news for hundreds of 
thousands of families, potentially lowering their monthly 
payments. But that obviously has a negative impact, I would 
think, on the FHA's capital reserves.
    Now, you said in response to a question from Senator Murray 
that ultimately you think that it is going to benefit the fund. 
I am trying to understand how cutting the fees will benefit the 
fund. Is it that you expect to make it up in volume? It seems 
inconsistent with your overall approach of increasing premiums.
    Ms. Galante. So again, this does get a little bit 
confusing. But these are borrowers who are already in our 
portfolio, who are paying 55 basis points on an annual basis 
today.
    And what we have done under the Streamline Refinance that 
was announced this week is we have said, if they want to 
refinance at today's current interest rates, essentially they 
get to keep the same premium that they have as opposed to 
having to pay the new current premiums that we have increased, 
not just this past week, but that we have increased over the 
past 3 years.
    And so, if they had to pay those higher premiums, the $175 
up front and 1.25 points over time, that would so significantly 
cut into their net benefit on a monthly basis that many of them 
simply would not choose to refinance. So, they would just stick 
where they are, and they would in some ways be a higher risk to 
us because they are paying a higher interest rate today, and 
they are not being able to take advantage of the lower interest 
rate.
    So, that is why we really believe that this is different 
than charging new borrowers for higher mortgage insurance 
premiums.
    Senator Collins. I understand that, but are you not 
actually cutting their fees compared to the fees that they are 
currently paying? I understand they are not going to have to 
pay the higher fee, but it was my understanding that you were 
going to cut the annual fee in one-half and cut the up-front 
insurance premium costs from 1 percent of the loan balance to 
.01 percent.
    Ms. Galante. So, here is where it gets a little difficult. 
For the current borrowers, they are already paying that 55 
basis points. What we are saying is we are not going to jack 
you up to the higher mortgage insurance premiums. And we had 
been doing that to other borrowers. That is how we have been 
running this program until June 1 when we have this go into 
effect.
    So, it is not cutting the existing borrowers' fees. It is 
that they will not have to pay the higher fee, if that makes 
sense.

                            CAPITAL RESERVES

    Senator Collins. Let me move to the statutorily mandated 
level of 2 percent for the capital reserves. This really 
troubles me because this is not a guideline. It is not a best 
practice. It is not a suggestion. It is not a recommendation. 
It is the law. And for the third year in a row, FHA has not met 
that level.
    Now, I understand why, and the total collapse of the 
housing market--and I know that you are putting in new premium 
increases and proposing new rules related to lender oversight. 
I guess my question is, are you confident that that is going to 
be adequate?
    I do not think you should be relying on a one-time windfall 
from the lender's settlement to get you back to the statutorily 
required level.
    Ms. Galante. So, we certainly are not relying exclusively 
on the settlement funds to get us back to the level. I mean, 
$900 million is not going to get us back to a 2-percent capital 
reserve. That is why we have been over the past 3 years 
increasing mortgage insurance premiums significantly.
    So, we have between the start of this administration and 
the premium increases announced last week, we have doubled the 
mortgage insurance premium on FHA loans. And we are financing 
borrowers at very low interest rates. Those loans are going to 
stay with us and continue to be paying a mortgage insurance 
premium for many years to come.
    And we are not going to get there up to the 2-percent 
capital reserve in 2013. It is going to take a couple of years 
of the loans that we have and that we have put this additional 
premium increase on. It is going to take a couple of years to 
late 2014, early 2015, before we project we will back to the 2 
percent. And it is not a result of just the settlement. It is a 
result of these ongoing increases in premiums to help us get 
there, as well as other activities, other policy changes that 
we are making.

                         RISK ASSESSMENTS TOOLS

    Senator Collins. Thank you, Madam Chair.
    Senator Murray. Clearly the re-estimates are going to be 
impacted by the conditions in the market that is outside, has 
control, if prices of homes decline or whatever. I think 
everybody understands that. But we also know that HUD has to 
work to improve its ability to monitor its risk and its 
estimates. And the Government Accountability Office (GAO) has 
recommended improving your risk assessment tools to better 
incorporate the risk of future economic volatility.
    In years past, the Congressional Budget Office (CBO) has 
raised concerns about your estimates, and I understand that you 
currently have a contract that will allow you to use stochastic 
modeling in the next actuarial review.
    Can you explain how that modeling is different than what 
you are doing today, and how that will change your estimates?
    Ms. Galante. Sure. I will take a stab at it. We, first of 
all, appreciate the help that Congress has given us in funding 
a number of important initiatives that help us get the modeling 
as up to date as possible.
    And stochastic modeling allows us to really have more 
dynamic scenarios built in, more variables built in, to monitor 
many different increases and changes in market conditions. And 
so, it will enable us to have many more points of range of--
under different economic conditions, what happens?
    So, it is going to provide us significantly more 
information than we have under the current modeling. But I 
would also say the modeling has been improved over the past 
couple of years. It has not been a static situation.
    Senator Murray. Does that address the concerns that GAO 
outlined for you?
    Ms. Galante. I believe so, yes.
    Senator Murray. In your testimony, you said HUD has 
clarified the rules around lender indemnification for insurance 
lenders. What aspect of the rules did you feel were important 
to clarify, and what effect will those changes have on 
enforcement going forward?
    Ms. Galante. So, the most important thing was to define 
material and serious violation so that lenders--this cuts two 
ways--lenders will know that we are not going after minor 
little box checking errors, but it is clear what they will be 
held accountable for. So, that helps them understand the 
standard that we are going to be looking at. So, that was the 
most important thing.
    Senator Murray. Okay. You expressed an interest in getting 
two additional authorities to strengthen FHA's enforcement 
abilities, including lender indemnification requirements to 
direct endorsement lenders, and expanding your authority to 
remove lenders from the program on a national basis. Can you 
explain why those different rules currently apply to those 
different classes of lenders, and what impact those proposals 
will have on your enforcement?
    Ms. Galante. So, right now the indemnification rules apply 
to our lender insurance program, which covers, I think, 70 
percent of our volume, but only 30 percent of our lenders. So, 
we kind of have a reverse situation here where the largest 
lenders doing the most amount, we can get indemnities from. But 
for the smaller lenders who are direct endorsers, we do not 
have that authority. So, that would be a smaller volume, but it 
is still important to be able, in our view, to have the same 
authority for both types of lenders. So, that is one statutory 
requirement that we would like.
    The other is, right now, it is incredibly cumbersome to go 
after lenders when we see a systematic problem with a lender 
that operates in multiple jurisdictions, because we need to 
look at their offices on a geography by geography basis and 
what problems they have in that office. So, this makes it very 
hard when we are in the 21st century where lenders are 
operating all across different geographies, and our statutory 
requirements have not really kept up with the need to have that 
kind of systematic overview.
    Senator Murray. Okay, good. And the HUD Office of Inspector 
General has recommended that you seek legislative and program 
changes to prevent lenders and their corporate officers from 
reentering the program as an officer with the same or a new 
lender. Is that a recommendation you agree with?
    Ms. Galante. We do conceptually agree with that. We have 
got to figure out exactly what the legal statutory language 
would be to walk a path of ensuring that we are keeping the bad 
guys out from just coming in the back door with another lender, 
but not trapping everybody who has worked for an institution, 
for example, that had issues, but perhaps were not directly 
involved in the----
    Senator Murray. So, the concept you agree with.
    Ms. Galante. The concept we absolutely agree with.
    Senator Murray. The language, we have to be careful with.
    Ms. Galante. Correct. That is correct.

                      REAL ESTATE-OWNED PROPERTIES

    Senator Murray. Okay. As a result of foreclosures and home 
price declines, the rental housing market is really tightening. 
So, on the one hand we have an excess supply of distressed 
housing, and on the other we have increased demand for rental 
housing and a shortage of affordable housing.
    Last August, FHA, Treasury, and the Federal Housing Finance 
Agency put out a request for information to determine interest 
in a proposal to sell distressed properties more 
systematically.
    FHFA recently announced a pilot sale of real properties, 
which would include the sale of 2,500 properties in bulk. Your 
testimony mentioned that following that pilot, FHA would do its 
own. What, specifically, is HUD considering in terms of a 
pilot, and do you have a timeframe on that?
    Ms. Galante. So, yes, thank you. There are a couple of 
things we are doing on that. The first is the Fannie pilot; the 
initial pilot is for properties where they had already tenants 
in place, and so it is a little bit separate from the rest of 
the REO-to-rental strategy that we are, as FHA, also working 
with FHFA and Government-sponsored enterprises (GSEs) on. And 
we, together, are looking at other pilot communities where all 
three of us--it might make sense to have a pilot where there is 
stock from each of those institutions, because one of the 
things we are trying to get to is ensuring that there is a 
reasonable number of units in a geography so that someone could 
actually own and manage these homes as rental housing in a 
cost-effective manner.
    Frankly, all of us have been working down our REO at the 
moment, and so there are limited geographies where it makes 
sense to do this all together. So, we are identifying those 
places, and I would hope in the next month or two that we would 
be able to announce where we would want to continue to work 
together.
    FHA is doing some other things on its own. We are 
interested in ramping up our Notes Sale Program. And without 
getting into the details, that is essentially a pre-REO sale of 
the note with the existing borrower in place. And then whoever 
buys that note has the opportunity to and requirement to work 
that borrower, maybe rent them back, maybe put them in a lease-
to-own. There are a variety of mitigation measures that they 
can do before the property reaches REO, because by that point, 
we are already losing a significant amount of money. So, there 
are a number of other things that we are working on around that 
pilot.
    Senator Murray. Okay, great. Appreciate it.
    Senator Collins.
    Senator Collins. Thank you, Madam Chairwoman.
    The administration has proposed paying for its broad-based 
refinancing plan by charging a fee on large financial 
institutions, a so-called bank tax.
    This fee has previously been proposed and rejected by 
Congress. When Secretary Donovan was before us, and also in an 
interview that he gave with reporters, he said that while he 
personally believes the fee is the right approach, HUD is open 
to exploring alternatives.
    What alternatives is HUD looking at?
    Ms. Galante. So, Senator, I would say I do not have a 
particular alternative to put on the table. The President's 
proposal does include the financial responsibility fee. If 
there are other ideas--I think what we are saying is that we 
are open to consider other alternatives for this. But it is 
important, back to the health of the FHA fund--we really think 
it makes sense to do this broad-based refinance program, but we 
also think it is important to have segmented from the MMI Fund, 
and whatever risk is in that fund to be funded from a separate 
pot of money.
    Senator Collins. I would suggest to the administration that 
since this proposal did not go anywhere in the past, that it 
would be really helpful if you came forward with other 
approaches that might be better received. I told the Secretary 
that too. I know it is a little bit out of your lane, but I did 
want to bring it up today.
    Madam Chair, I am going to submit the rest of my questions 
for the record because I do have to go to the floor to present 
an amendment.
    Senator Collins. But thank you for holding this important 
hearing. And Ms. Galante, thank you for being here today.
    Ms. Galante. Thank you.
    Senator Murray. Thank you very much, Senator Collins. And I 
just have a couple of questions left, and I appreciate your 
answering. Many of our questions we will have to submit in 
writing today.

                       UNDERWATER MORTGAGE RELIEF

    Senator Murray. We are beginning to see signs of life in 
this housing market, but there are still some looming concerns, 
especially about the number of underwater mortgages and the 
shadow inventory that is eventually going to hit the market. 
The settlement with those five largest servicers includes $17 
billion in direct consumer relief that will be provided to 
borrowers through help, like principal write-downs and short 
sales. It also includes $3 billion to support mortgage 
refinancing for underwater borrowers.
    I wanted to ask you how you expect the servicers to 
allocate the direct consumer relief among various relief 
options, and what do you expect the impact of that $3 billion 
to be?
    Ms. Galante. So, again, I think some of this is going to be 
worked out over time. Each servicer has an allocation of the $3 
billion of refinancing and the $17 billion in principal 
reduction and other consumer relief. And they have allocations 
based on a State-by-State basis.
    So, we do expect that--the combination of all of those menu 
of services across the country will help somewhere in the 
magnitude of 1.7 million owners through a variety of those 
activities. And it is going to depend on what their individual 
portfolio looks like, what State they are in, and a number of 
other factors.
    Senator Murray. So, we could see a different picture and 
different----
    Ms. Galante. Different picture in different States and by 
different institution depending on, again, what kind of 
borrowers they have in their portfolio.

                             MORTGAGE SCAMS

    Senator Murray. Okay. And finally, I wanted to ask you 
about mortgage scams. An important part of the recent 
settlement is that it provides relief to homeowners. But 
throughout this housing crisis, we have seen a lot of scam 
artists who are preying on vulnerable homeowners. And those 
perpetrating those scams have been incredibly skilled at 
adjusting their tactics as new opportunities arise. Are you 
concerned that scam artists could try and take advantage of 
homeowners who may be eligible for relief through this 
settlement?
    Ms. Galante. We are concerned, not just about the 
settlement, about that, but more broadly. When I was out at the 
event with the housing counselors that I mentioned in my 
testimony, that was one of the big things I heard, that the 
housing counseling community is trying to stay ahead of the 
scam artists. And, they get people who come into them after 
they had been taken advantage of. And it is a serious problem.
    I would say that we have a campaign that we are working 
with a number of other agencies and nonprofits that is a 
consumer education campaign. And in fact, this week is National 
Consumer Protection Week, and we are launching a campaign down 
in Atlanta today actually. The press release probably is coming 
out today. It is called Know It, Avoid It, Report It, and there 
is----
    Senator Murray. Know, Avoid It, Report It?
    Ms. Galante. Know It, Avoid It, Report It. So this is 
reaching out to borrowers to make sure that they understand 
that there are scam artists, and if they see it, if they are 
being asked for money to do certain activities, there is a 
number they can call. There is a Web site they can go to to 
report the scams that they are seeing.
    Senator Murray. Okay. I urge you to be really aggressive on 
that because these scam artists are really aggressive and stay 
ahead of us. So, I appreciate that, and we will be following 
that closely as well.
    Ms. Galante. Right.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Murray. I believe that is all the questions that we 
have for you at this time. Again, we will leave the record open 
for additional questions and your comments back.
    [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
                            evaluating risk
    Question. Given the volume of loans that FHA insures, it is 
critical that it has the capacity to monitor and assess risk. Two 
important aspects of this are: Staff with the appropriate expertise, 
and modern IT systems. In the fiscal year 2012 bill, the committee set 
aside $8.2 million for the Office of Risk and Regulatory Affairs to 
support increased risk controls. What is the current status of this 
relatively new office?
    Answer. Led by a Deputy Assistant Secretary with extensive 
experience in assessing credit risk, the Office of Risk Management and 
Regulatory Affairs (ORMRA) recently received its delegation of 
authority to carry out, in concert with program offices, all risk 
management, analysis, and evaluation functions, including decisions and 
corrective measures related to risk assessment, risk management 
strategy, and risk governance policies. With several credit risk 
officers already on staff, the office is in the process of hiring 
additional staff with credit risk and operational risk expertise to 
ensure that there is sufficient coverage and expertise to review and 
report risk across all FHA platforms.
    The Office of Risk Management and Regulatory Affairs is authorized 
to conduct risk management and risk assessment activities including, 
but not limited to the following:
  --Recommend actions to support FHA's ability to reduce risk exposure 
        to its insurance funds while meeting its housing mission and 
        operating in compliance with statutory capital requirements;
  --Promote transparency and comprehensive communication of FHA's risk 
        profile by establishing reporting metrics for key constituents, 
        both internal and external, in order to communicate, both 
        qualitatively and quantitatively, FHA's risk levels, trends, 
        priorities, risk mitigation activities, and impacts;
  --Identify the policies and processes that are key drivers of risk 
        via a structured risk identification framework: I.e., recommend 
        risk mitigation strategies for FHA and specific program areas 
        and provide independent oversight and assessment of risk 
        remediation activities; provide input and guidance to program 
        areas on key risk analytics, policies and practices, including, 
        but not limited to, algorithms and underwriting used to 
        identify, measure, and manage risk-related to endorsement and 
        management of Single Family, Multifamily, and Healthcare 
        programs, and collaborate with program areas regarding 
        counterparty risk (lenders and servicers), portfolio asset 
        management strategies, and enforcement practices to protect 
        FHA's insurance funds;
  --Design and maintain a comprehensive Risk Governance infrastructure, 
        including implementing policies, processes, and committees to 
        reduce risk exposure to the insurance funds; i.e., advise and 
        provide oversight for the implementation of policies, 
        processes, and committees that comprise the governance 
        structure;
  --Ensure the timely and proper conduct of statutorily mandated and 
        other necessary risk analyses, including the annual actuarial 
        study of the Mutual Mortgage Insurance Fund and front-end risk 
        assessments (FERA) for new and high-impact programs and 
        activities, in accordance with Federal standards, and in 
        concert with other Office of Housing offices; and
  --Ensure that risks are measured, monitored, and managed according to 
        an integrated framework across FHA and Office of Housing 
        program areas.
    In order to carry out its functions, the ORMRA has instituted 
monthly credit risk committees with each FHA program office to evaluate 
loan performance data and make informed policy decisions which account 
for risk. In addition, the Office is utilizing the work of FHA 
Transformation to create and obtain monthly reports based on various 
model scenarios that will allow FHA to evaluate the health of the FHA 
fund on a more regular basis throughout the year.
    ORMRA's Office of Evaluation assesses the financial impact of new 
or revised HUD/FHA programs and policies; new or proposed legislation; 
and/or new or proposed directives, studies or rules of the Office of 
Management and Budget (OMB), the Government Accountability Office 
(GAO), the Department of the Treasury (Treasury), or other agencies. 
The Office of Evaluation is responsible for actuarial analyses and 
cash-flow projections of the FHA insurance funds and evaluates 
relationships between current market conditions and FHA program goals 
and objectives. The Office of Evaluation estimates the financial impact 
of policy changes or external factors on FHA programs. In addition, 
that Office conducts a quarterly analyses of economic developments and 
ongoing portfolio analyses of FHA's insurance funds.
    The operational risk team within ORMRA has begun adopting GAO's 
recommendations from its November 2011 Report on Improvements Needed in 
Risk Assessment and Human Capital Management. This includes employing 
stochastic modeling for the 2012 actuarial report. Recently, the Office 
briefed GAO on its accomplishments to date in connection with such 
report.
    Question. GAO has noted the importance of integrated and updated 
risk assessments to the solvency of the Mutual Mortgage Insurance (MMI) 
Fund. Will the Risk Office assist in more integrated risk assessments?
    Answer. Yes, the Office of Risk Management and Regulatory Affairs 
(ORMRA) will assist in more integrated risk assessments. ORMRA is 
leveraging the current process utilized by the Office of Single Family 
Housing in its quarterly Internal Quality Control Reports to populate a 
baseline operational risk assessment. This baseline operational risk 
assessment will be used in conducting the annual risk assessment. ORMRA 
and Single Family will partner in conducting the annual risk assessment 
so that it is a more integrated and coordinated effort. In addition, 
ORMRA and the program offices plan to hold quarterly operational risk 
committee meetings to review the Internal Quality Control Reports, the 
risk assessments, and monitor the remediation plans.
    Question. Modern IT systems are necessary for FHA to assess risk 
effectively. Unfortunately, many of HUD's IT systems are decades old. 
This committee has provided HUD with millions of dollars, primarily 
through the Transformation Initiative, to modernize FHA systems. What 
is the status of that project? And when can we expect to see the 
benefits of these updated systems?
    Answer. The project is maximizing the funds appropriated by 
Congress to the greatest extent. We have completed several studies 
documenting a roadmap to follow for implementing business services on 
the Federal Financial Services Platform. We have identified the 
required Risk and Fraud tool, along with a Portfolio Evaluation tool. 
Procurement and deployment of the tools are underway. We need funding 
in fiscal year 2013 and beyond to continue to implement the vision of 
FHA Transformation which is a priority of the committee.
    Benefits of the FHA Modernization capital investment are being 
realized today. Acquisition of the Federal Financial Services Platform 
(using Oracle Exalogic hardware, featuring the integrated Fusion 
Middleware software stack) is the cornerstone IT investment. This 
platform ultimately has enterprise extendibility and provides the 
capability and capacity to replace the Unisys and IBM mainframe systems 
at some logical point in the future. Eighty percent of the initial 
planned environments are built out on the Oracle Exalogic platform; 100 
percent by August 31, 2012. A requisition for additional Oracle 
Exalogic hardware/software is in the procurement pipeline. This 
additional capacity positions us to accept requirements from other 
offices in the Department (e.g., Public and Indian Housing (PIHs), Next 
Generation Management System (NGMS) projects); accordingly, this 
achieves true enterprise capability and demonstrates scalability. The 
Lender Electronic Assessment Portal (LEAP) application consists of four 
modules (i.e., Approval, Recertification, Monitoring and Enforcement) 
that are in various stages of development and production. Today LEAP 
automates what largely has been a manual and paper intensive process. 
The LEAP application wholly aimed at improved counterparty (i.e., 
lender) management, addresses vestiges of risk and fraud at the front 
end (or origination) of the loan rather than relying on the antiquated 
process during the post-endorsement process. The Approval module went 
live in April 2012 and is successfully processing a steady state volume 
of request. The Recertification Generation I module is slated for 
operational capability in the second quarter of fiscal year 2013 with 
design and development of the other modules in the ensuing months; LEAP 
is projected to achieve full operational capability in the first 
quarter of fiscal year 2014. Consistent with addressing significant 
constraints on risk and fraud detection, the Loan Review System (LRS), 
Portfolio Evaluation Tool (PET) and Automated Underwriting System 
capabilities are slated to achieve operational capability in early 
fiscal year 2014. This complementary set of tools and capabilities 
effectively provide decision support (and analytics) at every step in 
the process of the loan lifecycle, from origination through post-
endorsement technical review.
    Question. Given FHA's significant presence in the market, the 
systems FHA uses to conduct its business are constantly in use. 
Therefore when new systems come online, transitioning from the existing 
systems to new ones will require careful planning. What are your plans 
for making sure that the transitions to new systems are as smooth as 
possible?
    Answer. FHA will continue to fully embrace HUD's Project Planning 
and Management (PPM) framework. New system deployments will be 
coordinated with all stakeholders to minimize disruptions and training 
costs. FHA will assess the operational readiness of each system, prior 
to its ``go live'' phase. Consistent with the PPM methodology, FHA will 
so document and detail the plans and procedures to decommission legacy 
systems as they are no longer needed. Launch of the business services 
will follow the industry best practices of beta testing, soft launch 
and full scale launch. Appropriate communications will be shared with 
users of the business services, to include citizens.
                                 ______
                                 
                Questions Submitted by Senator Roy Blunt
                             fha's solvency
    Question. As one of the only games in town, the Federal Housing 
Administration (FHA) continues to have a ballooning portfolio, well 
above the intended size. The administration's white paper proposes 
various reform options for the Government-sponsored enterprises (GSEs) 
Fannie Mae and Freddie Mac. How can the Department of Housing and Urban 
Development (HUD) ensure that FHA won't become the lender of last 
resort for home loans should the private market move slowly, if at all, 
to fill the space it once filled?
    Answer. The administration is currently working diligently on a 
number of interagency projects set forth in the white paper that was 
published in February 2011, including a detailed exploration of the 
three options for the future of housing finance. Of those three 
options, the third one does provide considerations around maintaining 
some Government presence through a model that would serve as a back-
stop in the form of reinsurance behind significant layers of private 
capital at a guarantor level. Below is greater detail on the strengths 
and weaknesses of this third option. However, to be clear, the 
administration is still working with a number of stakeholders, 
including Members of Congress, to fully explore all three.
    At the same time, the administration is equally engaged on topics 
that directly involve the GSEs, such as the development of national 
servicing standards, a transition plan for the wind down of Fannie Mae 
and Freddie Mac from their current status and reducing the footprint of 
the FHA. It is important to remember that the FHA and GSEs continue to 
provide an important source of credit availability as Government and 
industry work collectively to reduce the barriers of uncertainty that 
block a robust return of private capital. Thus, while the 
administration supports decreasing the role of FHA, Fannie Mae, and 
Freddie Mac and re-invigorating the private market, we also believe 
that any approach must be measured and comprehensive to address the 
tensions your questions above elicit.
    Question. The administration's budget once again requests increases 
in MMI premiums to help strengthen the fund. While I'm encouraged by 
the increase in liquidity to protect against risk to the solvency of 
the fund, I question whether the already bloated portfolio will grow in 
2013 rather than shrink as your budget assumes. What steps are being 
taken to encourage private lenders to originate quality, non-FHA 
insured loans? How can HUD encourage the private market to provide home 
loans for minorities who disproportionately rely on FHA's Government 
guarantee?
    Answer. In February 2012, HUD announced an increase in FHA annual 
and upfront mortgage insurance premiums, effective in April 2012. The 
decision to adjust FHA premiums for the fourth time since 2009 was made 
by balancing several factors--FHA's mission of providing access to 
credit for low-wealth, creditworthy borrowers, the health of the Mutual 
Mortgage Insurance Fund and FHA's long-term role in the Nation's 
housing finance system. As a result of these premium adjustments, FHA 
has been able to continue to serve its counter-cyclical role in the 
mortgage market--providing access to credit to creditworthy borrowers 
during this time of market constriction--but has seen overall volume 
decline. According to Amherst Securities' June 14, 2012, Amherst 
Mortgage Insight Report, the composition of FHA loans in Ginnie Mae 
securities has actually declined. This is in large part because these 
pricing changes have made conventional loans more competitive; high 
FICO borrowers who may have chosen to take out an FHA insured loan 
rather than a loan with private mortgage insurance are now finding the 
costs of private versus federally backed mortgage insurance more 
comparable. However, adjusting premiums is only one lever. Currently, 
FHA is the only federally backed institution able to originate high-
priced loans (loans above $625,500). As a result, borrowers seeking 
these ``jumbo'' loans only have one outlet--FHA. In its housing finance 
reform white paper, the administration urged Congress to allow the 
higher loan limits to expire. Unfortunately, in November 2011, Congress 
elected to extend these limits for FHA while allowing the GSE loan 
limits to go back to pre-crisis levels. This does create a disincentive 
to originate non-FHA loans in some markets and so we would once again 
urge Congress to allow FHA loan limits to step back to the HERA levels.
                           commercial lending
    Question. In my home State of Missouri, we have a large man-made 
lake with a substantial volume of lakefront properties, as well as 
continued commercial development. That said, HUD continues to promote 
mixed-use properties as needed housing stock diversity for communities. 
FHA's condo rules prohibit the purchase of a condominium in a property 
with more than 25 percent commercial space. What is the purpose of this 
restriction, and doesn't it run contrary to the new ``town center'' 
model that HUD is promoting?
    Answer. While FHA's requirement regarding permissible commercial 
space is less restrictive than the industry standard of 20 percent, and 
FHA has provided for an exception to 35 percent for those projects 
meeting additional eligibility criteria, we have been working on 
changes to our requirements that will better accord with the growing 
trend of mixed-use development while simultaneously managing risk to 
FHA. Prior to recent changes in the housing market, mixed-use 
properties were not submitted for FHA condominium project approval. Now 
that they are subject to FHA project approval, FHA must develop 
standards for approval of these projects. Until standards are fully 
developed, these projects are reviewed on a case-by-case basis, taking 
into consideration that they tend to be riskier and often times the 
primary use is more non-residential than residential. Therefore, there 
is a need to review these projects carefully to ensure that approved 
projects contribute to FHA's mission of providing affordable, 
sustainable housing opportunities while balancing the risk to the 
Mutual Mortgage Insurance Fund. We expect to issue updated guidance 
regarding mixed-use development very soon.
                               appraisals
    Question. In my office, we often hear concerns from prospective 
buyers, builders, lenders, and other industry representatives about 
serious problems with the FHA appraisal process. Are you receiving 
complaints at your agency? Are you concerned with the current appraisal 
environment?
    Answer. Consumers and realtors may often have value issues with 
appraisals that complicate transactions they are involved with, but it 
is important to recognize that both parties have a vested interest in 
the properties they seek to purchase and/or sell. Appraisers, by law, 
are required to comply with the Uniform Standards of Professional 
Appraisal Practice (USPAP), which, among other standards, requires 
appraisers to perform assignments with impartiality, objectivity, and 
independence. The appraiser's role as a disinterested third party is to 
provide an unbiased opinion of value. This may, at times, be at odds 
with the negotiated contract purchase price, which while reflective of 
market activity may not reflect market values in a given area. 
Appraisal issues tend to center around a perceived inability of the 
consumer or realtor to be able to communicate directly with the 
appraiser because of the Dodd Frank Wall Street Reform and Consumer 
Protection Act of 2010, which prohibits undue pressure on the 
appraiser, and a separation of production and compliance in the 
lender's operation. This has caused some confusion in the markets 
regarding what is allowed in terms of communication to the appraiser 
among all parties to the transaction including the appraiser. FHA has 
released guidance to appraisers and lenders through the release of 
Mortgagee Letter 2009-28 (entitled Appraiser Independence) to clarify 
what is acceptable.
    Question. Also, what appeal process, if any, exists when homes that 
were appraised far below or above another appraisal? What appeal 
process exists for builders or lenders when an appraiser values a home 
well below the price offered and under contract?
    Answer. The mechanism for an appraisal appeal is known as a 
reconsideration of value. A reconsideration of value is a request to 
the FHA Roster appraiser to reconsider the analysis and conclusions of 
his or her appraisal based on information that was not presented on the 
appraisal report, but was relevant to the appraisal and available to 
the appraiser in the normal course of business as of the effective date 
of the appraisal.
    Only the lender's underwriter can request a reconsideration of 
value from the FHA Roster appraiser. Information regarding comparable 
sales, listings, or under- contract-of-sale properties that the 
appraiser did not cite in the appraisal report but was available to the 
appraiser in the normal course of business as of the effective date of 
the appraisal are appropriate data to be provided to the appraiser. The 
appraiser is required to consider the data provided by the lender. The 
reconsideration may or may not result in an amended report. The 
underwriter should include all relevant data with the request for the 
reconsideration. Information available at the time of the appraisal but 
not provided in the original report should be in the appraiser's file.
                             treble damages
    Question. The GSEs and other major mortgage investors require 
lenders to repurchase loans that do not meet their underwriting or 
servicing guidelines. FHA has additional authority, under the False 
Claims Act and the National Housing Act to assess treble damages on 
lenders for origination and servicing violations. Clearly, lenders who 
commit fraud should be penalized and barred from participating in the 
FHA program. But for more routine mistakes, repurchases and 
indemnification exist as a remedy.
    For large institutions, treble damages on enough loans would be a 
significant business cost, but for smaller lenders the impact is even 
greater if they have to pay three times the claim amount. Small, 
independent mortgage bankers are struggling with compliance business 
costs that they incur now because of increased industry regulation.
    My concern is instances where lenders acted in good faith and there 
was no fraudulent activity. For some of the smaller lenders, the cost 
of simply defending themselves could be devastating. Can you tell us 
under what circumstances FHA would see itself using this more stringent 
authority rather than having lenders simply repurchase or indemnify 
loans?
    Answer. FHA is an insurer; it does not own loans originated by FHA-
approved lenders. Therefore, repurchase is not a means for resolving 
violations of FHA origination, underwriting, or servicing violations. 
In instances of material non-compliance, HUD often attempts to settle 
with the lender by obtaining an agreement from the lender to indemnify 
FHA against losses. Indemnification may also be compelled under HUD's 
Lender Insurance Program in response to violations of HUD's origination 
and/or underwriting requirements. Since 2010, FHA has pursued statutory 
authority to extend this indemnification authority to FHA-approved 
Direct Endorsement Lenders.
    With respect to treble damages, section 536 of the National Housing 
Act (12 U.S.C. sections 1735f-14) authorizes HUD to impose a penalty in 
the amount of three times the amount of any insurance benefits claimed 
by the mortgagee for any mortgage where the servicer has failed to 
engage in loss mitigation in compliance with HUD's requirements. 
Imposing treble damages under this authority requires a demonstration 
that the lender has acted knowingly (demonstrated through evidence of 
actual or constructive knowledge) and that the misconduct is material. 
HUD regards treble damages as appropriate only for egregious violations 
of its requirements, and has not yet imposed treble damages for 
servicing violations.
    The Department of Justice (DOJ) has authority under the False 
Claims Act to pursue treble damages for, inter alia, knowingly 
presenting or causing to be presented false claims to the Government or 
making false records to get a false claim paid. The False Claims Act is 
only employed where there is evidence of fraud.
    While the size of the lender bears no relationship to the extent of 
its misconduct or, as a result, the amount of damages and penalties 
sought, both HUD and DOJ consider the lender's ability to pay in the 
context of settlement discussions.
    Question. Has FHA considered how the indemnification polices and 
the penalty of treble damages impacts smaller lenders versus larger 
lenders?
    Answer. When HUD's Mortgagee Review Board (MRB) is determining the 
appropriate penalty to impose upon FHA-approved lenders who have 
violated FHA's requirements, and when HUD's enforcement lawyers are 
negotiating settlements with lenders who have violated FHA's 
requirements, HUD consistently takes into consideration the lenders' 
abilities to pay the proposed penalties.
    Question. How do you see FHA striking the right balance between 
fighting fraud while ensuring that honest lenders are not discouraged 
from participating in FHA programs? Does FHA have the authority to 
cease business with known bad actors?
    Answer. HUD, along with DOJ, have powerful enforcement tools to 
wield against those attempting to defraud the Federal Government, but 
employs these only in cases where there is evidence of fraud or knowing 
and material violations of HUD's requirements. Moreover, HUD's 
enforcement procedures provide lenders with considerable due process. 
Lenders receive written notices of HUD's findings and the underlying 
basis for those findings. Lenders then have the opportunity to respond 
and, if appropriate, to resolve the issues through, inter alia, 
provision of mitigating information or an agreement to indemnify HUD 
against harms before any enforcement action is taken. It is only in 
those instances when the matter cannot be resolved without enforcement 
actions that the case is referred to HUD's Mortgagee Review Board 
(MRB). HUD's MRB, after a thorough review of the violations and any 
preliminary responses from the lenders, issues a formal notice of its 
intent to pursue sanctions, if any, and provides additional 
opportunities for lenders to dispute and/or settle HUD's allegations. 
If the MRB determines that penalties are appropriate, HUD's enforcement 
lawyers initiate administrative proceedings, which enable lenders to 
dispute HUD's determinations before administrative law judges.
    The substantial due process outlined above assures entities that 
abide by HUD rules that they will have sufficient opportunity to show 
that any actions that may cause concern do not rise to the level of 
fraud or knowing and material violations while still deterring bad 
actors with the threat of sanctions. If HUD obtains sufficient evidence 
of misconduct by a ``bad actor,'' and that evidence warrants suspension 
or withdrawal of the lender's approval to participate in FHA's 
programs, HUD's MRB has the authority to suspend or withdraw the 
lender's FHA approval. Any such action by the MRB is subject to 
adjudication before administrative law judges and review by the Federal 
courts.

                          SUBCOMMITTEE RECESS

    Senator Murray. But I appreciate your testimony, and your 
time, and your staff today. And with that, this hearing is 
recessed. Thank you.
    Ms. Galante. Thank you very much.
    [Whereupon, at 10:56 a.m., Thursday, March 8, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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