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




 
                       BAILOUT, BUST, OR MUCH ADO
                     ABOUT NOTHING?: A LOOK AT THE
                    FEDERAL HOUSING ADMINISTRATION'S
                         2012 ACTUARIAL REPORT

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 13, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 113-2



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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 13, 2013............................................     1
Appendix:
    February 13, 2013............................................    57

                               WITNESSES
                      Wednesday, February 13, 2013

Galante, Hon. Carol J., Commissioner and Assistant Secretary for 
  Housing, Federal Housing Administration (FHA)..................     8

                                APPENDIX

Prepared statements:
    Hinojosa, Hon. Ruben.........................................    58
    Neugebauer, Hon. Randy.......................................    59
    Ross, Hon. Dennis............................................    61
    Galante, Hon. Carol J........................................    62

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Talking Points on Amendments to H.R. 5072, the FHA Reform Act 
      of 2010....................................................    80
Huizenga, Hon. Bill:
    Letter to Chairman Jeb Hensarling and Ranking Member Maxine 
      Waters from Fred R. Becker, Jr., President and CEO of the 
      National Association of Federal Credit Unions (NAFCU), 
      dated February 5, 2013.....................................    84
Maloney, Hon. Carolyn:
    Letter to HUD Secretary Shaun Donovan, dated November 9, 2012    86
    Response letter from Elliot M. Mincberg, HUD General Deputy 
      Assistant Secretary for Congressional and Intergovernmental 
      Relations, dated February 11, 2013.........................    87
Galante, Hon. Carol J.:
    Responses to questions for the record submitted by 
      Representatives Foster, Hinojosa, Luetkemeyer, Ross, and 
      Royce......................................................    93


                       BAILOUT, BUST, OR MUCH ADO
                     ABOUT NOTHING?: A LOOK AT THE
                    FEDERAL HOUSING ADMINISTRATION'S
                         2012 ACTUARIAL REPORT

                              ----------                              


                      Wednesday, February 13, 2013

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Bachus, Royce, 
Lucas, Capito, Garrett, Neugebauer, McHenry, Campbell, 
Bachmann, Posey, Westmoreland, Luetkemeyer, Huizenga, Duffy, 
Hurt, Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 
Ross, Pittenger, Wagner, Barr, Cotton; Waters, Maloney, 
Velazquez, Sherman, Meeks, Capuano, Hinojosa, Clay, Scott, 
Green, Cleaver, Ellison, Perlmutter, Himes, Carney, Sewell, 
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. The Chair will now recognize 
himself for 5 minutes for an opening statement.
    The American people deserve and demand a healthy economy. 
They deserve it today. What they do not deserve is the anxiety 
of stagnant jobs and paychecks that shrink in the face of 
higher gas prices, health insurance premiums, and the list goes 
on.
    And they particularly do not deserve the anxiety of 
wondering whether their children and grandchildren will drown 
in a sea of debt.
    To my left and to my right, I have up the National Debt 
Clock. For those who are unfamiliar with it, this Nation has 
racked up more debt on a nominal basis in the last 4 years than 
in the previous 200 years. It stands at--at least before we 
turned it on, it stood at $136,178 per household. For many 
constituents in the 5th District of Texas, that is more than 
they will ever amass in savings in their lifetime, and they owe 
it as their share of the Federal debt.
    The spending-driven debt crisis that we have today is the 
great existential threat to our Nation of this generation. For 
us to have a healthy economy, we must put the Nation on a 
sustainable fiscal path, and to have a sustainable fiscal path, 
we must also have a sustainable housing finance system.
    I have grave fears that FHA, as it is operating today, is 
an impediment to both, and that is why this committee is 
holding the second in what will be a series of hearings on the 
financial health, stability, and mission of the Federal Housing 
Administration.
    As was well established in last week's hearing, the FHA is 
currently facing some tremendous financial challenges stemming 
from its dramatically increased market share and the 
dramatically deteriorating economic value of its insurance 
portfolio. I am very pleased that we have Carol Galante, the 
FHA Commissioner and Assistant Secretary for Housing at HUD, 
here today to help us sort through some of the issues that 
challenge and surround the status of the FHA.
    In response to the housing crisis of the late 2000s, the 
FHA has morphed into a mortgage insurer of last resort to a 
dominant component in our mortgage finance system. In fact, the 
FHA now controls more than 56 percent of the total mortgage 
insurance market in terms of new loan endorsements, crowding 
out its private competitors with extremely low downpayment 
requirements and expanding its insurance to higher-income 
individuals and houses in the upper end of the marketplace.
    The policy of cheap, up-front pricing and elevated maximum 
loan limits as high as $729,000 has allowed the total size of 
FHA's insurance book of business to explode by more than 64 
percent, up to $1.13 trillion in Fiscal Year 2012, making FHA 
the largest mortgage insurance company in the United States.
    And what is the result for the FHA and taxpayers of this 
unprecedented mission creep? The FHA is broke. The FHA is flat 
broke, and I fear soon the FHA will prove to be bailout broke.
    Now, that is not just my conclusion; it is the conclusion 
of the annual independent actuarial study of FHA's Mutual 
Mortgage Insurance Fund--the government fund that insures the 
FHA single-family mortgages--that was released last November.
    I quote: ``The economic value of the fund as of Fiscal Year 
2012 is negative $13.48 billion.'' And the study did not even 
factor in the FHA's money-losing book of home equity conversion 
mortgage, and I quote from the same report, ``The economic 
value of the HECM portion of the Mutual Mortgage Insurance Fund 
to be negative $2.8 billion.''
    Clearly, the FHA is in a dire financial predicament where 
its projected future insurance claims far exceed its current 
cash on hand, a situation that ought to concern both critics 
and proponents of the FHA.
    So the conclusions of the annual independent actuarial 
study give rise to several fundamental questions regarding the 
FHA that I hope Commissioner Galante can shed light upon. As I 
have said before, hardworking Americans demand a healthy 
economy, and we cannot have a healthy economy until we have a 
sustainable path to fiscal sustainability for our Nation, and 
until we have a sustainable housing finance system that is also 
competitive.
    I now recognize Ranking Member Waters for 2 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this hearing this morning, which is the second in your series 
of hearings about the health of the Federal Housing 
Administration.
    We all agree that we need to closely monitor the health of 
FHA in light of the 2012 report from the agency's independent 
actuary, and we want to make sure that we remain focused on our 
long-term goals to help revive the mortgage market, bolster the 
economy, help qualified borrowers, and protect American 
taxpayers.
    As I said at the hearing last week, we must recognize the 
tremendous value that FHA has contributed to our economy, 
particularly since the financial crisis. And we must be 
cautious about moving too precipitously to constrain FHA's 
role, being mindful of the fact that constricting credit too 
quickly could harm our housing recovery.
    Let's be clear about what FHA is and what it is not. 
Emerging out of the foreclosure crisis that occurred during the 
Great Depression, the FHA was instrumental in creating the 
long-term, fixed-rate mortgages that form the backbone of our 
housing finance system, and that millions of middle-class 
families have used to build their long-term economic security. 
In the wake of a 2008 financial crisis caused by poorly 
underwritten loans from the private sector, FHA was able to 
ramp up from its tiny pre-crisis market share and provide 
crucial liquidity.
    One estimate from Moody's Analytics found that if FHA went 
out of business in October of 2010, housing construction would 
have plunged 60 percent, home prices would have dropped an 
additional 25 percent, and our economy would have lost 3 
million jobs and a half-trillion dollars of economic output. So 
with that in mind, I am eager to hear from Commissioner Galante 
on how FHA is fulfilling its statutory mission while also 
taking steps to boost its finances in the wake of the financial 
crisis.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, the chairman of the Housing and Insurance 
Subcommittee, Mr. Neugebauer, for 2 minutes.
    Mr. Neugebauer. I thank you, Mr. Chairman.
    Oversight is an important aspect of what people in America 
expect from Congress, and this committee has tried to do 
oversight on a number of agencies, including FHA.
    An important part of that oversight process is making sure 
that we have information that is factual and that we can count 
on. And when we look at FHA, what we notice is that over the 
last 2 or 3 years, we have had people come and testify that 
things are okay at FHA, that they are getting better, and yet 
the facts don't prove that out. And each year, in fact, the 
projections were missed. What we have now learned is that this 
agency is in much more terrible financial shape than we were 
told it was going to be.
    It kind of reminds me of the story about the doctor who 
called his patient and said, ``I have some good news and I have 
some bad news.'' The patient said, ``Well, what is the bad 
news?'' The doctor said, ``Well, those tests that we did a few 
months ago, I misinterpreted them, and in fact, it turns out 
that you do have a terminal illness and you only have 6 months 
to live.'' The patient asked, ``Well, if that is the good news, 
what is the bad news?'' And the doctor said, ``Well, the bad 
news is I should have called you 6 months ago.''
    And I think where we are today is that it has been 
represented to us that FHA is on the course of recovery and 
being healthier, but in fact, it is not. If a CEO of a major 
company kept telling his shareholders that things were getting 
better, and they kept having poor earnings, that CEO would soon 
be removed.
    I think what is a cause of concern and hope that we will 
gain from this hearing today is, what is the true condition of 
FHA? But more importantly, what steps are being taken to remedy 
this so that we can put this entity back on track and take the 
taxpayers off the hook for having to fund another bailout.
    With that, Mr. Chairman, I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Missouri, Mr. Cleaver, for 2 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I am extremely pleased that we have the Commissioner here 
today. I was a bit concerned last week because, whether 
intentionally done or not, there were those who at least 
suggested that in part the recession was caused by FHA or that 
FHA played a major role. And I always think we ought to laud 
loudly and allege lightly.
    My concern today is that when you look at the facts, when 
the recession began we, FHA had almost 4 percent of the market, 
and I don't know how 4 percent of the market could essentially 
ransack the entire housing market. But the issue is that FHA, 
as Mr. Neugebauer said, does come before this committee and we 
have a responsibility for oversight. And I think we ought to do 
that. I think that it is important for the best information to 
be brought forward.
    And I will just suggest to everybody on the committee that 
if we eliminate FHA and CRA, we won't have anybody to blame. So 
let's at least get FHA healthy so that we can blame FHA in 
order to have somebody to blame. We need a scapegoat, and I 
think we can probably lay it on FHA.
    If we give up our power to change things, we do so because 
we are blaming instead of fixing.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from Minnesota, Mrs. Bachmann, for 2 minutes.
    Mrs. Bachmann. Thank you so much, Mr. Chairman.
    I think it is important for us to know where we are going, 
and for us to know where we are going, it seems to me prudent 
to know where we have been. And if there is anything that the 
years 2006, 2008 forward has shown us is that it isn't a very 
good idea for government to be forcing mortgage lenders to make 
loans to people who either: (a) can't pay the loan back; or (b) 
aren't willing to pay the loan back.
    One thing that is very concerning about FHA and its process 
of insuring loans is that loans that are being made to people 
who either have bad credit or have nearly no downpayment or 
nearly no income. And my question is, who is being helped by 
this situation? Especially when in 2008, FHA had something like 
28 percent of all of the mortgage insurance market, now they 
have doubled that to about 56 percent, and we are seeing that 
we could be on the hook--the taxpayers--for something like $16 
billion at a time when we are the brokest nation in the history 
of the world. And so it seems to me that we have to get a grip 
on this because it is deja vu all over again if we are going to 
continue this practice that could keep putting us back into 
bailout broke status.
    It is a good thing to have people at all income levels be 
able to get into a house, but it is only a good thing if they 
can keep that house, if they can pay for that house. So it is 
important for us to look at strategies. Maybe it would make 
more sense for people to have a little bit more skin in the 
game when they put money down; maybe it would make a little bit 
more sense to make sure that their income is stable; maybe it 
would make a little more sense to make sure that they have a 
good credit score.
    We want this industry to absolutely succeed wildly, but 
what government is doing right now is hurting the housing 
industry, and let's see how we can turn it around.
    Ms. Waters. Is it appropriate for me to ask for--to clear 
up the record on the statement of the gentlelady? Did she say 
we are the brokest nation in the history of the world?
    Chairman Hensarling. We could pull the record at a later 
time for the ranking member, but otherwise that question is not 
in order unless you want to take it out of the time of your--
    Mrs. Bachmann. And, Mr. Chairman, I would love to--
    Chairman Hensarling. I understand. I am sure you two could 
have a wonderful conversation after we get through opening 
statements--
    Mrs. Bachmann. I will be happy to offer substantiation for 
the record.
    Chairman Hensarling. --but we do want to get to the 
Commissioner in due time.
    The gentleman from Colorado, Mr. Perlmutter, is recognized 
for 2 minutes.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    I think we need to have a little lesson in history here, 
and I thank the Commissioner for being here, and really I want 
to thank the FHA for keeping the housing market alive from 2008 
until 2011, when the private sector has finally decided to get 
back into the housing market business. But the abuses under the 
Bush Administration from 2003 to 2007, when there was zero 
down, and no income showing, and the private sector was buying 
these kinds of loans and then we have the crash at the end of 
2007, 2008, where the whole housing market shrunk, and the only 
game in town was to get an FHA loan for most Americans. Without 
that, there would have been no housing market, and the 
recession would have been deeper than it was.
    And so clearly, the book of business between 2003 and 2007 
for the private sector or the public sector was bad. In 
Colorado, we see our housing market coming back pretty 
substantially.
    But the private sector still wants the best credit. I don't 
blame them. They want to make sure that everybody has a 750 or 
800 FICO score. I don't blame them.
    Most Americans don't have a lot of cash to be able to buy 
that home but they do have an income, and if we don't abuse the 
system, as we saw in the Bush Administration during those years 
of 2003, 2007, where people were getting loans that they never 
should have gotten, then we will have a strong housing market 
and the FHA needs to play a substantial role. The private 
sector will grow as the economy stabilizes.
    But thank goodness loans were being made during the time 
when the market fell apart. So clearly, like any government 
agency or any institution, it isn't perfect and there are 
things that can be fixed, but I just want to thank you for your 
testimony today in advance of what you have to say.
    Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Georgia, Mr. Scott, for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    First of all, the American people are pretty much sick and 
tired of this antigovernment, antigovernment. We need FHA today 
more than we ever needed it.
    When this economy went through the turmoil that we went 
through over the last 4 or 5 years, it was due to the downturn 
in the real estate market, the downturn in housing. No sector 
of our economy was affected more than housing. That is what 
dragged it down.
    But it was because we had an FHA that we were able to turn 
this thing around. If we have an example of where government 
works, FHA is at the center of this. The soundness of FHA is 
particularly vital to our national housing market.
    Why? Because it plays a critical role as a backstop to 
lenders if borrowers are unable to pay their mortgages through 
no fault of their own. We went through an extraordinary 
downturn in the employment. Thank God we had an FHA there.
    The guarantee that FHA offers enables banks to offer 
mortgages to potential borrowers with less desirable credit 
scores or lower incomes. This is America. We have a variety of 
income stratas.
    In 2010, FHA had a 19.1 percent share of the mortgage 
market, representing a substantial portion of the housing 
sector. And FHA is especially critical to minority homebuyers. 
Listen: No sector of our population was hit as hard as the 
African-American market, and through no fault of their own. 
They were steered into abusive lending practices, primarily 
because they were Black.
    Now, let me tell you something. In my State of Georgia, we 
ranked fourth in foreclosure in 2012. Each year in the last 4 
years, we gave foreclosure prevention programs. Without FHA, we 
would not--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Westmoreland, for 1 minute.
    Mr. Westmoreland. Thank you for having this hearing, and I 
hope that we can get FHA back to the original intent that it 
was created for: to help the first-time homebuyer and people 
who might not otherwise be able to attain a mortgage. But at 
the same time, I hope that we can also get the private sector--
private mortgage insurance writers--into the game because if 
they ran their business like the FHA has run their business, 
they would be out of business.
    And so, while we are trying to make sure that we keep a 
secondary market or availability for certain homebuyers, I 
think we need to do more to turn it back over. And I think if 
you look at what Secretary Donovan said in 2009: ``Based on 
current projections in absence of any catastrophic home price 
decline, FHA will not need to ask Congress and the American 
taxpayer for any bailout. Indeed, because of the quality of 
loans FHA is making today, the independent actuary expects this 
drop to be temporary and return about 2 percent within the next 
2 to 3 years.''
    And I hope there will be an explanation of why it said 
minus--
    Chairman Hensarling. The time--
    Mr. Westmoreland. --44--
    Chairman Hensarling. --of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, for 2 minutes.
    Mrs. Maloney. Thank you.
    And welcome Commissioner Galante, and congratulations on 
your confirmation.
    As one who represents one of the hardest hit areas by 
Hurricane Sandy, I want to thank you for the steps that you 
took to help the victims of the hurricane, including 
moratoriums on foreclosures, rental assistance to those who 
were displaced, and other significant assistance. We know that 
FHA was established after the Great Depression to be a backstop 
to housing, and it was designed to act as a countercyclical 
force in the market, ballooning in times of economic stress and 
contracting in times of economic prosperity.
    And we have seen a great flux in their market share. It has 
been as low as 3 percent of the market and it is currently 14.6 
percent of the market, but very importantly, it is down from 21 
percent in 2009.
    So there is no question that it plays a critical role in 
our housing finance system. We have a bipartisan, strong 
support that--and know that FHA fills a very important role for 
first-time homebuyers.
    Now, some have expressed some concern about the health of 
the fund. I share that concern and I wrote the Commissioner in 
November. I received her response of the steps that they are 
taking. I would like permission to place my letter and her 
response into the record and to note that they have taken 
important steps, specifically: raising the insurance premium 5 
times; selling distressed assets at an increased pace; 
implementing new downpayment and credit score requirements; and 
making changes to its reverse mortgage program.
    I would like to note and place into the record a Moody's 
analysis that has said that if FHA had closed its doors in 
October of 2010, home prices would have dropped an additional 
25 percent, and we would have lost an additional 3 million 
jobs. No one is keeping the private sector from coming in and 
helping, but if they are not there, FHA is there to help the 
housing and first-time homebuyers.
    Thank you.
    Chairman Hensarling. This morning, we welcome Carol Galante 
as our sole witness. She is the Commissioner of the Federal 
Housing Administration and the Assistant Secretary for Housing 
of the U.S. Department of Housing and Urban Development. She 
first joined HUD in May of 2009 as the Deputy Assistant 
Secretary for Multifamily Housing. Among other things, the 
Commissioner has direct responsibility for oversight and 
administration of the FHA's trillion dollar insurance 
portfolio.
    The witness will be here until 1 p.m.; thus, I will be very 
strict with the gavel for all Members.
    Commissioner Galante, you will be recognized for your 
requested 7 minutes to give an oral presentation of your 
testimony. And without objection, your full written statement 
will be made a part of the record.
    Commissioner Galante, you are now recognized.

 STATEMENT OF THE HONORABLE CAROL J. GALANTE, COMMISSIONER AND 
ASSISTANT SECRETARY FOR HOUSING, FEDERAL HOUSING ADMINISTRATION 
                             (FHA)

    Ms. Galante. Thank you.
    Good morning, Chairman Hensarling, Ranking Member Waters, 
and members of the committee. I appreciate the opportunity to 
appear before you to discuss the FHA and the critical role it 
has played in our Nation's housing finance system as well as 
policy changes enacted and needed to further strengthen the 
Mutual Mortgage Insurance (MMI) Fund.
    This is an important moment for our housing market and our 
Nation's economic recovery. There are encouraging signs: 
housing construction growing faster than it has since 2008, the 
strongest year of home sales since the economic crisis began, 
and rising home values lifting 1.4 million families above water 
in 2012.
    FHA's programs have been a critical component of this 
recovery. That should come as no surprise, given the program's 
goals and history. With the dual mission of providing access to 
homeownership to underserved and low-wealth populations, and 
acting as a stabilizing force during periods of economic 
stress, the FHA is designed to fill gaps in the market.
    It is clear that FHA has done just that. By ensuring needed 
liquidity in the Nation's mortgage finance markets, FHA was a 
vital stabilizing force as we experienced the worst economic 
decline since the Great Depression. In the last 4 years, the 
FHA has made homeownership possible for 3.5 million families, 
including 2.8 million first-time homebuyers, and for 50 percent 
of all African-American and Latino homebuyers in the last year. 
And Moody's Analytics estimates that were it not for the FHA's 
presence during the crisis, home prices would have fallen 
another 25 percent.
    While FHA has acted as a critical support, it was not 
immune to the stresses of falling home values and rising 
unemployment. According to the independent actuary's annual 
report on the MMI Fund, in 2012 the capital reserve ratio fell 
below zero to negative 1.44 percent, representing a value of 
negative $16.3 billion.
    Now, we take these findings extremely seriously. As 
stewards of taxpayer dollars we have, since the start of this 
Administration, made it a priority to strengthen the fund, and 
we are continuing to take aggressive action to return the fund 
to fiscal health, including action discussed in our annual 
report to Congress as well as additional changes announced last 
month.
    It is important to understand, as well, that the actuary's 
report does not in and of itself mean that it will be necessary 
for FHA to use its authority to draw from Treasury to reserve 
for projected losses over the next 30 years. While this is a 
possibility, it is dependent on several factors, including the 
estimates in the President's upcoming budget submission and the 
actions and activities of FHA throughout the remainder of the 
fiscal year.
    And let me assure you that: one, FHA has $31 billion in 
current reserves; and two, we remain committed to taking every 
action appropriate to protect taxpayers while continuing to 
ensure that FHA supports the stabilization of the housing 
market and that families have access to sustainable mortgage 
credit options.
    With the help of Congress, this Administration has already 
taken significant actions to protect and strengthen the fund, 
including: five separate premium increases; changes to credit 
policies such as increasing downpayments for certain borrowers, 
and ending seller-financed downpayment assistance; and better 
oversight and enforcement of FHA lenders. Were it not for the 
flexibility granted by Congress to FHA in 2010 in setting 
premium pricing, the current economic value of the MMI Fund 
would be more than $2 billion--I am sorry, $10 billion lower 
than it is today.
    Additionally, Congress paved the way for us to establish 
FHA's first ever office of risk management, which has been 
instrumental in strengthening oversight and implementing 
policies to better protect the fund. Together, our efforts to 
strengthen and protect FHA have added well over $32 billion to 
the fund, to date.
    As attested to by the actuary in its report and which can 
be seen in the slide shown here, the strong efforts of FHA to 
improve the quality of new FHA-insured loans have worked, as 
loans insured since 2010 are expected to be the most profitable 
and strongest in the agency's history. The reason for this is 
that we have made substantial progress in reducing losses from 
defaulted loans while simultaneously increasing revenues 
through premium increases and policy changes.
    These improvements are visible on the next slide, as you 
see here, as a result of loans insured since 2010 are projected 
to generate $20 billion in additional value for FHA.
    However, as the actuarial further protests, with fully $70 
billion in claims attributable to the 2007, 2009 books of 
business, there remains substantial additional work to be done 
to mitigate the impact of legacy loans insured during that 
time. That is why we have devoted significant attention to 
addressing the severe stresses placed on the fund by these 
loans, employing a number of innovative approaches to enhance 
the effectiveness of FHA's loss mitigation policies and reduce 
FHA's losses resulting from nonperforming assets.
    Under our existing authority, we have confronted FHA 
stresses at every point in the lending cycle, and in doing so, 
we have both strengthened FHA for the long term and set the 
stage for the return of private capital to the market. And in 
fact, our market share has been declining steadily since its 
peak in 2009 from a level of nearly 30 percent at that time to 
less than 15 percent today. At the same time, we recognize that 
this housing recovery is fragile, that access to credit remains 
critical to solidifying the recovery, and that FHA must balance 
these important goals as we proceed with changes that protect 
the fund.
    That said, with your help we could do even more to protect 
the fund while not damaging access to credit for responsible 
borrowers. We have developed a comprehensive list of additional 
risk management and lender enforcement authorities that will 
further enhance FHA's risk management and fiscal health. Many 
of these were included in the bipartisan reform legislation 
initiated by this committee and passed by the full House in the 
last Congress.
    I sincerely hope that we will once again be able to work 
together with Congress on efforts that protect FHA and 
strengthen its programs.
    Mr. Chairman, in addition to strengthening FHA's financial 
picture, there does remain a broader question as to FHA's role 
over the long term as we begin to look to a new system of 
housing finance in this country. As we work to create a safer, 
stronger, and more robust system of housing finance, where 
private capital plays a primary role and taxpayers are 
protected from unnecessary losses arising from the activities 
of private lenders, we must consider the place of FHA in that 
system. It is critically important that this work be done in a 
coordinated and comprehensive way where all components of the 
system are addressed in an interrelated manner.
    I believe that just as it has for nearly 80 years, FHA's 
mission will continue to remain relevant and important in 
providing a pathway to the middle class and quality, affordable 
housing opportunities for American families. And I look forward 
to working with this committee to strengthen, protect, and 
equip FHA to play this important role.
    I thank you very much, and I am happy to answer your 
questions.
    [The prepared statement of Commissioner Galante can be 
found on page 62 of the appendix.]
    Chairman Hensarling. Thank you, Commissioner.
    The Chair will yield himself 5 minutes at this time.
    Commissioner Galante, as bad as the picture appears from 
the independent actuary report, I fear that the true finances 
could potentially be even worse. Last week, we had testimony 
from Mr. Ed Pinto, a resident fellow at the AEI, who said, 
``Under Generally Accepted Accounting Principles, FHA has a 
current net worth today estimated at a negative $26 billion, 
meaning it has a total capital shortfall today of $47 billion, 
based on its 2 percent capital requirement.''
    Professor Joe Gyourko, who is a professor of real estate 
finance and business and public policy at the Wharton School of 
Business says, ``The FHA's main insurance program is materially 
undercapitalized with the likely amount of capital infusion 
required being in the $50 billion to $100 billion range.''
    Dr. Mark Calabria, who is the director of financial 
regulation studies at the Cato Institute, said, ``Relatively 
small changes in the performance of FHA's portfolio could 
result in significant losses to the taxpayer. Reasonably 
foreseeable changes to the FHA's performance could easily cost 
the taxpayer tens of billions of dollars, surpassing the 
ultimate cost of the Troubled Asset Relief Program bailouts, 
otherwise known as TARP.''
    Are you familiar with the studies and analysis of these 
economists?
    Ms. Galante. Some of them, yes.
    Chairman Hensarling. And do you have a critical analysis of 
them? Do you find them accurate or inaccurate?
    Ms. Galante. Mr. Chairman, what I would say is that the FHA 
is accounting for its projected losses over a 30-year period of 
time, and that is done under the Federal Credit Reform Act, put 
in place in 1990, which is when the first capital reserve ratio 
was also instituted for FHA. So--
    Chairman Hensarling. No, I understand that. But do you find 
the analysis correct or incorrect?
    Ms. Galante. I would say that they are trying to 
interpolate, from my understanding, how you would project 
losses under a totally different accounting system, so--
    Chairman Hensarling. Okay. If I could move on, can I have 
the chart I requested, please?
    With respect to projections, Commissioner Galante, my 
concern here is that for over a 4-year period the projections--
and one of these days this committee room will get larger 
screens--but this is not the first time that we have heard 
similar testimony. And in fact, last year the HUD Inspector 
General testified that FHA continues to project that current 
and future year books of business will be profitable and make 
up for these past year losses. But we have seen in the past 3 
years, it is a troubling trend whereby the point at which the 
fund is expected to reach its mandated capital level is pushed 
further into the future.
    So, if you look at the slope that goes down, that is the 
actual ratio in the fund, and the four lines that move upward 
are the predictions. And unfortunately, Commissioner Galante, 
not only has FHA been wrong, it has been wrong for 4 years in a 
row, and I started this hearing showing our National Debt 
Clock. It reminds me of the book written by Professors Reinhart 
and Rogoff entitled, ``This Time is Different'' about nations 
who encounter financial crises.
    And so I guess the question is, after 4 years of being 
wrong, why is this testimony different?
    Ms. Galante. Thank you, Mr. Chairman, for your question. 
Let me be clear about the actuarial projections. First of all, 
these are independent--it is an independent actuary and they 
rely on independent economic forecasts that are predicting--
forecasting--30 years' worth of house price appreciation, 
trends in interest rates, and how those economic forecasts will 
impact--
    Chairman Hensarling. But do you find fault with the audit?
    Ms. Galante. I would say this: projecting, you could ask 
100 different economists in 2008 what the house price 
projections were going to be and you would get 100 different 
answers. There are a couple--when you are projecting over 30 
years and you are projecting over 30 years at the depth of a 
crisis, being able to make those--
    Chairman Hensarling. I understand that, but it has been 4 
years in a row, and I am going to attempt to set a good 
example. I only have 30 seconds left.
    The Housing Act of 1934 says that the FHA ``shall ensure 
that the Mutual Mortgage Insurance Fund maintains a 2 percent 
capital ratio at all times.'' It doesn't say ``may,'' it 
doesn't say ``might,'' it doesn't say ``try;'' it says 
``shall.'' What should the consequences be that for 4 years 
running the agency has violated the law?
    Ms. Galante. Again, Mr. Chairman, the 2 percent capital 
ratio is a--not meeting it is a finding in our audit. We take 
that seriously. We have been working as hard as we can to make 
policy changes so that we can get back to that capital ratio.
    Chairman Hensarling. I thank you.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you very much.
    Ms. Galante, I am very pleased that you are here today 
because this is one of the subjects on which we have had so 
much misleading information. For example: the FHA is crowding 
out competing with the private market; the FHA has an unfair 
advantage over the private market. It was suggested in the last 
hearing that FHA represents 56 percent of the market, but I 
understand and I think your testimony just a moment ago said it 
is closer to 15 percent. Is that correct?
    Ms. Galante. Yes, Ranking Member Waters. Let me just say 
this: There is the total housing market, which is the refinance 
and home purchase market, so we have gone from the peak of 30 
percent down to less than 15 percent of the total market. On 
the purchase market, we have also receded--we were higher. We 
have also receded significantly.
    And of the private mortgage--of the mortgage insurance 
market, I think the number quoted of 56 percent, we are now 
more like--and there is a slide in your deck--slides four and 
five--that clearly demonstrate that we have been coming down 
even as a share of the mortgage insurance market down to more 
like 42 percent, and you can see that the private mortgage 
insurers are on their way back up.
    Ms. Waters. Thank you. I think it is important to get that 
into the record.
    The other statements we have heard basically--and as our 
chairman just pursued this discussion--the FHA, and 
specifically the Mutual Mortgage Insurance Fund, is broke. Now, 
according to data from the FHA actuarial report in fiscal year 
2012, the capital reserve ratio of the agency's primary 
insurance fund fell below zero to negative 1.44 percent and the 
fund's economic value stands at negative $16.3 billion.
    The economic value refers to the amount that would be 
needed for FHA to meet all its expected claims over the next 30 
years if FHA closed its doors tomorrow and had no business to 
offset those claims. The FHA still has--I will let you say it. 
How much money does the FHA still have to settle insurance 
claims as they come in?
    Ms. Galante. A couple of points on that, Congresswoman. 
First, we have $31 billion in reserves against those projected 
losses. And as you stated, there is additional revenue coming 
in every year from these very profitable books of business from 
2010 on. So on an ongoing basis, on a cash flow basis, there is 
certainly money there to pay the claims.
    Ms. Waters. And is it true that in addition to the $30.4 
billion to settle insurance claims as they come in, you 
basically have enough cash for at least 7 to 10 years?
    Ms. Galante. Yes. Again, we have ongoing business and the 
actuarial, by the design of the way the capital ratio is 
calculated, does not include any future revenue from future 
business.
    Ms. Waters. And finally, the FHA is essentially a subprime 
lender. That is what some of my friends on the opposite side of 
the aisle have been saying, that it gives risky loans to low 
FICO score borrowers. Would you comment on that, please?
    Ms. Galante. I would just say this: FHA has always been 30-
year, fixed-rate, fully documented, serving a broad range of 
borrowers with a focus on lower-wealth individuals. These are 
sustainable mortgages for the families who are taking them out. 
Now, during the--
    Ms. Waters. Madam, in the few minutes that you have, where 
you are being accused of being subprime lender, did you do-no 
documentation loans?
    Ms. Galante. No, we did not.
    Ms. Waters. Do you do resets with teaser loans?
    Ms. Galante. No, we do not.
    Ms. Waters. Do you do all of your loans going to jumbos, or 
how--would you explain exactly what the mission is and what you 
are trying to do?
    Ms. Galante. Yes. Again, our mission is dual, both to be a 
countercyclical force when needed in the market, and also to 
serve lower-wealth borrowers to access credit and be able to 
purchase or refinance a home.
    Ms. Waters. What would you ask this Congress to do 
legislatively that would make your job easier, to help you 
fulfill the mission?
    Ms. Galante. Yes. We have put forth a number of items in 
our report to Congress, including additional authority to 
enforce against lenders on a wider geographic basis. There is a 
whole class of lenders for which we do not have indemnification 
authority. And I would also add, in particular, we have not 
talked a lot about the reverse mortgage program, but it has 
some serious challenges, and we are asking for some emergency 
authority there.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer.
    Mr. Neugebauer. I thank the chairman. Mr. Chairman, just 
for the record, I wanted to clear that there have been some 
numbers thrown around. According to GAO, this is the third 
quarter 2012 FHA's market share of insured market in terms of 
numbers of loans: the Federal Housing Administration, 56.4 
percent; private mortgage insurance, 19.7 percent; and 
Department of Veterans Affairs, 23.9 percent. So obviously, the 
taxpayers are the big insurers of mortgages in this country.
    Ms. Galante, thank you for coming. I enjoyed our visit the 
other day.
    I really don't know where to start other than in my opening 
statement, I think the point I tried to make is, do you 
actually know where you all are? When we see the numbers that 
the chairman put up there where we see projections, we come 
back next year and it turns out those weren't the numbers, and 
you have an entity that, according to the study, actually has a 
negative net worth, but you reported that you have about $38 
billion in reserves, but you are running a $1.1 trillion 
entity, so you are running an entity that is leveraged 36 to 
one, and so that is a 2.7 percent capital ratio.
    Any kind of financial institution in this country that had 
those numbers would be under some sort of cease-and-desist 
order. And then you look at the numbers currently right now of 
your delinquency rates. For example, in 2012: first quarter, it 
was 12 percent; second quarter, it was 11.89 percent; and third 
quarter, it was 11.14 percent. So an entity that is making 
financial transactions with those kinds of delinquencies with, 
according to the study that was done, has a negative net worth 
but according to you has a 2 percent net worth.
    The question is--and I think the other point I would make 
is, you don't even pay your operating expenses out of that 
fund. The taxpayers pay the operating expenses. So does the 
accounting that we are using now allow you to actually manage 
this entity?
    Ms. Galante. There are a number of different questions 
embedded there, Congressman. Let me just talk about the 
delinquency rates. To be clear, you have to divide this by 
cohort year, because we have serious--if you look, again, back 
at that original chart--we have some serious stress from older 
books of business, and those delinquencies are much higher. The 
delinquencies in our new book that we are writing insurance on 
now are extremely low.
    Mr. Neugebauer. But, Ms. Galante, I don't--I have a limited 
amount of time. A delinquency is a delinquency. Just because it 
is not as bad as it used to be, but it is bad over here, I have 
to look at--my oversight is the entire entity, and so you have 
some problems here. And the question is, do you have enough 
reserves to carry that? Some people say that you don't. I 
question whether you even know what reserves you need, so how 
do you then price your product if you don't know where you are?
    Ms. Galante. That is a very good question. Let me just be 
clear. These long-term economic projections have volatility. 
That does not mean that we are not monitoring the portfolio for 
the delinquency rates and getting rid of policies like the 
seller-assisted finance program that cost $14 billion. We would 
be above zero. We would have an economic value of almost $2 
billion if it weren't for that seller-financed program. So, we 
got rid of it.
    We are monitoring the portfolio for that kind of activity 
all the time. One of our actions that we just took was to 
ensure that we did not cancel the mortgage insurance premium 
prematurely, that again was a policy that was being done in the 
past that negatively affected economic values.
    So we are, with our new risk management activities, clearly 
monitoring this portfolio on an ongoing basis.
    Mr. Neugebauer. Thank you. And I think the question is, the 
reason accounting is so important--and I am an old bean 
counter; I have an accounting degree--is that knowing what your 
product costs is an important part of pricing it. And you have 
some tools that are available to you that you are not 
necessarily using. I know you just raised the G.P. about 10 
basis points but you actually could have raised it 30 basis 
points. The up-front premiums--you still have some room to 
charge additional premium there.
    I just question, if you don't know where you are, then how 
can you utilize those tools effectively, and shouldn't--given 
the financial picture that is painted before you today, 
shouldn't you be more aggressive in trying to restore this fund 
to at least the congressionally requested levels?
    Chairman Hensarling. The time of the gentleman has expired, 
so an incredibly brief answer, Ms. Galante?
    Ms. Galante. My answer on the premiums is that we have 
raised premiums 5 times, and we think that is the right place 
for the pricing of the risk that we are taking on for these new 
loans. And we have to be careful about pricing new borrowers to 
pay for the challenges of the past. We will clearly damage 
access to credit if we do that.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. Thank you.
    I know that FHA worked very hard in response to the 
devastating effects of Superstorm Sandy, which hurt New York 
and my district particularly hard, as well as 23 other States, 
primarily New Jersey and Connecticut. Can you talk about some 
of the actions that FHA took to respond to help people? 
Specifically, what did you do to help homeowners who were 
affected?
    Ms. Galante. Yes, thank you. You know that Secretary 
Donovan leads the Sandy Rebuilding Task Force and he is very 
concerned that we help homeowners and renters alike during this 
crisis. And FHA, in conjunction with Fannie Mae and Freddie 
Mac, extended moratoriums another 90 days on both evictions as 
well as foreclosures that were already in process.
    And today, I am pleased to say that we are expediting--we 
are putting out guidance that we are going to expedite 
processing for multifamily properties that would like to come 
in for FHA multifamily insurance. So we are doing everything 
that we can to help the storm victims.
    Mrs. Maloney. Earlier, you responded to some questions from 
the ranking member on really abusive practices--predatory 
practices that came from the private sector and cost many 
homeowners their homes, which ended up in foreclosures. Another 
predatory practice that I am hearing complaints about from my 
constituents is the practice of a--when they do try to pay down 
their loan, they are getting a prepayment penalty. What is the 
policy of FHA on prepayment penalties? Do you have--
    Ms. Galante. I don't believe we have prepayment penalties.
    Mrs. Maloney. That is another example of how FHA is really 
helping first-time homeowners and homebuyers by not practicing 
these abusive practices. It was not FHA that came out with the 
no-doc loans; it was not FHA that said you didn't have to put 
anything down; it wasn't FHA that came out with the predatory 
practices that contributed so heavily to the financial crisis 
that FHA is helping us respond to and helping homeowners to 
stay in their homes.
    Can you go over some of the steps that you have taken in 
terms of improving risk management that some of my colleagues 
seem tremendously concerned about?
    Ms. Galante. Yes. As I have said, we have increased 
premiums 5 times. We have revised downpayment requirements for 
borrowers with 580 FICO scores or below to 10 percent. We 
recently have tightened on borrowers with credit scores of 620 
and under that they need to have a demonstrated no greater than 
43 percent what we call debt-to-income ratio without additional 
compensating factors. So, we have looked at areas where the 
credit box needs to be tightened a bit.
    We have also looked at increasing premiums to ensure that 
we are paying for or compensating for any risks that we are 
taking. Those are just a few of the actions that we have taken 
over the past couple of years.
    Mrs. Maloney. Both the chairman and the ranking member have 
placed GSE reform as one of the top priorities for this 
committee to address and try to settle and to make a priority 
of our work on the committee. Many have said that you can't 
have GSE reform without a strong FHA program. Could you 
elaborate on that?
    Ms. Galante. I--
    Mrs. Maloney. What role--
    Ms. Galante. I think it is critically important as we go 
into looking at GSE reform, broader housing finance reform, 
that we look at the role of FHA simultaneously, and moves that 
might be made relative to restructuring the housing finance 
system with respect to the GSEs, that we also ensure that we 
understand what the role of FHA is as part of that entire 
system, as opposed to trying to take this in piecemeal.
    Mrs. Maloney. Thank you. I think your comments are very 
relevant to the task that we have with GSE reform.
    Thank you for your service.
    Ms. Galante. Thank you.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from North Caroline, 
Mr. McHenry, for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman.
    Ms. Galante, I certainly appreciate your testimony and 
thank you for your service to your government.
    Now, in looking at the FHA delinquency rate, your 
delinquency rate was 11.14 percent and the seriously delinquent 
rate was 8.54 percent. Together, that is almost 20 percent.
    Your delinquency rate is 2\1/2\ times that of the whole 
mortgage industry, and so added together, that 20 percent 
delinquency rate means that nearly one in five FHA-insured 
loans goes into default. In looking at this statistic, I look 
at something that Senator Elizabeth Warren once said to justify 
the creation of the Consumer Financial Protection Bureau: ``It 
is impossible to buy a toaster that has a one-in-five chance of 
bursting into flames and burning down your house, but it is 
possible to refinance an existing home with a mortgage that has 
that same one-in-five chance of putting the family out on the 
street.''
    Now, since FHA performs no better than that one-in-five 
chance that Senator Warren references, that unacceptable 
default rate, how can you justify that FHA is actually helping 
rather than hurting average homebuyers?
    Ms. Galante. Congressman, just to be clear about these 
numbers, because I think we are conflating a couple of 
different things, our seriously delinquent rate is a little 
over 9 percent--9.5 percent--
    Mr. McHenry. I am sorry. I referenced 8.54 percent, so that 
is higher. I am sorry.
    Ms. Galante. But you are adding to that people who are not 
seriously delinquent, they may be 30 days delinquent, and 
adding those together to get to your numbers. We have one in 10 
who actually fail and go into some kind of foreclosure. So you 
can be seriously delinquent, you can be 30 days delinquent, and 
we have loss mitigation programs for folks, we have 
modification programs. We work with borrowers to get them out 
of delinquency, and that--just because you have missed a 
payment and you are ``30 days delinquent,'' does not mean that 
you have failed in making--
    Mr. McHenry. I certainly appreciate your response, but your 
rate is 2\1/2\ times that of the rest of the industry. That is 
my comparison.
    Ms. Galante. I would like to address that. Let's be clear. 
We don't have as good a delinquency rate as the lenders who 
will only lend to people at an 800 FICO score and who have lots 
of wealth to put down--20, 30 percent downpayment, who don't 
need our help. We do generally focus on a borrower population 
that still can be very successful but--
    Mr. McHenry. I appreciate the fact you don't have the 
numbers in front of you. But my point of reference here is that 
for your prime loans--that portfolio of prime loans--and I 
appreciate getting the message; perhaps you can give more flesh 
to what you just said--but the comparison for FHA prime loans 
to the mortgage industry's prime loans, your default--your 
delinquency rate is 2\1/2\ times that. Is that acceptable?
    Ms. Galante. Again, FHA is designed to fill in market gaps. 
We are designed to provide access to credit and--
    Mr. McHenry. I understand your design. I have read the law.
    Ms. Galante. Yes.
    Mr. McHenry. With all due respect, I have read the law. I 
am giving you statistics from the DBA Delinquency Survey for 
the third quarter of 2012. So I understand you are quibbling 
with my statistics. Tell me what the acceptable delinquency 
rate is for FHA.
    Ms. Galante. I would just say this: We have borrowers who 
ultimately, on average, over time are not successful, so they 
are subject to foreclosure is a 10 percent number.
    Mr. McHenry. And is that acceptable?
    Ms. Galante. I believe that on average, across 40 years, 
across all different kinds of borrowers--if 90 percent of our 
borrowers are going to be successful, a 10 percent rate is--we 
would like to get it lower. It is certainly lower for our new 
populations moving forward. But I don't think that is 
unacceptable, no.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    And, Commissioner, thank you for your testimony. I would 
like to give you an opportunity to once and for all discuss 
whether or not FHA forces lenders to make loans or make loans 
to unqualified borrowers.
    Ms. Galante. Thank you. Certainly, FHA does not force 
lenders to make any loans. We make insurance available to 
lenders who are willing and able to underwrite loans to our 
standards. I would actually say that one of the biggest 
challenges that we haven't talked about here today is that we 
have lenders who won't lend even to the FHA standards, that 
they are creating lender overlays on top of that because of 
concerns that they have.
    Ms. Velazquez. Thank you.
    The Fiscal Year 2012 actuarial report emphasized that the 
predicted default within FHA's portfolio was focused on loans 
endorsed between 2007 and 2009. Would you please explain the 
characteristics of these loans and the borrowers?
    Ms. Galante. The characteristics of those borrowers?
    Ms. Velazquez. Yes.
    Ms. Galante. So the characteristics of those--
    Ms. Velazquez. At risk of default.
    Ms. Galante. At a risk of default?
    Ms. Velazquez. Yes.
    Ms. Galante. I would just say that these borrowers are 
often in places that have been subject to the greatest economic 
distress that has occurred in this country, so areas of high 
unemployment that they were impacted by, where jobs have left 
and they lost jobs. They are concentrated in areas where there 
has been the most serious economic distress.
    Ms. Velazquez. Can we discuss the loans that FHA insured 
from 2010 onward that have been performing extremely well? Why 
have these loans insured between 2010 to 2012 been so 
successful?
    Ms. Galante. They have been successful for a number of 
reasons. One, we have increased our premiums so we have more 
revenue coming in to protect ourselves from the risk. The other 
reason they have been successful is they are fully underwritten 
and they are being underwritten at a time when economic 
circumstances are better, and they are successful for those 
reasons.
    Ms. Velazquez. And do you believe that the success of these 
types of loans between 2010, 2012 insured by FHA can be 
replicated in future business?
    Ms. Galante. Yes, I do. And again, I would just go back to 
say one other element, which is, to some extent we would like 
to see lenders lend to a broader range than they are currently 
lending to in terms of the overall FHA population of loans.
    Ms. Velazquez. Many critics of FHA believe the private 
sector can effectively duplicate the agency's mortgage 
insurance services when it returns to the market. Do you 
believe that this is the case, particularly for low-income, 
minority, and first-time homebuyers?
    Ms. Galante. I do not believe that the private market can 
fully take care of all the borrowers that FHA takes care of, 
and I think you are going to witness that at the height of the 
crisis. That private capital fled and it really was FHA that 
was there for minority homebuyers.
    Home purchase mortgages dropped 50 percent for the entire 
White population. It dropped 65 percent for African Americans 
and Latinos. Those borrowers were even more negatively impacted 
than the broader market.
    Ms. Velazquez. During the hearing last week, some of the 
witnesses argued that FHA is crowding out private investors. Do 
you believe that is the case? Is the private sector in fact 
ready to return to the market?
    Ms. Galante. I think that the private market is starting to 
return and they are starting to return because they are seeing 
some economic recovery. They are seeing some strength in the 
housing market and that is a positive sign. And I think the 
charts that I have showed indicate that is continuing to come 
back.
    But one point that I think is really important here is that 
the total market shrunk during this crisis and it has not come 
close to coming back. So while FHA went up a little bit and now 
it has come down, there is a whole area we didn't step into but 
no one else has either.
    Ms. Velazquez. Thank you.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from Minnesota, Mrs. Bachmann.
    Mrs. Bachmann. Thank you so much.
    I really was troubled by these delinquency rate numbers 
that Mr. McHenry brought up, because it really concerns me when 
I am reading that the MBA Delinquency Survey for all loans 
nationwide is 7.4 percent, and then you look at the FHA and it 
is over 11 percent, 2\1/2\ times the rate of prime loans, and 
the seriously delinquent rate is 8.54 percent.
    Delinquency is a big deal, because in my home State of 
Minnesota, we had 13 private banks that fell below their 
capital requirements, and when that happened the FDIC came in, 
and they were put in receivership. But when the FHA has fallen 
below their capital requirements, their market share has only 
grown.
    So this makes me very, very nervous and I think it is 
making taxpayers very, very nervous. And so my question is, is 
the FHA meant to be funded by the taxpayers?
    Ms. Galante. Thank you, Congresswoman.
    FHA is intended to, again, price its risk and be able to--
    Mrs. Bachmann. But your funding. Are you intended to be 
funded by the taxpayers?
    Ms. Galante. Over the long term, we are intended on a day 
in, day out basis to be able to be self-sustaining.
    Mrs. Bachmann. But you would agree that you are not self-
sustaining right now?
    Ms. Galante. What I would say is that we have a negative 
capital ratio, right--
    Mrs. Bachmann. And that is what makes me nervous.
    Ms. Galante. Yes.
    Mrs. Bachmann. So what I want to know is, what percentage 
chance do you think that taxpayers will have to bail out the 
FHA sometime in the next 15 years if this trend continues on 
defaults?
    Ms. Galante. First of all, again, we have been--we have 
talked about this. The trend is much, much better than it was 
as a result of the economic crisis, and now that we are in 
recovery those trends are--
    Mrs. Bachmann. But the trend on default isn't good. The 
trend on default is over 11 percent.
    Now, let me ask you this: The FHA does have risk assessment 
practices, right?
    Ms. Galante. That is correct.
    Mrs. Bachmann. You have them. That would include things 
like credit scores, downpayments, people's income. I would 
assume those are things that you take into account?
    Ms. Galante. Yes. Again, lenders make these loans under our 
requirements.
    Mrs. Bachmann. Right. And you said that you changed these 
risk requirements about 5 times, I think you said. You 
increased premiums and you talked about the FICO score, if they 
are below 580, they have to have a 10 percent downpayment; if 
they are 620--so you are talking about those scores. But when 
you look at conventional lending, usually your credit score has 
to be above 700, a minimum 650, usually with 20 percent down.
    So if the FHA is going to keep on taking risks by insuring 
so many people who have low credit scores, almost no 
downpayment, and almost no income to pay for a mortgage, how 
does the FHA differ from predatory lending practices?
    Ms. Galante. Again, Congresswoman, FHA is designed to deal 
with lower-wealth borrowers and it is appropriate for us to be 
taking different kinds of risks than the private market in and 
of itself would do. That is the point of having an FHA.
    Mrs. Bachmann. But wouldn't you agree that poor people are 
better off if they could be able to hold onto their home and 
stay there and live there? And wouldn't you agree that it would 
be far better practice for our government if we would want to 
help people to own the assets that they put in their home so 
that we are rewarding people who are able to pay their bills? 
Because wouldn't you agree that it really hurts a person to 
lose their home and it hurts their credit?
    Ms. Galante. It is devastating for a person to lose their 
home, and I just want to be clear: Again, 90 percent of our FHA 
borrowers are ultimately successful. You cannot look at what 
FHA does and who it helps and not see that we have really 
helped millions of families--
    Mrs. Bachmann. But your default rate is 2\1/2\ times worse. 
That is really what the problem is, isn't it? Because it is 
devastating right now and we are looking at putting the 
taxpayers on the hook for that unconscionable level of default. 
That is what we are nervous about is this trend and trajectory 
that it seems like you want to continue because your lending 
practices are in the realm of predatory lending that we have 
been trying to mitigate against.
    Ms. Galante. You really--I am sorry, but you have this 
backwards, okay? We have had higher defaults through the 
economically distressed books of business where default rates 
are higher. You trend those forward, you blend those with now 
what are very, very low delinquencies, and our borrowers are 
going to be even more successful moving forward because we got 
rid of--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognized the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Thank you.
    Just a couple of opening statement remarks.
    Yes, but, my colleague in Minnesota, you can close down 
this or that bank because it doesn't have the capital. The 
depositors are insured and people needing banking services can 
just walk down the block and go to a different bank.
    If we shut down the FHA--if we had done that, we would have 
had a 25 percent further decline in home values, a cost to 
American families of well over $3 trillion, a double-dip 
recession, and the effect on our debt would have been so big 
that when the chairman put up the debt on the screen, we would 
need to equip this room with bigger television sets, if you 
imagine what our debt would be if there was no FHA, if there 
was an additional 25 percent decline in home values.
    You have indicated to us that you would like additional 
tools to manage the risk of the Mutual Mortgage Insurance Fund, 
but many of those tools were in legislation passed by this 
committee and passed by the House. Could you just quickly 
outline what are the tools that you need and were most or all 
of them in that bill?
    Ms. Galante. Yes, thank you. Most of them were in that 
bill, and again, that includes indemnification authority for 
certain lenders so that we can hold lenders accountable if they 
don't follow our underwriting standards, a greater ability to 
terminate FHA approval of lenders on a larger geographic basis 
than just individual areas, more flexibility in how we deal 
with our compare ratio, so again, we can hold lenders 
accountable.
    So those are the actions that we are asking for, and then 
to deal with the reverse mortgage program. Those are the 
actions we are asking for moving forward. The reverse mortgage 
program one was not in the prior reform bill but is something 
that we are asking for today.
    Mr. Sherman. This recession is something beyond what most 
Americans have lived through in the past, but in the 1980s, in 
the big oil-producing States, we had a big downturn in the 
1980s, not for the whole country but for Texas, Oklahoma, and 
Louisiana. And isn't it true that at that time the FHA was the 
primary lender in those States? The FHA helped stabilize prices 
and over time the private market returned on its own?
    Ms. Galante. Yes. My understanding is that is correct and 
it is a perfect example of FHA staying in a market when others 
leave and receding as appropriate.
    Mr. Sherman. So, like the gunslinger--like the hero of 
western movies, you came into town--a place like Texas or 
Oklahoma--restored order, and pretty much left town.
    Ms. Galante. I like the image.
    Mr. Sherman. Now, some say that the FHA has gone beyond its 
mission, but aren't you actually serving exactly what your 
mission is designed for, and that is to serve private market 
when the private market is unable or unwilling to participate?
    Ms. Galante. Absolutely. And I think if you were to look at 
slide 5 on the deck that I handed out, if you look at how 
private capital literally precipitously just fell off in 2007 
through 2008 and FHA was there to pick up as much of the volume 
as we could in that very short period of time, and that is 
exactly what we were designed to do.
    Mr. Sherman. I represent an area that the statisticians 
would say is a little wealthier than the rest of the country. 
It is really just our--the home prices are higher, and one of 
the 12 high-cost areas in the country where your limit is at 
$729,000. If it wasn't for your limit being that high, all the 
nicer homes in my area would have dropped precipitously in 
value and then the homes a few blocks or miles away would have 
also dropped as well.
    Are you pricing your current guarantees, and particularly 
for those up between $625,000 and $729,000, high enough so that 
you are charging a bit more than the risk you are taking and 
making a profit for the Federal Government?
    Ms. Galante. Yes, sir, we are. And, again, we--it is a bit 
of an aberration that FHA has those high limits but it was 
necessary during the crisis. And we have instituted both higher 
premiums than the rest of our book of business for those higher 
loans, and we also just recently increased downpayment 
requirements for those loans as well.
    Mr. Sherman. So you are making money for the Federal 
Government that--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Alabama, the 
chairman emeritus, Mr. Bachus, for 5 minutes.
    Mr. Bachus. In the first 20 years of FHA's existence, there 
were 5,000 claims made. In other words, 5,000 mortgages fell 
into default or foreclosure, and that was out of almost 3 
million that were made. Today, you are making--there are over 7 
million mortgages outstanding and yet you are having 12,000 
claims every month.
    You had 5,000 in the first 20 years of existence of FHA, so 
you are actually having more about every 10 or 12 days than you 
had in the first 20 years. And let me show you--I don't know if 
you can see--you have in front of you two charts. One shows 
that the default rate--now, this is on the 2010--that families 
with FHA mortgages are defaulting at about what appears to be 
over 10 times the amount of Fannie mortgages and the same for 
MGIC.
    Does that greatly disturb you--that foreclosure rate?
    Ms. Galante. Again, I am not sure which chart we are 
referring to. On this one with the large spike, one thing that 
troubles me about this chart is it is not to a reasonable 
scale. You have left off 1967 through 2006--
    Mr. Bachus. No, 1967 is--this is all in there. Didn't it 
start going up in--when did it start--when did you take this 
chart increase?
    Ms. Galante. I think that if you put this on a proper 
scale, it is not as sharp an increase as it would otherwise 
appear--
    Mr. Bachus. Let me ask you this: From 1954 to 2003, it was 
less than two. Now on any scale it is above--it is above 18 
today. Is that not correct?
    Ms. Galante. I am not sure that is correct.
    Mr. Bachus. So you are saying--
    Ms. Galante. Again, I am just looking at this for the first 
time so it is a little hard to look at these numbers--
    Mr. Bachus. So you are saying there has not been a great 
increase in foreclosures?
    Ms. Galante. Again, you have to look at this over time. 
Were there significant--
    Mr. Bachus. I am trying to do that.
    Ms. Galante. --increases in foreclosures at the height of 
the economic crisis? Absolutely.
    Mr. Bachus. Let's go to the second one, then, okay? Let's 
just take 2000--let's just take the 2010 book. Now, you don't 
have a problem with this chart, do you? And it shows a 
delinquency rate of above 5 percent.
    Ms. Galante. Yes. Again, I don't know the definition of the 
seriously delinquent in this chart compared to the way we do 
seriously delinquent--
    Mr. Bachus. If you will see up there, it defines it. It is 
5 percent. Do you consider that 5 percent of the insured loans 
in the 2010 book is a serious delinquency? If it is not above 5 
percent, it used to be almost, as you can see from this first 
chart, even in 1954, it was almost nonexistent. But what is the 
delinquency rate today of the 2010 book? And that is the last 
one I think we have any records of. Can you--
    Ms. Galante. So again, our overall seriously delinquent 
rate is 9.4 percent--
    Mr. Bachus. 9.4?
    Ms. Galante. --today. ``Seriously'' means 90 days. But I do 
want--
    Mr. Bachus. So the way I computed it, actually it is 
greater than--and I was trying to be conservative.
    Ms. Galante. I am just--I am trying to be direct with you 
here. Again, I will go back to the point I made to 
Congresswoman Bachmann. Seriously delinquent, 90 days late, 
does not--is not a failed loan. It is not a loan that 
ultimately goes into foreclosure. That is a different rate.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from New York, Mr. 
Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    Commissioner, it is good to see you. And I am walking in 
and this is the second hearing that we have had, and I know if 
it wasn't for FHA, I might not even be sitting here, because my 
experience was with my parents when they first bought their 
home if it wasn't for FHA--their mission was to get 
individuals. We were in public housing and it was the dream of 
my parents to own a home, and they could not get a conventional 
loan or anything of that nature. The only way that they were 
able to own a home was through an FHA loan.
    And I understood that was the mission of FHA, to help 
individuals who may otherwise not be able to enjoy or live the 
American dream, help make that happen. And so they did that and 
my parents never missed a mortgage payment and going forward.
    So just listening back and forth sometimes I get confused. 
Has the historical role of FHA--has that changed or is that 
still the same today?
    Ms. Galante. It has not changed.
    Mr. Meeks. So it is still today, and could you give us an 
idea of what the housing market would look like today, 
particularly for a family like mine, an African American who 
comes from public housing, or a Hispanic who--their parents are 
working hard every day trying to make a living--what would that 
market look like today? Would my parents have a chance today to 
get a mortgage or something of that nature without an FHA?
    Ms. Galante. Again, today 50 percent of all African-
American and Latino families are using FHA in order to purchase 
a home, so we are a very large share of credit availability for 
the minority community.
    Mr. Meeks. And what about individuals, no matter what their 
ethnicity is, this is their first time they want to buy a 
house? They have been struggling and they just got out of 
college, and just got married or something, and the first time 
they want to buy a house--is the FHA--will they--is that part 
of their mission, too? Can they be helpful in that?
    Ms. Galante. Absolutely. First-time homebuyers are very 
much a part of our mission. Close to 80 percent of the 
mortgages we make in the purchase area are for first-time 
homebuyers.
    Mr. Meeks. So, and that also, then, stimulates the economy, 
wouldn't you say? That, in fact, I think that there was a Mark 
Zandi from Moody's who said that in 2010, without the FHA, we 
would have had 3 million fewer jobs and a 2 percent decrease in 
GDP, and that in 2011, approximately half of all African 
Americans and Latinos who purchased homes did so, as you have 
indicated, through FHA.
    So it is clear, I think, then, that FHA has been playing a 
positive and supporting role in helping and moving the economy 
forward and making--I think you just testified that the Federal 
Government, at least while President Obama has been President, 
has been making a pretty good return on its rate to the 
taxpayers and to the Federal Government. Is that not correct?
    Ms. Galante. Yes. Again, the loans we have been making and 
the premiums that we have been charging for those loans since 
2010--again, with the help of Congress, in order to be able to 
increase those premiums, are extremely profitable and are 
projected to be extremely profitable for the Federal Government 
moving forward. And we really just have this challenge of 
dealing with the crisis and the challenges that remain from 
there.
    And just to go back to Congressman Bachus' point for a 
minute, our seriously delinquent rate overall is 9.5 percent. 
It is now much lower. For 2010, it was 5 percent; it is even 
lower for 2011 and 2012.
    Mr. Meeks. Let me ask--at last week's hearing also, one of 
the witnesses questioned the necessity of having FHA provide a 
100 percent insurance guarantee and suggested that Congress 
reduce the guarantee to 25 or 50 percent, which is currently 
the policy used by the V.A. Could you discuss some of the key 
factors for why it is important for the FHA to provide a 100 
percent guarantee and some of the key differences between the 
FHA and the V.A. programs?
    Ms. Galante. Yes. So the V.A. program obviously is limited 
to eligible applicants from the--from Federal service in the 
military and so they are a smaller population of people who are 
eligible for the V.A. I think the idea of how much a government 
guarantee should be on any particular loan, there is a 
reasonable conversation to have there in terms of the pros and 
cons, right? And I do believe that the V.A. has a totally 
different structure for how they underwrite their population.
    Mr. Meeks. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Westmoreland, for 5 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    And, ma'am, my first two questions are just simple yes or 
nos. Are you familiar with the GAO high-risk list?
    Ms. Galante. Yes.
    Mr. Westmoreland. Is FHA on that list? Are they included in 
the high-risk category?
    Ms. Galante. Not today, no.
    Mr. Westmoreland. Let me say that there is some type of 
misconception that maybe this side wants to do away with FHA. 
We do not want to do away with FHA.
    We really agree with your statements about phasing out the 
countercyclical role of reducing FHA's footprint in the 
marketplace. We agree with the President when he says that 
going forward, we will coordinate reforms of Fannie Mae and 
Freddie Mac with changes at FHA to help insure the private 
market, not FHA fills the market opportunities created by 
reform.
    But for some reason, the other side seems to think we want 
to do away with FHA. We want to strengthen FHA. We want to make 
sure FHA is there. I am a builder by trade. I want FHA there. I 
want people to buy homes.
    And so, that is some type of misconception. We just want it 
to be on good, sound footing, just like you do and just like 
the President does.
    The other comment that the President made in the White 
Paper that he issued on GSEs in 2011 says the Administration 
will make sure that creditworthy borrowers who have incomes up 
to the medium level for their area have access to these 
mortgages, but we will do so in a way that does not allow FHA 
to expand during normal economic times to a share of the market 
that is unhealthy and unsustainable. Now, last night in his 
speech, he said that today our housing market is finally 
healing from the collapse of 2007. Home prices are rising at 
the fastest pace in 6 years, home purchases are up nearly 50 
percent, and construction is expanding again.
    Do you think that was what he was saying last night, that 
we are getting back to normal economic times?
    Ms. Galante. I do. I think we are clearly on a path of 
recovery, both in the housing market and the economy overall, 
but it is fragile and we do need to ensure that we understand 
that and manage to that fragility at this moment as we proceed.
    Mr. Westmoreland. So your goal is to get back to where 
typical FHA has been in the private mortgage insurance. Is that 
correct?
    Ms. Galante. We are looking forward to receding over time 
here, and we have--we--as I have mentioned in my testimony now 
several times, we have done that. But we do need to do it in a 
careful way, given where the economy is going. There are still 
risks to the economy, including something like sequestration, 
which would clearly be a risk to the economy and a risk to FHA.
    Mr. Westmoreland. So you agree that FHA having 56.4 percent 
of the market share private mortgage insurance outsized the 
role of FHA and should be decreased, right?
    Ms. Galante. I do, and it has declined. I think it is about 
42 percent today. It was higher than 56 percent at the peak, so 
we are steadily declining.
    Mr. Westmoreland. Now, let me ask you another question. 
Supposedly in 2013, FHA--the President had put in his budget a 
bailout of $688 million, but according to the DOJ settlement, 
you were put in for $1 billion. So you are not projecting a 
shortfall for 2014?
    Ms. Galante. The President's budget is not out for 2014, so 
I--
    Mr. Westmoreland. It was due last week, wasn't it?
    Ms. Galante. I am not in charge of putting out the 
President's budget. But I would just say, back to your comment 
about last year, yes, we did get settlement dollars that helped 
offset what would have been a potential draw from the budget, 
but that was not what really impacted us. We made premium 
changes, we made policy changes, we ended up actually having $3 
billion more.
    Mr. Westmoreland. Okay. So you haven't requested a--FHA 
hasn't requested anything in the President's budget?
    Ms. Galante. The President's budget is not out--
    Mr. Westmoreland. But you have made your request to the 
budget, right?
    Ms. Galante. We have made--direct appropriations requests 
are part of the budget--
    Mr. Westmoreland. Mr. Chairman, one final question.
    Do you believe that FHA should be considered on the high-
risk list?
    Chairman Hensarling. The time of the gentleman has expired.
    The gentleman from Massachusetts, Mr. Capuano, is 
recognized for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Thank you, Madam Commissioner, for being here. I think you 
actually answered all the questions pretty clearly and pretty 
fairly and openly, and I will tell you that the questions I 
have really are more repetitious, to clarify a few things more 
than anything else.
    First of all, the delinquency rate. Everybody--not 
everybody, but some people are pointing out this 9.4 percent 
rate. Am I wrong to think that most of that rate is made up of 
loans made in the 2007 and 2008 years and that since that time 
the delinquency rate is well below that number?
    Ms. Galante. That is correct, and thank you for saying 
that. I think I got a little jumbled there earlier, but yes, 
that is the overall seriously delinquent rate, which takes into 
account the whole book of business--
    Mr. Capuano. I guess I want to be clear, too, about FHA's 
mission, or what they have historically done, not necessarily 
even what they are doing now countercyclical. In the normal 
course of events, before the current crisis, did FHA compete 
with prime lending entities? If I was able to--if I had a score 
of 800 and had a gazillion dollars in the bank would FHA take 
me on or would I just go to a private entity?
    Ms. Galante. Theoretically, we could take you on, but from 
a price perspective and from an underwriting perspective it was 
much better for you to go somewhere else. That is right.
    Mr. Capuano. The mission of FHA, as I understand it, has 
always been to the more moderate-income people who might have 
difficulty getting into the housing market or are maybe on the 
cusp, not necessarily the most difficult because those people 
can't afford to buy a home no matter what; that is what public 
housing is for. But the people on the cusp is where FHA has 
been at the sweet spot for historical purposes. Is that a fair 
statement?
    Ms. Galante. Yes. That is a fair statement. And again, our 
loan limits are one of the things pre-2008 that would--which 
keeps FHA in that sweet spot.
    Mr. Capuano. At any given time, your delinquency rates or 
your seriously delinquency rates, or whatever term you want to 
use, have always been and will always be higher than prime 
lenders. Is that a fair statement?
    Ms. Galante. I think that is a fair statement.
    Mr. Capuano. Because you are dealing with different 
clientele. You are dealing with people who are working-class 
people as opposed to people who are clipping coupons--well, 
Wall Street coupons, different kinds of coupons. And that is my 
understanding of it as well.
    I guess I also want to talk about the $30.4 billion or $31 
billion you have. It is my understanding that if you were to 
close your doors today, which, of course, I think is a 
ridiculous assumption--if I lost my job today, I couldn't 
afford to pay my bills either, but I guess for the purposes of 
discussion, for a nice, aesthetic discussion, we will presume 
that you close your doors--it is my understanding that $31 
billion would still last for about 7 years to pay off the 
normally expected bills if nothing else were happening. Is that 
a rough estimate?
    Ms. Galante. That is correct. And again, we do ongoing 
business, so we pay out claims but we have new money coming 
in--
    Mr. Capuano. I have always thought that was a ridiculous 
assumption at all levels to presume any government entity is 
going to shut down because we have to have fully funded 
pensions, we have to--we are not shutting down, period, so 
therefore it is a ridiculous assumption, but I also know that 
we have to make it for the purposes of making our accounting 
friends happy.
    At the same time, it is my understanding that the current 
Federal budget rules might require you to access certain 
Treasury funds at some point, as opposed to actually needing 
and using the money. Is that the right assumption?
    Ms. Galante. Yes. Again, under the Federal credit reform 
accounting, we would potentially need to draw from Treasury to 
put money in reserves to add to that--
    Mr. Capuano. Money that you would not use--you would not 
need to use?
    Ms. Galante. We would not need to use, again, if we are 
continuing to have ongoing business.
    Mr. Capuano. So the current Federal budget rules are kind 
of like the original bailout where we forced certain people to 
take some money. And therefore, why don't we just change some 
of these rules to make it so that--it is one thing to have the 
full faith and credit of the Federal Government behind you, 
which I think is a good idea. It is another thing to make you 
access money that you don't need.
    I actually think that is a stupid rule, and whoever put 
that rule together should change it. You should be able to 
access money when you need it, not before you need it.
    Who do I talk to about that?
    [laughter]
    Ms. Galante. Maybe yourself, I guess.
    [laughter]
    Mr. Capuano. Jeb and I will have a long discussion. If that 
is the case, certainly I think it is something we should be 
considering, because again, I believe in the full faith and 
credit of the United States Government being behind the FHA; I 
don't believe in forcing people to take loans that they don't 
need. And my fear is that at some point if you are required by 
our budget rules to access money, some will call that a 
bailout. I call it ridiculous because you don't need the money.
    If you need a bailout we will have our debate and we will--
some of us will support it, and some of us won't. But if you 
don't need a bailout, you shouldn't be accessing taxpayer 
dollars, and you shouldn't be required to do so by some 
ridiculous accounting rule.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, and asks that he yield to the chairman for a brief 
moment?
    Mr. Luetkemeyer. I will yield to the chairman for a brief 
moment.
    Chairman Hensarling. Ms. Galante, quickly, you were asked 
the question about whether or not FHA qualifies for GAO's high-
risk series. You said, ``Not currently.'' Do you believe, as 
you understand the definition, that it should? Yes or no, or do 
you have any knowledge of that?
    Ms. Galante. Pardon me?
    Chairman Hensarling. Does FHA qualify for GAO's high-risk 
series? Yes or no, or do you not know?
    Ms. Galante. I am not sure what you mean by, do we qualify? 
I understand the GAO is releasing a report tomorrow--
    Chairman Hensarling. Okay, so you have no knowledge that 
GAO considers you a high-risk agency?
    Let me move on to the second question, then: In the 
President's last budget request, he did request a taxpayer 
bailout. I understand you do not write the President's budget. 
You have no knowledge that the President in his next budget 
submission will request a taxpayer bailout for FHA, or do you 
have any knowledge?
    Ms. Galante. I do not.
    Chairman Hensarling. Okay. Thank you.
    I yield back to the gentleman from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Ms. Galante, I am just kind of curious here. Your book of 
business has grown exponentially over the last several years 
and the top loan is $729,000 now. Whenever you look at a loan 
of that size, is it really fulfilling your mission to be making 
loans of that size?
    Ms. Galante. Congressman, that was a loan limit increase 
that was done in 2008 as part of the Housing Recovery Act, and 
those loan limits were extended by Congress last year. They 
expire at the end of this year. I do not think that is a 
typical traditional place for FHA but we are implementing the 
congressional mandate to have those--
    Mr. Luetkemeyer. Okay. If you don't believe it is a 
traditional place for FHA, then where do you think it should 
be?
    Ms. Galante. Again, I think loan limits should recede over 
time. I think they should go back to the $629,000 first, and I 
think as we proceed we--
    Mr. Luetkemeyer. It has doubled from what it was back in 
2008, I believe--is that a good place to go back to, $363,000, 
is that a--
    Ms. Galante. Again, I think these are questions that we 
should work on together. I think that the loan limits should 
recede over time, and an appropriate role and an appropriate 
way of constraining FHA's ultimate market share, loan limits is 
a good way to do that.
    Mr. Luetkemeyer. This is a concern of mine. It seems like, 
with the book of business that you keep talking about, which is 
improving now as we go along, which is great, but I have some 
questions about that. Number one, the book of business you are 
taking on are these higher loans, which are not necessarily 
what I believe and you just admitted to as--and testified to as 
not really where your mission should be, number one; and number 
two, it looks to me like you are using these larger loans as a 
way to underwrite and pay for a lot of the smaller loans that 
are where the problems are at.
    I think this is something that we need to get back to. I am 
not arguing with your mission. I think you have a mission and I 
know I would like to see FHA get back into that niche or where 
you need to be.
    That being said, in your testimony you made the comment 
twice on page three that you think we need to be financing 
creditworthy borrowers, and to me that--and qualified borrowers 
is another term that was used. And I agree with that. If we are 
doing that, I think that we are looking at a borrower who can 
afford to make the payment. And when you are looking at people 
who are getting homes of this size, they are not low-income 
individuals. With a $729,000 loan, you are looking at somebody 
who is going to have to make probably a $3,000-a-month payment. 
That is not a low-income person.
    Even if you go back down to where we need to be with this, 
we still need to get back to the sound tenets of lending. 
People have to be able to pay for what they are going to get 
involved in, and if we don't do that, would you agree that we 
have a problem, that we have a moral risk there, a moral 
responsibility to people to not put them in something they 
can't afford?
    Ms. Galante. Certainly. But I think what we really need to 
focus on together is what does that prudent underwriting look 
like? What is the right--
    Mr. Luetkemeyer. Let's be honest here now. When you look at 
people who don't have a downpayment, why do they not have a 
downpayment? Are they somebody who is just getting into the 
market, somebody who just got out of school, somebody who 
doesn't have a job? Is it somebody who has had a financial 
hardship, a medical problem, and suddenly all their money is 
gone? Are they somebody who can't physically manage their 
money, and then they can't save anything? Or are they just 
somebody who is struggling to make ends meet and don't have the 
wherewithal to get there?
    Those are all different scenarios. Some of them are 
worthwhile, some of them aren't, but I think the moral 
responsibility that we have is to provide that service but not 
to put people in homes who can't afford it, and I think we 
have--we are doing that.
    Chairman Hensarling. Regrettably, since the chairman took 
some of his time, the time of the gentleman from Missouri has 
expired.
    The Chair now recognizes another gentleman from Missouri, 
Mr. Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman. Thank you for conducting 
this hearing. And this gentleman from Missouri has a different 
take on the FHA than the previous questioner.
    And let me thank the Assistant Secretary for coming today.
    Critics of the FHA falsely state that loans insured by the 
agency are just like subprime loans. Can you help us to debunk 
that notion? And moreover, how did FHA's market share change 
during the subprime boom and what is FHA's current market 
share?
    Ms. Galante. FHA did not do low-doc, no-doc, no 
documentation for a loan. We did not do loans that reset. We do 
30-year, fixed-rate, fully underwritten mortgages. During the 
subprime boom years, those other kinds of instruments were 
available to people, and what happened is that, frankly, FHA's 
market share went to about 2 percent because people were 
solicited and took these very abusive loans rather than coming 
to the FHA. So that is what happened in the ramp-up to this 
crisis that frankly engendered the crisis and put the whole 
economy at risk.
    So when that bubble burst, FHA was there again to help a 
broad range of borrowers be able to buy a home and to 
refinance, sometimes out of those very toxic mortgages that 
they had, unfortunately, gotten themselves into.
    Mr. Clay. So the FHA is now experiencing an uptick in loans 
during this recent bounce-back of the U.S. housing market?
    Ms. Galante. I would say this: FHA, during the depths of 
the crisis, took on more activity. We are now receding. Our 
loan volumes have been going down as private capital starts to 
come back to the marketplace. So we are now down to about 15 
percent market share.
    Mr. Clay. And currently, FHA has an active portfolio of 
$1.13 trillion in insured loans. Can you discuss whether you 
think FHA has the appropriate level of resources and staffing 
to manage this book of business both in terms of lender 
enforcement, servicer monitoring, and oversight of the firms 
that handle REO management?
    Ms. Galante. We could certainly use additional financial 
resources. We are working on technology changes so that we can 
do our business better and we could certainly use some 
additional enforcement authority to both monitor our portfolio 
and our lenders.
    Mr. Clay. Okay. Thank you.
    And how does the low interest rate environment impact FHA's 
finances?
    Ms. Galante. Yes, well, under the actuarial report, if the 
interest rates remain as low as they are, frankly, we do see 
some people refinancing out of FHA into other things or so 
there is a--there can be, actually, a negative if the low 
interest rates--to our total economic value as a result of low 
interest rates. But low interest rates are a good thing for 
current borrowers and, frankly, helps them absorb some of the 
mortgage insurance premiums that we have needed to put on our 
new loans.
    Mr. Clay. Thank you for that response.
    And how have both the annual and up-front mortgage 
insurance premiums at FHA changed since this Administration 
took over in 2009? Do you believe that the FHA is changing its 
pricing to facilitate a return of private capital to the 
market?
    Ms. Galante. I do believe that the pricing changes that we 
have made over time are increasing private capital availability 
and essentially, for most borrowers now, our rates are, 
frankly, high, and that is helping facilitate private capital 
coming back for those who can go there.
    Mr. Clay. And so competition is good?
    Ms. Galante. Yes.
    Mr. Clay. Thank you for your responses.
    Mr. Chairman, I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Ohio, Mr. Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
holding this very important hearing.
    I do believe that FHA poses a risk to taxpayers because 
they mispriced their risk--the premiums they charge for their 
risk. And you said in your testimony that you have raised your 
premiums, but I am curious about a few things. I have a few 
questions.
    Number one, does FHA charge the maximum premium that is 
authorized by law?
    Ms. Galante. We charge the maximum premium on the very 
large--the loans over $629,000.
    Mr. Stivers. But for these other risky loans that you 
talked about, does FHA charge the maximum amount authorized by 
law for all loans?
    Ms. Galante. We do not charge the maximum premium, but we 
believe we are priced now appropriately for the risks that we 
are taking on.
    Mr. Stivers. And second, the FHA has had the authority to 
use a tiered pricing structure for more risky loans. For 
example, condos are more likely to default than single-family 
housing. But has FHA in that instance charged more for the more 
risky loans, such as condos?
    Ms. Galante. I think you are making an assumption that 
condos are inherently more risky. Certainly, our data doesn't--
    Mr. Stivers. The historical data backs that up though, 
doesn't it?
    Ms. Galante. Not the FHA data.
    Mr. Stivers. The historical data in the broader marketplace 
does back that up. Go ahead, ma'am?
    Ms. Galante. So again, we don't charge a different premium 
based on the geography or the loan type.
    Mr. Stivers. But you are authorized to by law?
    Ms. Galante. I am not certain that is the case, but--
    Mr. Stivers. You have been since 2008.
    The next question: In answering Mr. Luetkemeyer's question 
you admitted that you have sort of strayed from your basic 
mission of affordable housing, and in 2006 FHA controlled about 
4.5 percent of the new purchase market; today, give or take, it 
is about 30 percent--might be 28, 29, but almost 30 percent of 
the new purchase market. What is the right amount for your 
niche market that you are supposed to serve and what is your 
transition plan to get there?
    Ms. Galante. I don't think we have strayed from our 
mission. We have a dual mission, including playing the 
countercyclical role. Congress asked us to take on loans up to 
the higher limit and we have done that, and we have done it in 
a way that still tries to get those loans to go to the jumbo 
market. So we have played that role and we do believe that over 
time, we should be receding. But those loan limits are 
authorized--not authorized, required by Congress at this time.
    Mr. Stivers. So what do you think is the average income of 
somebody who buys a $725,000 house?
    Ms. Galante. I would have to do the math, but probably 
$100,000.
    Mr. Stivers. And would you call that person somebody who is 
low- to moderate-income?
    Ms. Galante. Again, our incomes are based on area median 
income, so whether you are low- or moderate-income depends on 
the area median income of your jurisdiction. I am from the San 
Francisco Bay area where the moderate-income definition 
probably is $100,000.
    Mr. Stivers. And certainly, that $700,000 in San Francisco 
is not what it is in some other places, but it is still a very 
expensive home by American standards.
    The next question I have is about your mortgage insurance. 
You now write about 50 percent, in round numbers, of the 
mortgage insurance market. Is that correct?
    Ms. Galante. We are down to 42 percent.
    Mr. Stivers. Okay, so almost 50 percent. And what are you 
doing to make sure that the premiums that you charge are less 
than what is charged in the private mortgage insurance market. 
Is that correct?
    Ms. Galante. Again, the private mortgage insurance market 
prices their insurance differently than we do. And, by the way, 
it is a different product. It is a top loss; it is not a full 
mortgage insurance. So they price it differently than we do. 
And you have to combine that pricing with securities pricing to 
really get to any kind of appropriate comparison.
    Mr. Stivers. Sure. Do you think it is appropriate to have--
to insure dollar one losses and not have any insurance and 
insure up to 100 percent, unlike the private mortgage insurance 
market, that usually insures about 20 to 30 percent of the 
loss--you insure 100 percent of the loss?
    Ms. Galante. I'm sorry, what is the question?
    Mr. Stivers. Do you think that is appropriate?
    Ms. Galante. We do insure 100 percent of a loss and we have 
just changed a policy to ensure, for example, that we keep our 
mortgage insurance premiums in place for the totality of the 
period of time that insurance is in force.
    Mr. Stivers. My time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    And thank you, Commissioner and Assistant Secretary 
Galante. Let me also thank you and FHA and HUD for your strong 
support with me in our efforts. Each year, as you know--I think 
you were at one of our home foreclosure prevention events in 
Atlanta, Georgia. I appreciate you for doing that. As you know, 
I represent seven counties around Atlanta, the suburbs, which 
is the epicenter of so much of the home foreclosures. So I 
appreciate your involvement with that.
    I want to go back for a moment, because I don't think you 
were given the necessary opportunity to really respond to Mrs. 
Bachmann's, my colleague from Minnesota's, concerns, and you 
made the statement that you felt that she had gotten it 
backwards. And I sort of agree with you on that, with all due 
respect.
    Let's get the record straight on this in terms of your 
mission and your role. I think it is profound--and these 
statistics I am about to give I want you to concur with, and 
very revealing so it helps tell the whole picture, and that is 
this: In the last year--in Fiscal Year 2011 is it not true that 
over half of all African Americans who purchased a home--not in 
one area but 52 percent, over half of all African Americans who 
purchased a home in the United States of America and 50 percent 
of all Hispanics who purchased a home in the whole Nation of 
America did so with FHA financing. Is that correct?
    Ms. Galante. That is correct.
    Mr. Scott. And also, 78 percent--nearly 80 percent of all 
FHA borrowers were first-time buyers. Is that not correct?
    Ms. Galante. That is correct.
    Mr. Scott. That is phenomenal. Now, I would like for you to 
kind of elaborate on this, because these statistics are very 
telling. Why is this so?
    Why is it that one agency, the FHA--if it were not for the 
FHA, where would the African-American community be in 
homebuyership? First-homeowners? And the Latino community? And 
is it not other factors that are at play here so that we can 
tell the full story on the mission and the role that FHA--and 
you have the opportunity to set the record straight on how this 
relates to the FHA mission. Would you please?
    Ms. Galante. Yes. Thank you.
    There are a couple of points I would like to elaborate on. 
The first is that FHA has played a particularly strong role in 
this crisis in particular. Again, home purchase mortgage 
availability dropped for everyone, but it dropped more for 
African-American and Latino homebuyers. It also dropped more 
for low-income neighborhoods.
    It has fallen off 75 percent in low-income neighborhoods, 
50 percent for more middle- and upper-income neighborhoods. So 
again, as the private market left, FHA stayed in the market, 
continued to be there to serve this broad clientele.
    Mr. Scott. Now, I want to talk to you about, because there 
have been some other significant misunderstandings about FHA's 
market share and how that has shifted over time. For example, 
at the hearing last week it seems that as if some members on 
our committee have not fully recognized how FHA has reduced its 
footprint in the mortgage market as we have slowly but surely 
recovered from the housing crisis.
    Can you please explain to the committee, first of all, 
traditionally what kind of market share has FHA had?
    Ms. Galante. Historically, FHA has been 10 percent, maybe a 
little bit less, maybe a little bit more. Pre-ramp-up to the 
bubble, as I had mentioned earlier, we dropped to maybe a 2 
percent market share as people went to the subprime, toxic 
mortgage market, unfortunately.
    So we do think--and again, market share is a funny 
statistic as well, because you have to look at the fact that 
the entire market dropped during these past number of years.
    Mr. Scott. And finally, before the hammer comes down on me, 
many of my colleagues have said they are interested in helping 
continue to support FHA, which I am glad to hear on the--on my 
Republican side. But let me ask you your fear of sequestration.
    Chairman Hensarling. I am sorry. The time of the gentleman 
has expired. The proverbial hammer did come down.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    I don't come from a wealthy part of the country. There are 
a lot of my constituents who have used FHA to purchase a home. 
They are low- and moderate-income individuals. And I have seen 
the program work for a lot of people. So I--what we talk about 
here today, I don't want that to be taken away. It has been a 
helpful program.
    But over the last several years there have been a lot of 
questions that have been asked from this committee and others 
about the solvency of FHA. Some have compared it to Fannie and 
Freddie and have inquired as to whether FHA is going to need a 
Federal taxpayer bailout.
    And so as those questions have been asked, many have come 
in and told us not to worry. The program is fine, it is 
solvent. Be assured, we are not Fannie and Freddie.
    For instance, Secretary Donovan was testifying before the 
Senate Banking Committee in 2009 and he indicated that within 2 
to 3 years the capital reserve would be back up to 2 percent. 
Last year, in February, you were here and you told us that we 
expect to be at a capital reserve of $8 billion by the end of 
2013.
    And so, as I am looking at the statements that have been 
made in regard to the questions that have been asked, I have 
some concern now that we have a shortfall of $16.3 billion and 
a negative capital reserve of 1.44 percent. And as I sit here I 
wonder, have we been misled in Congress? Have you in HUD been 
negligent? Incompetent?
    How can we ask these pointed questions that we had concerns 
about, outside individuals had concerns about, and we have not 
been given the appropriate information until today? What is it? 
Is it incompetence? Have we been misled? What has the issue 
been?
    Ms. Galante. There are two different analyses of FHA's book 
of business, so you have to start with--this is, unfortunately, 
more complicated than any of us would like. The actuarial 
studies which you are referring to in terms of the economic 
value and the capital ratio, done independently on long-term 
economic forecasts and long-term projected losses. Set that 
aside.
    Whether we need to draw any funds from Treasury is based on 
the President's budget, which is done by different economic 
analysis and comes up with a budget re-estimate. And again, 
even if we needed to draw, it is to put money into reserves.
    So to be clear, this is totally different than a Fannie or 
Freddie that were private entities taking private risk, taking 
profits privately and giving them to shareholders, and then the 
government comes in years later after they have spent those 
funds--
    Mr. Duffy. I want to be clear--I only have 2 minutes left.
    Ms. Galante. Yes.
    Mr. Duffy. You are saying it is complicated, okay?
    Ms. Galante. Yes.
    Mr. Duffy. And you are the Commissioner. Listen, there are 
outside people who don't have the access to information that 
you have, who have been raising the red flag saying, ``Hey, we 
have a problem at FHA.'' They have come in, we have had 
hearings on it. So how can you come in and tell us, ``We don't 
have any problems. We are going to be fine?''
    And outsiders who don't have your information knew that we 
were going to have this very problem that we are talking about 
today and you didn't share that with us. That gives me great 
concern. Have you talked to the President about needing dollars 
in his budget? Have you communicated with him?
    Ms. Galante. No, sir, I have not.
    Mr. Duffy. So if the President is going to offer money to 
FHA as a way of a bailout, he is going to be shooting in the 
dark. Or has the agency talked to him about dollars that are 
going to be needed for him in his budget?
    Ms. Galante. Congressman, I just want to say a couple of 
things. We have been totally transparent with this committee; 
we have been totally transparent with Congress. We have an 
actuarial study. We describe in that actuarial study the risks 
of going one way or another. We have--
    Mr. Duffy. What happened in the last year? Last February, 
you were here, and you were telling us that we were going to 
have a reserve of $8 billion by the end of 2013. And lo and 
behold, we are $16 billion short. How did you get it wrong in a 
mere 12 months to have this analysis completely wrong?
    Ms. Galante. Congressman, we didn't get it wrong.
    Mr. Duffy. You didn't get it right.
    Ms. Galante. We provided you an actuarial study that had a 
range of things that could happen depending on economic 
circumstances. The economic circumstances--house prices--did 
not match what the independent actuary predicted would happen. 
These are long-term forecasts that they make and we are 
reporting to you those results.
    Mr. Duffy. You got it wrong. Outsiders got it right. That 
makes me concerned about how honest or competent you guys have 
been.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    And I thank the ranking member, as well.
    And I would like to assure those persons who are viewing 
this at home that we really do love FHA and that we really do 
want to save FHA. FHA, seriously--let me ask a question so that 
you may say it, Madam Commissioner. Has FHA ever been bailed 
out before, ever?
    Ms. Galante. I want to be clear that FHA has what we call 
permanent and definite budget authority, so these are 100 
percent guaranteed loans by the government. We have been self-
sustaining through the 80 years of our existence.
    Mr. Green. Founded in 1934 or 1935, and since that time you 
have not received what is being called a government bailout. Is 
this correct?
    Ms. Galante. Again, I have a challenge with the whole 
concept of thinking about any potential draw from the Treasury 
being a ``bailout.''
    Mr. Green. Yes, ma'am.
    Let's continue with another proposition. One of the things 
that you are trying to correct and you are correcting has to do 
with your premiums and the fact that you at one time, after a 
buyer had a certain amount of equity there was--it had an 
impact on the premiums paid. Is this correct?
    Ms. Galante. That is correct, yes.
    Mr. Green. Could you kindly and quickly explain this 
circumstance?
    Ms. Galante. Yes. When borrowers pay a mortgage insurance 
premium--we had a previous--we had a policy that we just 
changed last month, but prior to last month, when your loan 
automatically self-amortized down to essentially 78 percent 
loan-to-value, we would be cancelling that premium even though 
we still were 100 percent--
    Mr. Green. Let's do this, if I might ask, Madam 
Commissioner, explain to us what cancelling means. What does 
that mean to the borrower? Do you continue to pay the premium 
or do you cease to pay a premium?
    Ms. Galante. If the premium is cancelled, it means you 
cease to pay the premium.
    Mr. Green. And as a result, the borrower would now have 
more money in his pocket, of course, but FHA would have less 
money to capitalize it. Is this correct?
    Ms. Galante. That is correct.
    Mr. Green. And you have now changed this, and as a result 
are you projecting that this will help you to stabilize FHA?
    Ms. Galante. That is correct, and we are--we obviously 
continue to have the risk of that loan.
    Mr. Green. You have the risk of that loan but you have made 
that change?
    Ms. Galante. Yes.
    Mr. Green. And you are making other changes to stabilize 
and secure FHA, correct?
    Ms. Galante. That is correct.
    Mr. Green. Would you give us one additional significant 
change that you are making, please?
    Ms. Galante. Yes, one additional change is that we are now 
requiring that if you have a 620 FICO score or credit score or 
less, we require no more than a 43 percent debt-to-income 
ratio, and without additional compensating factors for that 
borrower.
    Mr. Green. Now, much has been said about how FHA has been a 
benefit to persons in this country who are known as minorities. 
Quite frankly, it is a term that I don't particularly like, but 
I use it to communicate.
    But is it true that the overwhelming majority of the loans 
in your portfolio are held by Anglo-Saxons?
    Ms. Galante. That is correct.
    Mr. Green. Would you guess that of the loans in your 
portfolio that are held by people who we in this country call 
White, would you guess that it is probably upwards of around 70 
percent or more?
    Ms. Galante. I think it is more in the 60s, 60-plus percent 
range.
    Mr. Green. 60-plus percent. So FHA is not a welfare 
program, is it?
    Ms. Galante. It is not.
    Mr. Green. Okay. It has been a program that has been of 
great benefit to people across all lines--it wasn't designed to 
accommodate any particular ethnic group, was it?
    Ms. Galante. No, it was not.
    Mr. Green. And FHA, throughout its history, has pretty much 
complied with the will of Congress, has it not?
    Ms. Galante. Absolutely.
    Mr. Green. So if FHA is making loans at $729,000, it is 
doing so because of Congress, correct?
    Ms. Galante. Correct.
    Mr. Green. And I mention this to you because listening to 
this argument, one would think that FHA has been a renegade, 
you have just been out there doing all sorts of dastardly 
things, you created the yield spread premium, you created 3-
27s, 2-28s, no-doc loans, prepayment penalties that coincided 
with teaser rates, that you have just been ugly. But this is 
not true, is it?
    Ms. Galante. No, it is not. Thank you.
    Mr. Green. Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The gentleman from Michigan, Mr. Huizenga, is recognized 
for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. And I would like to 
submit into the record a couple of things. One is a letter from 
the National Association of Federal Credit Unions, and I wanted 
to talk a little bit about the content there. And another is an 
ad called, ``My FHA,'' regarding FHA mortgages, and I would 
like to submit that into the record.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Huizenga. All right. Thank you.
    Commissioner Galante, I appreciate you being here. My 
background is in real estate and developing. My family is still 
involved in construction.
    And I have a couple of concerns and I think we were hearing 
two lines of discussion from two friends over there, Mr. Green 
and Mr. Scott, about who actually benefits from these programs. 
And it seems to me that as we are looking at claims, half of 
all of the loans are to African Americans, half are to 
Hispanics, is what you had said earlier, and when I got my 
REALTORS license, the Elliott Larson Act says that we cannot 
discriminate. One of those things that it says is we cannot 
discriminate on race and creed.
    Low- and moderate-income is not a Black issue, it is not a 
White issue, it is not a red issue, and it is not a yellow 
issue; it is a green issue. And what I learned is you are green 
when you come and make that application. Can you afford it or 
can you not afford it? Do you have enough green to buy that 
product that you are out trying to buy?
    And I am concerned that we have seen sort of both sides of 
the argument on the other side of the aisle that this is sort 
of meant to benefit, or at least the implication is that it 
benefits one particular race over another, and I just want to 
make sure that we do not accept--because I believe that the--
certainly the law demands it, morality demands it, and we must 
have equal treatment under the law. And if we are not doing 
that, then we cannot allow some sort of separate but equal 
system occurring here, which seems to be the implication from 
Mr. Scott's line of questioning.
    Now, on to this advertisement--and I know you don't 
encourage these ads or particularly control them at all, but I 
am going to read this to you: 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, if you have filed bankruptcy in the 
past, if you have high debt, you may still qualify for an FHA 
loan. And it says at the end, if you--there are much better 
choices in very expensive financing that banks call subprime.
    And it seems to me that, based on some of the questioning 
that we heard earlier from Mrs. Bachmann and others, I am 
afraid that this industry--people with bad credit are being 
encouraged to go in and use FHA as a vehicle for a subprime 
type of loan. And I have to believe that cannot be acceptable, 
because we know how devastating losing a home is. We know how 
devastating that can be.
    And the letter from NAFCU here, the Federal credit unions, 
we know that FHA's current policy with respect to strategic 
default, which--strategic default would be someone literally 
making the choice to default, to walk away--is barring such 
borrowers from obtaining an FHA loan for a minimum of 3 years. 
So they are barred from getting another FHA loan for 3 years.
    Comparatively, Fannie Mae has instituted a policy that 
would prohibit such borrowers for 7 years. Can you explain to 
me why you would have a 3-year gap versus Fannie Mae having a 
7-year gap if we are trying to make sure that people aren't 
compounding bad decisions?
    Ms. Galante. Let me address both of your points. You are 
correct that we do not condone the kind of ads that you talked 
about there that you have seen on the Internet, and I just 
recently issued to our lenders a reminder that we will enforce 
against any FHA lenders for advertising. We do require 
borrowers to meet our credit criteria, so we want to be very 
careful about that. We will refer people to the I.G., to the 
Department of Justice--
    Mr. Huizenga. I have 30 seconds left, just quickly, if you 
can address the 3 years versus 7, and then I want to hear your 
opinion: If this was a private company, would it be in 
receivership? Because my suspicion is that it would be.
    Ms. Galante. On the 3-year versus 7-year, again, our 
requirements are at 3 years, you can apply to return--or to 
come into the FHA but you still have to meet our credit 
criteria, including the restrictive credit criteria that I have 
mentioned that we have tightened up on--the 620, the 43 percent 
DTI as an example restriction. So not anybody can come back 
into--or come into FHA as a result of having been through--and 
let's be clear, particularly in this recent circumstance, some 
of these folks have been through a very devastating experience 
and they are not--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Carney.
    Mr. Carney. Thank you, Mr. Chairman.
    And thank you, Commissioner Galante, for coming in. I have 
found in the 2-plus years that I have been sitting on this 
committee that the most challenging thing is to seek some light 
with all the heat that has been going on, and I thought we had 
arrived at that point when my friend, Mr. Westmoreland, was 
speaking and he started off by saying that we on their side 
didn't want to do away with FHA. We recognize that there was an 
important role in the marketplace. We want to make it stronger; 
we want to protect the taxpayers. And I think those are things 
that both Democrats and Republicans on the committee agree on.
    Mr. Duffy started off the same way and then went off on a 
little bit of a rant about the--you and the FHA not being 
straight-up with the committee. It is my understanding that we 
had hearings last year and legislation that was passed here by 
the House to address some of these issues that we are talking 
about today. Isn't that the case?
    Ms. Galante. That is the case, and I think there are many 
things that all sides of the aisle can agree on with respect to 
strengthening FHA. And I really appreciate that.
    Mr. Carney. We had a couple of witnesses last week who came 
in and they had a whole list--I asked my staff to put it 
together and it is two or three pages--of things that they 
suggested, policy proposals to help address the financing issue 
that FHA faces. Is there anything among those ideas on those 
lists that got your attention that we should really think about 
as Democrats and Republicans who care a lot about FHA and its 
important mission?
    Ms. Galante. I would say this: What we are focused on in 
terms of strengthening FHA right now are immediate actions that 
we can take, like the enforcement with lenders, like the 
emergency authority for the dealing with the reverse mortgage 
program.
    I think there are other ideas, some of them that are on 
this list, that are worth talking about in terms of future 
conversation--where is FHA play in the broad new housing 
finance system? And so I want to spend time on a number of 
those, whether it is looking at our appraisal board versus the 
way we currently do appraisals. Those are quite interesting 
things for us to go back and take a look at.
    Mr. Carney. So let's talk about that in the 2\1/2\ minutes 
that I have left. You mentioned this at the top about looking 
more broadly about housing finance in this country and the GSEs 
and somebody before me said that is a priority for both sides.
    Where do you see FHA fitting into a new framework for 
housing finance in this country?
    Ms. Galante. So again, I think this could be a longer 
conversation--
    Mr. Carney. Obviously.
    Ms. Galante. --amongst all of us, but we have been very 
clear, the Administration has been clear that we do believe 
that FHA should be playing a smaller role, a more targeted 
role, that loan limits should come down over time, and that we 
should focus on those more targeted credit needs in the 
country.
    Mr. Carney. What might they look like--more targeted--
    Ms. Galante. Yes, more targeted. So back to, again, an area 
home price, something in a range around the median home price, 
a little above, a little less, that is the typical--
    Mr. Carney. That was one of the suggestions that one of 
the--
    Ms. Galante. Yes.
    Mr. Carney. --folks last week talked about.
    How about market share? I think it was maybe Mr. Green or 
somebody else who mentioned, what do you see as the appropriate 
market share for FHA?
    Ms. Galante. So again, I hate to--market share I think 
really is a difficult challenge but--
    Mr. Carney. You mentioned 10 percent as a historical number 
or something in that--
    Ms. Galante. 10 percent is a historical number. Again, it 
changes over time, and I think you want a--you want the ability 
to be in a range in 10, 15 percent of the market.
    Mr. Carney. So I see a little bit lower than--by the way, I 
think this chart that you provided is a great illustration of 
the appropriate role of FHA insurance where you see the PMI 
just dropping right precipitously off the table and FHA moving 
in at a very critical time in the housing market and filling 
that void.
    But it looks like the historical level was somewhere above 
15 percent and below 30 percent. Any sense of where it might be 
in an ideal world going forward? I guess it would depend on 
economic conditions as well.
    Ms. Galante. Yes. And again, that particular chart is for a 
small portion of the overall mortgage market. It is for 
purchase only and only mortgage insurers, so it is a 
particularly shrunken piece of the overall pie.
    Mr. Carney. Thanks very much.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Indiana, Mr. Stutzman, for 5 minutes.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you, Ms. Galante, for being here. It has been a 
very informative hearing.
    First of all, my question is, do you understand why all of 
the red flags around FHA? Do you understand why we are so 
concerned about FHA? And I think one of the big red flags is 
that the President is suggesting including money for FHA in his 
budget.
    Ms. Galante. I think it is absolutely reasonable and 
important to look at FHA's long-term financial health, and the 
actuarial gives some indication about what kind of money we 
need over the long term and that we are short of that under the 
actuarial. So this is--absolutely we understand the importance 
of this.
    Mr. Stutzman. Okay. You said earlier that you think the low 
limits should recede, and I appreciate that. What I am 
concerned about--and I am new to this committee, but as I sit 
here and listen and try to absorb what is happening, it seems 
that FHA is outside of its original charter, and a lot of that 
is due to the recession and the housing collapse. But what I--
it seems to me that as FHA is trying to get out of this hole 
that it is in, it is now moving outside of its original intent.
    As I look at this chart here that compares FHA's operations 
in 2008 compared to today, the average FICO score in 2008 was 
647, and today it is 696. Is that roughly correct, do you know?
    Ms. Galante. Sounds correct.
    Mr. Stutzman. To me, that says that we are trying to move--
that FHA is trying to move into market area that it is not 
designed to be in. Also, the loan sizes have moved up.
    What I think that is happening here is not entirely your 
fault, but is the result of policies on a macro level where we 
have now seen--since 2009, when President Obama took office, we 
have seen a huge decline in median household income. In 2009, 
it was $55,198; today, it is $50,678.
    You talked about the premium increases and I guess I 
don't--I understand you are going to those you are serving and 
increasing the insurance premiums, but do you understand, when 
median household incomes are dropping and the increase on 
premiums are increasing, we are squeezing people to where they 
are going to be put in a position where they cannot afford to 
be in their homes. Any comment?
    Ms. Galante. Again, you have made a number of points there. 
Let me say a couple of things.
    First of all, on the credit scores of FHA borrowers going 
up in this recent period of time, we would be, frankly, 
delighted if lenders would lift some of their credit overlays 
that they have been putting on top--FHA enables loans to 
creditworthy borrowers but at lower credit scores than lenders 
are currently lending to, so this is not something that FHA is 
trying to induce. This has to do with a broader concern on the 
part of lenders and that is something that we want to work with 
them on to ensure that they are giving access to FHA loans to 
as broad a prudent population as possible. So that is one point 
I want to make.
    The other thing is that again, we do think that these 
premium increases have been important for the health of the 
fund. They have also been important in terms of ``pricing our 
risk correctly.'' We do believe that because interest rates are 
so low, borrowers are able to absorb those increases.
    Mr. Stutzman. But when you are asking for only 3.5 percent 
down, people are getting into homes very possibly that they 
just cannot afford. Mortgage insurance premiums go up, median 
household incomes decline. You said earlier that you think we 
are on the road to recovery. The President said the same thing 
last night in his State of the Union address.
    What I see coming from the Midwest is that maybe the DC 
Metro area is doing fine, but the rest of the country is not, 
and so my comment to you is that we have to get back to your 
original charter which you are originally designed for, 
lowering the caps and really helping those who do need the 
help.
    With that, I will yield back, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Florida, Mr. Murphy, for 5 minutes.
    Mr. Murphy. Thank you.
    Commissioner, thank you for your time and your service and 
for answering our questions today. I ran for Congress because I 
believe in a smarter government, and at the same time, my 
background in the construction industry informs me of the 
critical role the housing market plays in my own State of 
Florida and across the country.
    Whatever we do to resolve the problems at FHA must be done 
with a mindful eye on how it could affect middle-class 
homeowners, as we have discussed today.
    Two years ago, the Obama Administration outlined its 
proposal to limit GSE involvement in the housing market while 
preserving the Federal Government's role in a more limited 
capacity.
    Commissioner Galante, do you think that the answer to the 
problems faced by the GSEs and FHA is as simple as narrowing 
the scope of borrowers?
    Ms. Galante. I think it is much more complicated than that, 
but that is part of the issue.
    Mr. Murphy. There has been talk of the max loan size. Would 
you agree that this isn't a one-size-fits-all? That this should 
be tied to some sort of a formula for maybe the location, for 
the market, for the location of that house?
    Ms. Galante. Yes, absolutely, and to be clear, the high 
loan limits that people have been talking about, the $729,000, 
that is only for higher-cost areas, and to be clear, that only 
represents about half a percent of FHA's business at the 
moment.
    Mr. Murphy. So, the million-dollar question or I guess 
because of the size of what we are talking about, perhaps the 
trillion-dollar question is, how do we help stabilize the 
overall market faster to reduce the expected future claims on 
FHA, but most importantly to restore the dream of homeownership 
that has fallen out of reach to so many middle-class families 
because of this recession?
    Ms. Galante. Thank you for that question. One of the things 
that we are doing that we have not talked much about today, so 
I appreciate the question, is what are we doing to ensure that 
with policies that we currently have in place and are putting 
in place, the best thing that is going to help FHA in terms of 
moving forward is to deal with these legacy loans and we have 
very substantial policies in loss mitigation and asset 
management activities being able to dispose of distressed 
assets, distressed loans more quickly. All of that will help 
our recovery. All of that will help FHA's dollar recovery, 
which will help FHA in terms of its overall financial picture.
    Mr. Murphy. Do you mind outlining a couple specifics there 
for what you are doing not only to help what happened but to 
prevent it from happening again?
    Ms. Galante. Yes, so there is both. There is both dealing 
with the damage that has been done and on that front, again, we 
are making it easier for borrowers to do a short sale when they 
are in distress for example.
    We are making loss mitigation and doing modifications 
easier for people to get. So we are selling our distressed 
loans in the market faster. We have an overhang. Moving 
forward, we have increased premiums to price risk appropriately 
for the risk that we are taking on with borrowers.
    We have made some underwriting changes that I have talked 
about here today in terms of ensuring that borrowers are 
prepared for the financial obligations they are taking on.
    Mr. Murphy. Thank you, Commissioner.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from South Carolina, Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    And thank you, Commissioner Galante. I have a couple of 
questions. I heard a lot over the last couple of hearings about 
the dual mission of the FHA, and I have been able to find one. 
I have been able to find the one that says you are supposed to 
serve as the lower economic groups, the first-time homebuyers, 
provide gaps where private credit markets don't exist, and I 
can find that.
    I can't find any legal justification, any basis for what 
everyone talks about is the second half of the mission, which 
is this automatic economic stabilizer, this countercyclical 
mission of the FHA. Where are you drawing that from?
    Ms. Galante. Congressman, if you go back and look at the 
original founding of FHA, you can see quotes from the Federal 
emergency administrator talking about the purpose of that, so 
the congressional intent talking about the purpose of FHA at 
the time was actually to get the economy back on its feet 
again--
    Mr. Mulvaney. It is fair to say it is not in the statute, 
right? That mandate is not in the statute. It is implied 
perhaps in many of the things that we do, from having hearings 
like this to raising the borrowing rates, but it is not the 
same as the other mandates.
    Ms. Galante. It probably isn't in the wording of the 
statute, that word countercyclical, but the fact is that it was 
created to be a source of credit availability when nothing else 
was there so that it would be steady and available.
    Mr. Mulvaney. But I think you would agree with me that in 
an ideal--while that first mandate to serve that underserved 
market is consistent and permanent, the countercyclical mandate 
is supposed to come and go, right?
    Ms. Galante. Yes, but again, underserved, you can be 
underserved at different points in different ways, right? So 
underserved because capital has left or underserved because 
capital is never interested in a particular whether it is a 
rule--
    Mr. Mulvaney. But there was no countercyclical purpose to 
the--it was not serving that mission during the first half of 
the 2000s, right, the first decade? You were not serving a 
countercyclical mission when the market was overheated, were 
you?
    Ms. Galante. That is correct.
    Mr. Mulvaney. Okay.
    Ms. Galante. And in regional distress, we have played a 
countercyclical role--
    Mr. Mulvaney. So let me ask you, as the housing market 
comes back, and we understand that it is and we are hopeful 
that it continues to do so, what affirmative steps are you 
taking to lower your market share?
    Ms. Galante. We have already taken a number of affirmative 
steps, as I think you have heard today, including raising 
premiums 5 times on new borrowers moving forward. That 
certainly is helping private capital come back in to, and if 
you read the Washington Post over the weekend, and you can see 
quotes from all kinds of mortgage brokers, et cetera, they are 
very concerned that FHA--
    Mr. Mulvaney. All right. So you have raised rates a couple 
of times. I understand that. I have put a graph up that the 
chairman used earlier. I have also provided you with a copy so 
that you can actually see it, and I recognize the fact that you 
have some concerns with some of the previous estimates.
    Are you more comfortable with the estimate of 2012, the 
line that is shown in dotted red? I recognize that the fact you 
said you had a difficults because of the difficulty of making a 
30-year projections and so forth. Granted, this is only a 5- or 
6-year projection, not a 30-year production, but are you more 
comfortable with a 20-year graph curve on this graph?
    Ms. Galante. So again, I would just say, I am not sure 
where these numbers are--
    Mr. Mulvaney. This is the independent auditor report. You 
have seen this several times today.
    Ms. Galante. Yes. This is an actuarial report projecting 
based on economic conditions. This economic--
    Mr. Mulvaney. Are you comfortable with it?
    Ms. Galante. I don't think that economic conditions are 
ever going to be exactly as what was predicted--
    Mr. Mulvaney. Do you do your own projections?
    Ms. Galante. We do--not to the level of complexity that are 
done--
    Mr. Mulvaney. Can we see the projections that you have 
done? Everything you have given us today is backward-looking. 
It stops in the second quarter of--third quarter of 2013. Can 
we see your projections?
    Ms. Galante. So, again, we don't do long-term--
    Mr. Mulvaney. I am not interested in long-term, I am 
interested in short-term. You said you are going to get back 
above the 2 percent line in the next couple of years. Can we 
see those projections?
    Ms. Galante. Those are based on the actuarial report.
    Mr. Mulvaney. So you are relying on this line?
    Ms. Galante. The--
    Mr. Mulvaney. You said you had concerns with this line, but 
when you say that we are going to be back at 2 percent in the 
next couple of years, you are relying on this graph.
    Ms. Galante. To be clear, we are statutorily required to do 
an independent, to have an independent actuarial done and to 
present that information and what it shows in terms of the 
economic value of the fund based on that independent actuarial 
and to provide that to Congress.
    Mr. Mulvaney. Does this graph assume that you go back down 
to a historical level of roughly 10 percent market share?
    Ms. Galante. The actuarial report does over time project 
that we go back down. I don't know to what volume.
    Mr. Mulvaney. Does this report assume that you have what 
you called a roughly 10 percent failure rate relatively; that 
your average failure rate. I think Mr. McHenry asked you about 
seriously delinquent. Does this assume that you maintain a 
roughly 10 percent failure rate?
    Ms. Galante. Yes.
    Mr. Mulvaney. Thank you.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Maryland, Mr. 
Delaney.
    Mr. Delaney. Thank you, Commissioner, and thank you for 
your service during this very important time. Housing is 
obviously central to our recovery.
    My first question relates to the standard that we hold FHA 
to, and there is something that has confused me across this 
hearing and the prior hearing that some of my colleagues 
mentioned, and I think this started with Mr. Pinto's testimony.
    There seems to be a sense that FHA is a private business 
and it should be held to public company standards. As someone 
who ran a large financial services company that was publicly 
traded, which I started, I think I understand how people think 
about private businesses and how they think about public 
company standards, and in addition to running it ethically and 
in a responsible manner, you focus on your shareholders and you 
have a profit motivation and you have all kinds of incentive 
structures in your management team to pursue those objectives.
    Did I miss something? Is FHA a private company that is held 
to public company or private company standards? I just want to 
give you an opportunity to respond to that because perhaps I 
missed that somewhere.
    Ms. Galante. No, you are correct. FHA is part of the 
Federal Government.
    Mr. Delaney. Got it, because I think it is important when 
people talk about a private company or a public company that 
they have an understanding as to what that means. And I think 
one thing you may want to mention in future testimony is that 
practically every publicly traded financial services company 
trades as a multiple of its projected earnings, which 
inherently means people are looking at the future prospects, 
which is one of the things I think you are looking to, to 
buttress some of the losses you have incurred.
    And so even if you were to be held to a private company 
standard, I think this notion that doesn't exist, which I think 
was in Mr. Pintos testimony, is flawed. So just a comment 
there.
    My second question is, do you have economic data to show 
that if FHA would have stayed at its historical market share 
and not increased its market share and housing prices would 
have inevitably continued to fall, what the overall economic 
impact would have been on the taxpayers, and how that relates 
to the additional costs FHA clearly incurred by stepping into 
the breach after the financial crisis? And we should be 
reminded that across the financial crisis, 19 of the 20 largest 
financial institutions in the United States either failed or 
required massive government support.
    So it was not an inconsequential breach. It was a never-
seen-before breach. So I was wondering if you have economic 
data to show what FHA actually saved the economy by stepping in 
the way that the way it did. And if so, maybe you could provide 
that to us or if you have any comments on that?
    Ms. Galante. Yes, I would just say that Mark Zandi of Moody 
Analytics has done a certain amount of that work. I don't have 
detailed projections, but clearly, house prices would have 
declined further. So not only would have FHA been hurt by that, 
but the broader economy would have been hurt by that.
    Mr. Delaney. Do you have a sense as to the multiples? In 
other words, if we think about the additional losses in the 
book of business that you, that FHA underwrote during a time of 
declining housing prices, which is definitionally something a 
private market participant would never do, and you clearly 
incurred losses higher that you, than the organization would 
have liked. Do you have a sense as to what the payback has been 
to the economy?
    Ms. Galante. I don't have specific numbers on that.
    Mr. Delaney. It might be relevant to put some of these 
things in context going forward. And then my last question is--
because I am concerned about this notion of crowding out the 
private market because I do think we want to leg into a much 
more robust private market.
    And it seems to me the private market hasn't been 
participating in the mortgage industry for two reasons. The 
first is credit, meaning they were concerned about how prices 
were falling when you come from an industry where prices had 
historically rose across all the data you could measure, there 
were no real underwriting models to allow these institutions to 
step into a falling home price market.
    That, I think, in many markets we are starting to get away 
from that. Housing prices are stabilizing, improving. There is 
a lot more work to do. So we may be past the credit concerns 
that these institutions have.
    The second concern is that they have this pricing. In other 
words, it may not be economical for them to compete at the 
levels you, in the GSE's are, and that is a product-specific 
analysis, right, it relates to single-family; it relates to 
multifamily. Do you have a sense as to how far the private 
market is off your pricing and where pricing would need to be 
for them to be more robust players?
    Ms. Galante. I would say where this gets a little 
complicated is some of the private markets charge different 
pricing for different kinds of credit characteristics for most 
borrowers to whom they are interested in lending.
    So for higher credit score borrowers, for example, we 
believe we are priced higher than they are at the present time. 
So I don't think it is a pricing issue at this point. I think 
it goes back to credit quality, credit concerns, housing, 
housing market recovery concerns--
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from California, Mr. 
Campbell.
    Mr. Campbell. Thank you, Mr. Chairman.
    And Commissioner Galante, for all of the kind of sparks and 
so forth, I think I heard at least one area of general 
agreement that something you said in response to a question 
from the other side of the aisle that although FHA, as you 
know, went to a really low market share for a while and then 
for very high market shares and we know the reasons why, but 
you said, and I wrote this down as close as I could, that you 
would like to see it go to a smaller, more targeted role and 
that loan limits should come down. Correct?
    Ms. Galante. That is correct.
    Mr. Campbell. Okay. So now let us talk a little bit about 
how we do that. And I guess the first question is, would you 
see that as being somewhere around a historical 10 to 15 
percent area?
    Ms. Galante. Ten to--of market share?
    Mr. Campbell. Yes, market share.
    Ms. Galante. I think that is a reasonable assumption, yes.
    Mr. Campbell. Okay. I really don't think there is much 
debate about that anywhere, so let us talk about how to get 
there. First of all, where are we? GAO said in what they said 
was the latest available third-quarter 2012 that FHA had 56.4 
percent of the insured market.
    I think I heard you say 40 or 42 percent. Is GAO wrong? 
Because I have that they said 56.4 percent in the third quarter 
of 2012.
    Ms. Galante. Our data that I am using shows us at 42 
percent. We would have to do a double check with that data if 
that is coming from the GAO.
    Mr. Campbell. Is that over the same period of time? You can 
look at the sheet--
    Ms. Galante. I think our--
    Mr. Campbell. I think you have to--I know how that works.
    Ms. Galante. I am not sure what quarter of--it is in 2012, 
but I am not sure what quarter our data is from. I think it is 
the third quarter.
    Mr. Campbell. Okay, I would like to suggest, Mr. Chairman, 
that is something we ought to try and figure out. That is not a 
small discrepancy, 56 to 42 percent. So it would be nice to 
know where we are and where we are actually beginning.
    Chairman Hensarling. Would the gentleman yield?
    Mr. Campbell. Yes, I would be happy to yield.
    Chairman Hensarling. Just for the record, this comes from 
HUD's U.S. Housing Market Conditions report.
    Mr. Campbell. From the GAO, yes. Okay. So apparently, you 
are saying the GAO numbers are wrong, so we need to talk to 
somebody to figure out where we are starting from. But then, 
when we look at other things, if you look at private insurance, 
they have to have a 25:1 leverage ratio. You guys are at 36:1. 
We have QM and QRM from which FHA would be exempt from 
underwriting and risk retention requirements.
    Might that not be a place to start in order--and I know the 
gentleman from Maryland who I guess left now mentioned he is 
concerned about FHA crowding out the private market, and so if 
the private mortgage insurance market has much tougher 
standards then you are required to have, isn't that going to 
crowd them out to some degree?
    Ms. Galante. I think the only rule that we have right now 
is the Qualified Mortgage standard and so I am not quite sure 
and again, that is not a place yet, but I am not quite sure 
what you are referring to in terms of how that affects the 
private market versus FHA.
    Mr. Campbell. Okay. Under the QM and QRM proposals, FHA 
would be exempt from various risk retention, elements of that 
and some of the underwriting provisions. So FHA wouldn't have, 
an originator wouldn't have to have risk retention, and you 
wouldn't have to follow certain underwriting principles.
    Wouldn't it be better if that were not the case if you were 
following similar rules to the private mortgage market if we 
want--and again, keeping you at your original mission, but if 
we want private mortgage insurance to start to step in and take 
over where you are right now in some places.
    Ms. Galante. Again, the only rule that we have is the 
Qualified Mortgage and FHA will be writing its own qualified 
mortgage standard. The QRM is still under discussion in terms 
of, in rule making so I can't speak to and we don't know what 
the terms and conditions of those QRMs will be.
    Mr. Campbell. Okay, but regardless of where they are, 
should you have a different standard than the private mortgage 
insurance market on things like risk retention, et cetera?
    Ms. Galante. Again, we are a government agency. We don't 
have the same kind of capital requirements. We are not 
borrowing, we are not getting equity from private entities that 
we need to pay a return on. So to--
    Mr. Campbell. No, but you are getting equity from the 
taxpayers, and you don't need to pay a return, but we need to 
protect that money. We need to be as judicious with it as 
possible, understanding the mission of FHA.
    Ms. Galante. And again, we have our requirements under 
Federal credit reform in terms of what kinds of capital we need 
to be reserving for.
    Mr. Campbell. Thank you, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Washington, Mr. Heck, for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman. I wasn't sure this would 
happen until April or May, but I appreciate it very much.
    Commissioner Galante, again, thank you very much for your 
service. I would just like to start by noting that it was 40 
years ago this year that I bought my first home with the help 
of the FHA.
    I would like to ask you a little bit about the reverse 
mortgage activity, and I am prompted to do so because in your 
testimony you set forth what appears to be a significantly 
disproportionately negative impact on your balance sheet as a 
result of activity in that area.
    So, if you could please briefly describe utilization of 
this over the last 5 to 10 years, briefly describe what actions 
you are taking today to ameliorate that negative impact, answer 
whether or not you need congressional action in order to take 
additional action, and if so, will you be seeking it?
    Ms. Galante. Yes, thank you. The reverse mortgage program I 
think has a very important mission objective, which is to help 
seniors who have limited income but some equity in their homes 
to be able to stay in their homes.
    Having said that, over the past number of years, for a 
variety of reasons, we have gotten into a situation where 
seniors are taking out up-front in a fixed lump sum much more 
money than they frankly can afford over the period of time and 
not having money on an ongoing basis for property taxes and 
insurance and important elements of maintaining their home.
    The actuarial projects that even though the reverse 
mortgage program, which was put into the MMI fund in 2009, is 
only 7 percent of the portfolio, it is generating 17 percent of 
the losses or 17 percent of the negative economic value. So 
that is a major problem, and it needs to be fixed, moving 
forward.
    We issued a mortgagee letter, guidance where we essentially 
disallowed those large up-front draws on a fixed-rate basis 
moving forward and that goes into effect this spring.
    Frankly, there are more things that we would want to do 
including financial assessments of borrowers, whether they can 
afford to pay the taxes and insurance or set aside for the 
taxes and insurance, and we can do those via regulation, but 
that takes a year-and-a-half or more to go through that 
regulatory process.
    So what we are asking Congress for is authority to make 
those through guidance mortgagee letters and come back and do 
the rulemaking over time and that would help is very much in 
terms of putting this program on the right foot moving forward.
    Mr. Heck. And I began with asking, what has happened to 
utilization over time of this program?
    Ms. Galante. The utilization actually went up over the past 
few years and it has started to come back down again. I don't 
have the numbers right in front of me--
    Mr. Heck. Thank you.
    Ms. Galante. --but I can get them for you.
    Mr. Heck. I yield back.
    Chairman Hensarling. I am always happy to have those 2 
minutes back. The gentleman from Virginia, Mr. Hurt, is now 
recognized for 5 minutes.
    Mr. Hurt. Ms. Galante, thank you.
    And Mr. Chairman, thank you. Mr. Chairman, one thing I 
wanted to point out is the figure that we have been using, and 
I think this committee has been operating on, comes from HUD's 
US Housing Market Conditions quarterly report, which indicates 
in the third quarter of last year, the FHA percentage of the 
mortgage insurance market was 56.4 percent.
    Now, that is what we are dealing with, and it doesn't seem 
like you know where your 42 percent comes from, but I think I 
would ask the chairman to follow up to make sure that we know 
what the correct information is. That is very important, I 
think, for the work of this committee.
    I come from Virginia's 5th District and we have, I think by 
your figures, 13,500 citizens, people who are in my district 
who are in or have benefited from the FHA program. Of the 
13,500, it appears to me when you add up 30-, 60-, and 90-day 
delinquencies, foreclosures, and bankruptcies, we are talking 
about 17.2 percent of that 13,500.
    So you have about 2,300 people who are in those 5 
categories; understanding that is a wide variety. I think when 
we talk about the full story, which we have heard a lot about 
or heard mentioned here today, I think it is important to 
remember that the American dream of owning a home does not 
derive from Washington, D.C., and I think if you spend enough 
time in this room and around these vaunted halls, one might 
think that is what drives homeownership in this country.
    It is working 16 hours a day; it is working 80 hours a 
week. It is having two jobs or three jobs to be able to achieve 
that dream. That is, if you ask the people, probably the 13,500 
people that FHA affects and all the other homeowners, and 
thousands of others who reside in my district.
    If you asked them about homeownership, that is what they 
would tell you, and I am sure you know that, but I think it 
makes your mission particularly important because what we are 
dealing with are those people and their dreams, and I think 
that encouraging people, having policies that encourage people 
to do things that are not in their best interests and that they 
can't live up to hurts them far more than it helps them.
    And I think if you asked those 2,300 people in my district 
who face these circumstances, they would say that they are not 
better off, and I would assume that you would agree.
    But talking about the big picture as you seem to have 
invited the conversation of the big picture, I was just 
wondering, from a big picture, we talk about the FHA wanting 
ultimately to have 10 to 15 percent of the market share, is 
that correct?
    Ms. Galante. I am not saying we want--that is an important 
point. I am not saying we want to have 10 to 15 percent. I 
think naturally through--we were down to 3 percent and that is 
okay with us to when that happens, when private capital is 
there to do it.
    Mr. Hurt. But you are--as the Commissioner, I assume you 
have goals. Do you have a goal to reach 10 to 15 percent? Is 
there a goal that you have in mind?
    Ms. Galante. Just to be clear, we have a goal to reseed to 
10 or 15 percent--
    Mr. Hurt. Okay, that is what I am asking.
    Ms. Galante. --but not to try to always stay at 15 percent. 
We don't have an upward goal, I guess is what I am trying to 
clarify.
    Mr. Hurt. So you have a goal to get down to 10 to 15 
percent, maybe even more, but at the same time you say that as 
an agency, you would like to believe it should also be a goal 
to be self-sufficient. Is that right?
    Ms. Galante. That is correct.
    Mr. Hurt. Can you do those two things at the same time? Can 
you be have only 10 to 15 percent of the market and have the 
private market come in and take up the slack, which I think we 
all want, and I think you want? Can you still be self-
sufficient and be at 10 to 15 percent? Are those things 
inconsistent?
    Ms. Galante. They are not inconsistent. Again, if you look 
at FHA over time, historically, except for regional ramp-ups 
because of an economic distress, we have had historically a 
lower market share. We are not trying to drive that market 
share up in order to be ``self-sustaining.''
    Mr. Hurt. But you say you have taken steps to drive that 
market share down.
    Ms. Galante. We have, yes.
    Mr. Hurt. And you will continue to do that?
    Ms. Galante. Yes, we will.
    Mr. Hurt. Do you believe the private sector better prices 
risk than the public sector, than FHA as a maxim?
    Ms. Galante. I would say this crisis would teach us that 
no, that has not actually been the case and I would--
    Mr. Hurt. If that is the case, then why do we want to have 
the private sector get more of the marketplace?
    Ms. Galante. Again, the private sector can do what it will 
to come in in front of the public. Why wouldn't you want the 
private sector to be taking that overall risk?
    Mr. Hurt. Thank you. I yield back what I don't have.
    Chairman Hensarling. The Chair now yields to the gentleman 
from New Jersey, the chairman of the Capital Markets 
Subcommittee, Mr. Garrett, for 5 minutes.
    Mr. Garrett. And I thank the chairman.
    One of the points that was raised about whether you are a 
private entity or not, and of course you are not a private 
entity, and I agree with that, but you do have shareholders, 
and the shareholders of course are the American taxpayers.
    And so one point is, I really see no reason why this entity 
should not have to comply with and abide by and be examined by 
the same accounting standards as any other private entity would 
be. Do you agree with that?
    Ms. Galante. I do not.
    Mr. Garrett. You think that there should be an exception 
because you are a public entity serving the public good?
    Ms. Galante. It is an ``exception.'' It is that the FHA 
follows Federal credit reform which is how loan guarantee 
programs, credit programs for all Federal Government guarantee 
programs are done and that does calculate appropriately for the 
FHA's--
    Mr. Garrett. We can have a discussion on that because we 
are looking to move to provide for more transparency within the 
FHA to the public as far as what their potential losses are in 
the future.
    But since you are a public entity and you are supposedly 
doing good for the American public as opposed to harm, can you 
tell me how many people the FHA loaned to back in 2009 and 
2010, and how many of those are now in foreclosure? How many 
loans?
    Ms. Galante. I don't have the exact numbers for 2009 in 
front of me. I can--
    Mr. Garrett. You can get that?
    Ms. Galante. --probably grab those.
    Mr. Garrett. And could you also find out how many of those 
foreclosures were for minorities?
    Ms. Galante. We can get you those statistics.
    Mr. Garrett. And you can--how many of those loans went into 
foreclosure also for people who fell below the watermark as 
they say, underwater within a year of receiving the loans. In 
other words, you issued them a loan and then 12 months later, 
they are already underwater. Do you know how many that is?
    Ms. Galante. You would have to have the external market 
data for that particular point in time to do that.
    Mr. Garrett. But isn't that--that would be something you 
would want to know as far as the loans you are giving to people 
if they are actually falling underwater a year after, within a 
year after year you are losing them. Isn't that something you 
would like to know as far as being a public entity?
    Ms. Galante. We track all kinds of statistics. Certainly it 
is important. In this economic crisis, there were a lot of 
people--
    Mr. Garrett. But the point here is if you are a public 
entity trying to do more good than harm, you are not really 
doing good to them if you are, if the number of foreclosures 
that are out there is high and the number between minorities is 
high and yet you are putting people into loans that they cannot 
afford and they are underwater within a year. Is that not part 
and parcel of the problem, that you provide for loans with loan 
downpayment requirements in a declining market?
    Ms. Galante. So--
    Mr. Garrett. That is what you had in 2009 and 2010.
    Ms. Galante. Again, as part of our countercyclical role, as 
home values were declining, people didn't know exactly how far 
homes--
    Mr. Garrett. So the market is going down and you are 
helping people to get into the market so they can see 6 or 7 
months later that their house is worth less. Is that good for 
the people or is that bad for the people?
    Ms. Galante. We help people get into the market. We didn't 
have perfect vision about where home prices were going--
    Mr. Garrett. So you really don't care--
    Ms. Galante. --we help people refinance out of bad 
mortgages, so there was a lot of countercyclical work that was 
important for us to be doing in that period of time.
    Mr. Garrett. It seems like the answer to everything we say 
is that it is countercyclical. So it is okay for the government 
to help somebody to get into a mortgage that you know they 
can't afford, even though it is a declining market, and 12 
months from now they will actually be underwater and go into 
foreclosure.
    Is that maybe the reason why when this committee tried to 
provide some degree of reform for FHA back in 2009 and 2010, 
and with the Chair's permission, I would like to put this in 
the record--
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Garrett. --this is talking points or lobbying points 
by--not by you because you weren't here but by some of the 
people who are with you here--I had an amendment, which has 
downpayment requirements of 5 percent, and a prohibition of 
financing by closing cost.
    The chairman had an amendment, a moratorium of FHA 
insurance until the MMIF meets capital ratio requirements. I 
had other requirements--one, two, three, four other amendments 
that we were trying to make sure that since you didn't have a 
view towards the future that you would not find yourself in the 
situation that you are finding yourself today.
    Do you think it was appropriate that FHA came and lobbied 
against reform to the FHA in 2009 and 2010?
    Ms. Galante. Let me be clear. We do believe that you can do 
quality, low-downpayment loans successfully. Over our history, 
we have done that.
    Mr. Garrett. Let me just give you one example. I was out of 
the room. Somebody asked you whether you would be able to give 
a loan for $755,000 to somebody making--you were asked what was 
the median income for somebody getting that loan and you said 
about $100,000. Is that correct?
    Ms. Galante. I believe that is what I said, yes.
    Mr. Garrett. If you make $100,000, your take-home pay is 
around $6,500 a month, and that means your mortgage and tax 
payment on that is almost $4,000 a month to pay for that loan. 
Is that type of loan that you want to put somebody into, 
especially during a declining market?
    Ms. Galante. Again, we are dealing with the loan limits 
that Congress has--
    Mr. Garrett. I am not talking about the loan limits. I am 
talking about your underwriting practices to put somebody who 
makes $100,000 into a house that is worth almost $800,000; 
$755,000. Is that a prudent use of taxpayers' money? And is it 
fair to put the person into that home when you know that he 
cannot afford $4,000 a month on a mortgage when he is only 
making $6,500 a month? Is that good?
    Ms. Galante. So again, I was guessing at the median income 
required to make that mortgage payment--
    Mr. Garrett. The appropriate level of income, I would 
assume under the standard rule, would be around $250,000. If 
that was the level, would you think that would be appropriate 
then to help somebody making $250,000 to buy a $750,000 home?
    Ms. Galante. If we are asked by Congress to go to $729,000 
in high-cost areas, and we prudently underwrite that loan based 
on a debt-to-income ratio, based on the longevity of 
employment--
    Mr. Garrett. The question, Mr. Chairman, is whether that 
would be a prudent loan, I would assume.
    Chairman Hensarling. The time of the gentleman has expired. 
In order to accommodate Ms. Galante's schedule, the last 
questioner will be the gentleman from Kentucky, Mr. Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    And Commissioner Galante, thank you for your testimony 
today, and let me apologize in advance if I am covering 
territory you have already covered. I had to step out for a 
little bit, but I wanted to just get your feedback on some 
statements made by other regulators in the financial services 
sector.
    A press release from the Consumer Financial Protection 
Bureau (CFPB) in January of this year indicated that it was the 
government's policy to make sure lenders offer mortgages that 
consumers can actually afford to pay back. I would assume you 
agree with that basic government policy.
    Ms. Galante. Yes, it is the Ability-to-Pay Rule.
    Mr. Barr. Right, exactly. And the same release stated that, 
``Unaffordable loans helped cause the worst financial crisis 
since the Great Depression.'' Would you concur with that 
statement?
    Ms. Galante. Yes.
    Mr. Barr. And in addition, the CFPB release stated that, 
``Lenders should not set up consumers to fail.'' I also assume 
you would agree with that basic statement?
    Ms. Galante. Certainly, and when you talk about 
unaffordable and unsustainable, the CFPB clearly has written 
rules so that we don't get into this situation that we have 
gotten into today, not FHA, but as a society of no 
documentation and high rates--
    Mr. Barr. No. I understand, but as a general policy 
obviously the government shouldn't be doing anything to set 
consumers up to fail. That is a policy that this Administration 
has advocated.
    Ms. Galante. These policies are to assure that no one sets 
up consumers.
    Mr. Barr. Sure, sure, and as I understand it, there are 
now, according to the GAO, 16 financial literacy programs 
across the Federal Government and there are 4 homeowner 
counseling programs across the Federal Government. I take it 
that the FHA is supportive of these financial literacy 
programs. Is that correct?
    Ms. Galante. Absolutely. We actually have an Office of 
Housing Counseling.
    Mr. Barr. Right, and so in just doing a little bit of 
homework on some of these financial literacy programs, I was 
looking at the Web site www.money.gov which is presumably a Web 
site set up as a part of the Office of Financial Literacy, a 
new government agency that was established as a result of Dodd 
Frank.
    Is it fair to say that you support these efforts to counsel 
individuals and make sure that people are measuring their 
ability to repay before undertaking the obligation of 
homeownership?
    Ms. Galante. We do, and we actually announced--and I don't 
know anything about that one--
    Mr. Barr. Okay.
    Ms. Galante. --so I am not endorsing whatever that site is, 
but we actually have in our report to Congress indicated that 
we want to bring back what FHA had many years ago: a robust 
housing counseling effort for new homebuyers to FHA.
    Mr. Barr. In one of the links on this www.money.gov Web 
site, this new Web site I suppose, there is no substantive 
guidance for the consumer, but it does redirect the person to 
the FDIC site, which has the section on there to buy or not to 
buy a home. And I will just read it to you and have you respond 
to it.
    ``Homeownership may not be for everyone. It is a big 
financial commitment starting with the initial shock of your 
purchase including a downpayment and fees followed by years of 
monthly mortgage payments, real estate taxes, property, 
insurance, and maintenance costs.''
    That is the advice that the Federal Government is giving 
prospective homeowners. Do you agree with that advice?
    Ms. Galante. Yes.
    Mr. Barr. Okay. So the follow-up question then is--and I 
understand your testimony earlier. I did have the benefit of 
hearing what FHA is doing in part to address the negative 
capital ratio and some of the reforms that you are by 
administrative measures taking to try to deal with some of the 
challenges that the agency faces. I think you testified that 
there is some credit box tightening and premium changes and 
whatnot, which I applaud the agency for taking the steps.
    But generally speaking, do you think that encouraging 
lending to individuals in this category, the category of low 
credit scores, people who can barely get by on cheap up-front 
pricing, the 3.5 percent downpayment, the low downpayment 
requirements, do you believe that encouraging lending to that 
category of individuals is consistent with the advice that the 
Federal Government is giving across all of these financial 
literacy programs?
    Ms. Galante. Again, to be clear, FHA provides 30-year, 
fully-amortizing, fixed-rate loans, underwritten to borrowers' 
qualifications. Again, have we tightened up some in terms of 
how much income you need to have, how much after payment of 
debt that you need to have? Absolutely, and these are, 
including low downpayment, very sustainable mortgages for these 
families over time and we think these are affordable and 
appropriate.
    Now, I am not saying there aren't further things that we 
should look at in terms of overall credit quality, but these 
are affordable, sustainable mortgages.
    Chairman Hensarling. The time of the gentleman has expired. 
There are no other Members in the queue.
    I would like to thank Commissioner Galante for coming 
today, and again, thank you for your service to our country.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place her 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.
    Without objection, this hearing is adjourned.
    [Whereupon, at 1:06 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           February 13, 2013


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