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





                     MORTGAGE INSURANCE: COMPARING
                           PRIVATE SECTOR AND
                    GOVERNMENT-SUBSIDIZED APPROACHES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 13, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 113-6



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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
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
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
                 Subcommittee on Housing and Insurance

                   RANDY NEUGEBAUER, Texas, Chairman

BLAINE LUETKEMEYER, Missouri, Vice   MICHAEL E. CAPUANO, Massachusetts, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California           EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia  WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey            BRAD SHERMAN, California
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             CAROLYN McCARTHY, New York
ROBERT HURT, Virginia                KYRSTEN SINEMA, Arizona
STEVE STIVERS, Ohio                  JOYCE BEATTY, Ohio





















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 13, 2013...............................................     1
Appendix:
    March 13, 2013...............................................    43

                               WITNESSES
                       Wednesday, March 13, 2013

Bazemore, Teresa Bryce, President, Radian Guaranty, Inc..........    15
Bjurstrom, Kenneth A., Principal and Financial Consultant, 
  Milliman.......................................................     7
Chappelle, Brian, Partner, Potomac Partners LLC..................    11
Shapo, Nat, Partner, Katten Muchin Rosenman LLP..................     9
Stelmach, Stephen, Senior Vice President and Research Analyst, 
  FBR Capital Markets & Co.......................................    13

                                APPENDIX

Prepared statements:
    Neugebauer, Hon. Randy.......................................    44
    Bazemore, Teresa Bryce.......................................    46
    Bjurstrom, Kenneth A.........................................    65
    Chappelle, Brian.............................................    76
    Shapo, Nat...................................................    88
    Stelmach, Stephen............................................    99

 
                     MORTGAGE INSURANCE: COMPARING
                           PRIVATE SECTOR AND
                    GOVERNMENT-SUBSIDIZED APPROACHES

                              ----------                              


                       Wednesday, March 13, 2013

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Royce, Miller, Capito, Garrett, Westmoreland, Hurt, Stivers; 
Capuano, Velazquez, Cleaver, Sherman, Himes, Sinema, and 
Beatty.
    Ex officio present: Representative Hensarling.
    Also present: Representative Green.
    Chairman Neugebauer. Good morning. This hearing of the 
Housing and Insurance Subcommittee will come to order. By 
mutual agreement, we will have opening statements, about 10 
minutes on each side, as previously agreed. And there may be 
members of the full Financial Services Committee who want to 
participate in this hearing today, so I ask unanimous consent 
that members of the Financial Services Committee who are not 
members of the subcommittee and who have joined us today will 
be entitled to participate. Without objection, it is so 
ordered.
    This is our third hearing that we have done on FHA. And the 
reason we have had so many hearings is that FHA is an important 
component of the housing and the finance markets in this 
country. And they have become a larger and larger portion of 
the business, in controlling over 50 percent, for example, of 
the mortgage insurance premium in this country.
    This is no small insurance company. This insurance company 
has over a trillion dollars worth of business on the books. 
What does that mean? It means that because it is a government-
backed entity, the taxpayers are, in fact, on the hook for over 
a trillion dollars worth of mortgages in this country.
    But the other aspect of it is that it is disturbing to find 
that this entity--as we have learned in previous hearings--is 
somewhat in financial straits. It is an entity that basically, 
has a negative net worth. And so, you have an over-trillion-
dollar entity that is backed by the American taxpayers that has 
a negative net worth.
    Now, any other company like that would be in bankruptcy or 
receivership. And so, I think that this may be the most 
important hearing we have had so far. Because today what we are 
going to analyze is if FHA is, in fact, an insurance company, 
which they are, then are they operating like traditional 
insurance companies? And we are going to hear from witnesses 
today who will tell us a little bit about what the profile of a 
entity like this should look like if it were in the private 
sector. Why is it important that we compare them to the private 
sector? It is important that we compare them to the private 
sector because they are competing with the private sector. That 
is one reason. But the other reason for them to be run in a 
financially sound way is the fact that the taxpayers are on the 
hook for these mortgages. And so, we need to make sure that the 
people who are enjoying the benefits of having an FHA loan in 
this country are actually carrying their load, and that they 
are not actually putting the taxpayers at risk.
    Because for those people who don't have an FHA mortgage or 
have a private mortgage, they are, in fact, being penalized 
because they are paying their mortgage and they are paying the 
risk premium for having a privately-insured mortgage. But at 
the same time, they are at risk of also subsidizing the premium 
for people who have an FHA loan. So there are a number of areas 
where we are going to explore today.
    I want to make sure that we have an open and honest 
discussion. And one of the things that we want to make sure of 
is that as we move forward, we make sure that FHA is operating 
within what I think is the congressional intent. It has gotten 
to be a much bigger organization, and it is actually growing at 
an exponential rate. It is growing faster than it is ever grown 
and it is bigger than it has ever been. And the question is, is 
this the FHA that Congress intended, and is this FHA being run 
in an appropriate way for the American taxpayers?
    So, I look forward to the hearing, and I look forward to 
hearing from the witnesses today. And with that, I will yield 
back my time and recognize the ranking member of the 
subcommittee, Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman, for holding this 
hearing, and I certainly welcome our witnesses. I look forward 
to your testimony.
    The bottom line is, I agree with many of the things that 
the chairman said. The FHA, we all know, has grown. We have 
differences of opinion as to why it has grown and what would 
have happened had it not grown. I happen to believe that had it 
not grown at the time it did, there would be no housing market 
right now. Now, granted, that is past tense in 2008 and 2009 
and 2010. The question is, what do we do from this point 
forward?
    From what I see, things are moving in the right direction. 
The FHA is slowly but surely and steadily, thoughtfully 
decreasing its share of the market, and private enterprise is 
coming back into the market the way it should. Nonetheless, I 
think it is fair and reasonable to ask all these questions. And 
also to oversee to make sure the FHA is doing what Congress 
wants it to do. I think all that is fine, I think it is good, 
and I think it is useful.
    And those are the aspects on which I agree with the 
chairman. I do have some concern, however, that a lot of these 
hearings are being used simply as a setup to make sure that 
when the time comes, private enterprise will be able to grab a 
larger share than they have ever had in any traditional sense 
of the word. We will be a little bit careful of that, only 
because I like the housing market that we had for 40 years.
    Granted, it got out of whack and we need to put it back in 
whack. But I don't want to go overboard and completely 
disincentivize the entire middle class from ever being able to 
purchase a home. I think that is part of the balance here. I am 
also a little concerned that some of the things that are 
happening might be used, at some point, to make a political 
point. For instance, as I understand the law, the FHA is 
required by law to access certain Treasury funds even though 
they don't need them.
    So I will be asking each witness if you think the FHA will 
actually need to borrow Federal dollars this fiscal year 
regardless of what the law says. Not access the money, because 
as I understand the law they have to, but do you think the FHA 
this year will have to access anything outside of their own 
funds? And if the answer is yes, you will have to explain to me 
why. And that is why I filed H.R. 1028, which simply repeals 
the section of the law that requires the FHA to access Treasury 
funds when they don't need them.
    It is a ridiculous law that I never knew existed until we 
hit this particular situation. I guess it is excessive. It is 
belt-and-suspenders, and maybe two-belts-and-two-suspenders. It 
is a little bit of overkill to make sure that the FHA stays 
whole. And I think it is unnecessary and inappropriate. But 
nonetheless, we will see if some of my colleagues will help 
pass that bill to get the FHA on the footing that it deserves 
and to not jeopardize taxpayer dollars unless it is absolutely 
necessary.
    So I look forward to your testimony today, and I look 
forward to making sure, together with the chairman and other 
members, that the FHA is doing what we wanted it to do when it 
was originally created.
    Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now, the vice chairman of the subcommittee, Mr. 
Luetkemeyer from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. And thank you for 
the important salient hearing we are having today.
    Regardless of political ideology, there are certain facts 
about FHA that can't be denied: one, FHA's market share has 
grown considerably over time; two, FHA insures more than $1 
trillion worth of mortgages on more than 7 million loans; 
three, FHA has the authority to draw funds directly from the 
U.S. Treasury; and four, FHA's Mutual Mortgage Insurance Fund, 
or MMIF, has a capital ratio that has fallen below the 
statutorily-required level of 2 percent.
    In fact, during Fiscal Year 2012, the capital reserve ratio 
fell to a negative 1.44 percent. Despite these facts, FHA's 
book of business continues to grow as the private market is 
being forced to comply with stricter regulations and standards. 
As someone who has spent many years in the banking and 
insurance industry, I respect and understand the importance of 
the sound tenets in lending and underwriting. And looking at 
the data surrounding FHA's finances, it is clear that they are 
not employing sound practices.
    What is most disturbing about this is that the taxpayers 
are the ultimate backstop for FHA's sloppy work. The simple 
truth of the matter is that FHA needs to be examined and needs 
to be held to the same standards, high standards, that they are 
currently operating under. I look forward to hearing from our 
witnesses today, particularly about how we can return FHA to 
its original mission, ensure that they follow the sound tenets 
in lending and underwriting, and help spur growth in the 
private mortgage insurance market.
    Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman, and I also want 
to recognize that the chairman of the full Financial Services 
Committee, Mr. Hensarling, has joined us today. It is good to 
have you in the hearing.
    Now, I recognize the gentleman from Missouri, Mr. Cleaver, 
for 2 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman, and I do appreciate 
very much the fact that you have called three hearings to deal 
with FHA. And I think a part of this committee's benefit to the 
entire body is, you have been in municipal government and our 
ranking member came out of municipal government. And FHA has 
played a role since the Depression in keeping the housing 
market in this country sound.
    I am not sure I would agree that FHA is crowding out the 
private industry. Because when you think about it, before the 
housing crisis, there were 10 private mortgage insurance 
companies. Almost all of them went bankrupt, almost all of 
them. And it was at a time that we needed FHA to step in, and 
they did. And with recovery on its way, I think it is on the 
horizon.
    Private mortgage insurance posted their best year since the 
collapse in 2008. I was looking at this report from Inside 
Mortgage Finance that they put out, I think, on a monthly 
basis. Private mortgage insurance reported $175 billion in 
total new insurance written in 2012, more than doubling the 
amount of the business they did the year before, according to 
Inside Mortgage. So I do think that there may be a need for us 
to discuss this and massage it.
    But the truth of the matter is, FHA is still providing a 
service that we desperately need, and I look forward to 
interacting with our panel.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now Gary Miller, the vice chairman of the full 
Financial Services Committee, is recognized for 2 minutes.
    Mr. Miller. Thank you, Mr. Chairman. I don't think that we 
can argue that we must respond to the reality the FHA wasn't 
prepared to have the pressure it faced during the downturn 
crisis. But we also face the reality that the private sector 
and FHA are somewhat different. FHA was driven by a mission 
structure. The private sector is driven by a profit structure, 
which is most appropriate. But let's look at fair competition.
    I guess the question we need to ask is, was the FHA 
crowding out, or was there no crowding-in by the private 
sector? I think that is something we don't have an answer to 
right now. And I think we need to look at the structure that 
caused the lack of crowding-in. If you look at Basel QM--QRM, 
we are doing everything from a structural perspective from 
Congress to basically make sure the private sector does not 
come in when they should be.
    And if you look at the FHA, they play a countercyclical 
role. They grew when the private sector didn't come in. But now 
it is time to look at how do we ratchet back the FHA and other 
groups to let the private sector come in. That is something we 
need to really look at. And the latest actuarial review makes 
it clear that FHA wasn't fully prepared for the strains they 
faced during the downturn. They had five increases in fees. 
Were they appropriately timed, could they have moved in 
quicker?
    We need to explore the mechanics of the private sector 
mortgage market and ask, how do we evaluate their operational 
structure and apply that to FHA, determine where reforms are 
needed, to make sure FHA can play this countercyclical role 
they are intended to play? But we need to respond to certain 
things that FHA has done to make sure they can perform their 
function in the future. We need to ensure their management 
system and technology are appropriate to do the job they are 
supposed to do.
    We need to make sure that they ensure that appropriate 
credit quality is preserved in the system. I have introduced 
legislation in the past to make sure they would do that and, 
for some reason, that is not occurred. And we need to demand 
that FHA remain adequately capitalized. There are a lot of 
questions and a lot of concerns I have, and I am sad to say my 
time has expired.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from California, Mr. Sherman, is 
recognized for 2 minutes.
    Mr. Sherman. Yes, indeed, FHA's market share has grown, as 
the gentleman from California points out. That is FHA's 
mission, to step forward and play a larger role when we have a 
downturn, in this case the largest downturn in the housing 
economy in modern times. FHA has lost money on the guarantees 
that it made of mortgages in 2007 and 2008. Who hasn't?
    Very few people realized we were headed for a huge decline 
in home prices. And even the most carefully selected mortgages 
made in 2007 and 2008 had a higher than expected default rate, 
as people became unemployed and as they were unable to sell 
their homes at a profit when they were forced to sell them by 
unemployment or divorce or whatever. Moody's Analytics 
estimated that if the FHA hadn't stepped forward, then by 2010 
we would have seen another 25 percent decline in home prices 
around this country.
    That would have been terrible for our economy, and even 
terrible for the private mortgage insurance industry. I look 
forward to restoring a more orderly market, one in which 
private mortgage insurance will be playing a bigger role, and 
FHA will be playing a smaller one, as we stabilize this economy 
and stabilize home prices.
    Finally, I come from a high-cost area, where $729,000 is 
still a middle-class family. And to have Fannie Mae and Freddie 
Mac shut out of that market, but the FHA in it, I think is 
unfair to the private mortgage insurance industry. People with 
those mortgages ought to be eligible for a combination of 
private mortgage insurance and Fannie Mae and Freddie Mac. I 
look forward to restoring the situation where Fannie and 
Freddie have limits at least as high as FHA.
    And I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman, Mr. Westmoreland, is recognized for 
2 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman. I have said this 
many times before: The FHA is insolvent. If FHA were a private 
mortgage insurance company or one of my community banks, it 
would have failed a long time ago. We don't want FHA to fail. 
We want it to do what it was created to do. Instead of focusing 
on fundamentals like shrinking their portfolio, reducing risk, 
and charging a premium that is in line with risk, FHA has 
advanced a policy that can only be described as out of bounds 
from its original intent.
    In fact, the administrator admitted to this committee last 
month that people earning over $100,000 are eligible for an FHA 
loan. Are these the low-income borrowers FHA is supposed to be 
serving? FHA is in markets and arenas that they don't need to 
be in. Further, Dodd-Frank, the QM, and Federal housing 
policies are driving businesses to FHA rather than away from 
the private sector. The list of FHA advantages over the private 
market is long, and I have fought to bring private mortgage 
financing and PMI back into the market.
    We need to reduce the 100 percent guarantee to 25 to 50 
percent to be in line with the VA program and what private 
mortgage insurance offers. We need to reduce the loan limit to 
be in line with the area medium income, and tie FHA loans to 
the income. We need to restructure FHA premiums so that they 
can recapitalize their fund. And we need to be sure FHA uses 
the same standards for underwriting that are used in the 
private market.
    I hope Chairman Hensarling and Chairman Neugebauer work 
towards a conservative bill that ends these subsidies and 
refocuses FHA on its core mission to serve first-time and low-
income borrowers.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlewoman from Ohio, Mrs. Beatty, is 
recognized for 2 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member. I, too, join my colleagues in looking forward to 
continuing to discuss FHA's financial position and, in 
particular, the notion of government crowding out private 
mortgage insurance from the residential mortgage insurance 
market.
    FHA has, indeed, become a much more significant player in 
the mortgage insurance market. But this reflects the fact that 
private mortgage insurers all but pulled out of the market 
during the housing downturn. According to Moody's Analytics, 
the FHA's response to the housing collapse prevented house 
prices from falling an additional 25 percent, which would have 
resulted in 3 million more jobs lost and a reduction in the 
economic output of $500 million.
    So I think when we discuss FHA's larger market share, let's 
do so with a clear understanding of what precipitated this 
increased growth, which is first, the FHA's fulfillment of its 
statutorily-defined mission to promote long-term stability in 
the U.S. housing market by providing countercyclical support. 
Second, despite playing such a critical role in the crisis, the 
FHA has already begun taking steps to shore up the MMIF and to 
also refocus its efforts towards the primary market for FHA-
insured loans, first-time homeowners, and low- and middle-
income borrowers.
    And lastly, by increasing, up front, annual fees, and 
making mortgage insurance premium payments due for the life of 
the loan, rather than just until the borrower's equity reaches 
a certain level, the FHA has actually strengthened the position 
of private mortgage insurances. And I certainly look forward to 
hearing from our witnesses today and continuing these hearings.
    I yield back my time.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from Texas, Mr. Green, is recognized 
for 1 minute.
    Mr. Green. Thank you, Mr. Chairman, and thank you for 
allowing me to be a part of this subcommittee hearing.
    I am here to say to FHA, ``Thank God for you.'' I really do 
believe that FHA has been of great benefit to this country. It 
was formed at a time of crisis in 1934 when loans were hard to 
acquire, if you could acquire one at all. They were short-term, 
they had balloons. FHA was born out of a crisis with the intent 
of responding to a crisis, and that is exactly what it has 
done.
    It has responded to the ``Great Recession'' by allowing 
people to acquire homes who probably could not have acquired 
them otherwise, given that so many of these other companies 
have gone out of business. If not for FHA, we would be in dire 
straits today. I believe that FHA can do some things to improve 
its position, and I look forward to tweaking it, and mending 
it, but not ending it.
    Chairman Neugebauer. I thank the gentleman. And now, we 
will recognize our panel. Each of you will be recognized for 5 
minutes. Your written statements will be made a part of the 
record.
    The panel today consists of: Mr. Ken Bjurstrom, principal 
and financial consultant from Milliman; Mr. Nat Shapo, a 
partner at Katten Muchin Rosenman; Mr. Brian Chappelle, a 
partner at Potomac Partners; Mr. Steve Stelmach, senior vice 
president and research analyst at FBR Capital Markets & 
Company; and Ms. Teresa Bryce Bazemore, president of Radian 
Guaranty, Inc.
    Thank you for being here today. And with that, Mr. 
Bjurstrom, we will recognize you for 5 minutes.

  STATEMENT OF KENNETH A. BJURSTROM, PRINCIPAL AND FINANCIAL 
                      CONSULTANT, MILLIMAN

    Mr. Bjurstrom. Good morning. Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee, thank you for 
the privilege of appearing here today.
    My name is Ken Bjurstrom. I am a principal at Milliman, 
where my practice focuses on mortgage credit risk analysis for 
the mortgage insurance and mortgage banking industry, both for 
private and government organizations. In association with 
Milliman, I have conducted analyses of the private MI industry 
and, at the request of HUD's Inspector General, I have 
conducted several reviews of the actuarial report for the FHA's 
mutual mortgage insurance fund.
    During the early 1980s and again in the early 1990s, as 
well as over the last few years, the economy has suffered 
declines in home prices or increases in unemployment resulting 
in mortgage insurance claims. Subsequent to each of these 
periods of economic stress, the MMIF experienced substantial 
losses. For endorsement year 1981, roughly 22 out of every 100 
FHA borrowers defaulted and lost their home, resulting in a 
mortgage insurance claim to the FHA.
    For endorsement years 1990 through 2003, relatively good 
times, the comparable rate was 8 out of 100 borrowers. And for 
the 2007 endorsement year, according to the FHA's MMIF 
actuarial report, the rate is estimated at over 30 out of every 
100 FHA borrowers. All mortgage insurers are exposed to 
considerable risks which, in turn, require them to maintain 
basic disciplines, including underwriting, ratemaking, loss 
reserving, and also a commitment to high capital levels.
    Historically, insurers have generally used the size of the 
downpayment or loan-to-value product type in the amount of 
coverage in their underwriting and ratemaking approach. 
Relatively recently, private MIs have expanded their premium 
rate programs to recognize the importance of borrower credit 
scores and other factors. In contrast, the FHA currently 
utilizes fewer tools available to them to manage their 
insurance exposures. Without a more granular approach to 
ratemaking, the FHA may be encouraging adverse selection with 
respect to obtaining FHA mortgage insurance protection.
    State insurance laws require private MIs to adequately 
maintain multiple reserves. These reserve requirements require 
the MI to account for near-term expected losses, restrict 
shorter-term dividends, and measure the company's ability to 
write new business. The FHA, in contrast, does not have a 
comparable reserving methodology. Private MIs are generally 
subject to a maximum risk to capital ratio when combined with 
reserve requirements, require it to build reserves and 
surpluses during periods of economic growth so that they are in 
a position to cover substantial levels of claims during periods 
of economic downturn.
    The FHA, on the other hand, is not required to hold 
equivalent statutory reserve requirements or comparable capital 
requirements. FHA's Mutual Mortgage Insurance Fund is required 
to have an independent actuarial analysis of its economic net 
worth and financial soundness to determine whether it has 
maintained a 2 percent ratio of the economic value to its 
insurance in force. This ratio requirement, and the economic 
valuation from which it is derived, is the only gauge of FHA's 
ability to withstand losses.
    FHA's economic value calculation has several inherent 
weaknesses. The long-term forecast used generates significant 
positive economic value for the most recent endorsement years, 
as if these economic forecasts were certain. It considers 
anticipated future premiums from these books and their future 
losses. But these recent books are very large and have the 
potential for significant variability over the long-term.
    In contrast, private MIs do not take credit for the 
economic value reflected in future premiums and terms of their 
statutory requirements. If we were to re-look at history and 
forecasted FHA claim rates and the economic environments that 
caused them, it is clear that the FHA should establish a 
capital threshold that reflects a more risk-based probability 
of stress losses in the future.
    Additionally, the FHA should be allowed to establish loss 
reserves and account for estimated loss liabilities prior to 
determining its capital ratio or other assessments of its 
financial strength. Loss reserves are a critical part of 
determining the actuarial health of any insurance fund, and 
should be part of the MMIF capital assessment to give Congress 
a more accurate view as to the capital adequacy of the FHA's 
single-family operations.
    Since the early 1980s, when I began working in this 
industry, I have witnessed multiple economic downturns which 
created tremendous losses for both private MIs and government-
run funds at both the State and Federal levels. It is therefore 
important to continue to work diligently to protect the FHA 
program. To that end, I recommend that the FHA evaluate and 
adopt many of the private MI statutory accounting provisions 
described above, better understand and modify their exposures 
to support their mission, and retain the necessary capital that 
is required to protect the program now and for the next 
economic downturn that will most definitely occur.
    Thank you for inviting me and for your consideration of my 
views. I would be pleased to answer any questions.
    [The prepared statement of Mr. Bjurstrom can be found on 
page 65 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Shapo, you are recognized for 5 minutes.

  STATEMENT OF NAT SHAPO, PARTNER, KATTEN MUCHIN ROSENMAN LLP

    Mr. Shapo. Thank you, and good morning, Mr. Chairman, 
Ranking Member Capuano, and members of the subcommittee. Thank 
you for inviting me. It is a privilege to participate as the 
subcommittee performs its important work.
    My name is Nat Shapo. I am a partner at Katten Muchin 
Rosenman LLP in Chicago. I practice mainly in insurance, 
litigation, and regulatory matters. I am also a lecturer at the 
University of Chicago law school, where I teach insurance law. 
And I was privileged to be the Illinois Insurance Commissioner 
from 1999 to 2003.
    At the subcommittee's request, I have analyzed the FHA 
Mutual Mortgage Insurance Fund from a regulatory perspective. 
From what I found, based on GAO audits and other public record, 
the fund appears to have been, and to be, operating and 
overseeing in a manner that conflicts with basic regulatory 
principles.
    Insurance is regulated in the United States primarily by 
the States per the Congress' direction in the McCarran-Ferguson 
Act. The State insurance department is generally divided into 
solvency regulation and market practice oversight. The former, 
solvency regulation, is usually looked at as the most important 
function of insurance regulation, since financial impairment 
jeopardizes the carrier's ability to carry through on the heart 
of the insurance contract, the promise to pay.
    Nearly a century ago, the Supreme Court nicely explained 
the key place that solvency regulation has in protecting the 
well-being of the common fund that all consumers rely upon. 
Insurance companies, the court said, create a fund of assurance 
and credit, with companies becoming the depositories of the 
money of the insured, possessing great power thereby and are 
thereby charged with great responsibility. How necessary their 
solvency is, is manifest.
    With respect to solvency regulation, requiring 
capitalization commensurate with risk is a basic pillar. Thus, 
a common requirement in the States, based on a National 
Association of Insurance Commissioners model, is a risk to 
capital ratio limiting outstanding liability on the insurer's 
aggregate policies to 25 times its capital surplus and 
contingents in reserve. In other words, the carrier must have 
real money, at least 4 percent of its liabilities, on hand.
    The 4 percent capital to risk ratio is backed up in the 
NAIC model. If it is pierced, the carrier may not write new 
business. This protects both current and potential new 
consumers by preventing an impairment from becoming a 
catastrophe. The FHA fund's risk to capital ratio of 50 to one, 
which means capital in the amount of 2 percent of exposure, is 
half as stringent as the NAIC model's 4 percent. Certainly, the 
weaker standard is relevant.
    But my bigger concern is that the standard, at whichever 
level, is not enforced, as a regulatory requirement, in 
practice. The GAO found that the capital ratio fell from about 
7 percent in 2006 to 3 percent in 2008, below 2 percent in 
2009. It is not expected to reach 2 percent again until 2017, 
meaning it will likely be below its statutorily-mandated level 
for 8 years. This extended failure to meet the legal minimum is 
exacerbated by the FHA's practice of attempting to write its 
way out of trouble.
    An impaired insurer is generally not allowed to write new 
business absent very stringent additional requirements. But 
FHA's exposure has ballooned, according to the GAO. In 2006, 
FHA insured approximately 4.5 percent. Today, it insures at its 
peak, though in 2009, it insured 32.6 percent. Today, we are 
still over a quarter. The results have been predictable, and 
exactly what insurance regulation is designed to prevent; the 
deepening of the crisis, and a full-blown negative balance 
sheet.
    GAO explained that in 2012, the capital ratio fell below 
zero, to negative 1.44 percent. The fund is expected to be in 
negative balance for at least 2 years. A private insurer in 
such insolvent condition would be put in liquidation. The 
commonly-adopted NAIC hazardous financial condition regulation 
establishes a number of other different standards that would be 
triggered by an insurer in the fund's condition, which I have 
covered in my written testimony.
    Adverse findings in audits--we have seen that with the GAO. 
An insurer's operating loss in a 12-month period greater than 
50 percent of the insurer's remaining surplus. The fund has no 
surplus. The insurer growing so rapidly that it lacks adequate 
financial capacity. The fund's increased market share by 700 
percent, while turning into a balance sheet insolvency. So the 
fund would be in violation of those basic standards of the NAIC 
hazardous financial condition regulation.
    I was asked to provide a regulatory analysis, and the 
ultimate policy issues here are well beyond my proverbial pay 
grade so I will only briefly comment. Insurance is complicated, 
but its basics are straightforward. The Supreme Court explained 
that Congress understood the business of insurance to be 
underwriting the and spreading of risk. The fund operates apart 
from the basic rule. It does not evaluated hazards according to 
actuarial principles or correlated premiums-to-risk.
    The capital in this common fund does not support its 
exposure. Government intervention in the distribution of risk 
never ends well, and does not ultimately protect consumers that 
it is meant to. We have seen that in the New Jersey auto market 
and other places with heavy government intervention. By doing 
so, FEIA makes obtaining business and attracting capital, the 
core functions of any business, more difficult for carriers, 
distorts the entire market as a whole, and deepens the spirals 
already in place both at the FHA and among private carriers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Shapo can be found on page 
88 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And now, Mr. Chappelle, you are recognized for 5 minutes.

  STATEMENT OF BRIAN CHAPPELLE, PARTNER, POTOMAC PARTNERS LLC

    Mr. Chappelle. Thank you, Mr. Chairman, Ranking Member 
Capuano, and members of the subcommittee. I am Brian Chappelle 
with Potomac Partners.
    I believe that a strong and viable private mortgage 
insurance industry is an integral part of the mortgage market. 
I also believe that the MIs' challenges today have little to do 
with FHA. The MIs benefited from FHA's support of the mortgage 
market at the height of the crisis in 2008. By helping to 
stabilize home prices, FHA reduced MI losses. However, as the 
FHA audit shows, FHA will incur significant losses on loans 
made during that period.
    The good news is that loans made since then have 
strengthened the fund. FHA has taken numerous steps to shore up 
its reserves. Its rate increases are also pushing more business 
back to the MIs. FHA has raised its premium 5 times, with 
another coming next month. Even an MI said, in its annual 
earnings filing just last week, ``We believe that the FHA's 
current premium pricing has allowed us to be more competitive 
with the FHA than in the recent past for loans with high FICO 
credit scores.''
    And that was before the FHA's upcoming increase. For all 
the attention given FHA's mortgage limits, the data shows that 
FHA activity is concentrated in lower-priced homes. FHA's 
median loan amount was $147,000 in 2011. Seventy-one percent of 
FHA loans insured in 2012 were below $200,000; $200,000 is 
below the base loan limit in effect prior to the Economic 
Stimulus Act of 2008. Over 80 percent of FHA loans insured last 
year were also below the pre-stimulus limit when high-cost 
areas were included.
    FHA did more loans under $50,000 than over $500,000. FHA 
did twice as many loans under $100,000 as they did over 
$300,000. Concerning borrower income, the FHA median was 
$56,000 in 2011. FHA's median was only 12 percent above the 
U.S. median family income that year. That is lower than FHA's 
borrower profile in 1971, 40 years ago, when the FHA median was 
22 percent higher than the U.S. median.
    There are three ways that FHA achieves the balance between 
its mission, its responsibility to the taxpayer, while also 
minimizing overlap with the private sector. First, FHA's 
premium structure reduces overlap. Unlike many types of 
insurance, FHA charges all borrowers the same premium 
regardless of credit characteristics, thereby helping the 
private insurers to compete for better-quality loans.
    Second, FHA uses reasonable mortgage limits to minimize 
overlap. As the above data showed, high-balance loans are a 
very small part of FHA's business, or the MIs problem. However, 
some high-balance loans can help FHA cushion taxpayer risk 
because every audit I can remember has said higher-balance 
loans perform better.
    Third, FHA provides 100 percent insurance coverage. A 1997 
GAO audit concluded, ``Reducing coverage would increase 
borrower costs and reduce borrower eligibility.'' In addition, 
lenders are now taking the unprecedented step of adding their 
own underwriting requirements on top of FHA's. Reducing 
coverage would exacerbate this current problem.
    There is a more immediate problem facing the mortgage 
market today, however. As Federal Reserve Governor Duke noted 
in a speech last Friday, purchase mortgages hit their lowest 
level since the early 1990s. That is 22 percent fewer purchases 
than in 2008 at the height of the crisis. Younger home buyers 
are being particularly hard hit by tight credit. According to 
Governor Duke, from late 2009 to 2011, the number of first-time 
home buyers under 40 was half of what it was in the early 
2000s.
    She added that since 2007, there has been a fall of about 
90 percent for borrowers with credit scores between 620 and 
680. At the same time, about 30 percent of all purchase 
transactions in 2012 had home buyers paying cash. They did not 
need or want a mortgage. For the first time I also can 
remember, all cash sales are now the number one source for home 
purchases in our country, ahead of FHA, Fannie Mae or Freddie 
Mac.
    In other words, the private sector has returned to the 
housing market, just not to the mortgage market. I am worried 
that we may well be moving backwards towards the housing market 
where homeownership is limited to those who are wealthy or have 
wealthy parents, and a dwindling few whose credit is stellar 
enough to qualify for a mortgage. I believe that we must first 
solve this challenge before worrying about carving up a 
depressed purchase mortgage market.
    The fundamental problem with the current market today is 
not that FHA is doing too many purchase loans, but that, 
combined, FHA, the private mortgage insurers, and the GSEs are 
not backing enough of them.
    Thank you very much, and I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Chappelle can be found on 
page 76 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Stelmach, you are recognized for 5 minutes.

   STATEMENT OF STEPHEN STELMACH, SENIOR VICE PRESIDENT AND 
          RESEARCH ANALYST, FBR CAPITAL MARKETS & CO.

    Mr. Stelmach. Good morning. My name is Steve Stelmach. I am 
senior vice president at FBR Capital Markets, an investment 
banking firm headquartered in Arlington, Virginia. I would like 
to thank Chairman Neugebauer and Ranking Member Capuano for my 
invitation today.
    Among the issues that the subcommittee asked to be 
addressed today is the impact of the FHA's policies and 
practices on investments in private mortgage insurance. This is 
a topic for which I can offer a unique perspective. In my role 
at FBR Capital Markets, I have 10 years of experience in 
advising our clients on the merits and risks of investing in 
particular industries and companies
    My particular area of focus is U.S. housing, mortgage 
finance, and, relevant to the subcommittee, mortgage insurance. 
FBR's clients are pension funds, endowments, mutual funds, and 
asset managers in the United States and in Europe. 
Collectively, these clients match assets in the trillions of 
dollars. Having participated in countless conversations with 
these institutional investors over many years, I can attest 
that the actions of the FHA have a direct influence on investor 
decisions to allocate or not allocate capital to the private 
mortgage insurance industry.
    Today, I would like to address three main topics on which 
investors tend to focus: first, how the FHA has historically 
crowded out private capital; second, how recent changes at the 
FHA has actually encouraged new capital into the market; and 
third, how FHA policy changes can have the impact of expanding 
mortgage availability.
    First, on the issue of crowding out private capital, the 
FHA has a fixed insurance premium structure, which means the 
borrowers are all charged the same insurance premium. Until 
recently, that premium was at or below rates charged by private 
mortgage insurers. This premium, combined with the downpayment 
requirements, are less than those required by private mortgage 
insurance, higher FHA seller concessions, lower perceived 
repurchase risks for defaulted loans, and higher gain on sale 
margins pushed lenders and borrowers into the FHA product.
    With capacity constraints within the mortgage origination 
channels, uncertainty of our future liabilities, the 
creditworthiness of the average FHA borrower is much higher 
than historical levels. Currently, the average credit score of 
an FHA-insured loan hovers around 700. This is safely in prime 
credit territory, and well above the average FICO score for 
many low- and moderate-income households that the FHA has 
traditionally served.
    When the FHA premium was capped at 55 basis points, FHA 
charged a lower insurance premium for this prime quality 
borrower than premiums charged by the private mortgage 
insurers, making it exceedingly difficult for the private 
mortgage insurers to compete for that business. Turning to the 
issue of private industry, or private capital returns in the 
mortgage insurance industry, we see investor interest as very 
strong.
    Following the passage of the FHA Reform Act of 2010, the 
FHA was given the authority to raise annual premiums to 155 
basis points, or 1.55 percent. Following a series of premium 
increases, the current FHA premium is 1.35 percent. 
Additionally, the FHA has taken further steps to shore up its 
finances, making FHA loans less attractive to higher credit 
quality borrowers, expanding the market share from private 
mortgage insurers.
    Since the FHA began to institute premium increases in 2012, 
FBR has helped to raise $550 million in capital for a new 
mortgage insurance company, and recently participated in 
raising a billion in capital for an existing mortgage insurance 
company. In total, the mortgage insurance industry has 
attracted nearly $3 billion in new capital in the last 12 
months. Notably, investors chose to invest this capital only 
after FHA instituted premium increases.
    Despite the sums raised in the past 12 months, it is a far 
cry from the roughly $20 billion of capital that the private 
industry enjoyed just a few years ago. While much of the 
decline in industry capital is a result of extraordinary claims 
that the industry has paid in recent years, investors have been 
hesitant to provide capital to the industry, given persistent 
regulatory uncertainty, including GSE reform, FHA reform, 
Qualified Mortgage definitions under Dodd-Frank, and Qualified 
Residential Mortgage definitions under Dodd-Frank.
    We believe that as the market receives greater clarity on 
these issues, this clarity can facilitate even greater 
investment in private mortgage insurance. As a public policy, 
it could be seen as self-defeating for the FHA to allocate 
precious dollars for borrowers who would otherwise qualify for 
private mortgage insurance, while other borrowers struggle to 
get financing. As a means of expanding mortgage availability to 
those less-served segments of our country, the FHA has a 
critical role to play.
    And this dynamic leads to my final point. Higher premiums 
and other actions taken by the FHA can actually increase 
mortgage availability, up to a point. Now, this may sound 
inconsistent with policymakers' objectives but, in fact, we 
expect FHA premium increases to widen mortgage availability to 
less-served segments of our community. As premium increases 
take hold at the FHA, the FHA will price itself out of the 
prime credit market that I mentioned earlier.
    Private mortgage insurers are willing to serve this market. 
And if the government backs away, investors are more willing to 
invest in this private industry. In fact, we have started to 
see this play out. Importantly, however, now that the FHA 
capacity is not being allocated to this higher credit quality 
borrower, the FHA's precious resources can be directed to 
qualified but less creditworthy households. Under this 
scenario, we see the FHA fulfilling a very important policy 
objective of providing mortgage credit to underserved 
borrowers, while private capital becomes increasingly available 
to meet growing mortgage market demand.
    Again, I thank the committee for inviting me today. I am 
happy to answer any questions that you may have.
    [The prepared statement of Mr. Stelmach can be found on 
page 99 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And finally, Ms. Bazemore, you are recognized for 5 
minutes.

STATEMENT OF TERESA BRYCE BAZEMORE, PRESIDENT, RADIAN GUARANTY, 
                              INC.

    Ms. Bazemore. Thank you. Good morning. I am Teresa Bryce 
Bazemore, president of Radian Guaranty, a leading private 
mortgage insurance company. For decades, FHA and private MI 
have worked together in housing finance to ensure that low- and 
moderate-income families could purchase homes, often their 
first homes, with low downpayments.
    In fact, my first loan was an FHA loan for a condo, and so 
I have personally benefited from receiving both FHA and 
privately insured mortgage loans. FHA has been, and remains, a 
valuable part of the housing finance system. However, in the 
past few years FHA has dominated the mortgage insurance market 
due to housing policies and practices that provide competitive 
advantages to FHA, while crowding out private capital.
    By way of background, the private mortgage insurance, or 
MI, industry is the private sector alternative to loans insured 
by FHA. Private mortgage insurers help qualified, low-
downpayment borrowers obtain an affordable and sustainable 
mortgage. When a borrower places less than 20 percent down, the 
lender is required to obtain private MI in order for that loan 
to be eligible for subsequent sale to Fannie Mae or Freddie 
Mac.
    Even during the recent challenging times, the MI industry 
raised over $8 billion in new capital, paid approximately $34 
billion to the GSEs in claims resulting from foreclosure 
losses, and has reserved another $16 billion for this purpose. 
This is $50 billion taxpayers do not have to pay. We are able 
to pay claims at these levels in part because of the rigorous 
countercyclical reserve requirements and loan loss reserve 
requirements imposed by State insurance commissioners.
    A requirement to reserve half of every premium for 10 years 
ensures that significant capital reserves are accumulated 
during good times, and then drawn upon to absorb the losses 
during downturns. While private MI and FHA are similar in that 
they enable borrowers to buy a home with less than a 20 percent 
downpayment, there are some significant differences that 
Congress should consider.
    First, private MI places private capital at risk in a 
first-loss position after the borrower's equity. FHA relies on 
Federal funding, so that taxpayers currently are on the hook 
for over $1 trillion in mortgages.
    Second, private MI covers 25 to 35 percent of the loan 
amount, whereas FHA insures 100 percent of the loan amount, 
meaning the lender lacks any meaningful risk of loss.
    Third, private MI companies adjust premiums depending on 
the underlying loan characteristics. FHA premiums, on the other 
hand, do not reflect the true overall risk of the loans that 
FHA insures. Fourth, loans insured by FHA and guaranteed by 
Ginnie Mae are priced more favorably in the market than 
conventional loans guaranteed by Fannie and Freddie and insured 
by private MI.
    Keeping these differences in mind, I would like to offer 
five recommendations.
    First, authorize risk-sharing between FHA and private 
mortgage insurers. The private mortgage insurer will conduct an 
independent underwriting, and take a first-loss position ahead 
of the taxpayer.
    Second, alter FHA borrower eligibility standards to refocus 
FHA on serving lower- and moderate-income borrowers who need 
their help, as proposed in the Administration's February 2011 
White Paper on housing finance reform.
    Third, consider reducing FHA's guarantee below its current 
100 percent level, much like the VA mortgage program. A lower 
level of insurance coverage results in better underwriting and 
loan performance, which reduces both the probability of default 
and the severity of loss.
    Fourth, authorize FHA to adjust its premiums to levels that 
reflect the true risk of the loans that it insures.
    And fifth, avoid government actions that unintentionally 
steer borrowers to FHA, such as GSE guarantee fees and loan 
level price adjustments that are not actuarially based.
    The result is to make privately insured loans purchased by 
the GSEs more expensive than FHA-insured loans, thereby 
steering borrowers to FHA loans. Finally, I would like to say 
that unless the QRM and Basel III rules recognize private MI as 
a risk mitigant, low- downpayment borrowers will find it much 
harder to obtain a mortgage.
    Thank you, and I will be glad to answer any questions.
    [The prepared statement of Ms. Bazemore can be found on 
page 46 of the appendix.]
    Chairman Neugebauer. I thank the gentlewoman. And now, each 
Member will be recognized for 5 minutes for questions.
    I will begin by recognizing myself for the first question. 
Mr. Shapo, according to the NAIC Model Act, and I am going to 
read from that, ``In the event that any mortgage insurer has an 
outstanding total liability exceeding 25 times its capital, 
surplus and contingency reserve, it shall cease operating until 
it can build sufficient reserves.'' Why do you believe that 
State regulators put that in place?
    Mr. Shapo. It is part of the risk. The risk to capital 
ratio is a pillar of the system. There are minimum capital 
requirements in the low seven figures, but for a larger 
company, that is not the most important requirement. The most 
important requirement, as the company grows and as its exposure 
changes, the capital has to change and increase as the risk 
increases. So the baseline requirement is risk to capital.
    The requirements in different lines of insurance all follow 
that, in one form or fashion, the risk to capital ratio. And so 
that is the baseline requirement. And then the most important 
remedy, the most important follow-up to that is that if you 
don't meet that ratio, you can't continue to write business. It 
is essential that a company that is not able to support its 
level of exposure with real money in hand cannot continue to 
write more business and, potentially, increase and take 
basically an impairment and turn it into an--
    Chairman Neugebauer. So to if I am following you here then, 
if FHA were an insurance company in Illinois, where you were a 
former insurance commissioner, and they had a negative net 
worth and they were writing 52 percent of the business, would 
they be allowed to continue to do that?
    Mr. Shapo. No. The basic purpose of the regulation is to 
keep, is to try to cabin the risk. You need to cabin the risk 
because you need to protect the current policyholders, you 
want--you need to--
    Chairman Neugebauer. My time is limited. I intended for 
that to be a yes-or-no question.
    Mr. Shapo. I am sorry.
    Chairman Neugebauer. So would they be allowed to continue 
to operate in Illinois if they had a negative net worth and 
they were increasing the amount of business that they were 
getting?
    Mr. Shapo. No, the purpose would be to avoid the negative 
net worth. And so the answer is they would not be allowed to 
continue.
    Chairman Neugebauer. So I want to get consensus here 
because I think an important piece of this hearing is to 
establish what FHA is. And so, Mr. Bjurstrom, is FHA a mortgage 
insurance entity?
    Mr. Bjurstrom. I believe it is, yes.
    Chairman Neugebauer. Yes. And so is it being run, and is 
the oversight consistent with other mortgage insurance 
companies in this country?
    Mr. Bjurstrom. I think over the last 20 years, there have 
been several attempts to perform actuarial credibility as well 
as capital modeling. But due to the single-premium-fits-all 
type of structure, and the lack of actual reserving for losses, 
there is a lot of confusion with respect to how much the 
capital ratio or even just the capital account has in order to 
pay losses.
    So if you look over the last 20 years, they have lowered 
their premiums. I think they began about 380 basis points about 
20 years ago. They reduced them down, thinking that they had 
enough money after the last crisis. But we went into this next 
crisis in such a manner where now they are increasing premiums 
again. And it is that kind of fluctuation and lack of temporal 
diversification that creates a lot of confusion. Therefore, the 
standards aren't set and regulated enough in order for them to 
maintain a high enough water level to meet their expected claim 
liabilities.
    Chairman Neugebauer. And my final question--and I have 
asked this a couple of times in previous hearings. One of the 
concerns I have is, almost that FHA manages their fund based on 
cash flow. In other words, as long as they have enough cash 
flow coming in to cover the losses for this year, they kind of 
think they deem themselves sufficiently capitalized. And if you 
run business on that model, then you are not ready for the big 
hit down the road.
    But the question I would have today is, I wonder what the 
numbers would look like. The fund is now underwater to the tune 
of about, I think, 1.7 percent or something like that. If they 
didn't have the current levels of business of the market that 
they have, if they had a more traditional level, would that 
number--you have done a lot of analysis--be much lower? In 
other words, their capital would be actually more negative if 
they didn't have the cash flow day after day from the fact that 
they are dominating the market?
    Mr. Bjurstrom. Yes, they operate on a cash basis, and they 
have operated in that manner until they actually--until they 
were held to hold a--to perform the capital ratio test. But the 
capital ratio test is just a number of financial strength. They 
still operate on a cash basis. So at the end of the day, there 
are roughly 750,000-plus serious delinquent borrowers right 
now. So that if they were to have to reserve immediately for 
those losses, and pull that cash into a reserve and then 
recalculate their capital ratio, you are correct that capital 
ratio, or financial ability to serve future borrowers, is much 
less.
    Chairman Neugebauer. I thank the gentleman.
    And now the ranking member, Mr. Capuano, is recognized for 
5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. And again, I thank 
the witnesses for your testimony. Thank you for being here 
today.
    Mr. Bjurstrom, do you think the FHA should be shut down 
because it is bankrupt?
    Mr. Bjurstrom. I do not.
    Mr. Capuano. Mr. Shapo, do you think the FHA should be shut 
down?
    Mr. Shapo. No, sir.
    Mr. Capuano. Mr. Chappelle?
    Mr. Chappelle. No, sir.
    Mr. Capuano. Mr. Stelmach?
    Mr. Stelmach. No, sir.
    Mr. Capuano. Ms. Bazemore?
    Ms. Bazemore. No.
    Mr. Capuano. Good. We agree. Thanks for coming.
    [laughter].
    But we all agree that the FHA has some current issues. We 
all agree with that, no doubt, no debate. Mr. Bjurstrom, as I 
understand it, the FHA now has approximately $30 billion, give 
or take, in reserves. Do you believe that they will exceed 
those reserves in this year? Do you think they will dip beyond 
that, into taxpayer funds, to meet their requirements this 
coming fiscal year?
    Mr. Bjurstrom. I think it will be close.
    Mr. Capuano. Do you think they are going to need taxpayer 
funds this year?
    Mr. Bjurstrom. No.
    Mr. Capuano. Mr. Shapo, do you think they are going to need 
taxpayer funds this year?
    Mr. Shapo. Not to my knowledge.
    Mr. Capuano. Mr. Chappelle?
    Mr. Chappelle. No, sir.
    Mr. Capuano. Mr. Stelmach?
    Mr. Stelmach. Not to my knowledge.
    Mr. Capuano. Ms. Bazemore?
    Ms. Bazemore. I don't have a basis to make that assumption.
    Mr. Capuano. Fair enough. So of those of you who have an 
opinion agree they are not going to have to access taxpayer 
funds. Yet the law requires them to access that because the 
law, in my opinion, is stupid. Mr. Bjurstrom, do you think that 
law should continue? Do you think we should keep a stupid law, 
or do you think we should change a stupid law?
    Mr. Bjurstrom. I don't have enough of a legal background to 
answer that question. I think that the--
    Mr. Capuano. You learned from Ms. Bazemore, didn't you?
    Mr. Bjurstrom. No, I think at the end of the day, the fund 
is the way--the accounting of the FHA is such that it relies on 
this water balance between the number of claims that they have 
to pay--
    Mr. Capuano. No, I understand. They--I apologize, but my 
time is short.
    Mr. Bjurstrom. Sure.
    Mr. Capuano. I am not going to go through this because I 
think I just made the point that none of us think they are 
going to have to dip into taxpayer funds this year. I can't 
imagine that anyone would defend a stupid law, and therefore we 
should change a stupid law. And therefore, I invite my 
colleagues again to sign on to H.R. 1028, which will stop and 
prevent a stupid law from occurring and therefore exposing 
taxpayers to paying for something they don't have to pay for.
    But we will see who actually signs on to that. I guess--
what we are talking today is--I guess Ms. Bazemore, you have 
been in this business for awhile, correct?
    Ms. Bazemore. Yes.
    Mr. Capuano. Okay. Are all of the companies that were in 
business in 2007, all the PMI companies, still in business 
today and writing insurance today?
    Ms. Bazemore. No. There were eight companies prior to the 
crisis, and three of them are no longer writing business. They 
are managing the portfolios that--
    Mr. Capuano. So 3 out of 8 is what, 40 percent?
    Ms. Bazemore. Five. So five are left. And three new 
entrants have come into the market.
    Mr. Capuano. So approximately 40 percent of the companies 
have disappeared because of the crisis, and yet I am supposed 
to say when 40 percent of the companies have disappeared those 
losses have been probably been shifted over to government 
responsibility. And I understand that, I am not blaming them. 
Everybody lost money in 2008, a lot of people made bad 
assumptions and bad bets. But at least 40 percent of the PMI 
industry somehow made those same bets.
    And yet, I am supposed to say everything was fine, we 
should just ignore that? The States can take care of it?
    Ms. Bazemore. Actually--
    Mr. Capuano. I think it speaks for itself, when you lose 40 
percent of the companies doing the business, that there is an 
inherent problem that everybody has to share. I have no doubt 
that your business model has shifted today from what it was in 
2007 and 2008.
    Ms. Bazemore. I would just point that the loss reserves 
that were being discussed earlier, each of the companies that 
are--even though they are no longer allowed to write business, 
they had significant loss reserves to pay claims. So--okay.
    Mr. Capuano. I understand that. And so is the FHA, 
obviously. So therefore, I understand that part of the reserve 
has worked. But they are out of business, so there is some 
problem. I guess I am trying to make the point that private 
insurance is a good thing. And I think that there is certainly 
a role for it, and I actually agree that it is upside-down now.
    But I am looking at a chart that indicates in 2002, private 
insurance had 70 percent of the market and the FHA had 30 
percent. Is that the right number? And in 2007, private 
insurance had 82 percent of the market and FHA had 18 percent. 
The question is, what is the right balance? And I guess we will 
find out as the market goes on. Today--in the last 2 years, 
private insurance had actually increased its share of the 
market by 2\1/2\ times. In 2008, did the FHA crowd you out?
    Ms. Bazemore. I would say that the FHA actually didn't take 
actions to crowd us out. I think there were other government 
policies, such as the GSE increases in their fees, their LLPAs 
as well as--
    Mr. Capuano. You do agree that we had to do something in 
2008 and 2009?
    Ms. Bazemore. Those two things happened in the 2008-2009 
timeframe, and we saw a precipitous decline.
    Mr. Capuano. Bingo.
    Ms. Bazemore. And we have done a number of things as 
private MIs to get that business back.
    Mr. Capuano. And I think that is fine. So has the FHA, and 
right now we are still in the process of trying to find that 
right balance, which I agree with. That is where I agree with 
the whole premise of these hearings, that we have to find the 
right balance, exactly where it is. But there is no given that 
somehow the FHA or government involvement in certain aspects of 
the market is a good thing. The question is, where is the line, 
let's fine tune it a little bit.
    And by the way, before my time runs out, I just need to 
make the same point I always make, that when you talk about 
$200,000 limits, you are basically taking about a third of the 
country and saying we are not going to do any loans in your 
district. Because in Massachusetts last year, they had 83,000 
FHA loans. Texas had 815,000. That is 9.7 times more FHA loans 
than Massachusetts did.
    And if you limited it to $200,000, because the market in 
Massachusetts is so much more expensive, it would have been 24 
times more loans. Because Texas is a relatively modest-priced 
State, and Massachusetts is not. And we are not alone. 
California, New York, Philadelphia. To understand the market, 
you have to understand there are regional differences in both 
real estate prices and wages. And I know you know that, but I 
say that because my time is running out.
    Chairman Neugebauer. I thank the gentleman. And that is one 
reason a lot of people are moving to Texas.
    [laughter].
    Mr. Capuano. Mr. Chairman, then why haven't our real estate 
prices gone down?
    Chairman Neugebauer. I now recognize the vice chairman of 
the subcommittee, Mr. Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. The gentleman 
next to me from California is wanting all of those folks to 
come out to California, as well, so--thank you all for being 
here this morning. And to follow up a little bit on the ranking 
member's line of questioning there with regards to the size of 
the loans, the other day when we had the FHA individual in here 
talking about their model of how they were doing things, over 
the last couple of years they indicated that they have actually 
expanded the larger part of their--or the portfolio part of 
their business to making larger loans.
    And they did it, they said, to--obviously, because of the 
increasing amount of premium they can get to shore up their 
bottom line. It would be counter to what I have heard this 
morning from, I think, two or three of you with regard to the 
data here that you are quoting this morning indicates that FHA 
actually has not been making larger loans in increasing 
numbers.
    Can you give me some information? Mr. Chappelle, I know you 
were--you had a lot of information in your testimony.
    Mr. Chappelle. Thank you, Congressman. The Congress gave 
FHA the authority, in 2008, to expand its mortgage limits to 
help ensure there was liquidity in the entire mortgage market. 
Because private businesses made the decision, the smart 
decision, to pull back. But Congress wanted to make sure that 
there was money available so that the market would not collapse 
as far--worse than it actually did. And so, they gave the 
authority to the FHA to raise their limits.
    FHA raised the limits. But the point is, they have done 
very few loans over $400,000; only 9 percent of their business 
is over $400,000.
    Mr. Luetkemeyer. Is it increasing, though? That was the 
point they made the other day.
    Mr. Chappelle. No, it is going the other way.
    Mr. Luetkemeyer. That they are increasing those numbers, 
and they are looking at the last couple of years of loans they 
have made. And they keep coming back and saying their portfolio 
has improved, our past dues are less, our loss ratios are less, 
and are pointing to that portion of their business as improving 
their overall picture.
    Mr. Chappelle. But the key issue is, structurally, in the 
FHA program, FHA charges every borrower the same premium. By 
charging every borrower the same premium, which some of my 
colleagues here aren't too crazy about--but by charging 
everybody the same premium, that means people with lower risk 
are paying more. It has been a fundamental part of every audit 
that I can remember that higher-balance loans perform better 
than lower-balance loans.
    So by definition, if you are charging those borrowers 
here--if your premium is here on those borrowers, they are 
overpaying their premium. Consequently, they will go to the 
private MI because it is a better deal, unless they have no 
other choice. So the--
    Mr. Luetkemeyer. My comeback to that would be--I am not 
trying to argue with you here, but I--it is--I am getting some 
different information from those other folks who testified 
earlier. And having been in the financial services industry for 
35 years, I can tell you that, yes, the bigger loans, they may 
make more money on. But you also have more exposure to loss 
because there is a bigger loan there.
    And if you don't have better criteria on those larger 
loans, and you don't do a better job of underwriting those 
loans, your exposure is greater. On the front end, you may make 
a few more dollars, but on the back end, your exposure is huge 
because it is a larger loan. If it goes south, you have a 
bigger problem. So I am not sure that they are actually solving 
the problem; I think they are probably taking on more risk in 
the long term, if that is the case.
    But if you are saying they are not doing that, why, I 
appreciate your testimony this morning. From the standpoint 
of--Ms. Bazemore, you had some interesting comments here with 
regard to a number of suggestions on how to price risk and how 
FHA could improve their book of business. Could you go back 
over those? I thought some of those were pretty salient. And I 
guess my initial question would be, as you go through them, has 
FHA thought about doing some of these things?
    Are you talking with them, do they have an ombudsman 
program, for instance, that you would be able to communicate 
with them on to be able to have some interaction and then have 
them take up some of these suggestions?
    Ms. Bazemore. I would say that clearly they have made some 
changes in terms of increasing their pricing. I think part of 
it is just to understand what their risk is and making sure the 
pricing is commensurate with the risk that they are taking on. 
But with respect to risk-sharing, I think the concept there--
which is something that we have had some engaged conversation 
about--is with the idea of being able to bring some of what we 
have built in the private mortgage insurance industry to bear 
in a way that would be really a partnership.
    And we have built a lot in terms of risk analytics, we have 
built a lot in terms of our ability to analyze portfolios, even 
on a weekly basis, what is being submitted. And to communicate 
back with the lenders who are originating those loans to help 
them understand what is going on.
    Mr. Luetkemeyer. Thank you. My time is about ready to run 
out. I want to make one quick point. There are certain tenets 
of sound lending that are inescapable regardless of whether it 
is a large loan or a small loan. And if you get away from those 
sound tenets of lending, you are going to lose. It seems to me 
that we have continually done that with some of our GSEs. We 
continually--we know what we need to be doing, and yet we fall 
away from that. And then when--as soon as we do, we wind up in 
trouble.
    Mr. Chairman, I yield back. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlewoman from New York, Ms. Velazquez, is 
recognized for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Bjurstrom, 
following the housing bubble-burst, three of the eight largest 
private mortgage insurance companies went out of business. 
Those that survived suffered significant losses. Could you 
please explain the reasons why many of the major private 
mortgage insurers suffered such losses during that economic 
recession?
    Mr. Bjurstrom. I would be happy to. I think during that 
period of time there were a lot of new types of products that 
were brought to the market. And from an actuarial pricing 
standpoint, there was not a lot of information to judge the way 
they price their products. And therefore--
    Ms. Velazquez. It didn't have anything to do with the fact 
that your industry relaxed the standards?
    Mr. Bjurstrom. Yes.
    Ms. Velazquez. Borrower standard and underwriting 
requirements, pressure by the lenders?
    Mr. Bjurstrom. That is correct.
    Ms. Velazquez. Okay. So why were some of these companies 
not able to pay these claims without going bankrupt?
    Mr. Bjurstrom. Actually, they have been put into 
receivership and they have been under the department of 
insurance of their State of domicile. They are restricted from 
writing new business, but they are still paying claims and 
setting up reserves for those losses.
    Ms. Velazquez. But still, can you explain to me why they 
were not able to pay the claims without going bankrupt?
    Mr. Bjurstrom. Without going bankrupt?
    Ms. Velazquez. Yes.
    Mr. Bjurstrom. I think Mr. Shapo had indicated that they 
reached their statutory risk to capital.
    Ms. Velazquez. Okay. Mr. Chappelle, Fannie Mae noted in its 
most recent report to the SEC that many of its private mortgage 
insurance counterparties were struggling to meet their current 
State regulatory capital reserve requirements. Based on your 
experience as a former insurance commissioner, would you be 
concerned about this company's current financial conditions? 
What about their obligations to fulfill future claims? Why or 
why not?
    Mr. Shapo. Why what? I am sorry, ma'am.
    Ms. Velazquez. Why, or why not?
    Mr. Shapo. No. The purpose of the regulation is to keep the 
companies from going bankrupt. They are not bankrupt. The 
purpose of the regulation is to make sure that the risk to 
capital ratios are in line.
    Ms. Velazquez. Would you please comment on the Fannie Mae 
recent report to the SEC?
    Mr. Shapo. I think I am commenting on it. What the States 
are doing is, they are preventing the companies from expanding 
their potential exposure at a time when their financial 
condition cannot support it. The whole purpose of that is to 
keep the companies from actually going bankrupt. They are not 
bankrupt. That is the purpose of requiring a minimum ratio. 
What has happened in some cases is the companies have been put 
in runoff, prevented from continuing to write new business.
    They are put in runoff for the whole purpose of protecting 
the common fund and protecting the ability to pay clients.
    Ms. Velazquez. Mr. Chappelle, recent reports from Fannie 
Mae on the Bank for International Settlements indicate that 
private mortgage insurers are still in a wait position and are 
susceptible to significant risk. If private mortgage insurers 
were to obtain a larger share of the market as they claim they 
want, would they be in a good position to weather another 
economic downturn? Why or why not?
    Mr. Chappelle. That is a good question, Congresswoman. And 
it is an uncertain thing. None of the MIs have the rating that 
Fannie and Freddie required before the housing crisis, which 
was a AA rating. The good news is that the ratings are 
improving. But they are still well below an A rating, and that 
is a problem.
    Ms. Velazquez. Thank you. Could you, Mr. Chappelle, discuss 
the importance of FHA's countercyclical role during periods of 
economic recession, when private mortgage insurers are absent 
from the market? How bad could the downturn have been if FHA 
was not present to keep the housing finance market afloat?
    Mr. Chappelle. Sure. I worked at FHA from 1975 to 1986, so 
I saw what happened in the oil patch States in 1982 to 1986. 
When we were at FHA, we continued to stay in those markets 
after the private sector made the right business decision to 
pull back. I remember a statistic that we had from back then, 
that 19 percent of FHA's business came from the 6 oil patch 
States, but 50 percent of their claims came from those 6 
States.
    Now, it would have been easy for FHA at the time to pull 
out of those six States. But if they had done that, it would 
have been devastating for Texas, Oklahoma, Colorado, Louisiana, 
Alaska, and another State. And so the value that played there 
is--what they are doing now is the same thing--at the national 
level, what it did in 2007 and 2008.
    Ms. Velazquez. And can we talk about FHA solvency? Do you 
think that the agency has taken steps that will address its 
underlying solvency issue?
    Mr. Chappelle. Absolutely, Congresswoman. Their MIP for the 
period from the 1930s to the 1980s was roughly 3.5 percent, 
what they were collecting. They are now collecting 9 points 
today; 9 percent is their premium, effectively. That is going 
to allow them to shore up the fund immediately and build 
reserves so that hopefully, they will be above the 20 percent 
capital ratio much sooner than the actuary audit anticipated.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Miller [presiding]. Thank you.
    Mr. Chappelle, you made a good point. Mr. Luetkemeyer made 
a statement, and he was correct, that when the larger loans do 
default, it is a large amount of money. But if you look at the 
reality, only 1.6 percent of FHA loans were made above 
$500,000; only 3.5 percent were made above $400,000; and only 9 
percent were made above that range.
    Mr. Chappelle. Correct.
    Mr. Miller. But if you look at the default rate, above 
$400,000 the default rate was about 33 percent lower.
    Mr. Chappelle. Correct.
    Mr. Miller. As you go up, they even went down. So the FHA 
was right to a point. The loans they made that were the safest 
and best-performing are in the higher-cost areas, but they are 
not making that many of them.
    Mr. Chappelle. Exactly.
    Mr. Miller. Because of the cost.
    Mr. Bjurstrom, you made a statement that their rates were 
much higher 20 years ago than today, but CDs were 6 and 7 
percent 20 years ago, and they are less than 1 percent today. 
So everything has come down dramatically in that time.
    But I am kind of curious how you perceive FHA's performance 
compared to the private sector in four ways: first, adequate 
internal controls and technology systems in place--how do they 
currently compare to the private sector; second, appropriate 
accounting standards; third, real-time risk management; and 
fourth, their capital ratios. Can you address those?
    Mr. Bjurstrom. Yes. I think there is really--I can address 
it with two points. One is, is in any insurance company with 
respect to enterprise risk management, having a lot of change 
in any given year or over a very short period of time is never 
good. A few years ago, the FHA had a very low share of the 
market. And then as they came in, in the latter part of 2008 
and 2009, they went from 400,000 policies to over a million 
policies.
    That puts a lot of stress on an organization. So at the end 
of the day, working through that additional business puts a lot 
of stress--
    Mr. Miller. But that doesn't address the questions. Are 
their internal controls and technology systems, compared to the 
private sector, adequate? Are their appropriate accounting 
standards compared to the private sector, adequate? Real-time 
management? Are they responding in an adequate timeframe in 
their capital ratios?
    Mr. Bjurstrom. Yes, I think their accounting needs to be 
changed to recognize the more certainty--certain liabilities 
that one can--
    Mr. Miller. So we need to provide better assets for them to 
make sure they can do their job.
    Mr. Bjurstrom. That is correct.
    Mr. Miller. Okay.
    Mr. Bjurstrom. That is correct.
    Mr. Miller. And how about their appropriate accounting 
standards and real-time management? Are they responding 
adequately today to the market changes? They weren't a year or 
2 ago, but are they today? Have they upgraded their standards 
on risk management?
    Mr. Bjurstrom. I believe they are working on it, to achieve 
a certain level of standards. But according to the GAO, I think 
there are a lot of improvements to be made.
    Mr. Miller. Okay. For everybody on the panel, do you think 
FHA operational technology and the cutting tools it needs are 
available to them today to minimize taxpayer risk? Ms. 
Bazemore?
    Ms. Bazemore. I believe they need additional tools.
    Mr. Miller. Okay.
    Mr. Stelmach. I don't have the ability to judge the FHA's 
internal--
    Mr. Miller. I couldn't hear you.
    Mr. Stelmach. I don't have the ability to judge FHA's 
operations.
    Mr. Miller. Okay. Mr. Chappelle?
    Mr. Chappelle. They can always improve, but they are doing 
it at an acceptable level right now, I believe.
    Mr. Miller. Okay. Mr. Shapo?
    Mr. Shapo. I don't have the factual basis to be able to 
have a full answer to the question. But clearly, they are not--
they do not have the same kind of enterprise risk management 
practices and self-assessment tools that regulated carriers do.
    Mr. Miller. Okay.
    Mr. Bjurstrom. I agree with Mr. Shapo's point that the 
regulation is such a--in such a manner that those--that 
transparency is not there.
    Mr. Miller. Okay. Yes, sir--
    Mr. Chappelle. The legislation that this committee passed 
last year would go a long way to helping along that issue, 
though, also.
    Mr. Miller. Okay.
    Ms. Bazemore, you commented on the lack of involvement of 
the private sector. And what I am seeing out there from people 
wanting loans is, the private sector is just not moving back in 
adequately. And the only option out there, in many cases, is 
FHA. That is the reality I see builders are going through when 
they are building homes and selling them.
    And you say FHA premiums are harming the private sector 
return to the marketplace. They have increased them 5 times. So 
is it the premium problem, or is it the QM, QRM and Basel? All 
the private sector issues that we are trying to deal with, and 
we have made more difficult, are those keeping the private 
sector out more than just more the cost differential?
    Ms. Bazemore. I think the first thing I would say is, you 
have to think of the private sector as sort of two parts. So 
when you think of private MI, we are really part of the GSEs. 
And so we insure GSEs, essentially bring private capital to 
that. That has always been there, we have never left the 
market. However, I think there was a perception with lenders in 
terms of going to FHA because that is where the decision is 
made about whether to use FHA or to use private mortgage 
insurance.
    And so, for instance, over the last year we have trained 
15,000 loan officers on the fact that many times it is better 
for the borrower to have a mortgage-insured loan than--
    Mr. Miller. No borrower with common sense would use FHA 
over private sector mortgage insurance, because of cost alone, 
if it were available. So, if you look at the cost differential 
between the two, it is huge. So if you are going to get an FHA 
loan, your fees and costs are much greater than if you went to 
a PMI in a private sector. So there has to be more keeping the 
private sector out than we are addressing.
    Ms. Bazemore. You have to really look at the FHA and Ginnie 
Mae execution together, and that is the real comparison with MI 
and the GSEs. And it is still more favorable to have FHA and 
GSE, with a Ginnie Mae guarantee in terms of the loan in the 
marketplace.
    Mr. Miller. My time has expired. I would like to go into 
that more.
    But, Mr. Cleaver, you are recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. This is one of the 
committees, I think, where there is an attempt to avoid having 
fact-free debates. So I would like to know whether any of you 
disagree with the report from Inside Mortgage Finance which 
says the private mortgage insurance--insurers were able to 
write $175 billion in 2012. Does everyone agree with that?
    Ms. Bazemore. Yes.
    Mr. Cleaver. So how do you juxtapose that with the subject 
of this hearing? FHA is crowding out the PMIs? Yes, Ms. 
Bazemore?
    Ms. Bazemore. Congressman Cleaver, I think that a lot of 
the crowding out took place in sort of the 2009--late 2008-2009 
timeframe. And since then, there have been efforts, I think, 
both by the FHA--because even Secretary Donovan stated that he 
felt they had too large of a share of the market. So FHA has 
taken steps, through premium increases. The private industry, 
private MI, we have also taken a number of steps to try to 
increase the share.
    And I think that it is slowly working, and that is what you 
are seeing in Inside Mortgage Finance, that sort of has 
continued. The difficulty is that things like increased GSE 
fees, can have the effect of changing that. And so other 
benefits, when you see what is happening with QRM or Basel 
III--where FHA may get benefits--all of those things could 
actually reverse the benefits that we have been seeing. And 
that is one of the points of my testimony.
    Mr. Cleaver. Mr. Chappelle?
    Mr. Chappelle. Yes, I agree with your point, Congressman. 
The problems from the MI industry are not FHA-related. As Ms. 
Bazemore pointed out, it was QRM, it was loan level price 
adjustments from the GSEs. But also equally important, when you 
pull out of a market in 2008 and 2009, the mortgage business is 
a relationship business. If you pull out, you just can't flick 
a switch and come back in. It is going to take time.
    And as Ms. Bazemore said, they are training loan officers 
about the benefits of private mortgage insurance. But I know a 
lot of lenders, going back to the oil patch days in the 1980s, 
who still have trouble doing business with MIs because they 
felt they had policies rescinded without having the coverage of 
insurance. So there are a lot of other factors that have 
nothing to do with FHA.
    And, hopefully, the LLPAs are a critical--the GSE LLPAs are 
a critical part of that. And I know we agree that needs to be 
looked at. But it is far more of these other issues than it is 
the FHA issue.
    Mr. Cleaver. Yes, and if you listen to all of you, each of 
you has, at times, made statements that would suggest that you 
all agree that FHA is not the problem. But--and Ms. Bazemore, 
to go back to what you said, in 2007, the housing market 
collapsed. It collapsed. And so, these private companies did 
what they do at a time when things go bad. They pulled back. 
They stopped lending. Do you agree?
    Ms. Bazemore. I don't think we stopped lending. I think, in 
fact, we changed our underwriting guidelines because we saw so 
many borrowers were being put into homes that they couldn't 
afford and we thought the loans should be affordable and 
sustainable. So many of the changes are in alignment with Dodd-
Frank and QM.
    Mr. Cleaver. Yes. We probably have a slight disagreement. 
Because I think they stopped lending, and we actually had 
committee hearings where we dealt with that with banks. They 
stopped. And it is true that some of the exotic products had 
created problems, and that was pushed aside as it never should 
have been brought to the surface.
    But, there was some robust and reckless lending. Does 
anybody disagree with that? Okay. And so those companies--you 
can--I don't know how you want to--if you are going to say they 
came--that they had more intelligent lending. But the fact is, 
the percentage of the mortgage insurance written fell back, 
right?
    Ms. Bazemore. Yes.
    Mr. Cleaver. So that, in and of itself, I think, would 
suggest the need to maintain FHA. I think we need to tweak a 
lot of things, including Dodd-Frank. But I don't think we can 
attribute everything bad to FHA. I am out of time.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman, Mr. Westmoreland, is recognized for 
5 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    Mr. Chappelle, I was noticing in your resume, or biography, 
that when you were with FHA you actually maybe had the 
responsibility for the development of the adjustable rate 
mortgage program. Is that true?
    Mr. Chappelle. Yes, I worked on the implementation of it. 
Yes.
    Mr. Westmoreland. Okay. Originally, did FHA make that 
buyer, as part of the loan guarantee, qualify for the 
adjustable rate, or what the rate could eventually go to?
    Mr. Chappelle. We surely didn't use what it could 
eventually go to, Congressman. It was 30 years ago, so I am 
going to have to--I would have to go back and read the 
mortgagee letter.
    Mr. Westmoreland. Okay. I was just thinking that you might 
remember it because it was a pretty important part, and you 
were there.
    Mr. Chappelle. The only thing I would say is adjustable 
rate mortgages are probably 1 percent of FHA's business today, 
a very small portion of it.
    Mr. Westmoreland. Okay. But if you were making somebody 
qualify for what the rate could have been versus what the 
adjustment rate was, that would have been a smarter move, don't 
you think?
    Mr. Chappelle. Absolutely.
    Mr. Westmoreland. Mr. Bjurstrom, you evidently counsel, I 
guess, businesses on how to compete against FHA. What are some 
of your recommendations that you give them to be able to 
compete, and what level can these private industries--do they 
play on the same level, the same guidelines, as what FHA does?
    Mr. Bjurstrom. I think the MI companies try to price their 
products so that they achieve the amount of loss-paying ability 
and capital accretiveness that is necessary to remain a viable 
company. I think it is difficult to compete with one price that 
the FHA has with their--because it creates a sort of adverse 
selection between the products and programs that are being 
targeted for a capital accretive and solvent--on a solvent 
basis versus an all-in.
    And from time to time it works out, but with one price for 
all borrowers over all times the underlying mix of the 
underwriting characteristics of the borrowers changes. So in 
some years, when the economy is good, you may have additional 
premium because losses are low. But in times that it is bad, 
you have more losses, and therefore you are going to need more 
premium to cover those.
    So to basically--the way I advise my clients is just to 
make sure that they understand the risks and exposures 
associated with originating a borrower, and then price it 
effectively.
    Mr. Westmoreland. So, basically, are you saying that FHA 
may have some different guidelines as far as the quality of the 
credit?
    Mr. Bjurstrom. Yes.
    Mr. Westmoreland. Okay. Now, let me ask you this. And we 
agree--at least I agree coming from a building background, real 
estate background--that we need FHA. And FHA was started with 
great intentions as far as first-time home buyers, and low- to 
moderate-income. Do any of you on the panel see that FHA has 
gotten out of that original intent and gotten into some places 
where maybe the private sector, private mortgage insurance, has 
more expertise in that area of lending than what FHA was really 
created to do?
    Ms. Bazemore?
    Ms. Bazemore. I would just say that I think that while it 
is continuing to serve some of its historical mission, I think 
just because of some of these policies we have talked about, it 
has broadened out further than that. And a significant amount 
of loans that they are doing fall within what the private 
sector could be doing. And the capacity is there, certainly, to 
do it.
    A comment came up earlier, just in the last 2 weeks, that 
two of our companies have raised $1.8 billion in capital. So 
the capacity is actually growing, and I think the model is 
working as it was intended to.
    Mr. Westmoreland. Mr. Chappelle?
    Mr. Chappelle. Congressman, it is important to remember 
that the loans that the FHA is getting, these higher credit 
score borrower loans, are helping the solvency of the fund. But 
they charge a premium structure that discourages those 
borrowers from coming into the program unless they have no 
other option. So they are not--those borrowers are not getting 
a good deal because FHA charges that borrower the same price 
they charge the borrower with credit deficiencies.
    So if they are coming in, they are coming in because they 
have no other option, because it wouldn't be the right business 
decision. But by the fact they are coming in, they are helping 
to strengthen the portfolio and the solvency of the fund.
    Mr. Westmoreland. I am out of time. I will yield back. But 
I can appreciate that fact that they wouldn't be coming to FHA 
if they could go somewhere else. But to me, that is also a 
telltale sign of the quality of some of the loans that actually 
may be coming through.
    So with that, I yield back.
    Chairman Neugebauer. I thank the gentleman. Mr. Sherman is 
recognized for 5 minutes.
    Mr. Sherman. Ms. Bazemore, I was interested in your 
testimony on Basel III. I agree with you that obviously 
mortgage insurance is a risk mitigant. What can the 
Administration and/or this committee do to make sure that in 
calculating bank capital, the obvious risk mitigant effect of 
insurance, mortgage insurance, is taken into account?
    Ms. Bazemore. I think the easiest thing to do would be to 
stay with what has been the current practice through Basel I of 
recognizing private mortgage insurance as a risk mitigant 
rather than the proposal that would not give any weight to it, 
but would give full weight to government loans.
    Mr. Sherman. I would hope that this committee would join 
with you and others in the industry in making sure those who 
are crafting Basel III get that issue right. We all agree that 
we want private sector capital to be part of mortgage 
insurance. And I understand the private mortgage industry has 
recently attracted new capital. How much have you attracted?
    Ms. Bazemore. Our company, about 2 weeks ago, raised a net 
$689 million. One of the other legacy mortgage insurer--
insurance companies, in fact, just released today that they had 
netted, I think, about $1.1 billion. So just for those two 
companies, there was significant capital that came into the 
market.
    Mr. Sherman. Now, are there changes that can be made in the 
FHA to increase the role of the private sector and to attract 
more capital into mortgage insurance?
    Ms. Bazemore. I think the focus really is on moving FHA to 
more of its historical mission, understanding that may have 
changed over the last few years. And it is moving back, but 
looking at practices that really make sure that when private 
mortgage insurance is in the best interest of the borrower, it 
is being used. And that there aren't other sorts of decisions 
that are made, or policies that are put in place, that it would 
encourage otherwise.
    Mr. Sherman. Now--and I don't know which person to address 
this to, so I will kind of see who seems interested in 
answering it--I understand that under the proposed QRM rule, 
loans insured by FHA are automatically exempted from the risk 
retention requirements, while loans insured by private 
insurance are not necessarily exempted.
    Is this because meeting FHA standards somehow means that it 
is a wonderful, pristine loan? Or that the value of FHA 
insurance is so--that value means it is a Qualifying Mortgage, 
and why wouldn't we also exempt from the risk retention private 
mortgage insurance?
    Always the same hands. I am used to that.
    Ms. Bazemore. I think, first of all, the reason why FHA is 
given full credit is because it is fully backed, 100 percent 
explicitly, by the Federal Government, and so the banking 
regulators are essentially looking at that. I think that with 
respect to--there has been a huge coalition that has come 
together of industry, trade groups, and consumer groups that 
are very concerned about the QRM rule, because we believe that 
it could actually reduce the availability of low-downpayment 
loans.
    And so, there has been a lot of focus on the fact that low- 
downpayment loans with MI should also be included in the QRM 
rule.
    Mr. Sherman. So the reason for the exemption is not that 
FHA has standards that are so good that if you meet those 
standards it must be a Qualifying Mortgage. It is simply that 
if the lender has that insurance, they are pretty well-insured 
from loss. Mr. Stelmach, I see you nodding.
    Mr. Stelmach. I simply agree with Ms. Bazemore, that there 
is a 100 percent government guarantee on GMA securities, which 
are ultimately the destination for FHA loans. Those loans trade 
more--are more profitable to make than those in the mortgage 
origination market. And it makes more sense, perhaps, from a 
QRM definition. But it also will introduce distortions in 
market share between FHA and private capital, which may 
exacerbate the current situation.
    Mr. Sherman. My time has expired.
    Chairman Neugebauer. Yes. Thanks to the gentleman.
    And now the gentleman, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
holding this hearing.
    My first question is for Ms. Bazemore. Do you believe that 
FHA underprices the risk that they insure? Because we talked 
about how they have gained a lot of market share from private 
mortgage insurance. PMI premiums have gone up because of the 
risk experience, but FHA hasn't gone up as much. Do you believe 
they under-price their risk?
    Ms. Bazemore. Without doing a true actuarial review, it is 
hard for me to say at this point whether or not they are--
    Mr. Stivers. Let me ask it another way. Does private 
mortgage insurance charge an actuarially sound premium?
    Ms. Bazemore. Yes, we believe we do.
    Mr. Stivers. Does FHA underprice PMI?
    Ms. Bazemore. I think, based on the comparison, we would 
think that it is somewhat underpriced because of the risk 
profile of the loans that they are insuring.
    Mr. Stivers. I won't ask you take the next logical step, 
but everybody can do that for themselves. If PMI is actuarially 
priced soundly, and FHA underprices PMI, everybody else can do 
the rest of the equation for themselves.
    One of the loss reserve accounts that are used by private 
mortgage insurance companies is the contingency reserve, where 
50 percent of each premium collected from each given year's 
book of business is required to be held in reserve for a period 
of about 10 years to pay claims that might arise out of a 
specific book of business in the event of some kind of severe 
problem like we experienced over the last few years.
    Which means private mortgage insurance can't earn all their 
premiums through short-term distortions in the marketplace of 
low default rates. Do you know if FHA follows that same 
reserving procedure?
    Ms. Bazemore. That might be a better question for--
    Mr. Stivers. Does anybody on the panel know if FHA uses 
that same procedure?
    Mr. Bjurstrom. They currently do not use that standard.
    Mr. Stivers. And if FHA doesn't have a contingency reserve, 
should it have one? I will go ahead and--we can go straight 
down the panel. Does everybody think that would be a good idea?
    Mr. Bjurstrom. I think it would be a good idea.
    Mr. Shapo. It would be a sound way to manage risk in a way 
that they are not doing now.
    Mr. Chappelle. FHA does have $38 billion in reserve.
    Mr. Stivers. And what did they have last year?
    Mr. Chappelle. Thirty-three billion dollars, $32 billion. 
It has gone up.
    Mr. Stivers. Okay. Still going down there.
    Mr. Stelmach. Yes, I believe that would be a sound 
practice, absolutely.
    Mr. Stivers. Thank you. The other thing that Ms. Bazemore 
talked about that I think is an interesting idea is to have 
partnerships with FHA and private mortgage insurance companies. 
Does anybody else on the panel--she was the only one who really 
spoke in depth about that. Somebody else mentioned it a little 
bit.
    Mr. Bjurstrom. I have some--actually, there are examples of 
private-pubic partnerships now. A number of State housing 
finance agencies have mortgage insurance funds in which they 
actually reinsure 75 to 90 percent of the risk to the private 
MIs.
    Mr. Stivers. And do you think that is a good idea?
    Mr. Bjurstrom. I do think--
    Mr. Stivers. I guess I want to go straight down the line 
again and see if everybody thinks that is a good idea. Because 
it sounds like a great idea to me.
    Mr. Shapo. In theory, it sounds like a great idea. I am not 
as familiar with the proposals as Ms. Bazemore and Mr. 
Bjurstrom.
    Mr. Stivers. Sure.
    Mr. Chappelle. I agree, Congressman. The Congress did give 
that legislation back in 1992, and the MI industry and FHA were 
both interested in doing it. But there are factors. The 
economic factors of pricing, counterparty risk, sharing of the 
risk, and never--nothing ever came of it back then.
    Mr. Stelmach. I would agree that is a good idea. But we 
also need a balance between public policy and expanding 
homeownership with private capital. And that sounds a lot like 
some of the issues we had when the GSEs were in existence with 
trying to balance those same issues. So yes, a good idea, but 
balance.
    Mr. Stivers. Thanks. I think there are some ideas that we 
can pursue to have a more sound policy that charges actuarially 
sound rates, and still encourages homeownership. But when you 
encourage homeownership in a way that somebody can't sustain 
it, that is not really encouraging responsible homeownership. 
So I think charging rates that are inappropriate or low isn't 
fair to FHA or their long-term mission and their viability.
    So I think there are some simple reforms that we can enact, 
common sense reforms, that I think would make the program 
better. I really appreciate all of you coming today. I 
appreciate your thoughtful testimony and ideas.
    Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlewoman from Ohio, Mrs. Beatty, is 
recognized for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    Mr. Shapo, I believe you stated in your testimony that the 
FHA has expanded its business in a time when it is--I think it 
was impaired, insolvent and undercapitalized. With that said, 
what do you make of the fact that since its peak in 2009, FHA's 
market share has been steadily declining while the private 
mortgage insurance share has been increasing at roughly the 
same pace?
    Mr. Shapo. I think that the more important question is what 
would--the way I look at it is, what would happen--what would 
the ratios be now if it were not for the distortions to the 
market. The fact that FHA has reserves doesn't mean that it is 
not impaired and it doesn't mean that it is not in a negative 
position.
    The fact that the FHA--that the loss history is improving 
doesn't mean that it should have continued to write more 
policies after it went under its minimum ratio and after it 
went into a negative balance. By doing those things, by 
expanding beyond its position before, it has distorted the 
marketplace. And so the question would be, would the private 
companies have been able to take a larger market share if they 
had been able to get some more of that good business that FHA 
was able to get after the worst of the financial crisis.
    So I think that--my answer is, is that even though the 
private carriers have more market share, they do not 
necessarily have any market share that they could have gotten 
in the market share that could have properly supported their 
risk if there hadn't been distortions in the market.
    Mrs. Beatty. Mr. Shapo, with that said, maybe a better 
question, or response, would be if I put it this way. If you 
take, for example, the credit ratings, which I am sure we will 
all agree plays a key factor--so if you look at the world out 
here of the market share, and I have a credit rating that is on 
the high end. And if I then look at what the percentage cost 
for that loan would be, if I have a high rating and I am 
getting it for 4.3 percent, why would I then go to FHA, which 
is going to be a higher rating if my credit rating is a good 
rate?
    So then those who would be in that same market share, with 
the higher--why would they go to FHA? You would, in fact, get 
those folks because most of us would understand a lower 
percentage, which you would get in the private market versus 
FHA. So I don't get that FHA would be hurting the private 
market, or insurers, because I am not going to pay 1.5 percent 
higher when I know I can come over here.
    It tends to be into FHA's mission, which I am glad we agree 
on and we have heard in the other hearings, what their mission 
is core to. So those folks who fall to the left of the higher 
end are paying that flat rate because they are not going to be 
engaged with the private insurers.
    Mr. Shapo. My take on it would be that because of the--FHA 
has brought artificial factors into the starting--during the 
crisis. And then if it does so, it is going to be in a position 
to take those better risks because it has become a larger 
player. Therefore, keeping the private companies away from 
getting those better risks when the market got better probably 
affected their ability to attract capital.
    They have attracted capital. But the question is, could 
they have attracted more capital? The mortgage insurance 
market, like all insurance markets but in particular the 
mortgage insurance market, is subject to pretty substantial 
fluctuations. And so the question is, would the degree of the 
comeback been higher if there hadn't been as much distortion to 
the market between the government--
    Mrs. Beatty. I guess for me, it is not the distortion. And 
rest assured that I am comfortable in saying FHA does not set 
the credit scoring. So based on those folks going in on--the 
credit scoring is not established by FHA. They would not go to 
FHA when they can get a better rate.
    Mr. Shapo. But FHA's market position, I think, has 
distorted the market and restricted the ability of the private 
carriers to take in--to get the better risks, and then to 
attract more capital.
    Mrs. Beatty. I think we just have a difference of opinion. 
Thank you.
    Chairman Neugebauer. I thank the gentlewoman.
    Now the gentleman from California, Mr. Royce, is recognized 
for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. Mr. Chairman, I think 
we have had a very good round of hearings on the future of FHA. 
It is not my goal to do away with FHA, but I do think we have 
to force the FHA to deal with its fiscal woes. We have to stop 
attempting to grow out of that situation with the approach that 
they are on now, and figure out a way to allow the private 
market to regain market share.
    And when you think it through, I think that is the best 
scenario that we have for the taxpayers, but also for future 
homeowners if we can do that. I think we have already pretty 
clearly established that current policies at the FHA have led 
to the crowding out of the private market. So the concern here 
is, in the future, going forward, are there policies that are 
going to further aggravate that situation. And specifically, 
the proposed Qualified Residential Mortgage rule and the 
proposed Basel III capital rules provide special dispensation 
to FHA loans.
    The former gives a safe harbor from the risk retention 
requirements for FHA loans, and the latter allows a zero-risk 
weight to loans insured by FHA. So the net result is that 
government policies, I presume here, are going to steer 
borrowers to the FHA and further crowd out the private market, 
which certainly was not the congressional intent. What will be 
the impact, is the question here, on the mortgage insurance 
marketplace if these rules are finalized in their current form?
    And I would ask Mr. Bjurstrom and Ms. Bazemore for opinions 
on that.
    Mr. Bjurstrom. I think the execution gets incredibly more 
expensive, and therefore the alternative FHA programs will 
dominate the market.
    Ms. Bazemore. I would agree with that. I think that the 
concern is that the cost will become significantly higher, and 
so FHA would again be favored in the marketplace.
    Mr. Royce. Would anyone else like to weigh in on that 
scenario, or do you agree with that assumption, or--
    Mr. Chappelle. I agree, Congressman. And I think it is 
important for private MI loans to receive the same general--be 
in the same general category as FHA or Fannie-Freddie loans 
are. Because we need more loans being made in the country, and 
we don't need anything that is going to restrict or leave out 
loans. So I would heartily endorse it.
    Mr. Stelmach. I would endorse that, as well. If you think 
about a $9 trillion mortgage market in the United States, there 
is only one industry right now, private industry, that provides 
some sort of credit enhancement with only $6 billion of capital 
to support that. So in a $9 trillion market with only $6 
billion of private capital, I think there is ample room on a 
regulatory basis, on a Basel III basis, to expand that private 
capital.
    Mr. Royce. Mr. Shapo, you say in your testimony you have 
seen many times, in the insurance marketplace, when government 
programs like residential risk pools put in place to try to 
help hard markets have ballooned in market share and only 
ultimately distorted the market and destroyed any chance the 
market had of pulling out of a crisis. And you cite the New 
Jersey automobile insurance markets as an example there.
    That appears a good reference point for what we see now 
with the FHA, with market share rising I think it is about 56 
percent or over that. And private insurers pressed to leave the 
market. As you say, this is just one of many examples of 
government intervention in the marketplace. Can you describe, 
then, the impact that this has on competition as a result of 
these interventions? Could you explain the result to consumers, 
and what other examples are out there that you might want to 
give us?
    Mr. Shapo. Thank you, Representative. Yes, the common 
thread in all these is substantial government intervention. 
Sometimes taking different forms, but substantial government 
intervention to try to enhance availability and/or 
affordability of insurance products. And my point is that an 
insurance market is like any other market. Insurance has many 
complexities, but the basic ways that the market works are not 
complex.
    I quoted the Supreme Court, which quoted a House report, in 
McCarran-Ferguson: ``The theory of insurance is the 
distribution of risk according to hazard, experience and the 
laws of averages.'' It is pretty straightforward stuff. And to 
the extent that the outcomes are not pleasing to policymakers, 
and that they try to affect those outcomes, that will affect 
the ways the market works.
    Subsidies will develop, risk will be mispriced, capital 
formation--
    Mr. Royce. Capital formation will be impacted negatively.
    Mr. Shapo. I'm sorry?
    Mr. Royce. Capital formation is impacted negatively.
    Mr. Shapo. That becomes the most important factor, is that 
capital formation is negatively impacted. Money does not flow 
to the marketplace. And what happens is, you tend to get a 
double spiral. You get a spiral in the government-encouraged 
pool because it is not properly pricing risk. So it tends to 
balloon out of--and we have an extreme example here, where you 
have a negative cash balance and a negative capital position 
with the FHA program.
    Mr. Royce. It can lead to insolvency, yes.
    Mr. Shapo. And it impairs the private market, too, because 
no capital comes in and they can't properly compete.
    Mr. Royce. Thank you. Thank you, Mr. Chairman.
    Chairman Neugebauer. Now, the gentleman from New Jersey, 
Mr. Garrett.
    Mr. Garrett. I thank the chairman. I just have a couple of 
questions.
    Mr. Bjurstrom, can you talk to me about accounting? GAAP 
accounting?
    Mr. Bjurstrom. I am not an accountant, but I will do my 
best.
    Mr. Garrett. Is there any reason why the FHA could not be 
using GAAP accounting?
    Mr. Bjurstrom. I don't--I believe they can account for it 
any way that you direct them to.
    Mr. Garrett. Okay. Is there any reason why other agencies 
or entities should not be using GAAP accounting, on the Federal 
level?
    Mr. Bjurstrom. I am not familiar with the ability of other 
entities to do that.
    Mr. Garrett. All right. But as far as the FHA?
    Mr. Bjurstrom. No, I believe that you have the ability to 
tell them specifically how to account.
    Mr. Garrett. Okay. So when you talked about the GSEs 
previously, you talked about them having stakeholders, which 
would be the investors in it, right? Now when you talk about 
the FHA, we don't have investors in the FHA in the typical 
sense of the word. But you do have shareholders, you might say, 
if you described the American taxpayer in the FHA.
    And I guess this is open to the panel, as the taxpayer 
being the shareholder of the FHA, should we not be looking to 
them to factor in market risk, FHA, when they make their--when 
they do their accounting? I will start at the end, and anybody 
else who wants to comment on it.
    Mr. Bjurstrom. Pricing is the art of factoring in all 
risks. And if you look at the exposures and the mission and the 
purpose, and then after you have figured that out and then you 
then back into pricing. And along with that pricing is a 
component for volatility, which would include a lot of the 
market risk which this industry has a lot of market risk 
volatility.
    Mr. Garrett. Right. And--so anybody else? Wouldn't that be 
more transparent if it was a private corporation? You would be 
requiring transparency to the investor. Here, the stakeholder 
is the taxpayer. So wouldn't that be good for the stakeholder, 
the taxpayer, to have that information, that transparency? Does 
anybody disagree with that? You disagree with that.
    Mr. Bjurstrom. I like the transparency question just 
because of the fact that instead of it just being a single 
entity like the FHA pricing its own insurance, I think that is 
where they need to start. But I also like the benchmarking 
against others that are pricing for the same risk.
    Mr. Garrett. Right.
    Mr. Bjurstrom. As well as the opportunity to do reinsurance 
or risk share. Because then you get many multiple points of 
validation that you agree with others that your price is 
commensurate with the risk, not just individually promoting 
price changes individually.
    Mr. Garrett. I understand. Mr. Chappelle, do you disagree 
with the idea of transparency?
    Mr. Chappelle. I don't disagree with the idea of 
transparency, but I do have trouble--FHA is a government 
program. If you are going to compare it to the private sector, 
it is impossible to come up with a legitimate comparison. You 
are going to have to make estimates as part of that process. 
There was already a say to evaluate FHA's soundness through the 
1990 Budget Act.
    And if you want to move the goal posts and change how they 
do it, you could do it. But it is a government program. I think 
we all recognize that, and it is hard to apply to a government 
program what the private sector has. They don't have the profit 
motive. They can't withdraw from markets. They can't do the 
things the private sector--
    Mr. Garrett. Right. So you take that out. But as--your 
initial testimony was that you can factor in the market risk. 
So that would be one aspect that GAAP accounting would be 
providing to the public, the taxpayer, to understand better 
what their actual financial posture is. Notwithstanding that 
they don't make a profit, and notwithstanding that they are 
backstopped, correct?
    Mr. Chappelle. It wasn't my testimony that said that.
    Mr. Garrett. No, I am just saying would that--is that not 
true?
    Mr. Bjurstrom. I think, at a minimum, doing the analysis in 
order to create the right policy and the right information 
concerning that policy is most appropriate.
    Mr. Garrett. In my minute that I have left here, the role 
of FHA, what it should be, what it was designed for. The 
President has talked famously about how we should be raising 
taxes on the proverbial rich. And they define the rich as those 
people making over $200,000, $250,000. If that is the rich, 
then should the FHA be put back to its original foundational 
format to say that it is not there to help the rich, it is to 
help out first-time homeowners and lower- and middle-income 
people making under $250,000?
    Does anybody disagree with that assessment? You do?
    Mr. Chappelle. Congressman, it is an insurance program.
    Mr. Garrett. Right.
    Mr. Chappelle. And like everybody has said on this panel, 
it has to spread risk. There is a cornerstone of the FHA 
program that higher-balance loans perform better than lower-
balance loans. So if we are going to protect the taxpayer, you 
need some of those borrowers. But the news is, FHA charges a 
premium structure that if someone who is ``rich'' wants to use 
the program, I would welcome it. Because they would be 
overpaying their insurance.
    Mr. Garrett. That is--okay, just to know, then, that we 
will establish one program that is for the rich, then, yes. 
That is fair.
    I yield back, I guess. It is the Chair's prerogative.
    Chairman Neugebauer. I thank the gentleman.
    I want to follow up here because a couple of points have 
been made. This hearing is really about a number of things, but 
one of them is that--and Mr. Chappelle just made this point--
this is an insurance program. But it is an insurance program 
that is not being run like an insurance program, in that when 
you look at the industry standards that governments have 
basically established for people in this kind of business, 
model legislation, models of how much leverage is--should be--
is reasonable, and reserves that should be there to protect 
people.
    So I think the question is, is why would there be any 
argument that if we are going to have an insurance program, and 
the shareholders are American taxpayers, why wouldn't we run it 
like an insurance company and have it adhere to the same 
standards that other insurance companies have to adhere to? Mr. 
Bjurstrom?
    Mr. Bjurstrom. I agree. If you need to run it like an 
insurance program and price it appropriately, reserve for it 
appropriately, and capitalize it appropriately, then you would 
have a better idea of what your future expected outlook looks 
like. And that is really the--from a financial, accounting and 
modeling and actuarial standpoint, that is all we are really 
suggesting and trying to achieve.
    Chairman Neugebauer. I think the other issue is--and I 
support what the gentleman from New Jersey said about using 
GAAP accounting or what I call ``accrual accounting'' to be 
able to establish what is the value of the portfolio and what 
is the potential risk of the portfolio so that you can price 
it.
    The other piece of the pricing currently is the fact that 
FHA doesn't factor in their operating costs into setting their 
price because we appropriate money for that. So at the very 
least, it would appear to me that if you are going--that entity 
should be at least, if it is not going to pay a dividend, if it 
doesn't have shareholders, it is going to operate as a 
nonprofit, it ought to at least, then, have to factor in the 
cost of operation.
    Because it is not so much that we are trying to steer 
business to the private mortgage insurance companies, but what 
we are trying to do is find a balance in the marketplace of the 
total housing finance picture. And while we may be pushing some 
more business to the PMI companies, the private companies, 
today, unfortunately, about 90 percent of the mortgages in this 
country are still being backed by the American taxpayers.
    And so it is the policy that we are driving, that we 
continue to, I think, put inhibition--or inhibit the ability of 
the private sector to be into the marketplace today. Because 
this has been brought out, the risk retention issues. But it is 
not so much the pricing differentiation of the premium law. 
That is a piece of it. But it is the fact that, overall, a FHA 
loan today is a lower-cost loan overall because of the fact 
that it is backed by the Federal Government.
    And so when--and Ms. Bazemore brought this point up--you 
put the fact that you have Ginnie and FHA together, then the 
borrowing cost in the capital markets is much less. And so, it 
pushes it automatically. It doesn't--really, almost to a point 
where the differentiation in premium maybe is negated by the 
fact that the overall lower borrowing cost is compensating for 
any premium differentiation in the marketplace.
    And so, I think one of the things that I would hope, as we 
are moving forward, is that we have two responsibilities here. 
One is to make sure that a program that we have oversight over 
as a government is being run appropriately. And that if we take 
a look at something that has been in place for a number of 
years without--not a lot of changes, and understanding that the 
world has changed. Back when FHA was originally put in place, 
there wasn't a lot of securitization going on.
    Most of the loan sales were individual sales. Now we have 
securitization, so should we take a look at how we--how that 
impacts the way we run these businesses? But more importantly, 
I think, for many of us is trying to get back--and I think Mr. 
Capuano made a great point earlier--what is the right formula. 
What is the role of--what is the marketplace for FHA? And then 
what is the marketplace for the private market to be in there?
    We have to fix all of the pieces. But we can only fix them 
one at a time. And so as we move forward, I hope that we can 
have a meaningful dialogue about how we look at the FHA piece. 
I think there is some room here to shore it up, and I think 
there is room here to make sure that we don't--that there are 
not some market distortions there that are driving people to 
FHA other than the mortgage premium, or mortgage insurance 
premium, that FHA is charging.
    And I think that is really, hopefully--we heard some very 
good testimony today, and I look forward to probably having 
some ongoing dialogue with some of the market participants 
here. Because the ultimate goal here is for all us to do the 
right thing. And I am concerned right now that we are running 
FHA kind of on an ad hoc basis. And if it had a little better 
structure that overall it would be a more sustainable program.
    We wouldn't need to have hearings about why you have a 
negative net worth. Those are not the kind of oversight 
hearings that we need to be having. We need to be having 
oversight hearings where things are getting better. And 
unfortunately, we have been told that things are getting 
better, but the results have not proven that fact. And then the 
other point is the fact that since we are not using Generally 
Accepted Accounting Practices, we really don't know if this 
entity is actuarially, how sound it is or isn't.
    So with that, I am going to yield to my colleague, Mr. 
Capuano, for any remarks that he may have.
    Mr. Capuano. Thank you, Mr. Chairman. And again, I agree 
with you. I think that the whole idea of this is try to figure 
out exactly what we want the FHA to do. But I do caution people 
that no government program should be run as a private program. 
We don't have the profit motive. And if you want to look at the 
model, look at the model of private insurance, private 
mortgages before the FHA.
    There were no middle-class mortgages, period, end of issue. 
Only rich people or people who inherited a house could afford 
to buy a home. And the FHA allowed people to get into the 
middle class by buying a home. So there is a balance. And I 
agree, our job is to try to find that balance. Ms. Bazemore, if 
I told you that in 2 years you could increase your share of the 
current business by 2\1/2\ times, do you think that would be a 
good deal?
    Ms. Bazemore. Yes. But it would also depend on where I 
started.
    Mr. Capuano. No, and I don't blame you. Of course, if you 
told me you were going to increase my salary 2\1/2\ times, I 
would say okay, I am in, sign me up. It's not happening, I 
know. PMI has increased its share of the mortgage businesses by 
2\1/2\ times in the last 2 years. And yet I keep hearing from 
some people that it is absolutely proven, without question, 
without a doubt that the FHA is squeezing private enterprise 
out.
    I find that hard to believe when you are increasing your 
mortgage here. You are going back to what appears to be a more 
normal time. We are not there yet. And I agree with that, there 
needs to be more done. And my fear is that if we don't get this 
right, if we allow the FHA to continue going where it is going, 
which I don't like some of the things they have done. I 
understand them in the short term, but in the long term we will 
be doing, effectively, what we shouldn't be doing, which is 
making mortgages so expensive or mortgage insurance so 
expensive, again, there will be no middle-class people.
    I guess I just want to reemphasize that as we rebalance 
this, as we look at it, the basic question is, how much is 
enough? And maybe I am wrong, but I don't think that the 
private mortgage industry would be well-served if we drive the 
middle class out. You have done a good job over the years 
finding a niche in balance with the FHA. Now, again, that 
niche, that whole system, was messed up in 2008 for everybody, 
and we need to re-find that balances.
    But prior to that, I didn't hear any complaints. No one was 
complaining then. And so the question is, do we or do we want 
to have any government involvement in allowing the middle class 
to continue being able to afford a mortgage. And for me, that 
is where we are trying to go. I have no philosophical viewpoint 
here, except that I know--and again, I never qualified for an 
FHA loan because I do come from a high-cost area and because I 
have been fortunate in my life.
    Fine. But I know one thing. If there were no GSEs and there 
was no FHA across the country, my mortgage rates would be 
through the roof and I never would have bought a home. Because 
I own, currently--the home that I bought in 1980 is a two-
family home. Why did I buy a two-family home? I needed the rent 
to pay the mortgage. And I had to fight with the bank to accept 
that.
    So without that, I wouldn't be in the middle class, and my 
children would not have had a college education because I, like 
many Americans, remortgaged my house to pay for their college 
education. And for me, I thank God there was a system in place 
that allowed me the opportunity to buy a home. And I need to 
make sure that is the case for the next generation. Which, by 
the way, as a point of fact, is not there in many parts of this 
country today.
    People 30, 40 years old cannot afford to buy a home. They 
can't get the downpayments together because the house prices 
are too high, and they can't afford the monthly mortgage. 
Especially if you add that on top of the student loans they are 
paying. That is not good for them. It is also not good for 
America, and it is not good for your businesses. So with your 
help, we will find that way to balance it.
    But I need to make sure that some philosophical viewpoint 
of some greater good doesn't get in the way of actually finding 
a way to rebalance this system in a manner that keeps it going 
for the next generation. I know that your testimonies I heard 
today all fit in that category, and I thank you for that. And I 
look forward to working with you all as we move forward.
    Thank you.
    Chairman Neugebauer. The gentleman from Texas, Mr. Green, 
is recognized for 5 minutes.
    Mr. Green. Thank you very much. And I neglected to thank 
the ranking member earlier for allowing me to be a part of the 
hearing. I did thank the chairman, so I now thank the ranking 
member. And after hearing the ranking member's statement, I 
think we probably are at the offertory and closing hymn. 
Because like him, I, too, thank God for FHA.
    But I will ask a few questions, if I may, to bring a little 
bit of clarity to your testimony. Because I suspect that some 
things are the case, but sometimes when you finish testifying, 
persons who are viewing this at home are not sure. So perhaps 
we can bring a bit of clarity. Is it true that each of you 
would keep FHA? Simply put, is there anyone who wants to end 
FHA, have no FHA at all?
    If so, would you kindly raise your hand if you want to end 
FHA? All right, let the record reflect that we have no hands in 
the air. And as a result, we can conclude that no one wants to 
end FHA. Now, let me go further and ask is there anyone who 
believes that FHA as it has functioned traditionally is somehow 
adverse to the market that has developed through the years, 
that has seen some difficult times as of late. But is FHA's 
traditional role one that we all believe is important and we 
should maintain.
    And if so, if you do not agree, would you kindly raise your 
hand? If you don't think its traditional role is one that we 
should maintain. And for our benefit, Mr. Chappelle, I am going 
to ask you to give us your summary, quickly, of what FHA's 
traditional role has been and how that role still benefits us, 
even in these difficult times.
    Mr. Chappelle. Sure, Congressman. FHA has helped low-, 
moderate- and middle-income families to be able to buy their 
home. Predominantly first-time home buyers; 75 to 80 percent of 
their loans go to first-time home buyers. Predominantly lower-
income home buyers, as I noted in my testimony. Their median 
income was $56,000 in 2011. So FHA's role is to help--it is 
really the insurer of last resort for creditworthy home buyers.
    But to be able to do that, they do need to spread that risk 
a little bit because they have to--they can't just have the 
highest-risk pool. They have to spread the risk. But they do 
have structural protections, I believe, which ensure they do 
not encroach too far into the private sector. And that would be 
the fundamental point I would make.
    Mr. Green. And do you think that tweaking the 100 percent 
rule--that is what I am calling the rule that allows FHA to 
insure the home for 100 percent--
    Mr. Chappelle. --of the value?
    Mr. Green. Of the value, yes. Do you think that can be 
tweaked such that it provides FHA with a greater amount or 
lesser amount of risk?
    Mr. Chappelle. I think it would be a major mistake for the 
program. That 100 percent insurance is one of the core, 
structural parts of the program. Because what is happening 
today in the marketplace is that lenders, even with 100 percent 
insurance, are adding their own underwriting requirements on 
top of FHA's. They are called ``credit overlays.'' Because--and 
I know some of the panelists said there are only perceived 
risks in the FHA program.
    I can assure everybody, lenders feel there is real risk in 
the FHA program. That is why they put these overlays in place. 
And if you go and lower that insurance from 100 percent, that 
is just going to ratchet up that risk factor for the lender, 
which will exclude the people that you would like to see, and 
we would all like to be--see to be part of the FHA program. So 
I think that would be a serious, serious problem for the 
program to lower that insurance.
    Mr. Green. And the final question on this--in this area. 
What do you think that FHA can do to better serve the public?
    Mr. Chappelle. Congressman?
    Mr. Green. Yes. Mr. Chappelle?
    Mr. Chappelle. I think the mortgage limits were raised in 
response to the problems in the marketplace in 2007 and 2008. 
I, and I am sure most other people who would like to see the 
FHA program continue to prosper recognize those limits should 
not stay there forever. And once the mortgage market recovers--
because the purchase market is still in a depressed state. But 
once the purchase market recovers, those limits should come 
down to more reasonable levels.
    And I think at the appropriate time, that would be the 
correct thing to do.
    Mr. Green. I thank all of the witnesses, and I will just 
have my parting comment. I have many constituents who have 
benefited from FHA. And it is the bridge that has brought a 
good many people over to the promised land, if you will, of 
homeownership. And I think that there may be some things that 
we can do to tweak it, but FHA should not be frowned upon for 
the good job that it has done.
    And to a certain extent, we are condemning it for being 
successful. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman. I would like to 
thank each of our witnesses again for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And without objection, the hearing is adjourned.
    [Whereupon, at 12:17 p.m., the hearing was adjourned.]














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