[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                    EXAMINING THE PROPER ROLE OF THE
                   FEDERAL HOUSING ADMINISTRATION IN
                     OUR MORTGAGE INSURANCE MARKET

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 6, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 113-1


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
JAMES B. RENACCI, Ohio               BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York           PATRICK MURPHY, Florida
STEVE STIVERS, Ohio                  JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana          JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 6, 2013.............................................     1
Appendix:
    February 6, 2013.............................................    43

                               WITNESSES
                      Wednesday, February 6, 2013

Gordon, Julia, Director, Housing Finance and Policy, Center for 
  American Progress Action Fund..................................    11
Petrou, Basil N., Managing Partner, Federal Financial Analytics, 
  Inc............................................................    10
Pinto, Edward J., Resident Fellow, American Enterprise Institute.     8
Sanders, Anthony B., Distinguished Professor of Real Estate and 
  Finance, School of Management, and Senior Scholar at The 
  Mercatus Center, George Mason University.......................    13

                                APPENDIX

Prepared statements:
    Moore, Hon. Gwen.............................................    44
    Neugebauer, Hon. Randy.......................................    45
    Wagner, Hon. Ann.............................................    47
    Gordon, Julia................................................    48
    Petrou, Basil N..............................................    64
    Pinto, Edward J..............................................    82
    Sanders, Anthony B...........................................   154

              Additional Material Submitted for the Record

Capuano, Hon. Michael:
    HUD Summary of FHA Policy Changes under the Current 
      Administration, updated February 2013......................   168
Maloney, Hon. Carolyn:
    Letter to HUD Secretary Shaun Donovan, dated November 9, 2012   172
Waters, Hon. Maxine:
    Written statement of the Local Initiatives Support 
      Corporation (LISC).........................................   173
    Written statement of the National Association of Home 
      Builders (NAHB)............................................   176
    Written statement of the National Council of La Raza (NCLR)..   180
    Written statement of Potomac Partners LLC....................   183
    National Association of REALTORS fact sheet entitled, 
      ``Myths and Facts about FHA,'' dated November 2012.........   201


                    EXAMINING THE PROPER ROLE OF THE
                   FEDERAL HOUSING ADMINISTRATION IN
                     OUR MORTGAGE INSURANCE MARKET

                              ----------                              


                      Wednesday, February 6, 2013

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Miller, 
Bachus, Royce, Capito, Garrett, Neugebauer, McHenry, Campbell, 
Pearce, Posey, Westmoreland, Luetkemeyer, Huizenga, Duffy, 
Renacci, Hurt, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 
Ross, Pittenger, Wagner, Barr, Cotton; Waters, Maloney, 
Velazquez, Watt, Sherman, Meeks, Capuano, Clay, Green, Cleaver, 
Himes, Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema, 
Beatty, and Heck.
    Chairman Hensarling. The committee will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Opening statements will be limited to 10 minutes per side. 
At this time, I will yield myself 3 minutes for an opening 
statement.
    Last week, many of us awoke to the news that we had 
negative economic growth in the last quarter. Although one 
quarter does not make a trend, it was not welcome news, and it 
was not expected news. Unfortunately, what has become expected 
news is subpar 1\1/2\ to 2 percent economic growth, when 
historic trends are above 3 percent, and clearly, the economy 
is capable of 4 percent or greater. Two percent economic growth 
means that millions of Americans lay awake at night pondering 
insecure financial futures for themselves and their families.
    Hardworking Americans demand a healthy economy, and we 
cannot have a healthy economy until we have a housing finance 
system that is both sustainable and competitive. In its current 
form, the Federal Housing Administration (FHA) is clearly an 
impediment to such a system. Because of this, the Financial 
Services Committee today is holding its first in a series of 
hearings to examine the FHA, now the largest mortgage insurance 
company in the United States.
    Historically, FHA has represented roughly 10 percent of the 
mortgage insurance market and has fulfilled its role of being 
the provider of mortgage credit for certain discrete 
populations, particularly first-time home buyers and low- and 
moderate-income Americans who qualify under stringent tests.
    Today, however, FHA has strayed far from its original 
mission and legislative purpose. It doesn't just focus on low- 
and moderate-income Americans; it provides mortgage insurance 
for expensive homes valued as high as $729,000. By offering 
riskier terms than private competitors, the FHA today controls 
56 percent, more than half of the total mortgage insurance 
market in terms of numbers of loans. Talk about too-big-to-
fail. So instead of complementing a robust private mortgage 
market, the FHA's high-cost loan limits and extremely low 
downpayment requirements put it in direct competition with the 
private sector.
    In addition, we know that as bad as that is, its single-
family insurance fund is flat broke. The independent actuarial 
study released last November shows that the FHA single-family 
mutual insurance fund has a negative--I repeat negative--
economic value of $16.3 billion. If the FHA were a private 
financial institution, it is likely that somebody would be 
fired, somebody would be fined, or the institution would find 
itself in receivership. Instead, it is merrily on its way to 
becoming the recipient of the next great taxpayer bailout.
    Finally, given their high-loan-to-value, low-credit-score 
policies and high rates of default, it is an open question 
whether FHA has now morphed into Countrywide. Arguably, the FHA 
has now become the Nation's largest subprime lender, all with 
the blessings of the Administration.
    FHA's loan downpayment lures families into having an 
unrealistic view of homeownership obligations. Their high loan 
limits encourage people to buy more home than they can possibly 
afford to keep. Putting borrowers in homes where one in eight 
loans end in default, the FHA can make entire communities worse 
off, trapping more and more families as property values fall. 
You do not help families achieve the American dream by putting 
them into homes they cannot afford. This is how you turn the 
American dream into a nightmare.
    I will now yield 3 minutes to the gentleman from Texas, Mr. 
Neugebauer, the chairman of the Subcommittee on Housing and 
Insurance.
    Mr. Neugebauer. Thank you, Mr. Chairman, for holding this 
important hearing.
    And I want to thank our witnesses for your testimony and 
for your being here today. I think this is an important 
hearing.
    What we do know is that there is kind of a trend here, that 
government doesn't do a good job at pricing risk. We see that 
manifest itself currently at FHA, and that did not evidently 
set the right risk premium because, as the chairman alluded to, 
there is $16 billion underwater, and the trend is not good. I 
think we have seen another example of that, for example, in the 
Flood Insurance Program, which is $20 billion in the hole.
    What we are learning, I think, is that the government has a 
hard time being in the insurance business. And in many cases, 
by the government being in the insurance business, we are 
crowding out the private sector. That is not a good trend. I 
think it detracts from the core mission of what government 
should be doing.
    We have had a number of projections that this fund was 
going to be get healthier each year over the last 3 years' 
testimony. But, in fact, the fund hasn't gotten healthier; it 
has gotten unhealthier--$16 billion underwater, almost a 
negative 1.44 percent.
    I think the other troubling thing, though, is the mission 
creep that has happened at FHA over the years. Basically when--
I am a homebuilder and I have been in the real estate business 
for over 30 years. I know I don't look that old. But, I think 
the thing when FHA was originally started, it was to help kick-
start a certain group of people, help them get into 
homeownership. But now we see we have an agency that controls 
over 50 percent of the mortgage insurance in this country and 
almost 30 percent of the origination market, with loan limits 
now of over $700,000. This is not your mother's or your 
father's FHA. And, in fact, about 90 percent of the portfolio, 
I believe, that is in FHA now would not qualify under the 
original standards that were set up.
    And so I think it is important that we have a hearing and 
begin to set FHA on the track of its original mission, but 
also, more importantly, to create some space for the private 
sector to come back into the market.
    So when we have all of these discussions, what is the 
bottom line here, what is the important thing here? The 
important thing here is that homeownership is an important part 
of the American dream, but we don't, as the chairman said, want 
to turn it into the American nightmare by having policy at the 
Federal level that infringes not only on the rights of the 
people trying to get into the housing market, but also damaging 
the people who are already homeowners in this country. And I 
think we have seen over the last few years where that has 
actually been the case, and basically then infringes on 
everyone's rights by the fact that we are not making the right 
policies.
    So I look forward to the testimony of the witnesses. And, 
with that, I yield back. Thank you, Mr. Chairman.
    Chairman Hensarling. The gentleman from Massachusetts is 
recognized for 3 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, I am glad that we are having this hearing. I 
am glad we are going to be looking at the FHA and hopefully the 
entire problem of being able to buy and maintain housing in 
this country. But I think that we need to be a little careful 
with some of the rhetoric. I don't think there are many 
independent people who think we are looking at the next great 
bailout.
    Yes, the FHA is a little bit of an issue at the moment 
because of its countercyclical mission. By the way, it was part 
of their original mission to come in during difficult times. 
They did that, and they are in trouble because of it. We all 
understand that. Everybody here wants to make sure to the best 
of our ability as quickly as possible the housing industry can 
get back to normal. No one likes or enjoys this crisis or any 
aspect of it, not just in housing, but housing is the issue 
today.
    So as we go forward, for me, I am certainly looking for 
ways to improve the FHA and other lending agencies. I am 
certainly looking for ways to protect the American taxpayer. We 
are all looking for that. But I also want to make sure in doing 
that, we don't throw the baby out with the bath water. Because 
let's not forget that for 80 years, the FHA helped with a 
critical aspect of building the middle class, of building 
equity.
    I say this as a person who comes from a district that 
really doesn't benefit much from the FHA. And I say that 
because my district is a high-cost district. The FHA cannot 
make many loans in my district. In 2011, they made 5,000 loans 
in my district. In the Fifth District in Texas, they made 
25,000 loans. And that is just typical. I understand that, but 
I don't live on an island. My district will do fine with or 
without the FHA, to be perfectly honest. But I don't live on an 
island, and I want all Americans to enjoy the middle class. I 
want all Americans to have an opportunity to move into that 
middle class by building equity, the same way I did. I bought 
my house 30 years ago. It was not allowed to qualify for the 
FHA. And I had a higher debt-to-income ratio than most people 
because that house was expensive and my income didn't match it. 
But we did it, as many Americans do.
    So, yes, we have problems, and, yes, we need to address 
them, and, yes, we need to ask a lot of serious, difficult 
questions and debate what the right answer is. We also have to 
understand the FHA has taken a lot of actions, some of which I 
am not even sure I support. But it is not like everybody has 
been sitting on their hands or anybody wants to drive this 
country into bankruptcy.
    The housing crisis happened. The default rates for private 
mortgages are actually higher than those for the FHA--a lot 
higher in some instances, particularly in subprime.
    So I welcome the discussion. I look forward to the debate. 
More importantly, I look forward to a hopefully thoughtful 
discussion on what things we should do to make sure that the 
FHA or some other agency similar to it is around for the next 
generation and the next generation after that so that the 
middle class or people trying to get into the middle class will 
still have the hope that we have had.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The gentleman from California, Mr. 
Miller, is recognized for 1 minute.
    Mr. Miller. Thank you, Mr. Chairman.
    So that the FHA can play a countercyclical role in the 
future, as we have discussed, we must ensure the FHA program 
better manages the risk it is taking on. To preserve the 
countercyclical role, FHA must lessen taxpayer exposure. This 
can be accomplished in 3 ways.
    One, we must take a close look at the business model and 
management of the FHA. We need to look inside the FHA to ensure 
its policies, management, and technology can handle times of 
increased pressure.
    Two, we need to ensure appropriate credit quality for those 
receiving FHA loans. While the current book of business shows 
the FHA has made progress, we need to consider whether these 
actions have been enough. Are current FHA underwriting 
requirements basically adequate to keep default rates low in 
the future?
    We should also look at the structure of the FHA mortgage 
insurance product itself. Is there a way for FHA to preserve 
its function in a way that requires less taxpayer exposure?
    And, finally, we must demand the FHA remain adequately 
capitalized. We need to be careful not to disrupt the fragile 
housing recovery by abruptly pulling back liquidity. Liquidity 
right now is, above all, important to keep the housing market 
going and recovering. And so we need to be very cautious about 
what we do, but we do need to require accountability.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York for 2 minutes.
    Mrs. Maloney. I want to thank you for calling this hearing, 
and I welcome all the witnesses.
    Our housing market and recovery is critically important to 
this committee and will probably be one of the main issues that 
we look at over the next 1 or 2 years. Economists have 
estimated that housing's impact on our economy is 25 percent of 
our economy. So whether or not it is healthy and growing and 
balanced is critical to our economic recovery. And it is 
important that we, here in this hearing, study exactly what 
went wrong in the housing crisis and see what we can do to 
promote prudent lending and a vibrant secondary market.
    The FHA role in housing is countercyclical. At one point, 
it was as low as 5 percent. But in times of crisis, its 
portfolio expands, and then it contracts in good times. We were 
fortunate to have them there during the financial crisis, as 
they did come in and help finance housing. FHA insured nearly 
1.2 million single-family mortgage loans in 2012 alone, with a 
total value of $213 billion. And it has continued to play a 
role for first-time home buyers and for home buyers in minority 
communities and lower income brackets.
    So it is, of course, a logical question to ask in the wake 
of one of the worst financial crises in our lifetime how the 
Mutual Mortgage Insurance Fund is functioning and whether the 
stress that was placed on the fund will require a credit or a 
support.
    I wrote to HUD in November of last year and asked this 
exact question. I ask permission to put my letter in the 
record.
    Chairman Hensarling. Without objection, it is so ordered.
    Mrs. Maloney. I have not yet received a response, so I hope 
I will hear some answers today from the witnesses.
    Thank you. My time has expired.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey for 1\1/2\ minutes.
    Mr. Garrett. And I thank you, Mr. Chairman.
    So here we are again, another year, another multi-billion-
dollar taxpayer bailout for the housing market. And so I guess 
the question is, when are we going to learn?
    The continued oversubsidization of the housing market 
doesn't help the consumer, it doesn't help the borrowers, it 
doesn't help the neighborhoods, and it doesn't help the 
economy. You see, this housing bust that triggered the 
financial crisis was mainly caused by a combination of the 
Federal Government subsidies into the housing market and also 
by loose money by the Federal Reserve. And so you had a 
dangerous mix here that basically destroyed the economy and 
left millions upon millions of homeowners underwater.
    So instead of learning from these past mistakes, this 
Administration has done what? They have doubled down on their 
failed policy of throwing billions of taxpayer dollars at the 
problem and giving almost any individual who wants to buy a 
home one that is government-financed, with nothing down 
primarily, and all in the name of what? Just like we have heard 
over here: the name of countercyclicality.
    So instead of ensuring the housing market is put on a more 
sustainable basis in moving forward, what has the FHA done? 
They have helped literally thousands of borrowers get into 
homes that they can't afford, and they wind up now finding that 
they are underwater and undervalued.
    While continuing to spend literally billions of taxpayer 
dollars to reinflate the housing bubble--and this might 
temporarily help some of the market participants, those who 
financially benefit from this in the production and the sales 
of homes--again, it does nothing to help the consumers, the 
neighborhoods, the taxpayers, or the economy.
    So I look forward to this panel, to drilling down to see 
how we got here, and how it continues now going forward, and 
how we get out of this problem in the future.
    With that, I yield back.
    Chairman Hensarling. The Chair now recognizes the ranking 
member, the gentlelady from California, for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman, for holding this 
hearing today on the role of the Federal Housing Administration 
and our mortgage insurance market.
    FHA has long been a focus for me. In the last two 
Congresses, I worked first with Congresswoman Capito when I was 
chairwoman of the Housing and Community Opportunity 
Subcommittee, and then with Congresswoman Biggert to pass FHA 
solvency legislation through the House of Representatives. I 
was disappointed that the Senate did not take up our 
legislation, but I remain hopeful that this can be an area for 
constructive collaboration over this next congressional term.
    I think all of the Members here today are deeply concerned 
about the health of the FHA's Mutual Mortgage Insurance Fund, 
particularly the finding in FHA's actuarial analysis that the 
capital reserve ratio of the fund fell below zero in Fiscal 
Year 2012. So I welcome the opportunity to explore these issues 
fully in the series of hearings you recently announced.
    But along with that concern, I think it is important to 
acknowledge FHA's crucial role in our housing finance system. 
Particularly in the last few years, in the aftermath of a 
housing crisis precipitated by privately funded, poorly 
underwritten subprime mortgages, FHA stepped up, providing 
crucial liquidity and access to the mortgage market.
    All told, over the course of its 78-year history, FHA has 
helped more than 34 million Americans achieve the dream of 
homeownership, with a particular focus on first-time home 
buyers. In fact, Mark Zandi of Moody's Analytics estimates that 
if it were not for FHA, home prices could have fallen an 
additional 25 percent during the most recent economic crisis. 
So while we all agree that the government footprint in our 
mortgage market must shrink, we have to balance that concern 
with an understanding that the presence of FHA has mitigated 
the length and severity of the housing downturn.
    I would also like to explore more fully the recent actions 
taken by the FHA to address prior problems by tightening up the 
origination policies and stepping up their lender enforcement 
efforts. In addition to the ending of seller-funded downpayment 
assistance, the FHA has initiated five increases to their 
mortgage insurance premiums, tightened FICO score lending 
requirements, and reduced allowable seller concessions.
    Just last week, FHA announced four additional changes in 
policy, including raising debt-to-income requirements for 
borrowers with low credit scores, raising annual mortgage 
insurance premiums for new borrowers, initiating a moratorium 
on full cash-out reverse mortgages, and instituting greater 
oversight of borrowers who are trying to obtain FHA loans after 
foreclosure.
    And it appears that the changes instituted by FHA since 
2009 have helped lead to positive books of business for 3 
consecutive years, including the 2 strongest books in FHA's 
history, in 2011 and 2012.
    Again, I think that Members and other stakeholders will 
readily see and understand the significant risk management and 
policy changes that FHA has and continues to undertake in 
response to the most recent actuarial review. I look forward to 
us continuing that educational process through our hearing 
today as well as future hearings.
    And I yield back the balance of my time.
    Chairman Hensarling. The gentlelady from West Virginia is 
recognized for 1\1/2\ minutes for the last word.
    Mrs. Capito. Thank you, Mr. Chairman. I would like to thank 
you for convening this morning's hearing.
    In light of the latest independent actuarial review of 
FHA's Mutual Mortgage Insurance Fund, I believe it is a very 
legitimate concern that FHA will not have sufficient funds to 
pay the projected claims.
    As we have heard, the countercyclical role that the FHA 
traditionally plays in the mortgage market is an important one. 
And as our ranking member, Ms. Waters, just mentioned, we have 
worked diligently to try to put reforms in legislation in prior 
Congresses to ensure that the agency remains a source of 
funding for creditworthy borrowers. It is unfortunate that 
these efforts have not been able to make it beyond the House at 
a time when they are most needed.
    While FHA helped fill a gap in liquidity from 2007 to 2009 
as credit markets contracted and lending standards tightened, 
the resulting increase in market share continues to impede 
private insurance mortgage market resurgence. Downpayments, 
conforming loan limits, and premium structures that treat risk 
differently are all examples of FHA's being able to maintain an 
advantage in the market and make it much more difficult to 
restore a healthy and vibrant private market.
    I believe a mortgage insurance market dominated by FHA 
hinders the ability of our economy to function most 
effectively. The immediate long-term challenges that face the 
FHA will affect its ability to serve in its traditional manner. 
Moving in a direction which encourages private capital is the 
direction I would like to see us go.
    And I thank the chairman for this hearing. Thank you.
    Chairman Hensarling. At this time, I want to welcome all of 
our panelists. Thank you very much for agreeing to testify 
today.
    I do want to tell our panelists and all Members that, 
regrettably, votes are expected on the Floor sooner than 
originally anticipated, so the Chair will wield a very tight 5-
minute gavel. And although we normally provide very lengthy 
introductions, instead you will get abbreviated introductions 
at the moment.
    Ed Pinto is a resident fellow at the American Enterprise 
Institute, having previously served as an executive vice 
president and chief credit officer at Fannie Mae.
    Basil Petrou is the managing partner of Federal Financial 
Analytics. He has been a consultant on mortgage and housing-
related regulatory issues for 20 years. He previously worked at 
the Treasury Department.
    Julia Gordon is the director of housing finance and policy 
at the Center for American Progress. She previously managed the 
single-family policy team at FHFA.
    Finally, Dr. Anthony Sanders is the finance area chair and 
a distinguished professor of real estate and finance at the 
George Mason University School of Management, and is also a 
senior scholar at George Mason's Mercatus Center.
    Again, each one of you will be recognized for 5 minutes to 
give an oral summary of your testimony. Without objection, each 
of your written statements will be made a part of the record.
    Mr. Pinto, you are now recognized for 5 minutes. And please 
bring the microphone as close to you as possible.

    STATEMENT OF EDWARD J. PINTO, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Pinto. Thank you, Chairman Hensarling and Ranking 
Member Waters, for the opportunity to testify today.
    FHA poses a triple threat. It has an extraordinary failure 
rate that, as I will show, has continued for decades. It has 
insolvency on a regulatory and GAAP accounting basis that poses 
a threat to taxpayers. And it has unfair competition with 
private capital that is blocking housing finance reform.
    This is not the first time this has occurred. This is an 
excerpt from testimony by the late Gale Cincotta back in 1998 
before a subcommittee of this committee, and it reads as if it 
were written today. It talks about the same issues that we are 
talking about today. Likewise, on October 8, 2009--and I see 
many of the Members here who were present in 2009--when I 
indicated in testimony that FHA was facing a $54 billion 
capital shortfall, that has come to pass.
    FHA is a continuing threat to working-class neighborhoods 
and families because of the extraordinary failure rate that it 
experiences year after year. It has an 11 percent average claim 
rate over the last 37 years. That is the weighted average over 
37 years. Its abusive lending practice have led to over 3 
million failed American dreams since 1975. People tend to 
forget how many millions of families have had their dreams 
dashed by FHA's abusive lending practices. And this foreclosure 
pain is concentrated year after year after year on working-
class families and communities.
    This is a chart that shows year-by-year FHA data. It shows 
the number of claims per year, it shows the average claim rate, 
and that the cumulative amount of claims is over 3 million.
    This shows up very clearly in--just a second. This shows up 
very clearly in--getting out of order here. I am sorry, getting 
a little out of order.
    This shows up clearly in the masking of this pain. When you 
deal with lower FICO scores, you are looking at 20 and 30 
percent default rates. When you are looking at higher FICO 
scores and other lower-risk characteristics, you get averages 
that are below 5 percent. The problem is that averages don't 
cut it. The averages end up masking the pain. Where that pain 
shows up is very specifically in neighborhoods that end up 
being the same neighborhoods year after year.
    Chicago is an example of that. This chart shows a study 
that I completed last year on 2.4 million FHA loans. The 
Chicago loans are shown here from 2009 and 2010. The highest 
foreclosure rates are in the orange; the lowest foreclosure 
rates are in the dark blue. Loan counts show the size. And you 
see the concentration in the south side of Chicago, part of the 
west side of Chicago, but there are concentrations throughout 
Chicago. But these are the same areas that have been talked 
about for decades.
    This chart shows what happens in terms of income in the zip 
codes and house prices in the zip codes. The lower quadrant on 
the lower left we call the ``quadrant of doom'' because that is 
where the foreclosures are concentrated. They are people with 
below-average incomes and below-average house prices.
    The ``enablers of doom'' are the usual individuals, but 
they include investors in Ginnie Mae, they include Ginnie Mae 
itself, they include regulators, they include real estate 
agents and homebuilders and many others that are indifferent to 
the levels of foreclosure, these 3 million foreclosures that 
FHA has had over the decades.
    The insolvency of FHA puts taxpayers at risk because even 
under very generous accounting rules, FHA now has a negative 
economic value of $14 billion. But that really understates what 
is going on because under today's low-interest-rate 
environment, that negative economic value is in the mid-$30 
billion range. And when you add their required capital 
requirement, you are at the $54 billion number I predicted 3\1/
2\ years ago.
    By unfairly competing with the private sector, it really 
delays housing finance reform. The FHFA Director said in 
December that FHA is really the path to deciding on housing 
finance reform; you have to start with FHA.
    Turning hope into homes can be done by following four 
steps, and I list them there. You should start with some of the 
provisions from the House-passed bill. You should apply best 
practices that the VA has shown over the years. Needy families 
need FHA's full attention. FHA should be targeted on where it 
can help the most. And, lastly, they should establish a 
tolerance for failure; just stop making really bad loans. And, 
finally, I offer to work to with any Member here on 
accomplishing this tolerance for failure.
    Thank you.
    [The prepared statement of Mr. Pinto can be found on page 
82 of the appendix.]
    Chairman Hensarling. Thank you, Mr. Pinto.
    The Chair will now recognize Mr. Petrou for 5 minutes.

    STATEMENT OF BASIL N. PETROU, MANAGING PARTNER, FEDERAL 
                   FINANCIAL ANALYTICS, INC.

    Mr. Petrou. Thank you, Chairman Hensarling and Ranking 
Member Waters. It is an honor to appear before this committee 
today to discuss the proper role of the FHA single-family 
mortgage insurance program in the U.S. mortgage finance system.
    FHA plays a vital role. It has an urgent and continuing 
mission to ensure that the Federal Government supports 
sustainable homeownership for moderate-income borrowers without 
access to private capital.
    However, I believe that taxpayers should take as little 
risk as possible, standing back now that the crisis is ebbing 
to permit private capital to reenter the market under a new 
robust regulatory framework. With specific regard to FHA, I 
recommend that Congress should reduce the 100 percent full 
faith and credit guarantee provided by the FHA to parallel the 
limited coverage of 25 to 50 percent successfully used by the 
Veterans Administration.
    There are three simple points that demonstrate that 100 
percent FHA insurance coverage is self-defeating for FHA and 
the U.S. taxpayer. First, FHA is exposed to severe losses on 
every loan that goes to claim during a house price decline, 
such as that experienced since 2006. Second, FHA exposes itself 
to fraud and poor underwriting. That is far less likely to 
occur if the loan originator had skin in the game on every FHA-
insured loan it originates. And third, reducing the level of 
insurance coverage on future FHA loans while holding the FHA 
premium at its current level would recapitalize the FHA MMI 
Fund with positive budget scoring.
    It is simply impossible for there to be real incentive 
alignment between mortgage originators and the taxpayer if 
originators take all the profit and the U.S. taxpayer takes all 
the risk. Further, the FHA should be targeted to borrowers 
based on income, not home price. When the U.S. Government 
supports mortgage finance for higher-income borrowers, it 
unnecessarily supplants private capital otherwise ready to take 
on this risk.
    Also, since FHA mortgage underwriting is delegated to the 
lender, the FHA exposes itself to the risk that poor 
underwriting will only be found after a loss occurs. It is 
important that the taxpayer be protected at the front end of 
the loan origination from poor FHA-delegated underwriting. FHA 
should thus be authorized to engage in risk shares with private 
providers of credit risk mitigation.
    Importantly, the model used by FHA for accessing the 
actuarial value of its single-family fund is not working. Since 
2007, the current model has consistently overestimated its 
economic value. A strict new capital requirement should be set 
for the FHA's single-family fund, incorporated through a new 
actuarial model that accurately predicts losses.
    Additionally, the budget treatment of FHA should be changed 
to reflect the fair-value analysis recommended by the 
Congressional Budget Office as it currently applies to the 
GSEs.
    FHA is a critical market driver and source of taxpayer 
risk, but it is not the only force redefining U.S. housing 
finance. If reform to FHA or the GSEs is not well-balanced and 
pending rules are not carefully structured, we could well see 
creation of a set of new perverse Federal policies that force 
still greater mortgage market reliance on the taxpayer and, 
thus, still more risk, exacerbating our already dangerous 
fiscal situation.
    Thus, I recommend that Congress should work to ensure that 
an array of pending prudential rules for banks--for example, 
those implementing the Basel III capital rules--do not so favor 
U.S. Government-backed mortgages as to block the reentry of 
private capital.
    A critical pending rule would implement the risk-retention 
provision of the Dodd-Frank Act, creating a new Qualified 
Residential Mortgage (QRM) criterion that would exempt loans 
from risk retention. Although downpayment and loan-to-value 
ratio are key prudential factors, the QRM should not, as 
proposed, set a simple downpayment requirement without regard 
to the use of regulated, capitalized providers of credit risk 
mitigation like private insurers. Doing so would make it 
extremely difficult to securitize high-LTV loans for first-time 
home buyers and other borrowers who can prudently manage low-
downpayment mortgages with careful underwriting backed by 
private capital at risk. If the QRM advances as proposed, these 
loans will flood into the GSEs and FHA, and once the 
conservatorships are closed, then only into the FHA.
    In conclusion, private capital will only be attracted to 
the mortgage space when and if it becomes clear that the market 
has been reopened through the retreat of the government. One 
side of reform will only drive still more risk to taxpayers 
through FHA, an especially dangerous prospect given the many 
systems and risk management problems that have brought FHA to 
the perilous condition revealed in its most recent actuarial 
report.
    Again, thank you for inviting me to participate in this 
vital discussion. I look forward to answering your questions.
    [The prepared statement of Mr. Petrou can be found on page 
64 of the appendix.]
    Chairman Hensarling. At this time, the Chair will recognize 
Ms. Gordon for 5 minutes.

   STATEMENT OF JULIA GORDON, DIRECTOR, HOUSING FINANCE AND 
        POLICY, CENTER FOR AMERICAN PROGRESS ACTION FUND

    Ms. Gordon. Good morning, Chairman Hensarling, Ranking 
Member Waters, and members of the committee. I am honored and 
delighted to be here to testify today about the importance of 
the Federal Housing Administration in our mortgage market.
    Since its creation in 1934, FHA has contributed to broadly 
shared prosperity in this country by helping tens of millions 
of families access homeownership. FHA doesn't directly lend 
money to home buyers, but instead insures the loans made by 
private lenders. In exchange for this protection, the agency 
charges both upfront fees and annual premiums.
    FHA's model enables it to serve a crucial macroeconomic 
role, as well, because by providing reliable credit 
enhancement, it enables continued liquidity in severe credit 
crunches. It is essentially a shock absorber.
    This role never been more important than in the wake of the 
recent housing market meltdown. When the bubble burst, 
privately funded lending essentially came to a halt and the 
government placed Fannie Mae and Freddie Mac into 
conservatorship. Access to credit tightened precipitously, 
throwing the market into serious imbalance.
    In this difficult environment, lenders turned to FHA to 
help the market continue to function. FHA filled a gap left by 
the private market. It did not affirmatively seek market share. 
It is worth noting that the people who run FHA make the same 
amount of money whether they have a 3 percent market share or a 
30 percent market share.
    Since the beginning of the crisis, the agency has insured a 
historically large percentage of the mortgage market and, in 
particular, has served the home purchase market at a time when 
many other originations are refinancings. Right now, the 
housing sector is actually one of the brightest spots in the 
economy, and while the recovery does appear to be real, it is 
very fragile at this time.
    FHA's countercyclical role over the past several years is 
more than a simple convenience for mortgage lenders or a 
slogan. Economists estimate that the liquidity provided by FHA 
kept home prices from plummeting an additional 25 percent. And 
remember, that is on top of the 30 or so percent that they 
already did drop. That kind of market collapse would have 
wreaked havoc, not just causing an untold number of additional 
foreclosures and decimating FHA's insurance fund, but also 
requiring far bigger taxpayer bailouts of Fannie and Freddie. 
Even worse, it is likely to have sent our economy into a 
double-dip rescission, costing up to 3 million jobs and half a 
trillion dollars in economic output.
    As critical as it was to stabilizing the market, this 
support did not come without cost. FHA's insurance fund is not 
in good shape, and it is crucial that the agency takes steps to 
consolidate and improve its financial position as the economy 
recovers.
    The finances, however, are not a reflection of a flawed 
business model but instead are a consequence of the 100-year 
flood of the great recession. The bulk of the agency's losses 
come from loans originated between 2007 and 2009, the years 
just before and after the $700 billion government bailout of 
the Nation's largest private financial institutions. That time 
period also included a large percentage of loans that used 
seller-funded downpayment assistance, an admittedly flawed 
program that cost the agency $15 billion in losses and without 
which the economic value of the fund would likely not be 
negative. In contrast, the agency's more recent books of 
business are likely to be some of its most profitable and 
safest ever.
    FHA has taken a number of steps in the past few years to 
reduce risk and to strengthen the fund. They have raised 
premiums 5 times and instituted a variety of other risk 
management policies.
    In addition, the home price rise over the past year will 
further improve the financial outlook. At this point, it would 
be prudent to hold off on additional price increases or 
additional changes in the credit box to avoid overcorrecting or 
making mortgages unaffordable for too many people. However, as 
these changes take effect, FHA can continue to improve their 
loss mitigation to avoid paying claims whenever possible. It 
should also continue to crack down on lenders who don't follow 
the rules.
    But beyond FHA, the time is now to have a larger 
conversation about the future of our housing finance system. 
Fannie and Freddie cannot remain in conservatorship 
indefinitely, and a vibrant housing market cannot be built 
simply on refinancing. The market needs a steady supply of 
first-time home buyers who can then become move-up home buyers 
later. Many of these buyers will be people of color, young 
people with student debt, and other low-wealth but otherwise 
creditworthy families who don't have the means to put 20 
percent down. As we consider what role the government should 
play in the mortgage market, we need to consider closely who 
will serve these borrowers.
    I welcome the opportunity to discuss these important 
matters with you over the coming year. Thank you again for 
inviting me today, and I look forward to your questions.
    [The prepared statement of Ms. Gordon can be found on page 
48 of the appendix.]
    Chairman Hensarling. Dr. Sanders, you are now recognized 
for 5 minutes.

  STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF 
   REAL ESTATE AND FINANCE, SCHOOL OF MANAGEMENT, AND SENIOR 
    SCHOLAR AT THE MERCATUS CENTER, GEORGE MASON UNIVERSITY

    Mr. Sanders. Chairman Hensarling and distinguished members 
of the committee, thank you for the invitation to testify 
today.
    Where do we sit now with the FHA? High-LTV loans, defined 
as 95 percent LTV and higher, currently stands at 71.52 
percent. The FICO score buckets, which means the percentage of 
low FICO scores, which is 680 or below, is at 52.54 percent. 
These are very, very risky loans we are talking about.
    And what I would like to do is point you to the colorful 
tables I have in my presentation. I just want to point 
something out on the risk of high-LTV/low-FICO-score lending or 
insurance programs. In 2007, in the 620 and lower FICO score 
and 97\1/2\ percent and above LTV, the serious delinquency rate 
was 51.6 percent. That means we are putting over half of the 
households into harm's way. It is like putting them in front of 
a bus. And a lot of them got severely injured.
    But if we want to say, wait a minute, that was just that 
one year, flashback to 2001, before the bubble really hit, et 
cetera, 620 and below FICO and 97\1/2\ LTV and above was at 
22.7 percent serious delinquency rate. That is one in four.
    So, again, what I am saying here is that while the FHA has 
historically served a very notable presence in the market and 
has helped many American households get housing, it is also, by 
having the FICO score too low, throwing a lot of households 
under the bus, which is not great policy.
    And one thing I just want to point out is that--so if we 
take a look at the FHA loan limit and what we can do to that, 
FHA of course has a higher loan limit than even Fannie and 
Freddie, their cousins. And I would say the first step is to 
shrink the FHA's footprint to allow entrance to the private 
sector by reducing the loan limit to 625 and then going at 
$100,000 a year until this is over.
    According to a study by Robert Van Order, former chief 
economist at Freddie Mac, and Anthony Yezer at George 
Washington, they find that current FHA policies are unlikely to 
assist the FHA in reaching its historical constituencies--
first-time, minority, and low-income households: ``We find that 
FHA's current market share exceeds what is needed to serve 
these markets. In the wake of significant declines on home 
prices, we believe FHA could reduce its loan limits by 
approximately 50 percent and still almost entirely satisfy its 
target market,'' which I just mentioned. That will reduce its 
current market share, which is difficult for the FHA to manage. 
And David Stevens, the former FHA Commissioner, has said that 
exact same thing.
    We need to put a floor on the credit score, as well, again, 
primarily to protect those households that are actually getting 
annihilated in default and foreclosure. So I would recommend a 
floor of anywhere from 630 to 660. A maximum LTV of 95 percent, 
at least, should apply. We are not talking 20 percent down; we 
are talking 5 percent down at a minimum, or a minimum 
downpayment of 10 percent if your credit score is below 680. 
Maximum debt-to-income ratio should be about 31 percent, should 
be put in there as well.
    In summary, the FHA's low-downpayment, low-FICO policies 
with 100 percent guarantee, which is way too high, encourages 
risk-taking by working-class households when there is a viable 
alternative: renting. But simple adjustments to FHA's policies 
of a FICO score floor, a minimum downpayment of 5 percent, and 
a lower loan limit, going down from 625 down to 350 eventually 
or less, and a lower insurance coverage to, say, 80 percent 
instead of 100 percent, can improve the situation.
    These are not draconian measures. These are simple fixes to 
at least help protect the first-time home buyers and minority 
programs. All these measures can serve to reduce the FHA's 
substantial high-risk footprint in the mortgage market and 
allow competition in the market to come back in.
    Thank you for the opportunity to testify.
    [The prepared statement of Dr. Sanders can be found on page 
154 of the appendix.]
    Chairman Hensarling. Thank you, Dr. Sanders.
    Thank you to all of our witnesses.
    The Chair now recognizes himself for 5 minutes of 
questioning.
    As chairman, I will tell you that it is going to be a 
priority of this committee to forge a sustainable housing 
finance system in America. And I mean ``sustainable'' in two 
different senses: number one, something that can help reduce 
the severity of the boom-bust cycle that has imposed such a 
cost on our economy and our hardworking families and taxpayers; 
and number two, something that is also sustainable for 
families. Again, the American dream was not to buy a home, it 
was to buy a home that you can actually afford to keep.
    And so I have become concerned--and I think, Ms. Gordon, 
you used the phrase about the recent market meltdown, but I 
would remind all of us that the great debacle most people would 
date to September of 2008. It is now February of 2013. And I am 
again concerned that what were once extraordinary measures are 
becoming ordinary measures and becoming barriers to entry.
    I am concerned about FHA having 56 percent of the market. 
And I know that in the February 2011 report to Congress 
entitled, ``Reforming America's Housing Finance Market,'' the 
Administration stated that, ``FHA should be returned to its 
pre-crisis role--and that was 2 years ago the Administration 
called for this--as a targeted provider of mortgage credit 
access for low- and moderate-income Americans.''
    So we will start with you, Mr. Pinto. How much progress 
have they made?
    Mr. Pinto. Very little progress has been made, Mr. 
Chairman. While FHA says it has shrunk some, you have to 
realize that there are really three agencies that work in 
concert together under Ginnie Mae: FHA; the VA; and the 
Department of Agriculture. And their share has not changed very 
much because they have very large competitive advantages over 
the private sector.
    So we have made very little progress. And we actually are 
in a situation where that progress could be turned back. 
Because as the FHFA Director increases the guarantee fees for 
Fannie and Freddie--Congress passed a law requiring that they 
be set at private capital rates--if FHA doesn't increase their 
rates in lockstep, then the business can just shift in the 
future over to FHA. So we still have a situation where the 
government has a hammer-hold on the market.
    Chairman Hensarling. Dr. Sanders, what do you see as the 
impediments for private insurance to fill the market? What are 
the precise practices of FHA that are helping them maintain 
this 56 percent market share?
    Mr. Sanders. I agree with Mr. Pinto. It is the conglomerate 
of not only the FHA but Fannie and Freddie. The market share is 
huge.
    And right now, between Dodd-Frank and the Consumer 
Financial Protection Bureau and the endless mortgage put-backs 
by the same agencies that were involved in the National 
Homeownership Strategy, which caused the nightmare for American 
households, right now if I was lending or an insurer, I would 
be scared about going to the mortgage market, simply because 
you are going to get blamed for everything, particularly under 
the Qualified Mortgage (QM) rules that say all borrowers are 
now prime, and if any of them default, it has to be your fault.
    So we have created an environment where FHA, Freddie, and 
Fannie, particularly the FHA, are just going to have, as Mr. 
Petrou said, an incredible market share. And we are kind of 
scaring people out of the market.
    Chairman Hensarling. I am going to try to set a good 
example here and keep myself to 5 minutes.
    I just had my staff do a simple Google search, and I pulled 
up an ad called ``MyFHA: FHA Mortgages.'' It is a private 
company, but listen to the verbiage here: ``FHA Bad Credit Home 
Loans. Many people don't realize that FHA loans can help people 
with bad credit. Need a home mortgage but concerned about bad 
credit? You have come to the right place. An FHA mortgage can 
get you into a new home even if you have bad credit because the 
loans are insured by the Federal Government. If you have had 
accounts forwarded to collections, filed bankruptcy in the 
past, or have high debt, you still may qualify for an FHA 
mortgage. These loans can work for you even if you don't have 
much cash for a downpayment or closing costs. And they are a 
much better choice than the very expensive financing that banks 
call subprime.'' And the verbiage goes on.
    I wish I had time to ask a question regarding that. I hope 
some of the other panelists will explore the serious delinquent 
rates you spoke about earlier.
    At this time, I will yield 5 minutes to the ranking member.
    Ms. Waters. Thank you very much, Mr. Chairman.
    One of the great things about this process are these 
hearings where we have an opportunity to straighten out the 
record, to present the facts, and to unfold what is really 
happening in many of these issue areas. And while we are in the 
Minority on this side and we only have one witness today, I 
think it is important that we clear up some facts.
    Before I go on to the question, I would like to ask the 
chairman, did you say that the ad that you just read was by 
some unknown private business?
    Chairman Hensarling. The Chair said ``private.''
    Ms. Waters. I beg your pardon?
    Chairman Hensarling. The Chair said it was a private 
company.
    Ms. Waters. And so this was not an FHA ad soliciting 
anything; is that correct, Mr. Chairman?
    Chairman Hensarling. That is correct. The Chair--
    Ms. Waters. Thank you very much--
    Chairman Hensarling. --said it was a private company.
    Ms. Waters. --Mr. Chairman. I think we need to be clear 
about this.
    Let me go on to a question that I would like to pose for 
Ms. Gordon.
    The recent report released by FHA's independent actuary 
states that FHA's Mutual Mortgage Insurance Fund has an 
economic value of negative 1.44 percent, or $16.3 billion. But 
the fund's negative value is a future projected shortfall, not 
a current deficit.
    The report also showed that FHA still has more than $30 
billion of combined capital resources, and the manner in which 
the FHA's MMIF is calculated does not include future projected 
income.
    Can you discuss some of the misperceptions about FHA's 
economic health and delve into the nuances of FHA's exact 
financial position and the meaning of the independent actuarial 
review?
    Ms. Gordon. Sure, I would be happy to.
    The negative economic value number is a number that says, 
okay, if we closed our doors today and didn't do any more 
business and had to pay out claims for the next 30 years, do we 
fall short? And the answer right now is we fall a little bit 
short. That is--if I had to look at my own balance sheet that 
way, trust me, I would fall short too.
    Right now, FHA has plenty of cash to cover claims certainly 
for the next 7 to 10 years. And these new books of business are 
going to be extremely profitable. As home prices rise, losses 
decline. High foreclosure rates are a problem; I certainly 
agree with my colleagues on the panel about that. But from the 
point of view of the insurance fund, if in a foreclosure you 
sell a home and you don't take a loss, that is not a loss to 
the fund. So I think that is important to recognize.
    It is also important to recognize that in its authorizing 
statute, Congress gave FHA the ability to draw from the 
Treasury in the event that they have to balance their books, as 
is required. That does not require any kind of congressional 
action. It is not a bailout by the taxpayers. You are 
essentially moving money from one account to another inside 
the--
    Ms. Waters. Thank you very much.
    Dr. Sanders, do you realize that FHA does not insure loans 
over $729,750?
    Mr. Sanders. Yes, that is in my testimony.
    Ms. Waters. And is that available for the private market to 
take advantage of? They can have all of those loans over 
$729,750 if they want; is that correct, Dr. Sanders?
    Mr. Sanders. Technically speaking, that is correct.
    Ms. Waters. Whether it is technical or not, that is a fact. 
And they are not active in the private market while it is wide 
open to them, yet we talk about competition and we talk about 
them having too big a share of the market.
    Let me also raise another question with you about how the 
loans are performing. Is it not true, Ms. Gordon, that FHA 
loans have been performing very well since 2010?
    Ms. Gordon. Yes, new loans are performing very well. They 
are very safe. Average FICO scores for FHA borrowers right now 
hover around 700. These are certainly the safest books of 
business they have had in a long time.
    Honestly, this is an example of government working for all 
of us to help the housing recovery, which is helping all of our 
neighborhoods and all of our mortgages, whether or not they are 
insured by FHA.
    Ms. Waters. Thank you very much.
    I suppose my time is almost up, so I am going to be as 
generous as you were and yield back.
    Chairman Hensarling. Leading by example, as well.
    The gentleman from California, the vice chairman of the 
committee, Mr. Miller, is recognized for 5 minutes.
    Mr. Miller. Thank you, Mr. Chairman.
    I want to say that FHA has played a very important 
countercyclical role in the process, providing liquidity. We 
have been in a very distressed marketplace.
    Mr. Sanders, I agree with you--I have been a builder for 
over 40 years--that the private sector has actually been scared 
out of the marketplace by the Dodd-Frank Act.
    And I probably would disagree with all of you on certain 
things, but, Ms. Gordon, I had some real concerns in your 
testimony. You conclude your written testimony today saying it 
is important to give sufficient time to see the results of 
internal reforms recently instituted by FHA. That is a correct 
statement?
    Ms. Gordon. Yes. I think a lot--
    Mr. Miller. Thank you. I appreciate that. But I heard the 
same thing from FHA in 2009, 2010, 2011, and 2012. They said 
the very same thing when they testified before Congress.
    The problem I have is, when I look at the actuarial 
projections that you based your testimony on, in 2009 we were 
told they were 0.42 percent-plus at that point in time. We were 
told that by 2012 they would be at the congressionally mandated 
minimum of 2 percent. Is that not a correct statement?
    Ms. Gordon. That is correct. And I think--
    Mr. Miller. Thank you. And in 2010--
    Ms. Gordon. --there are a lot of things that have not 
gone--
    Mr. Miller. That is it.
    Ms. Gordon. --the way we thought.
    Mr. Miller. I am going to ask you some questions.
    In 2010, they were at 0.59 percent. We were told that by 
2011, they would be at 1.75 percent. Is that not a correct 
statement also?
    Ms. Gordon. Correct.
    Mr. Miller. And in 2011, they were at 0.12 percent, not 
1.75 percent. We were told that by 2012, they would be at 1.5 
percent. Is that not a correct statement?
    Ms. Gordon. Correct.
    Mr. Miller. They were actually at 1.28 minus, which means 
there is a 2.75 percent difference in what they projected every 
year based on what they have done and the reforms they have 
undertaken.
    Now, I agree that FHA has been a shock absorber for the 
economy, but it has kind of been broken. The shock absorber 
doesn't appear to be really working.
    I also agree that real estate is probably one of the bright 
spots in the economy today, because I am doing building in some 
States and I see the market coming back. But that doesn't 
change the fact that FHA is undercapitalized. Every projection 
they have made by the actuarial and their data that they have, 
that they have given them, has been wrong.
    And the problem I have is, yes, I agree that much of the 
losses, the major losses, occurred in 2007 and 2008, probably 
in 2009, in that era--I think they might have gone back to 2006 
when they started. But they have not done what is necessary to 
keep themselves in the plus column, and that is taking in and 
analyzing the risk that they are taking on certain loans and 
making loans that would offset the losses that they know they 
were going to take.
    And if we would have had any bank in the economy or 
mortgage industry group out there, we would have closed them 
down and taken them over in year one. But by the projections I 
see by the actuary, we are talking about 8 years. We are going 
to forego what we required every private sector lender out 
there to undergo by the Federal Government, being closed down 1 
year, we are saying, well, that is okay, but we are going to 
let you go 8 years.
    And so the problem I have, even though I support what they 
have tried to do to stabilize the economy, in your testimony 
you say that we should not be worried because a projection by 
the FHA actuary is that the capital reserve ratio will be 
positive by 2014 and will reach a statutory minimum of 2 
percent by 2017.
    And I am not trying to impugn you, but I am impugning 
somebody. Because what they are telling us is to sit back and 
hope--hope it is going to happen, hope they are going to be 
right this time even though they haven't been right in the 
previous 4 years. Vince Lombardi was really great. He said, 
``Hope is not a strategy.'' And I am unwilling as a 
Congressman, as much as I support the housing industry, as much 
as I love the industry--I have been involved over 40 years; I 
see it recovering--but I can't sit back here with taxpayers' 
dollars and say, well, I hope they are right this time.
    From 2011 to 2012--we were told in 2009 they had modified 
the structure of the FHA so you would not face these downturns. 
And we went from 0.12 in the plus to minus 1.28 in the negative 
in 1 year. Now, the problem is I don't know what has happened 
since 2012 to 2013. Did we go down another 1.28 percent?
    My time has expired. And I was not attacking you, but I was 
attacking what you were working under--
    Ms. Gordon. May I briefly respond?
    Chairman Hensarling. The time of the gentleman has expired.
    The gentlelady from New York is now recognized for 5 
minutes.
    Mrs. Maloney. Thank you.
    During the economic crisis, my constituents were telling me 
that it was impossible to refinance a mortgage, it was 
impossible to get a mortgage. I had distinguished businesses 
and businesspeople come to me and ask, why doesn't the Federal 
Government open up a bank so that we can get a loan for a home?
    So I would like to ask Ms. Gordon, what economic effects 
would we have witnessed if FHA closed down and stopped insuring 
new loans immediately following our recent economic crisis?
    I would like to add that many members of the panel say that 
the private sector wants to step in. Well, step in. Finance it. 
FHA came in during a crisis and provided a stop-gap support for 
housing that others were not willing to do.
    So, Ms. Gordon, your response, please?
    Ms. Gordon. Thank you for that question.
    The fact is, whether the fund is $1 billion up or $1 
billion down, this is a bargain price for what the FHA did to 
stabilize the housing market and the economy. We are talking 
billions, if not trillions, more that could have been lost if 
we had not had this liquidity available to us.
    I am very glad to see that Congressman Miller understands 
the role that has been played, but when we think of the $700 
billion bailout of those private institutions, which clearly 
were far worse at pricing risk than the government has been--in 
fact, they thought they had magically eliminated risk--we have 
really seen government at work here on behalf of all of us.
    Mrs. Maloney. I would like you to comment on a statement 
that Secretary Donovan made before this committee last year. In 
it, he was quoting findings from Moody's. And he said that the 
loss of FHA in 2010--if FHA had not been there in 2010, the 
loss would have meant the loss of 3 million American jobs and a 
2 percent decrease in our GDP.
    Would you agree with his statement on that and Moody's 
statement on that, on their role?
    Ms. Gordon. I would absolutely agree with it. This is FHA 
playing the role that was intended from the beginning. The Act 
establishing FHA did not limit FHA just to a particular set of 
buyers or a particular kind of loan. It was there to backstop 
the housing market.
    Mrs. Maloney. And in your testimony you spoke about this, 
but I would like you to elaborate on the countercyclical role 
FHA has played since the financial crisis began in 2008. You 
mentioned in your testimony that FHA has been as low as 3 
percent in times of great prosperity, but in times of crisis it 
steps in to fill the gap because the private sector is not 
there.
    Could you elaborate on the countercyclical role it plays?
    Ms. Gordon. That is exactly right, that FHA was available 
to provide the liquidity that people needed both to refinance 
their homes and, most importantly, to buy homes. Because when 
people are going through foreclosures or leaving their home, 
someone has to be on the other end to buy that home to keep the 
neighborhood stable and keep the market functioning. So that 
was so important about this role.
    As to the question of market share, there are a variety of 
steps, some of which FHA has already taken and, I agree with my 
colleagues on the panel, can be taken to maybe help crowd in 
private capital, as people talk about. But at the moment, if 
you look across Fannie, Freddie, and FHA, it is going to take a 
lot more to ``crowd in'' private capital.
    Private capital is sitting on the sidelines not just 
because of some CFPB rules and not because FHA is so cheap, 
because it is actually not that cheap to get an FHA loan, but 
because there is enormous uncertainty about what the long-term 
future of housing finance in this country looks like. And that 
is why it is really important that we soon have the 
conversation about the future of Fannie and Freddie and the 
future of FHA and what kind of housing policy we want to have.
    Mrs. Maloney. You have mentioned steps that could be taken. 
What steps is FHA taking in terms of improvements to risk 
management and fee increases to help mitigate the changes we 
have seen in the market?
    Chairman Hensarling. I am sorry. If you could summarize. 
There are only 10 seconds left.
    Ms. Gordon. Sure. There have been five premium increases, 
as well as a number of other policy changes.
    Mrs. Maloney. Thank you. My time has expired.
    Chairman Hensarling. The Chair now recognizes the chairman 
emeritus, the gentleman from Alabama.
    Mr. Bachus. Thank you.
    I would say to both the Members and to the panel, Ms. 
Gordon is right when she says the role of FHA originally was 
different from what it is now. In 1934, when it was formed, 60 
percent of Americans did not own their homes and you could only 
have a mortgage for 3 to 5 years. And then in the 1940s, it was 
primarily used for affordable multifamily housing. So, it has 
evolved.
    But I don't think there is any disagreement--I think Ms. 
Gordon would agree--that the present mission, even if you look 
on the official Web site, is to provide mortgage insurance for 
low- and middle-income American families for affordable housing 
and for multifamily housing. Now, we sometimes forget that 
multifamily housing. And I know Chairman Frank and I have both 
said that is a very important role and it is a profitable role, 
providing financing for private apartments.
    The present mission--and I would ask the panelists--as I 
understand it, is there is pretty much agreement on low- and 
middle-income mortgages, other than multifamily, for 
creditworthy families. And we sometimes forget that 
``creditworthy.''
    Now, having said that, where are these loans being made? 
They are primarily made in two areas. They are primarily made 
for people of higher incomes. You can look at Mr. Pinto's and 
Dr. Sanders' testimony. They are cross-subsidizing and 
loaning--I think the figure is 54 percent of its activity in 
2011 was for 125 percent of an area's median income housing, so 
above--and, actually, 63 percent of FHA borrowers in high-
income areas had greater than 150 percent of the average median 
income.
    So, they are doing that. The reason they are doing that is 
they are making money on that, which is subsidizing another 
category--I read Mr. Pinto's testimony and what he said 
earlier. Don't miss this. Forty percent of FHA's business 
consists of loans with either one or two subprime attributes: a 
FICO score below 60, below 60--that is bad credit--or a debt 
ratio greater than or equal to 50 percent. Now, those are risky 
loans.
    So my question for Mr. Pinto, Dr. Sanders, and any of the 
panel: These loans to high-income Americans and to families 
with FICO scores of 60 or below or debt ratios which are 
subprime category, is that the mission of the FHA?
    Mr. Pinto. I think it is not FHA's mission to serve higher-
income individuals and higher-priced homes. FHA's mission 
should be focused on working-class neighborhoods, first-time 
home buyers.
    And what I have suggested in my testimony is that if you 
establish a tolerance for failure of FHA around 5 to 6 percent, 
you can re-target FHA to that group and successfully price 
those loans and still have money left over so it doesn't 
negatively impact FHA's fiscal position, which is poor; we just 
don't want to make it any worse.
    The reason for this is, as my study has shown, once you get 
around 10 percent--and remember, that is the history of FHA 
over 37 years. That is why we have the 3.25 million 
foreclosures in 37 years. It is because FHA has been tolerating 
an 11 percent foreclosure rate year-in and year-out, on 
average. So if you have that 11 percent foreclosure rate, you 
end up having neighborhoods, thousands and thousands of them--
we found 6,000 zip codes where the foreclosure rate averaged 15 
percent. And that is financing failure in those zip codes and 
destroying those neighborhoods.
    Mr. Bachus. All right. So both of those categories that I 
talked about are really somewhat of a departure from their 
mission; is that correct?
    Mr. Pinto. Absolutely.
    Mr. Bachus. And Dr. Sanders?
    Mr. Sanders. Oh, absolutely. I think the FHA has veered 
dramatically from its original mission. In fact, based on the 
Web site Mr. Hensarling found, I think they ought to put a 
little asterisk there saying, ``Low-FICO, high-LTV loans have 
between a 25 and 50 percent chance of serious delinquency. So 
you might want to think twice--''
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Bachus. Thank you.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Pinto, isn't it true that FHA has stringent standards 
related to borrower qualifications and credit scores?
    Mr. Pinto. Than prior?
    Ms. Velazquez. They are talking about--I believe the 
previous Member asked you if they will provide--
    Mr. Pinto. We have this bifurcation that leads to an 
average. So, on one hand, FHA has very high-income, very high-
home-price, and relatively high-FICO-score borrowers. And they 
make loans to those borrowers, and they use those moneys to 
subsidize the borrowers who are below--the subprime borrowers 
who were mentioned, the 40 percent of borrowers who have FICO 
scores below 660 or debt ratios above 50 percent. That is what 
is going on here.
    Ms. Velazquez. Yes.
    Ms. Gordon, I would like to hear from you.
    Ms. Gordon. First of all, I think it is interesting that 
sometimes Mr. Pinto likes averages when he is talking about the 
foreclosure rates, but sometimes he doesn't like averages when 
he is talking about FICO scores.
    But that said, I think what we have to do here is we have 
to distinguish between what I like to call ``risky borrowers'' 
versus ``risky loans.''
    The reason we had a housing crisis was because of risky 
loans and risky lending practices. People in the neighborhoods 
that Mr. Pinto has identified, those neighborhoods were largely 
targeted and in some sense, terrorized by these exploding ARMs, 
negative amortization loans, loans that were push-marketed to 
people without including escrow in the monthly payment. These 
were terrible products that were designed to fail.
    FHA provides 30-year, fixed-rate, fully underwritten 
mortgages. These are not risky mortgages.
    Ms. Velazquez. Thank you, Ms. Gordon.
    Mr. Sanders, in your testimony, you suggest reducing FHA's 
loan limit by 50 percent over the course of the next few years. 
However, the average home prices in high-cost urban markets 
like New York are far above $350,000 and continue to grow. Your 
recommendation will price first-time and low-income buyers out 
of the market.
    How can FHA fulfill its mission if it cannot provide loans 
to first-time home buyers and low-income families in high-cost 
housing areas?
    Mr. Sanders. Thank you.
    On this score, I agree with Shaun Donovan, the Secretary of 
HUD, who believes that we should be building more multifamily 
projects in the city to help relieve that stress so we have 
people with sensitive credit who can actually live in clean 
multifamily housing. I think that is an excellent public policy 
goal.
    Ms. Velazquez. Ms. Gordon, could you please explain to the 
committee that the median home sale price in places like 
Brooklyn, New York, is $565,000. And I suspect in areas like 
Boston and San Francisco, that would also be the case. In 
Chinatown, the median average is about $1 million.
    FHA's products allow low-income borrowers and first-time 
home buyers to obtain affordable financing options to purchase 
homes in these and other high-cost areas. What will happen in 
these communities if FHA reduces loan limits, as suggested by 
some of the other panelists?
    Ms. Gordon. It is an anomaly right now that the GSEs have 
lower loan limits than FHA. That is an odd arrangement of the 
world. And I understand Congress made that choice, but I am not 
sure people quite understand that.
    But what is important to understand now is that this 
housing recovery is both crucially important to us right now 
and very fragile. So to the extent we move, we need to move 
slowly, and we need to move carefully.
    And I would love to see private capital come back into that 
space. They can come back into that space. The reason FHA used 
to have such a low market share is because private capital had 
no trouble competing. FHA mortgages are cumbersome, there is a 
lot of paperwork, there is a lot of stuff you have to go 
through. It used to be that private mortgages were more 
attractive to most people when they could get them. So if the 
private market comes in, FHA will be able to retreat.
    Ms. Velazquez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Royce, for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I think as we look at the overarching goal here, it is 
really to get private capital back in, right? And at the same 
time, we are concerned about the bailouts and the likelihood of 
a major bailout here if we go in the wrong direction.
    We had in 2009, and we had in 2011, testimony from the head 
of HUD and from the FHA that they were going to work to improve 
the financial footing. The way they were going to do it was HUD 
decided to allow FHA to expand, rather than to ask it to be 
recapitalized at that point.
    So we are headed in a direction, but what has the result 
been? The consequences of that expansion has--we have gone 
from, what, a positive $4.7 billion 3 years ago to $2.5 billion 
in 2011, to a negative $16.3 billion in 2012.
    I was going to ask Mr. Pinto--we talk about the enablers 
here of overleverage in the system. We are all concerned about 
what was done in the past to overleverage. You have heard me 
argue in the past about 10-to-1 leverage being the maximum we 
should allow. We had Bear Stearns at 30 to 1. That is a 
problem. But in November 2011, we had FHA at 422 to 1. I 
remember when Fannie Mae and Freddie Mac were discovered to be 
100-to-1 leverage, we thought we had a problem.
    So, clearly, going forward, we have something we have to 
address here. And now that the FHA has a negative economic 
value, I don't know how you even compute leverage. I don't 
think you can with a negative denominator for capital.
    Are there other accounting means that we can use to compare 
FHA to other public- and private-sector entities? I will ask 
Mr. Ed Pinto on that. And under any mechanism, is the FHA 
solvent? Does this raise the prospects, frankly, for us to be 
concerned about a future bailout here, given the way that this 
graph shows actual versus projected over the last couple of 
years?
    Mr. Pinto. Okay. Thank you, Mr. Royce.
    I don't know of any accounting regulatory scheme that would 
lead FHA to have a positive net worth. What is used by the 
actuarial study is what is known as government accounting 
principles. Back in 1984, when someone who worked for me was 
talking about government accounting principles, they said, 
``They are neither accounting nor principles. They are not 
based on anything that you can get your arms around.''
    Generally Accepted Accounting Principles (GAAP), which are 
used in the private sector--I have been reviewing FHA every 
month for over a year using generally accepted accounting 
principles. And based on that, FHA has a negative $25 billion 
net worth today, and it is also short $22 billion in its 
capital requirement as established by Congress, so for a total 
negative of over $45 billion.
    That is where FHA is today. And where it is going to be 
tomorrow--Ms. Gordon talks about how they would like to count 
future income and things like that, future business. No 
financial institution in the world gets to count things the way 
FHA counts them.
    Mr. Royce. Let me ask Mr. Sanders, then, because in your 
testimony you laid out a series of steps that could improve the 
financial soundness and would also reduce the market share, 
including: improve the credit quality of those receiving 
insurance; increase the minimum downpayment; and reduce loan 
limits.
    Can some of these steps be taken by the FHA under its 
current authority? And of those requiring congressional action, 
how would you prioritize which we should tackle in Congress? 
But, first, let's take what could be done under the current 
authority.
    Mr. Sanders. Under the current authority, they can do 
things like disclose information better. The FHA is almost like 
Communist China in terms of reporting their loan level data; we 
just don't do it. That would help us get around the problem 
that was asked of Mr. Pinto on accounting. Just show us your 
books. The actuarial reports are just--whether grossly 
misleading, I don't know, but they are just--
    Mr. Royce. Reducing loan limits?
    Mr. Sanders. I think reducing loan limits has to be done 
here. I don't think they can do that themselves.
    Mr. Pinto. Let me just say two things that FHA could do 
immediately that would be huge.
    Number one is, they threatened a 3 percent limitation on 
seller concessions, David Stevens, 2\1/2\ years ago. It has not 
been done. I think one of the Members said it had passed; it 
has not taken place.
    And then, number two, return appraisal panels, just like 
the VA does. Those two things would be huge.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlemen from North Carolina, 
Mr. Watt, for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    And let me start by thanking the chairman and the ranking 
member for having this hearing. I think it is critically 
important, and it is an important first step to getting to the 
basis of what we need to do in this committee not only about 
FHA but Fannie and Freddie. And if we don't find some good 
answers, housing in this country is going to be even worse and 
homeownership is going to be an impossibility, I think, over 
time.
    I assume there is nobody on this panel who believes that we 
don't need FHA, is there?
    Oh, there is somebody. Mr. Pinto.
    Mr. Pinto. I think that raises the question--
    Mr. Watt. Either you do or you don't, now.
    Mr. Pinto. Let me just answer it.
    Mr. Watt. Don't--
    Mr. Pinto. If you don't take steps to reform FHA, there is 
an alternative way to get to the kinds of housing assistance--
    Mr. Watt. Okay. But the mission--
    Mr. Pinto. But if you don't fix it--
    Mr. Watt. Let me rephrase the question. The mission of 
FHA--is there anybody on the panel who believes that we should 
not have the mission of FHA if FHA is operating within that 
mission? Is there anybody who--
    Mr. Sanders. The original mission?
    Mr. Watt. Yes, the original mission.
    Mr. Sanders. I have no problems with the original mission.
    Mr. Watt. All right. Okay. So the problems we are having 
is, it sounds to me like you believe that FHA is operating 
outside the mission. And part of that has been as a result of 
the private market fleeing for whatever reason. So one question 
I have is, how do we get the private market to step back into 
this space that FHA is inappropriately, you believe, in?
    Let's talk about that for a little bit. And I would love to 
have Ms. Gordon's opinion about that. I would love to have Mr. 
Pinto and Dr. Sanders' opinion about it. Because if the private 
market is not going to step into the space, either we are not 
going to have the space occupied or Fannie is going to occupy 
it or Freddie is going to occupy it or FHA is going to occupy 
it, all of which currently expose, potentially, taxpayers.
    How would you attract the private market into this, Ms. 
Gordon? And then, Mr. Pinto and Dr. Sanders?
    Ms. Gordon. It is going to be important to have the larger 
conversation all together. You can't just address FHA in a 
vacuum, if we really want to fix the housing market going 
forward.
    We have to get serious about what we are doing with Fannie 
Mae and Freddie Mac. They are showing a profit now; they have 
become a convenient piggybank. But the fact is we have to 
address the whole thing together so that we can appropriately--
    Mr. Watt. Okay. All right.
    Mr. Pinto, go ahead.
    Mr. Pinto. I agree with Acting Director DeMarco: ``The road 
to housing finance reform starts with FHA. You have to define 
the role of FHA.'' If we define--
    Mr. Watt. Well, we have agreed on the mission, the original 
mission. How do you get--
    Mr. Pinto. Right. So then you--
    Mr. Watt. How do you get the private market to come back in 
beyond that mission?
    Mr. Pinto. The private market is ready, willing, and able. 
You have new mortgage insurance companies that have started. 
You have capital being put in--
    Mr. Watt. What are they waiting for?
    Mr. Pinto. Excuse me?
    Mr. Watt. What are they waiting on? Why are my constituents 
coming to me saying, ``I can't get the private market to 
finance a loan?'' What are they waiting on? That is the 
question I am trying to get to.
    Mr. Pinto. You want responsible lending. I think we all 
want responsible lending. And the private sector is ready, 
willing, and able to do responsible lending. FHA, as I have 
documented, is not doing responsible lending in these areas 
that are occupied--working-class families and neighborhoods. 
They are not doing responsible lending. You want responsible 
lending.
    Mr. Watt. Dr. Sanders, go ahead.
    Mr. Sanders. I agree with Ed. Part of the reason, although 
Ms. Gordon doesn't agree with me--
    Mr. Watt. I am not looking for reasons. I am asking, how 
can we attract private capital back into this area? I am not 
looking to blame anybody. I know what the blame is. We have 
been doing that for 2 years now.
    Mr. Sanders. I am not blaming Ms. Gordon. I am just saying 
that--what I think is, if we take a look at the Dodd-Frank 
Consumer Financial Protection Bureau QM, whereas essentially, 
as I have called it before, is the Fannie-Freddie-FHA 
protection bills, because now most loans are just going to go 
to FHA once Freddie and Fannie come out of conservatorship. And 
so, we have to lower the footprint, raise the premiums even 
more on FHA, and, again, take them out of the subprime end of 
the market.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from West Virginia 
for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    I want to thank the panel.
    I would like to start on the shortfall at FHA, the $16 
billion that we have talked about, capital ratios in the 
negative. And I believe I heard Ms. Gordon say--and I haven't 
been in the entire hearing, so excuse me if I have misconstrued 
your comments--that basically what it would be is, if it was 
ever called upon, is just shifting from one account to the 
other and that there is really nothing that the taxpayers would 
be liable for.
    Is that your essential statement there?
    Ms. Gordon. No, that is not what I am saying. What I am 
saying is that right now, there is nothing that is going on 
that requires what I think people think of as a bailout, where 
Congress has to vote new money to do something that wasn't 
contemplated.
    What is happening right now is contemplated, that from time 
to time an agency with a mission like this is going to be in 
dire straights.
    And don't misunderstand me. These are financial dire 
straights, and it is very important to get the financial house 
back in order through steps such like the ones that FHA has 
taken and some of which they are seeking additional 
congressional authority so that they can take.
    Mrs. Capito. Right. But if there is an infusion from the 
Treasury, that would, in fact, impact taxpayers, because the 
Treasury is and continues to be our tax dollars. Correct?
    Ms. Gordon. Yes.
    Mrs. Capito. Okay.
    Then my next question would be to the experts on the panel. 
Is there a mechanism that if an infusion of capital from the 
Treasury becomes necessary, which it looks like it might be, is 
there a mechanism for FHA in rosier times to repay this as part 
of the process?
    Mr. Petrou. Yes, there is. The key is to, first of all, 
change the budget accounting, which is what CBO has 
recommended, to show the true risks associated with FHA. All 
these numbers that you are talking about are numbers that are 
really artificial, and they are artificially low in terms of 
the bailout that we are talking about.
    Mrs. Capito. So you think the $16 billion is a low figure?
    Mr. Petrou. It is low in terms of the real risk, and that 
is--
    Mrs. Capito. Okay.
    Mr. Petrou. --what CBO has made clear in its work with 
respect to fair-value accounting.
    The second thing, the way you want to--if you are going to 
grow--you can't--I don't believe in growing FHA's way out of 
its problem. I think that is really just what the S&Ls thought 
they would do in the early 1990s, and it failed, but now you 
are playing with taxpayer money.
    The answer, really, as I indicate in my testimony, is to 
cut the government insurance down to 30 percent from 100 
percent--
    Mrs. Capito. I see.
    Mr. Petrou. --so that the lender is on risk, and then keep 
the premiums so that you can recapitalize the fund to 4 or 5 
percent. And that way, you would start getting yourself into a 
responsible economic program, as opposed to worrying about 
supporting the market--if, in fact, it needs the support, 
continued support--by inflating home prices.
    Mrs. Capito. All right. Thank you.
    I am going to jump to another area here because I only have 
a minute and 45 seconds left.
    I was the ranking member on the Housing Subcommittee with 
Ms. Waters when she was the Chair, and we had more than a few 
meetings of this impending doom. This has been talked about in 
our committee for years, that this is the direction the capital 
ratio is headed.
    The response from the Secretary of HUD and others, the FHA 
administration, has always been that the newer loans, the ones 
that are being entered in now, are going to be the ones that 
are going to sustain the fund going forward and that the past 
ones are the ones that are really messing it up, and that all 
these loans are going to be cycled through. But from what I am 
hearing from your testimony, that is not what is happening 
here.
    Mr. Pinto, would you have a response to that?
    Mr. Pinto. Yes. You are absolutely correct. What is going 
on here, these projections are made, and they are just not 
credible.
    The projection itself that was made in November is based on 
a July interest rate projection. In the report, it talks about, 
if we are in a low-interest rate environment--and I think 
everyone here agrees we are in a low-interest rate 
environment--it is not $16 billion negative or $15 billion 
negative, it is $31 billion negative.
    Secondly, the last recession ended in mid-2009. It doesn't 
feel like it ended, but officially that is when it ended. FHA 
is very vulnerable to a recession, as the chairman said at the 
beginning, very vulnerable to a recession. If there were to be 
a recession anytime in the next 4 or 5 years--and I am not 
talking about a big one, just a normal, run-of-the-mill 
recession--FHA would suffer catastrophic losses and the 
taxpayer would be at risk.
    Why? Because not only do they have all these negative 
economic values we have talked about, then they run into some 
additional losses that they never projected.
    Mrs. Capito. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Thank you.
    The FHA may have mispriced risk, but I will point out that 
the private sector did worse. S&P stood as the crown jewel of 
the private sector's ability to price risk. They were in the 
business of telling everybody else in the private sector what 
the risk was. And now, a judge or jury will determine only the 
simple fact: Were they negligent in mispricing the risk or 
fraudulent in mispricing the risk?
    In 2010, this committee and the Congress passed legislation 
that pushed the FHA toward higher fees. Now, it appears that 
they are doing a better job of pricing risk--if anything, 
pricing it high enough to make a profit.
    Last December, the Secretary of HUD testified that FHA's 
market share was contracting. I want to recognize the 
gentlelady from West Virginia, because she and I worked on a 
letter that I think was important in prodding the regulators to 
define qualifying mortgage with a safe harbor. Now that they 
have a safe harbor--and let's hope that concept is made solid--
I don't know why the private sector is not playing a more 
robust role.
    Ms. Gordon, you testified that there would have been 
another 25 percent decline in home prices if FHA had not been 
in the market. I think that comes from Moody's? And you are 
nodding ``yes.''
    In a few sentences, could you tell us what this country 
would have looked like if we had had another 25 percent decline 
in home prices? Or do I have to watch all those post-
apocalyptic movies?
    Ms. Gordon. Yes, I would say you have to watch one of those 
movies with all the scary things, because I--
    Mr. Sherman. ``Thunderdome?''
    Ms. Gordon. --can hardly imagine. There are so many 
neighborhoods that still are in deep, deep distress because of 
the private, toxic, subprime loans that were made and because 
of the foreclosures, the subsequent recession, the 
unemployment. Imagine if we had had 3 million fewer jobs--we 
would not be on a road to recovery today at all.
    Mr. Sherman. For the record, I will just define your answer 
as ``somewhere between `Grease' and `Thunderdome.'''
    Ms. Gordon. That works.
    Mr. Sherman. I worked with the Vice Chair of this committee 
to allow FHA in high-cost areas to go as high as $729,750. That 
sounds like too much for most of the districts represented 
here, but in the 12 high-cost areas, it was critical.
    Are the FHA's reserves higher? In effect, are they making a 
profit, an actuarial profit, on those loans that they are 
guaranteeing between $625,000 and $729,000?
    Ms. Gordon?
    Ms. Gordon. I don't have the numbers in front of me, but 
one would imagine that is a possibility. Maybe Mr. Petrou has 
the number.
    Mr. Sherman. Mr. Petrou?
    Mr. Petrou. I would question whether or not that is the 
case. And the reason I question it is that, while FHA had hoped 
that its 2010 book of business, for example, would be 
performing better, hopefully enough to bail out the rest of the 
fund, in fact, if you look at the latest actuarial report, you 
will find that the present value of that book of business is 
falling.
    Mr. Sherman. I would beg to differ with you on a couple of 
points. First, I was asking about loans that make up about one-
twentieth of that book of business.
    Mr. Petrou. Yes, and that is where you get--
    Mr. Sherman. You are talking about what the temperature was 
in the whole country, and I asked you what the temperature was 
in one county.
    Mr. Petrou. And that is--I said my--
    Mr. Sherman. So I am going to reclaim my time and just note 
for the record that in terms of default rates, private-sector 
loans, prime, have been at 5 percent; subprime, 22 percent. 
Yes, the FHA overall is at 9 percent, but for those loans made 
in 2011, the seriously delinquent loans are only 3 percent.
    So to say that the FHA's recent loans--first of all, you 
have the actuarial value that says that their book of business 
for 2010, 2011, and 2012 should raise their capital by $22 
billion in profit, but then you have the actual nonprojected, 
real-life experience of 2011, a 3 percent default rate.
    And I believe my time has expired.
    Chairman Hensarling. It is certainly expiring.
    The Chair will now--
    Mr. Sherman. It is clearly expiring.
    Ms. Gordon, do you have any further comment in 5 seconds?
    Ms. Gordon. What we can all agree on is if we do a better 
job of loss mitigation, both at FHA and elsewhere, that will 
help everybody's books.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you.
    And before I begin, just to this issue of where the private 
sector is versus these that are basically in the public sector, 
remember, those loans that are in the private sector, if they 
go bad, the taxpayer is not on the hook. So if they made bad 
decisions on these things, it is not the taxpayer who 
ultimately has to pay the price for it.
    But on to this panel. This panel has been interesting in 
some of the rhetoric that we have heard so far, that we have 
heard from some members, at least Ms. Gordon, using the term 
``terrorism'' in the financial sector, that people have been 
terrorized, areas have been targeted, and what have you. I 
suppose that some of the government policies that also went 
after the low-income in these certain areas, such as CRA, might 
be government counterterrorism in those same areas, as well.
    But rhetoric aside, I think the other term that we hear 
from the other side, the constant refrain or the mantra of the 
countercyclical role of the FHA is an interesting one. I guess 
that means that if you, individually, would not lend money to 
your neighbor to help them buy a home because of market 
situation or what have you, but you want the government to use 
taxpayers' dollars to go in and help them out and buy a loan, 
that is the countercyclical nature of the FHA; something that 
you, individually or personally or investment-wise, you are not 
willing to do, but you are sure happy to have the taxpayer step 
up and step into that role. And that is the role you are 
suggesting for the taxpayer through the FHA.
    Now, notice that when you do require the FHA to take that 
countercyclical role, there is a price to pay, not for the 
prudent borrower, not for the individual who has said, ``During 
these down times, I am going to wait and save up my money to 
get into the market tomorrow or the next day,'' because when 
you act in this countercyclical manner that the FHA has done, 
what happens is, as this panel has indicated, the rates later 
on, as they are now, as Ms. Gordon has said as well, the costs 
go up.
    So that prudent individual actually has to pay the price 
for the failed policy of the Federal Government and also for 
the imprudent action of the prior borrower, who now finds 
himself either out of a house or in a house that is underwater. 
I am not sure why anyone would be advocating for imprudent 
investments and imprudent lending or for penalizing those 
individuals who do the appropriate thing and buy when they are 
able to afford it.
    Let me turn to Dr. Sanders as to what the appropriate role 
for the FHA is, since you said you approve of the appropriate 
historical role of the FHA. And that was, I believe, to help 
out first-time homeowners and those low-income communities and 
areas or individuals who could not afford to buy a home, and 
FHA was created in that manner.
    Just as an aside, I know our President has been on TV 
frequently defining who the rich are in this country, and the 
rich are anybody who makes over $250,000. So those are who are 
the rich. But isn't that exactly what the FHA has now morphed 
into, is saying that we are now going to allow and to help 
facilitate those rich people to buy homes?
    Mr. Sanders. Yes, the FHA has strayed from its original 
mission: first-time home buyers and minorities.
    And even on the minorities side, you have to be very 
careful about harming. Again, FICO score gets too low, they are 
actually worse off--not all of them, but maybe 50 percent are 
worse off going into this homeownership under the new rule, the 
revised thing. This is not helping; this is hurting.
    Mr. Garrett. Let's drill down on that a little bit. What we 
think, on the face of it, is actually helping communities and 
helping homeowners is, what? Is actually hurting them, because 
it is helping to facilitate people buying houses that they 
can't afford in a downward market, putting them into houses 
that are soon going to be underwater. And, actually, now, you 
are also adding the other facet that I didn't think about: That 
actually gives them a lower FICO score going forward if they 
need to get out of this or buy something else.
    Is that what you are saying?
    Mr. Sanders. Yes. I never think it is proper housing 
policy, or any kind of policy, to encourage households to take 
on a lot of risk, which is exactly what the FHA is doing when 
they strayed from their original mission. And, of course, that 
ended catastrophically in history.
    And, by the way, saying, going forward, the book looks good 
now may be true, but, remember, everyone was saying back in 
2002, the book looks great, everything is improving. Well, it 
didn't. We still had for those low-FICO 25 percent serious 
delinquency rates.
    The problem is that you can't just look at the current 
state and assume that is the future. We will have other 
recessions, as Ed said.
    Mr. Garrett. Mr. Pinto, I see you are raising your hand.
    Mr. Pinto. Yes. The NAR--and, in fact, they just took out 
ads, full-page ads today. And they say that FHA provides access 
for credit for millions of Americans exactly the way Congress 
designed it to operate 80 years ago. So I went back and looked. 
Eighty years ago, the maximum LTV was 80 percent; today it is 
96\1/2\ percent. The maximum loan term was 20 years; today it 
is 30 years. Insurance claim rate, 0.2 percent cumulative over 
20 years, versus 11 percent annual now. The loss rate has 
increased 400 times--400 times.
    Mr. Garrett. Thank you. Those are important points. I 
appreciate them all.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair is going to make an announcement. As you probably 
know, votes are anticipated on the Floor shortly, perhaps as 
early as 11:00. With the agreement of the ranking member, we 
will clear one more Member on each side and adjourn at that 
point. And I understand the Democrats have their retreat today, 
so we we will not be gaveling back in.
    So, at this point, the Chair will recognize the gentleman 
from New York, Mr. Meeks. And with apologies to everybody else, 
you can probably do the math and figure out whether or not you 
are going to be recognized.
    The gentleman from New York?
    Mr. Meeks. I want to thank the chairman and the ranking 
member for this time and for this hearing.
    Let me just ask a few quick questions. I know that the 
ranking member of the Housing Subcommittee is champing at the 
bit over here, and so I am going to try give him a couple of 
minutes, at any rate.
    But I just heard--Mr. Sanders, you stated and you have 
quoted in some of your testimony, I guess, this question about 
the policy or the mission of FHA and that it no longer can 
serve first-time buyers or minority and low-income borrowers.
    But isn't it true that in 2011, over half of all African 
Americans who purchased homes purchased an FHA mortgage and 
over 49 percent of Latinos did so with FHA financing, as well 
as 78 percent of all FHA finances were first-time home buyers? 
Isn't that the mission of what FHA is all about, and, 
therefore, they are continuing that original mission?
    Mr. Sanders. Mr. Meeks, thanks for asking me that question.
    First of all, I did not say they are not doing first-time 
home buyers. But, second, I have that table in my testimony, 
that, in fact, the FHA does serve more Black and Hispanic 
households.
    My point is that, while that may be true, do we really 
think, again, throwing them in front of a moving bus, where the 
delinquency rates are so high, is that proper public policy? Or 
are they better off doing what Shaun Donovan, the Secretary of 
HUD, said?
    Mr. Meeks. Just what we just said before, under those same 
time periods, if you look at the delinquency rates, it is down. 
In one year, it was 6 percent, and in the other, it was 3 
percent.
    And then in your same testimony you talked about the fact 
that--and you used the D.C. area, where you talked about 
foreclosures. But in the D.C. area, the majority of those 
foreclosures were not FHA; they came from foreclosures from 
privately funded subprime loans that were not insured by FHA.
    And I see Ms. Gordon is champing at the bit.
    Ms. Gordon, do you want to add something?
    Ms. Gordon. Yes, I just want to say, with all due respect, 
what Mr. Sanders and Mr. Pinto are doing is blaming the firemen 
for getting the house wet. FHA did not cause the crisis. FHA 
was virtually absent from the market when this got started.
    FHA has come into neighborhoods, neighborhoods that have 
been in something of a death spiral with foreclosures and the 
like, and tried to put some kind of floor under that and 
allowed people in those neighborhoods, many of which are 
neighborhoods with large communities of color, to get their 
feet back under them.
    Mr. Meeks. In fact, even in Mr. Pinto's statement, I 
believe he said that FHA is overly concentrated in low- and 
moderate-income communities. But that is FHA's core mission, to 
help creditworthy low- and moderate-income families. That is 
what their core mission is.
    I am going to yield back the balance of my time.
    They are going to come back? Oh, great. Good. Then I can 
keep going.
    Mr. Pinto, in your answers to Mr. Watt, I think that maybe 
you might want to--your statement clearly seems to me that you 
are not for the mission of FHA; you don't agree with it. 
Because you are saying in your statement that it was overly 
concentrated in low- and moderate-income communities, which is 
exactly what their mission is.
    I think that you raised your hand and then you put it down, 
so I want to give you a chance to really state--and it is okay. 
If you are not for the mission of FHA, then state it. Because 
that seems to be what your testimony is.
    Mr. Pinto. I appreciate that.
    First, let me say that FHA was not the firemen, they were 
the arsonist. Starting in 1992, Congress ordered FHA, Fannie 
Mae, and Freddie Mac to go down an arms race of weakened 
lending practices that led to the problems that we had, along 
with the National Homeownership Strategy.
    But on to your point, I am not against FHA's mission of 
serving working-class families and communities. What I am 
against is abusive lending practices by FHA in those 
communities and to those families. And that is what I have 
documented.
    If you go to page 25 of my testimony, you will find an 
explicit way to serve those communities precisely in a way that 
is not abusive and does not finance failure, which is what FHA 
has done--
    Mr. Meeks. All those delinquencies that you say were in 
private industry--
    Mr. Pinto. --for 30-plus years.
    Mr. Meeks. --so, therefore, the private industry that had 
all of those delinquent loans, that really caused--when they 
bundled them, sold them, they are not the arsonists. They 
should be exempt from what you have been talking about.
    And I see Ms. Gordon is champing at the bit. I am going to 
give Ms. Gordon a chance to say something there.
    Ms. Gordon. I think that it is insane to consider FHA 
abusive lending. This is fixed-rate, long-term, sustainable, 
underwritten mortgages. We know what toxic loan products look 
like, and they don't look like this.
    UNC has recently done a very in-depth longitudinal study of 
a group of something like 46,000 lower-income, lower-FICO home 
buyers who were given these 30-year, fixed-rate mortgages, 
sometimes with lower downpayments than FHA requires. And those 
loans have outperformed all but the very--
    Chairman Hensarling. The time of the gentleman has expired.
    I want to announce that the House is in recess at the 
moment, so several of you need not rush off.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I think one of the questions that was asked is a good 
question, and that was, what does it take to get the private 
sector back into this market? I think a couple of things would 
help that process.
    One is, if I was a private company and the Federal 
Government would subsidize my operating costs--that is what we 
do with FHA; they do not take any of their operating costs out 
of the fund revenue--and that I had an unlimited credit line at 
the United States Treasury and I didn't have to answer to any 
shareholders, I could be very competitive in making loans 
competing with FHA.
    But the truth of the reality is, in the marketplace today, 
it is very inexpensive to sanitize these mortgages, either 
running them through FHA, Fannie Mae, or Freddie Mac. And so, 
you have 90 percent of the market being sanitized there for a 
very low risk premium. If you want the more private market to 
come back in, you have to level the playing field, and the 
playing field is not level.
    Comments, Mr. Pinto, Mr. Sanders, Mr. Petrou?
    Mr. Pinto. Yes, absolutely. I think I testified 3 years ago 
that the housing policy in the United States has created a 
brick wall that the government mortgage complex has created. 
And that complex is impenetrable. It is 10 feet high, very 
wide, and it goes underground. So you can't dig under it, you 
can't go over it, and you can't go around it.
    The private sector doesn't like to break through brick 
walls. They like to go into opportunities. As long as the 
private sector--as long as the government mortgage complex, 
which is Fannie, Freddie, the FHA, VA, Ginnie Mae, USDA, all of 
these entities, are out there with their different programs, it 
is very difficult for the private sector to compete.
    The advantages that Ginnie Mae brings to FHA are not very 
well-understood. Ginnie Mae reduces the rate on FHA loans by a 
substantial amount. It actually almost offsets the amount of 
some of the premium increases that have taken place. And the 
result is that those securities sell at a higher price in the 
securities market than a Fannie Mae security. That is a 
subsidy, an implicit subsidy, that goes to FHA. And, again, it 
makes it very hard to compete.
    That is why these higher-income loans--you ask, why are 
those loans being made? The reason they are being made is 
because of the Ginnie Mae subsidy. They charged a lot on the 
FHA side, but you then add in the Ginnie Mae subsidy and those 
loans are able to be done.
    So the market is not a level playing field, and we need to 
get to one.
    Mr. Neugebauer. Mr. Petrou?
    Mr. Petrou. I agree completely. Ginnie Mae is pricing right 
through Fannie/Freddie securities, and that is the key factor 
in terms of trying to ``compete.''
    In the immortal words of Milton Friedman, we could still 
have a Pony Express, if you want to subsidize something like 
that, but we chose not to. And the reality is that nobody is 
going to get into this market as long as the government is 
blocking them with this cheap pricing.
    Mr. Neugebauer. And before you respond, Mr. Sanders, the 
other thing, too, that I didn't mention is this new risk that 
everybody is trying to figure out how to price, and that is 
called the regulatory risk now that falls onto the private 
mortgage market that doesn't necessarily fall to those loans 
being originated through FHA and Freddie and Fannie. Is that 
correct?
    Mr. Sanders. That is correct. Dodd-Frank and, to a large 
part, the Consumer Financial Protection Bureau omits Freddie 
and Fannie and FHA. So we have for the lenders a very stringent 
set of standards, including prime risk and the associated blame 
with that, but Fannie and Freddie and FHA just seem to have 
somehow waltzed their way out of this. So they are not really 
under the regulatory supervision of Dodd-Frank.
    That has been pointed out before, but that has to be fixed. 
We have to have rules governing the FHA, Freddie, and Fannie 
that make it a level playing field with the banks, the lenders.
    Mr. Neugebauer. Yes. So we are really comparing apples and 
oranges when we try to compare. And we are going to have a 
hearing in our subcommittee, and we are going to dive deeper 
into this so that we can begin to contrast these entities from 
an accounting standpoint, from the regulatory standpoint, to 
try to build a model here so we can tell why these entities 
aren't able to compete.
    I just had one last question for Ms. Gordon.
    Ms. Gordon, you said that if the money is advanced to FHA, 
it isn't a bailout because it isn't the taxpayers' money, it 
just comes from the Treasury. Do you know where the Treasury 
gets its money?
    Ms. Gordon. No, we have discussed that already. That is not 
what I said. What I said is Congress does not have to vote on 
some kind of bailout.
    Mr. Neugebauer. No--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    I want to thank the panel for being here today. As I said, 
I think you raised a lot of good questions. But I want to make 
a few points.
    First of all, we haven't publicly stated, though I know it 
is in your testimony, that at this very moment FHA has $30.4 
billion worth of cash ready and available to cover it. I 
understand that over the long term they have some concerns; I 
am not even arguing the point. That is why I want to hear some 
of the things. But this is not a crisis that is going to happen 
tomorrow, at least not right away tomorrow.
    I also want to be clear that the FHA has taken--I have a 
list of 15 different steps that they have taken over the last 
several years to address these very issues you mention.
    And I would like to submit that list for the record, Mr. 
Chairman, if I could.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Capuano. Thank you.
    But, this list includes increasing the mortgage premium 
rate at least 4 times. It might be 5 times; maybe I counted 
wrong. I am not even sure I like that, but at least it 
addresses your end of it.
    They increased some of the downpayment requirements for 
different FICO scores. They changed some of the things for 
seller concessions. At least that is pending, as I understand 
it. The new debt-to-income ratios--they have done a whole bunch 
of the things, at least in general, that you have suggested. 
And they are in the middle of doing others.
    Now, I am not suggesting they can't or shouldn't do more. 
But I think that needs to be recognized, as well, and that 
their book has gotten better over the last 2 years. I think 
those things have to be recognized. So I just want to put those 
on the record.
    I also want to state very clearly that if the chairman or 
anybody else wants to put the bill out that this committee put 
out last cycle, we should do it today, get it on the Floor, get 
it through. We can beat up the Senate for the next 2 years, 
instead of waiting until we beat up everybody we want to beat 
up to put out a bill. Let's put the bill out that this 
committee voted last cycle. Let's put it out today so that we 
can get moving on some of the things that the FHA says it needs 
legislatively that I think everybody agrees we want to give 
them the power to do. So let's do that instead of just beating 
each other up.
    I guess I want to also comment on some of the things that 
were said earlier.
    Prudent lending. Who is against prudent lending? Now, the 
question is, define ``prudence.'' Some people would define 
prudence as only lending to Donald Trump. That is prudent. He 
can pay it back. That means there is no middle class. The 
question on prudence is always about the ability to pay.
    And, Mr. Petrou, I want to get to some of your comments. 
Because the reason is, all of these agencies deal with the 
amount of money that is available for loans, and it doesn't 
take into consideration regional differences. The cost of 
housing in my district is approximately 2 to 3 times the cost 
of housing in the chairman's district, but wages are 
approximately 70 to 100 percent higher, as well.
    Mr. Capuano. The question shouldn't be on how much the 
house cost; it should be on whether the borrower can afford to 
pay. That all plays on all different things: downpayment 
requirements. I could not afford to buy any home in any 
district if you have a 50 percent downpayment requirement. What 
should it be? Should it be 5? Should it be 10? Fair questions. 
But to simply throw numbers out really begs further questions.
    For me, those numbers are fine. FICO scores up, down, over. 
The question is, what does it mean to the middle class? Can FHA 
actually accomplish its mission based on some of these numbers? 
And the truth is none of these testimonies gives answer to 
that. They raise questions, but they don't give answers. I need 
to see answers as to what the impact is of some of the things 
you are suggesting.
    And if we get to there, I don't think we are going to find 
ourselves on significantly different pages at the end of the 
day. Maybe we will, but right now we don't have it. If you have 
those statistics, I would like to get them.
    I read your full testimonies, including your multi-page 
thing, and I didn't see them. I saw nice, generic comments and 
studies of what happened in poor neighborhoods. FHA belongs in 
middle-class and lower-income neighborhoods. We all agree with 
that. Was it the FHA or wasn't it? What is the impact to this?
    Even by shifting to some of the things--for instance, the 
VA coverage of 50 percent versus 100 percent. Conceptually, I 
like that proposal. I don't know if 50 percent is the right 
number, I don't know the number, but the concept of somebody 
having skin in the game is a good concept. But I need to know, 
what does that do to rates? If you say we are going to have a 
10 percent skin in the game, does that mean that my mortgage 
rate goes up 20 percent? And if it does, that means you are 
kicking out a whole lot of people from being able to do it.
    So, for me, I guess I am asking especially those of you who 
have been enjoying kicking the recent history of FHA--I hope 
you are having a good time; that is great. It doesn't help me 
move forward. It doesn't help us get back to that mission.
    So, for me, I need you to tell me: What are the impacts on 
these rates? Who are we kicking out of the housing market? And 
how is it going to impact some of these middle-class 
neighborhoods that we claim that we all want to help?
    Mr. Pinto. Page 22 to 25 in my testimony explicitly and 
precisely answers every question you just asked.
    Mr. Capuano. Actually, I did read it. I don't think it did, 
but we will talk about that another time.
    Mr. Pinto. I would be happy to meet with you over it.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Campbell, for 5 minutes.
    Mr. Campbell. Thank you, Mr. Chairman.
    What I would like to focus on in this 5 minutes is what FHA 
should look like going forward. Let's assume that we are 
developing a sustainable housing finance market, which means we 
have to do a lot of things around FHA, granted. Okay, that is 
going to be a lot of the work of this committee coming this 
year. But assuming that happens--and we will all be deciding at 
some point what that looks like--what, ideally, would we like 
FHA to look like?
    Two things I would like to focus on, and that is, one, in 
terms of the original mission. I am from Orange County, 
California, a very high-cost area. FHA is doing a ton of loans 
from $400,000 to $700,000 in my area. A lot of low-downpayment 
loans, where people actually have more money for a downpayment 
but because loans are so cheap, interest rates are so cheap, 
they put as little down as they can--all kinds of things that 
it strikes me are not anywhere near--and I take your point, Ms. 
Gordon, about how we have softened what would have otherwise 
been a worse market. But that clearly is not what the original 
mission of FHA was.
    I heard from you, Mr. Pinto, and you, Dr. Sanders, I think, 
about the original mission. I would like to hear from the other 
two of you, Mr. Petrou and Ms. Gordon, about what sorts of 
loans should FHA be making in this ideal sustainable market in 
the future.
    Mr. Petrou. I think, as I say in my testimony, they should 
be targeted to the income of the borrower, not the loan amount. 
And that would be by geographic area on median income. And, 
consequently, if your borrowers in your district are of a 
certain income and they qualify for the loan, then those are 
the loans that should be made. You shouldn't have builders 
building up to an $800,000 limit because they are able to get 
it from FHA even though the median income in the area isn't at 
that level.
    And it also addresses the fact that when interest rates go 
up, the amount of money that qualifies falls for these 
mortgages. And you have to take that into consideration, as 
well.
    Mr. Campbell. Okay.
    Mr. Petrou. And, finally, on downpayment, it is critical 
that the downpayment be reflective of the risk.
    Mr. Campbell. I am going to get to that.
    Ms. Gordon?
    Ms. Gordon. Mr. Pinto referred to Gale Cincotta before, and 
I think I am fighting for the same thing she was fighting for, 
which is just to make sure that credit is available in all the 
communities of this country and to people of low wealth, people 
of color, younger people.
    And so, in my ideal world, you see both Fannie and Freddie 
and the private market competing for that business. I would far 
prefer to see most creditworthy borrowers served by a private 
market, maybe with some kind of government backstop, so that 
government is not on the hook for the first loss, and see FHA 
fill in behind that for people who otherwise need some 
assistance. I actually think we all share that vision. We may 
have slightly different views of how to get to it.
    And I am not sure how you pull FHA back before you make 
sure there is something coming in behind it so we don't go into 
another round of home price declines.
    Mr. Campbell. Right. And I get that. But, and to your 
point, I think there is agreement on the panel that we would 
like to see FHA go back to what it was originally designed to 
do. And as much as I get it and it is my district and all that 
now, they shouldn't be making $700,000 loans on million-dollar 
houses. There should be other accommodations for that sort of 
loan.
    Let's talk about whether FHA insures from dollar 1. With a 
3\1/2\ percent downpayment, effectively, when you sell a house, 
that doesn't cover the commission. So, essentially, FHA 
insurance covering from dollar 1 of the potential loss.
    I would like to start with you again, Ms. Gordon, and then 
work back the other way and just see, do you think that FHA 
should be doing that? Or should someone else bear some of the 
risk, 5 percent, whatever?
    Ms. Gordon. For the role that FHA would ultimately play, 
this is part of the historical mission, that FHA is an 
insurance program which is backed by the U.S. Government. And I 
think that is an appropriate role. But I think that what is 
important is that we make sure there are ample opportunities 
and avenues, channels for credit elsewhere that do not have--
    Mr. Campbell. Okay. Let me give someone else the final 14 
seconds.
    Yes?
    Mr. Petrou. I would recommend that you could do a risk-
share program within FHA so you could have a private risk at 
the first dollar loss, FHA takes the remainder down to 30 
percent, and then the lender is on the hook for anything 
deeper.
    Chairman Hensarling. The time of the gentleman has expired.
    We will call upon two more Members and then adjourn.
    Mr. Green from Texas is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank you and the 
ranking member for the dinner that we had together to engender 
a degree of civility and friendship. And I want to assure the 
people who are watching at home that we really did have the 
dinner.
    Let me start by saying to you that I did not come prepared 
to defend FHA today, but I feel compelled to do so. FHA did not 
create the housing crisis. Some things bear repeating. FHA did 
not--N-O-T--create the housing crisis.
    It started in the 1980s with these so-called exotic 
products. And I am sure you remember some of them, but for fear 
that some do not, let me express to you what some of them were.
    Teaser rates that coincided with prepayment penalties. FHA 
didn't creates teaser rates that coincide with prepayment 
penalties, such that you are locked into a loan and you can't 
get out unless you pay some large amount of money.
    Qualifying buyers for teaser rates but not qualifying 
buyers for the adjusted rate. FHA didn't create that product. 
By the way, Dodd-Frank addresses these products.
    Balloon mortgages. One big payment at the end of some 
period of time, after having maybe an interest-only payment.
    Option ARMs. Underpay, and we will tack what you don't pay 
onto the principal.
    No-doc loans.
    Rating agencies that--at least one of which is now being 
prosecuted--rating agencies that were literally giving those 
who desired an evaluation what they wanted.
    Credit default swaps in the tertiary market so that you 
could kind of gamble together with the taxpayers' money, in a 
sense.
    Originators of loans not having to be responsible for the 
default. Probably more than anything else, this was the 
gravamen of the problem. When we allow the originator to care 
less about whether or not there would be a default, just 
qualify the person as a home buyer rather than a homeowner, and 
send that on to the secondary and tertiary market, somebody 
else will worry about the default, this is what it was all 
about.
    Let's not kid ourselves and try to blame the CRA and FHA 
for what happened in the--started in the 1980s and ended up 
with the crisis that we had to give some attention to.
    FHA does insure--does not lend a penny, by the way--some 
loans that some would consider high-dollar loans. But would it 
surprise you to know that in October, the average loan amount 
for FHA was around $180,000, $183,000, less than $200,000? 
Would it surprise you to know that the entire portfolio of FHA 
has loans that average around $150,000? FHA is not a culprit.
    So let me just ask one question, and I will probably then 
yield some time so that others can be heard. But my one 
question is to the entire panel.
    Who among you would end FHA--would end it rather than mend 
it? Which of you would end it? I ask that you acknowledge that 
you would, if this is your position, by kindly raising your 
hand. Kindly raise your hand.
    Now, Mr. Pinto, I don't see your hand going up, so I am 
going to assume that you would not end FHA. This will require, 
unfortunately, because time is of the essence, a yes-or-no 
answer. And perhaps we will get into--
    Mr. Pinto. I can't--I answered the question earlier not 
yes-or-no. I am sorry, it is just not a yes-or-no question.
    Mr. Green. Not a yes-or-no. Then I will conclude, if I 
may--and you can have someone else help you with this, if you 
would like--but I am going to conclude that under certain 
circumstances, you would. And that is all I can conclude.
    Is there anyone else who would end the FHA?
    All right. Let me close with this, dear friends. I came to 
Congress to represent everybody in this country. And in so 
doing, I understand that there are a good many people who 
cannot go back to the 1930s, when you had 3- to 5-year loans, 
when you had huge balloon payments, when the interest rates 
were exceedingly high.
    FHA has provided middle-income persons with an opportunity 
to engage in homeownership. We have to mend it. There may be 
some problems. But we didn't end the big banks. We gave them a 
second life. I am going to fight to keep FHA.
    Chairman Hensarling. The time of the gentleman has expired.
    And I would just let the gentleman know, having paid for 
half of the bipartisan dinner, I certainly recall it.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    To my colleague from Texas, FHA does not have to meet the 
same QM/QRM standards that the Dodd-Frank requires private 
companies to have.
    And, Ms. Gordon, I just want to clarify one thing. I think 
the gentlelady from California was talking to you about the 
minus 1.44, and you were explaining that this does not have to 
do with the $30 billion that they have in the bank but that 
this was something that, if all of them come due at one time, 
that the fund would be a little bit short.
    Just for clarification so I can kind of get the perspective 
on it, what is a ``little bit short?''
    Ms. Gordon. The point I was making is that right now FHA 
has cash on hand, as has been pointed out by several of the 
Members today, and that the measurement that we are talking 
about is a measure of if FHA stopped doing business today and 
paid out its claims, not all at once but over the next 30 
years.
    Mr. Westmoreland. Yes. But what is a ``little bit?'' 
Because my numbers say it would be $16 billion.
    Ms. Gordon. We don't actually know what the number is 
because this is not the same number as will correspond to--
    Mr. Westmoreland. All right. What would your ``little bit'' 
be?
    Ms. Gordon. I think what I am trying to look at is what the 
value is that we are getting for our money here.
    Mr. Westmoreland. Okay. I don't think you are going to 
answer the question, or maybe I am not asking it correctly.
    In President Obama's Fiscal Year 2013 budget, FHA requested 
about $688 million to cover the expected losses during this 
fiscal year. Ultimately, FHA did receive $1 billion from the 
DOJ settlement with the banks and averted a taxpayer, what I 
would term a ``bailout.''
    And given what you all know about FHA's current financial 
situation, could each one of you give me an estimate on how 
much money you think that the FHA will need to cover their 
losses in Fiscal Year 2014?
    Mr. Pinto. I think the number is going to be in the 
negative $10 billion to $12 billion range.
    Mr. Westmoreland. Twelve billion?
    Mr. Pinto. Yes, $10 billion to $12 billion, negative.
    Mr. Sanders. That is a reasonable estimate, but, again, it 
all depends on whether we ever actually get out of this super-
slow-economic-growth thing or do we have a double dip in the 
economy, which is possible. Then all bets are off.
    Mr. Westmoreland. Right.
    Mr. Petrou. FHA has a lot of real estate owned on its books 
right now, and a lot of how much loss is buried in that real 
estate owned. So while I think $10 billion to $12 billion makes 
sense, it could go a lot higher.
    Ms. Gordon. I am not the economist as some other people may 
be, so I can't give you a number. But I can say it will depend 
a lot on the housing market, and it will depend on how well we 
continue to engage in loss mitigation, which is an area where I 
think the FHA still has significant room for improvement.
    And some of the efforts they are making in terms of the 
distressed asset sales and some of the changes they have made 
to the REO process, all of those things work together to 
determine how much money will be lost ultimately.
    Mr. Westmoreland. There are approximately, I think, six 
private mortgage insurance companies that write private 
mortgage insurance. And if I understand it correctly, they are 
under regulations by their States as to a capital requirement 
or whatever you want to say, as far as being able to cover 
their losses.
    And I would like to ask each one of you, how do you think 
they would rate the FHA as compared to some of the private 
mortgage insurance companies in their financial situation?
    Mr. Pinto. If you took away FHA's government guarantee and 
its access to the Treasury, FHA would be closed down, I 
believe, by every State regulator in the country because they 
have no capital today, period.
    What is called this $30 billion in the bank, for a private 
mortgage insurer you would go through the roughly 700,000 
delinquent loans, 60 days or more, you would figure out how 
much money you would expect on just those loans you know about, 
and that exhausts the $30 billion, plus. And so, they have no 
money on a regulatory basis under private mortgage insurance or 
under a GAAP accounting basis.
    Chairman Hensarling. Regrettably, the time of the gentlemen 
has expired.
    Votes are being held open. I would like to recognize the 
ranking member for a UC request.
    Ms. Waters. Mr. Chairman, I ask unanimous consent that the 
following materials from organizations that support the Federal 
Housing Administration be entered into the record: a statement 
from the National Association of Home Builders; a publication 
by the National Association of REALTORS; a statement from the 
National Council of La Raza; a statement from the Local 
Initiatives Support Corporation; and a statement from Brian 
Chappelle, a partner with Potomac Partners, which specializes 
in mortgage finance.
    Chairman Hensarling. Without objection, it is so ordered.
    I would like to thank each of our witnesses for coming to 
testify today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    The Chair announces that the next full committee hearing 
will take place Wednesday, February 13th, at 10 a.m., with FHA 
Commissioner Carol Galante.
    Without objection, this hearing is now adjourned.
    [Whereupon, at 11:20 a.m., the hearing was adjourned.]


                            A P P E N D I X



                            February 6, 2013


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