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



 
                      SUSTAINABLE HOUSING FINANCE:

                   PERSPECTIVES ON REFORMING THE FHA

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



                                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

                               __________

                             APRIL 10, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-10



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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:
    April 10, 2013...............................................     1
Appendix:
    April 10, 2013...............................................    47

                               WITNESSES
                       Wednesday, April 10, 2013

Kelly, Kevin, First Vice Chairman of the Board, National 
  Association of Home Builders (NAHB)............................    13
Marzol, Adolfo, Vice Chairman, Essent Guaranty, Inc..............     8
Rossi, Clifford V., Executive-in-Residence and Tyser Teaching 
  Fellow, Robert H. Smith School of Business, University of 
  Maryland.......................................................    16
Stevens, Hon. David H., President and Chief Executive Officer, 
  Mortgage Bankers Association (MBA).............................    10
Thomas, Gary, 2013 President, National Association of REALTORS 
  (NAR)..........................................................    11
Wartell, Sarah Rosen, President, the Urban Institute.............    14

                                APPENDIX

Prepared statements:
    Neugebauer, Hon. Randy.......................................    48
    Kelly, Kevin.................................................    50
    Marzol, Adolfo...............................................    59
    Rossi, Clifford V............................................    67
    Stevens, Hon. David H........................................    78
    Thomas, Gary.................................................    99
    Wartell, Sarah Rosen.........................................   114


                      SUSTAINABLE HOUSING FINANCE:


                   PERSPECTIVES ON REFORMING THE FHA

                              ----------                              


                       Wednesday, April 10, 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 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, Duffy, Hurt, Stivers; Capuano, 
Velazquez, Cleaver, Sherman, Sinema, and Beatty.
    Ex officio present: Representatives Bachus and Waters.
    Also present: Representatives Carney and Green.
    Chairman Neugebauer. Good morning. The Subcommittee on 
Housing and Insurance will hold a hearing today entitled, 
``Sustainable Housing Finance: Perspectives on Reforming the 
FHA.'' This is our fourth hearing on the FHA, a very important 
part of our economy and of the housing market.
    I will just remind everybody that we will have 10 minutes 
of opening statements on either side. And with that, I will 
recognize myself for an opening statement.
    As I mentioned, this is our fourth hearing on FHA and we 
have learned a little bit along the way. One of the things that 
we have learned is that FHA was not immune to the housing 
crisis and that their mortgage portfolio has been problematic 
to the point where we learned that their fund is basically 
underwater.
    It has a negative equity and the President just released 
his budget today which indicates that the American taxpayers 
may have to put as much as $943 million, nearly a billion 
dollars, into that fund.
    And we also heard from people saying that FHA had kind of 
moved beyond its initial charge, that it had expanded into 
markets and to territories it had not been before.
    We also learned that some people felt like FHA was, in many 
cases, being used as a vehicle for doing housing policy, 
sometimes to the detriment of FHA, and maybe sometimes to the 
detriment of the housing market.
    What we also learned, as we were looking to bring the 
private sector back into play for mortgage housing finance in 
this country, is that the pricing that FHA is using on its 
mortgage insurance in many cases was very difficult to compete 
with, particularly since the American taxpayers are the 
ultimate backstop.
    We have had a number of witnesses say that FHA reform is 
probably needed. There hasn't been a lot of reform to FHA in a 
number of years.
    And one of the things that I think House Republicans, and I 
think this committee, are committed to is having a robust 
housing finance market in our country, which is sustainable.
    Because we believe that if you have a sustainable, robust 
housing finance market in this country, then you will also have 
a more sustainable housing market in this country, and that is 
very important to the American people.
    Some of the people who got mortgages, who shouldn't have 
gotten mortgages, could have been victims in this circumstance, 
but I think in many cases, the real victims of the housing 
crisis were those people who had been making their mortgage 
payments, or maybe they paid their house off and were counting 
on the equity in their house for retirement or to send kids to 
college.
    And because of the market conditions and what happened, 
those housing values went down and those people were as much of 
a victim as those folks who got mortgages which maybe shouldn't 
have been made.
    So, I think that this is an important hearing today. We 
have, I think, additional stakeholders. We have tried to have 
as many stakeholders in this process as we can because, 
ultimately, the goal here is to begin to look at some 
legislative language and policy that we think accomplishes the 
goal of making a sustainable housing finance market in this 
country.
    And we want to make sure that we bring all of the 
stakeholders in place because it is important that we get it 
right. The ultimate goal here is to get this right.
    We look forward to hearing from the witnesses who are here 
today. I think we have a great panel and we are certainly 
looking forward to them.
    And with that, I yield back my time, and recognize my good 
friend, Mr. Capuano, the ranking member of the subcommittee, 
for his opening statement.
    Mr. Capuano. Thank you, Mr. Chairman.
    I want to thank the members of the panel for being here 
today. I particularly want to welcome Mr. Kelly, who grew up in 
my neighborhood. We did lose him to a small State named 
Delaware or something. It is this little State somewhere along 
the Atlantic Ocean, but he is welcome back.
    And my understanding is he is still registered to vote in 
my district. Don't worry about it, Mr. Kelly, nobody will 
change here as long as you vote the right way, of course.
    I just want to say that I actually want to thank the 
chairman. I think this panel today--I have read pretty much all 
of the testimony and I know pretty much where most of your 
organizations stand.
    I actually think this is going to be the most informative 
panel we have had, and the most thoughtful discussion, I am 
hoping. I am looking forward to it.
    I think that is the end of my opening statement, because 
the truth is I want to hear from you. I want to engage in some 
discussion.
    I think we all agree that we want to make some changes to 
the FHA and I think we need to have a discussion about the 
specifics and the details of what should change, and what 
shouldn't, within those parameters, which maybe today is not 
the day for full details, but at least some general parameters.
    So I am looking forward to it and, again, I want to thank 
the panel for coming. I look forward to your testimony. I yield 
back.
    Chairman Neugebauer. I thank the gentleman.
    And, now, the vice chairman of the subcommittee, Mr. 
Luetkemeyer, is recognized for 2 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, for this 
important hearing.
    While this conversation may be difficult at times, it is in 
the best interest of our country and the American people to 
closely examine FHA and to make responsible reforms to this 
Nation's housing finance system.
    I continue to be troubled by the fact that FHA seems to 
have grown well beyond its original mission. Loan limits are 
high. The number of insured mortgages has surpassed 7 million 
nationwide.
    So the question is, can we find ways to reform the system? 
During a recent hearing, FHA Administrator Carol Galante made 
it clear that she would be supportive of seeing the loan 
limits, which now stand at $729,000, decrease.
    FHA was created to serve low- to moderate-income borrowers 
who were creditworthy. That mission appears to have changed as 
FHA's book of business continues to grow.
    I firmly believe that we need to advance legislation that 
not only returns the mission of FHA to its original purpose of 
serving those creditworthy borrowers who need access to the 
housing finance system, but also one that shifts risk away from 
American taxpayers and allows for more participation in the 
private market.
    Last week, former FDIC Chairman Sheila Bair had an article 
in the Wall Street Journal which said, ``Regulators let big 
banks look safer than they are'' and it talked about the 
modeling of themselves and how they look at--when they look at 
their capital asset ratio.
    And it shows that the megabanks, the big banks, kind of 
fudge the numbers a little bit whenever they put some of their 
more risky assets at less than the actual value and concerns 
that we have about them and that part of those investments are 
mortgage-backed securities.
    So, again, we are playing with fire not only within the 
housing system itself, but also with investments in our 
financial system as well.
    I think it is essential that this committee work to return 
FHA to its original mission and to ensure that U.S. taxpayers 
are not the ones left footing the bill for these risky 
endeavors.
    I look forward to hearing ideas from the panel on how to 
reform the system into one that is safer and follows the tenets 
of its own lending and underwriting.
    And, with that, I yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And, now, the ranking member of the full Financial Services 
Committee, the gentlewoman from California, Ms. Waters, is 
recognized for 3 minutes.
    Ms. Waters. Thank you very much. I welcome the committee's 
continued attention on FHA and I am pleased that we are hearing 
from a number of key industry participants today.
    Today's hearing is the fourth hearing focused on FHA this 
year, and I welcome each of the witnesses to the committee.
    Since its inception in 1934, FHA has insured home loans for 
more than 37 million American families. For many of these 
families, FHA was the only home financing option.
    And while FHA has been put under considerable strain during 
the housing crisis, it served an important countercyclical role 
and ensured the continued availability of mortgage credit.
    Now that the housing market has stabilized, FHA's footprint 
has been reduced, as we have heard from witnesses during 
previous hearings, and I am pleased that FHA has taken a number 
of important steps, including multiple premium increases, to 
strengthen themselves, which has helped lead to FHA's strongest 
books of business on record in 2010 and 2011.
    The release today of the President's Fiscal Year 2014 
budget will, undoubtedly, return attention to the financial 
solvency of the Mutual Mortgage Insurance Fund (MMIF) and 
whether HUD may need to borrow funds from the Treasury, a 
situation, I might add, that we won't know for sure until the 
end of this fiscal year.
    There are bipartisan steps that we can take right now that 
would help address the solvency issue. I recently introduced, 
along with the ranking member of this subcommittee, Michael 
Capuano, bipartisan FHA solvency legislation that passed this 
committee unanimously last year, and which subsequently passed 
the House with over 400 votes, something that does not occur in 
this body very often.
    So I want to take this opportunity to urge my colleagues on 
the other side of the aisle to join us in quickly passing this 
legislation and sending it to the Senate.
    Among the key reforms contained in that legislation is 
indemnification authority, which FHA Commissioner Galante 
included in her list of recommendations to this committee in 
mid-February.
    One other point that is cited in Mr. Thomas' testimony, and 
that I believe deserves repeating, is that FHA continues to 
have significant resources, sufficient to pay 30 years' worth 
of expected claims on its portfolio.
    The Fiscal Year 2012 actuarial review showed that the total 
capital resources of the Mutual Mortgage Insurance Fund at the 
end of Fiscal Year 2012 were estimated to be $30.4 billion.
    As Mr. Thomas' testimony further notes, it is also 
important to keep in mind that the requirement that FHA hold 30 
years' worth of expected claims is 30 times more than what is 
required of banks, which are only required by the financial 
accounting standards to hold 1 year to reserve.
    I want to highlight this fact in particular for those of my 
colleagues who believe that FHA should operate more like a 
private company and be subject to accounting and other rules 
that apply to the private sector.
    Once again, I want to welcome the witnesses to today's 
hearing, and I look forward to examining more closely the ideas 
set forth in their testimony. I yield back the balance of my 
time.
    Chairman Neugebauer. I thank the gentlewoman.
    Now, the gentleman from California, Mr. Royce, is 
recognized for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman.
    The President's budget, which is going to be released later 
today, stands as a reminder of the risk posed to the American 
taxpayer if the financial solvency of the FHA is not addressed.
    And for us here today, it is an opportunity to start to 
turn the corner and talk about returning private capital to the 
mortgage insurance market.
    So my hope is that our witnesses will outline how the FHA 
can operate with a clearly defined mission that complements, 
instead of competes with, private credit enhancements.
    If that can be done, it is going to facilitate a 
sustainable housing finance system for the United States. And 
the FHA, of course, as we all know, has a key role to play for 
first-time and low- to moderate-income borrowers.
    But where we can unleash private capital, we should. And it 
is in the best interest of the taxpayer and our housing economy 
to do so.
    I yield back the balance of my time.
    Chairman Neugebauer. I thank you.
    And I have my interpreter here, the ranking member, and he 
has been making sure that I pronounce the next person--Mr. 
Carney, is recognized for 1 minute.
    Did I say that right?
    Mr. Carney. Thank you, Mr. Chairman. I want to thank you 
and the ranking member. Don't listen to the ranking member in 
pronouncing my last name though; you are not going to get it 
right.
    I just thank you for the opportunity to welcome one of my 
friends from Delaware, Kevin Kelly, who is here on the panel 
today. I have known Kevin for a long long time as an advisor, 
as a friend, and as an expert in housing in our State.
    As many of you may know, Kevin worked for one of the giants 
in housing in our State of Delaware and in our country, Leon 
Weiner--who passed away many years ago--a former president of 
the National Association of Home Builders, and I think the 
building has a bust of him outside of it.
    I have learned a lot from Kevin over the years on housing 
issues. He used to be the president of the Home Builders 
Association of Delaware. There was a time in a former life 
where I served as the acting director of public works for the 
largest county in our State, and we worked very closely 
together.
    I want to thank Kevin for all the work that he has done for 
our State, and he is now moving up as one of the vice 
presidents of the National Association of Home Builders, for 
all the work that he is doing and thank him for coming to be 
part of this panel today.
    And I yield my time back. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And I had an opportunity to know Leon Weiner as well. He 
was a great American, a giant in the housing industry.
    I now recognize the gentleman from California, Mr. Miller, 
for 2 minutes.
    Mr. Miller. Thank you, Mr. Chairman.
    If you look at the design of FHA, they were intended to 
play a countercyclical role, and in this downturn, that is 
exactly what they did as the private market withdrew, they 
moved in.
    Now, without a doubt, some of the worst years FHA has on 
the books are 2007 to 2009, and that is when they really ramped 
up to fill the void made by the private sector.
    The problem is that when they entered the market, they were 
not prepared for it. Their underwriting standards were not as 
they should have been. The premiums were not adequately 
adjusted in a timely fashion.
    But if you ask, did they do what they were intended to do, 
they did. The nice thing about what is happening today is you 
are seeing a recovery in the housing market. In my specific 
district, I am seeing people getting back to work because of 
that recovery.
    So, now, we look and say, what did FHA do that really 
restructured the way they were going, and in 2010, former FHA 
Commissioner Stevens created a risk management office. And, in 
doing that, he basically minimized some of the risks that were 
coming in the future, but he didn't do it as rapidly as some 
wanted him to do, but I want to praise him for what he did.
    What we are experiencing now in the recovery, I think you 
can say was partly due to the efforts of FHA. Now, I am not 
defending them, saying that they did a great job and they did 
what they should have done. They did what they should have done 
at the right time. They didn't do it in the right fashion.
    So how do we look at restructuring what they do in the 
future to make sure that their mission is appropriately managed 
and the risks they are taking on at a time is appropriate risk?
    The latest actuarial review made it clear that FHA was not 
fully prepared for the strain that it faced during the 
downturn, and I don't think anybody on the panel is going to 
say they were prepared for it.
    But did they do their job on operational structure? I think 
they did because they were designed to be countercyclical, but 
they weren't prepared for the measures that they were 
implementing and the full risks they were taking on.
    But as we return to a robust marketplace, we look for the 
private sector to come in and take over the job that the FHA 
has done and let's hope that happens in a rapid fashion.
    I yield back the balance of my time.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentleman from New Jersey, Mr. Garrett, the 
chairman of the Capital Markets Subcommittee, is recognized for 
2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, for holding this 
important hearing.
    Reforming FHA must be a top priority of this committee. And 
I agree with each and every one of the points you raised: that 
we must stabilize FHA; clearly define its mission; reduce 
taxpayer exposure; and ensure that it is run well and run like 
an efficient insurance company.
    But I would add one more point to the priorities. We must 
also make sure that the government's scorekeepers provide the 
American taxpayer with an accurate picture of the risks that 
are assumed.
    To do this, the first thing you must realize is that there 
is no such thing as a free lunch when it comes to a government 
program. The costs are inevitably borne by the taxpayer.
    And people are beginning to realize that not only is 
government costly, but also that it costs more than they 
initially thought. The burden of government rarely comes in 
under budget.
    So the typical narrative of government programs gone 
bankrupt should come as no surprise. However, it defies common 
sense that the Mutual Mortgage Insurance Fund, according to 
Administration officials, actually makes money for the 
government. Only through the alchemy of government accounting 
can you transform a mortgage portfolio, figuratively led into 
gold, and still remain true to the law.
    This free money comes courtesy of the Fair Credit Reporting 
Act of 1990 (FCRA). Under FCRA, cooked accounting rules, the 
cost of Federal mortgage insurance it determined it's risk on 
the basis of its subsidy cost including the risk that the 
borrowers default on its mortgages.
    The subsidy cost represents, in present value terms, the 
amount the loans are expected to earn or lose over their life. 
But the rub lies in the fact that FCRA uses the interest rates 
on Treasury securities to calculate this cost. This assumption 
fails to account for market risk or systemic risk. So unlike 
fair value accounting, which apparently incorporates a premium 
for market risk, FCRA fails to reflect the true cost of FHA-
backed mortgage insurance.
    Unfortunately, the Administration has strongly resisted the 
move to fair value accounting, instead clinging to this 
dangerous fiction of FCRA and this alchemy.
    So to bring a ray of sunshine to Federal budgeting, you 
must require the Administration to account for Federal loan 
programs on a fair value basis.
    I do hope the Administration will finally wake up to the 
unfortunate economic reality we are in, and much like FHA, free 
lunches do end up costing a lot more than you expect.
    And with that, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentlewoman from Ohio, Ms. Beatty, is 
recognized for 1 minute.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member.
    I join my colleagues today as we continue the examination 
of the Federal Housing Administration, specifically looking to 
the future as we anticipate the necessary reforms for improving 
FHA's long-term financial position, for refocusing the agency 
on its mission to increase mortgage assurance for first-time 
buyers and low- to moderate-income households.
    I think looking at the past history of the great benefits 
that FHA provided to the housing market and the economy as a 
whole, during the past several years, it has been, in my 
opinion, undeniable that the FHA has been an integral part of 
the housing recovery and the market as a whole.
    And we could not, in my opinion, function without its 
presence. So I look forward to hearing your testimony and how 
you can be helpful to assure that we don't lose sight of the 
original mission of FHA.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    I ask unanimous consent that all members of the Financial 
Services Committee who are not members of the subcommittee and 
who have joined us today will be entitled to participate in the 
hearing.
    Without objection, it is so ordered.
    Now, it is my pleasure to introduce our panel today: Mr. 
Adolfo Marzol, vice chairman of Essent Guaranty, Inc; the 
Honorable David H. Stevens, president and chief executive 
officer of the Mortgage Bankers Association; Mr. Gary Thomas, 
2013 president of the National Association of REALTORS; Mr. 
Kevin Kelly, first vice chairman of the board of the National 
Association of Home Builders; Ms. Sarah Rosen Wartell, 
president of the Urban Institute; and Mr. Clifford Rossi, 
executive-in-residence and Tyser teaching fellow at the Robert 
H. Smith School of Business, University of Maryland.
    I thank the witnesses for being here, and with that, Mr. 
Marzol, you are recognized for 5 minutes.

  STATEMENT OF ADOLFO MARZOL, VICE CHAIRMAN, ESSENT GUARANTY, 
                              INC.

    Mr. Marzol. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for the opportunity 
to testify today on, ``Sustainable Housing Finance: 
Perspectives on Reforming the FHA.''
    My name is Adolfo Marzol, and I am vice chairman of Essent 
Guaranty, a private MI company. Just a little background on 
myself, my parents came to the United States as Cuban refugees 
in 1961. They bought their home with an FHA loan. My mother 
actually still lives in that home today.
    I bought my first home with a 5-percent-down mortgage from 
Fannie Mae, fortunately, with private mortgage insurance. And I 
do think my family's story mirrors so many, where access to 
housing finance has made a tremendous difference in our lives.
    Essent was formed in 2008 in the depths of the crisis. We 
are dedicated to prudently continuing to provide access to 
mortgage credit. We are guided by the fundamental belief that 
truly private capital will take credit risk without explicit or 
implicit guarantees is something that would be needed and 
valued in our housing finance system.
    We believe private MI, backed by strong capital and a 
reliable payment of valid claims, offers the market a product 
that effectively mitigates risk. It can be accessed by lenders 
of all size. It integrates smoothly into the functioning of the 
mortgage market, including TBA securitization.
    And we think if government provides backstops in the 
market, private MI provides an effective alternative between 
either all taxpayer credit risk or no taxpayer credit risk.
    We are pleased that our business approach has been 
validated by the market. Since we actually began writing 
insurance in 2010, we have grown to be about 10 percent of the 
new private mortgage insurance being written.
    Our entry has been part of a broader renewal of a resilient 
industry which, importantly, is demonstrated through the 
ability of both new entrants and legacy companies to raise 
capital of over $10 billion since 2008, and nearly $2 billion 
just this year.
    Investor interest in providing capital to the U.S. MI 
industry appears to be quite strong, which should enable 
companies like Essent to do more.
    FHA helped our Nation through the crisis by expanding its 
role when private markets were distressed, and despite 
differing views regarding the eventual balance between the 
private and public roles in the market, we think there is 
widespread agreement that the role of private capital should be 
expanded from its present state, and taxpayer risk can be 
reduced.
    The balance towards private has definitely been improving. 
We think it can continue to improve without loss of access for 
ready borrowers by steady, incremental use of private MI.
    We support a future role for FHA, but transitioning to a 
more focused mission of providing access to homeownership for 
creditworthy borrowers who are not adequately served with 
private MI.
    And, today, we really come with four key recommendations: 
Number one would be to address the long-term solvency of FHA on 
a foundation of provisions similar to those that were adopted 
by the House last Congress in H.R. 4264, the FHA Emergency 
Fiscal Solvency Act of 2012, including additional authorities 
HUD has requested to address solvency, and we believe should 
also include setting prudential limits on seller concessions, a 
policy change HUD has proposed, but not implemented.
    Number two, we believe solvency should be addressed while 
moving toward a mission-focused footprint for FHA, simply 
because taking non-mission risks to address solvency needlessly 
increases taxpayer risk and creates incentives to serve 
borrowers that can be privately insured.
    Number three, we would like to urge beginning to explore a 
different relationship between private MI and FHA not as 
competitors, but as partners that make sure the market is 
covered. As partners, private insurance should play as large a 
role as possible, and FHA should be a complement that expands 
access where needed.
    And one approach to build a partnership is credit risk-
sharing with private MI by FHA. Risk-sharing approaches should 
be tested through pilots, as FHFA has directed be done at the 
GSEs, targeting risk-sharing transactions on $60 billion in GSE 
mortgages to contract taxpayer risk this year.
    And, finally, we would ask for support for appropriate 
recognition of the value of private MI when regulators 
establish the final Dodd-Frank mandated risk retention rules 
and continued recognition of MI in Basel III capital rules for 
banks.
    Appropriate recognition for the risk-mitigating benefits of 
MI will avoid needless business going to FHA when private MI 
works well.
    Thank you for this opportunity to share our views, and I 
welcome your questions.
    [The prepared statement of Mr. Marzol can be found on page 
59 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And, now, Mr. Stevens, you are recognized for 5 minutes. 
Thank you for being here.

  STATEMENT OF THE HONORABLE DAVID H. STEVENS, PRESIDENT AND 
  CHIEF EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION (MBA)

    Mr. Stevens. Thank you. Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee, thank you for the 
opportunity to offer MBA's perspectives on FHA reform.
    The MBA represents the entire real estate finance industry, 
but given the circumstances facing FHA in the single-family 
market, my oral statement will focus on that sector. My written 
testimony includes our views on FHA's critical role in multi-
family rental housing as well.
    FHA has never played such an important role in the housing 
market. Today, it is the dominant source of mortgage finance 
for borrowers with low downpayments and those without high 
incomes or inherited wealth.
    Many of these are first-time homebuyers, young families 
looking to put down roots in a community, and they are a 
segment that must be served if we are going to grow our economy 
and sustain the housing recovery.
    Since the onset of the housing crisis, when FHA's books 
suffered like everyone else's, the agency has taken a number of 
steps to address losses in its single-family portfolio: raising 
mortgage insurance premiums; increasing downpayment 
requirements for certain borrowers; eliminating the approval of 
loan correspondence; raising lender net worth requirements; 
reexamining reverse mortgage policies; and establishing the 
Office of Risk Management.
    By making these changes, FHA has moved swiftly to protect 
taxpayers and the fund. The credit profile and performance of 
the 2010 to 2012 portfolios demonstrates the effects of these 
changes.
    For example, the average FHA credit score for 2011 was 696, 
up from a historical average closer to 650. More importantly, 
these books are projected to contribute significantly to the 
economic value of the fund over the next several years.
    Looking ahead, we believe further programmatic changes at 
FHA must balance three priorities: restoring financial 
solvency; preserving FHA's critical housing mission; and 
maintaining the agency's countercyclical role.
    We continue to work with our members to develop additional 
policy changes regarding FHA's future and we will certainly 
share those recommendations with this panel as they get 
completed.
    There are a number of steps this subcommittee could take to 
further strengthen FHA and promote the return of private 
capital. Loan limits could be lowered from the levels that were 
necessary at the height of the housing crisis.
    Downpayment requirements could be adjusted to mitigate for 
other risk factors like low credit scores. Risk-sharing is 
another idea that if done prudently, could potentially meet all 
the objectives I have just listed.
    Similarly, risk-based underwriting could further reduce 
FHA's credit risk by targeting areas of risk-layering. However, 
the consequences to FHA's traditional borrowers on each of the 
above suggestions could be significant if FHA employs overly 
stringent controls.
    Finding the right balance is absolutely critical. Many 
lenders in recent years have tightened their standards beyond 
FHA's minimums. FHA may need to lock in some of these overlays 
as appropriate. This would protect FHA from any erosion in 
standards as market conditions evolve.
    Also, in recent years, FHA has increased its oversight and 
enforcement of agency-approved lenders. To be clear, as FHA 
Commissioner, I initiated tighter controls and enforcement 
procedures that shut down irresponsible FHA lenders. When 
warranted, this was certainly the right thing to do for the 
fund.
    The key is finding the proper tolerances and communicating 
them clearly to market participants. When lenders are forced to 
operate their businesses to near perfect standards, they will 
operate well inside of those published standards.
    Right now, credit is far tighter than anyone has 
experienced in decades. There may be families with good credit 
willing to put down substantial downpayments who are being 
frozen out of the market because the risks of making any 
mistake are simply too great and the rules of the road are 
unclear and often contradictory.
    When lenders don't know whether FHA will demand 
indemnification or cancel the government guarantee on top of 
the potential they may face substantial financial penalties 
because the goal posts have been moved, they will, quite 
naturally, only lend to people with perfect credit and limit 
financing options for FHA's targeted population.
    Mr. Chairman, we need to strive to clear up the uncertainty 
in our real estate finance system. We need a system where 
homeownership is a doorway to opportunity and borrowers can 
once again feel safe, confident, and secure in their loans, but 
also a system that thrives in an environment that encourages a 
competitive, responsible marketplace so business can grow.
    That includes not just FHA, but also examining the future 
of the entire housing finance system. Ultimately, all 
stakeholders want the same thing: a fully functioning market 
that relies most heavily on private capital with a limited, 
appropriate role for Federal programs.
    A stable, sustainable FHA program must be part of that 
system. Thank you for the time.
    [The prepared statement of Mr. Stevens can be found on page 
78 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Thomas, you are recognized for 5 minutes.

STATEMENT OF GARY THOMAS, 2013 PRESIDENT, NATIONAL ASSOCIATION 
                       OF REALTORS (NAR)

    Mr. Thomas. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for this opportunity 
to testify on behalf of the 1 million members of the National 
Association of REALTORS who practice in all areas of 
residential and commercial real estate.
    My name is Gary Thomas. I am a second generation real 
estate professional from Villa Park, California. I have been in 
the business for more than 35 years and have served the 
industry in numerous roles. I currently serve as the 2013 
president of the National Association of REALTORS.
    Throughout the course of my real estate career, I have 
witnessed the vital role that the Federal Housing 
Administration plays in providing access to affordable 
homeownership.
    Over the past 5 years, FHA's role has been more critical 
than ever as it sustained housing markets nationwide during the 
worst economic crisis of our lifetime.
    NAR recognizes the challenges that FHA is facing today and 
the concern about risk to the taxpayers. FHA has taken a number 
of significant steps to immediately replace their reserves, 
including raising premiums 5 times in the last 2 years, 
increasing risk management controls, and raising downpayments.
    We believe these changes are substantial and will continue 
to improve FHA's financial condition. However, there are 
additional reforms that we believe will further enhance FHA and 
protect the availability of mortgage credit to millions of 
American families.
    Today, FHA is constrained in its response to economic 
conditions and its own financing standing. We support 
legislation to provide FHA with flexibility to change program 
requirements when necessary to protect the fund. These include 
greater flexibility on setting premiums, changing loan 
policies, and other programmatic changes.
    As a tool in its risk management arsenal, FHA should 
continue improving its oversight of lenders. We support 
legislation that provides FHA the authority to seek 
indemnification from direct endorsement lenders, and the 
ability to quickly terminate a lender's ability to originate 
FHA-insured loans.
    There are a number of other proposals that have been 
suggested, which NAR believes are worthy of discussion. These 
include lowering the guarantee, and creating a risk-sharing 
model with private mortgage insurance companies. NAR does not 
currently have a policy on these proposals, but is actively 
reviewing them.
    We would benefit from additional information about the 
proposals and their impact on the FHA, consumers, and the 
housing markets. To summarize, the National Association of 
REALTORS supports reforms that strengthen the FHA fund. And we 
look forward to the return of a vital, robust private market.
    NAR remains concerned about changes that would cause 
disruption to the housing market. Now is not the time to lose 
sight of FHA's mission for the sake of encouraging greater 
private equity, which will return on its own when extenuating 
factors, such as regulatory uncertainty around issues like QM, 
QRM, and Basel III are resolved.
    We applaud FHA for continuing to serve the needs of 
hardworking American families who wish to purchase a home. And 
we stand in support of its mission, its purpose, and its 
performance, particularly in the times of a national housing 
crisis.
    On behalf of the National Association of REALTORS, thank 
you for the opportunity to share our thoughts on how we can 
work together to ensure that FHA maintains its critical role 
for American homeowners. And I look forward to taking any of 
your questions at the appropriate time.
    [The prepared statement of Mr. Thomas can be found on page 
99 of the appendix.]
    Chairman Neugebauer. I thank the gentleman. And now, Mr. 
Kelly, you are recognized for 5 minutes.

  STATEMENT OF KEVIN KELLY, FIRST VICE CHAIRMAN OF THE BOARD, 
          NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Kelly. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. I appreciate the 
opportunity to testify here before you today. I also wish to 
thank my Congressman, Congressman Carney, for being here today, 
and thank him for his service to this Congress and to our 
State.
    I am a homebuilder and developer from Wilmington, Delaware, 
and serve as first vice chairman of the National Association of 
Home Builders. NAHB supports efforts to improve FHA. We 
understand that this is not a simple undertaking, and change to 
FHA programs cannot be separated from the larger discussion of 
reforming the complex housing finance system, including future 
reforms to Fannie Mae and Freddie Mac.
    While the recent FHA actuarial report is troubling, and 
deserving of congressional oversight and action, NAHB urges 
Congress to proceed carefully. Although there is no question 
that the housing finance system needs to be reformed, the 
contributions that FHA has made during this economic downturn 
underscore the need for a government backstop to both the 
primary and secondary mortgage markets.
    As we have learned, private institutions have been unable 
or unwilling to meet the housing capital needs of homebuyers. 
Without government support for home purchasing and refinancing, 
the Nation's mortgage markets will grind to a halt in times of 
economic stress and uncertainty, throwing the economy into 
recession.
    FHA has become the primary source of mortgage credit for 
first-time homebuyers, minorities, and those of limited 
downpayment capabilities, as other sources of mortgage credit 
have disappeared. The program has been essential for the 
Nation's economic recovery. FHA's share of the market jumped 
from 3 percent during the housing boom to a high of 30 percent 
early during the housing crisis.
    Nearly 80 percent of FHA's purchase loans have been for 
first-time homebuyers. This dramatic shift is evidence that FHA 
is performing its mission of providing a Federal backstop to 
ensure that every creditworthy American has access to stable 
mortgage products.
    NAHB believes that the private market should be the primary 
source of mortgage financing, but that market is currently 
extremely limited. While such conditions prevail, it is 
appropriate for FHA and other federally-backed programs to play 
a larger-than-usual role to keep our economy afloat.
    FHA also plays an important role in financing of multi-
family rental housing, especially now during the economic 
crisis. Such financing is particularly valuable in small 
markets where Fannie Mae, Freddie Mac, and other market 
participants are less active.
    FHA is now in danger of exhausting its multi-family 
commitment authority before the end of the fiscal year. It is 
vital for Congress to provide an additional $5 billion in 
commitment authority to prevent the programs from shutting down 
this summer.
    With Fannie Mae and Freddie Mac directed to reduce their 
respective multi-family businesses by 10 percent over the next 
year, we face a severe reduction in multi-family financing for 
reasons unrelated to market conditions. NAHB believes the 
Congress should look at FHA and its policies in an effort to 
ensure the program is on sound financial footing.
    While we have cautioned against the piecemeal approach to 
address housing finance reform, we have supported individual 
reforms aimed at providing the FHA with immediate tools to 
better manage risk and to protect the insurance fund. FHA must 
be modernized so the agency can operate more efficiently and 
effectively.
    It has been constrained both by Congress and HUD, which has 
impeded the agency's ability to operate in a manner that 
evolves with the developments in the private market. FHA must 
be freed from bureaucratic restraints to develop a results-
oriented culture. NAHB believes that this can be accomplished 
by restructuring FHA as an independent government entity within 
HUD.
    In addition, a number of other changes to the single-family 
programs have been proposed recently, including risk-based 
pricing, risk sharing, and reduction in the FHA loan guarantee. 
These proposals merit exploration.
    NAHB believes that any modification should be analyzed in 
the context of other changes that have occurred or may occur 
both within FHA and in the broader housing finance market. NAHB 
stands ready to work with you to achieve reforms that will 
provide much-needed stability for the Nation's housing sector, 
while ensuring FHA's future role as a source of mortgage 
financing, particularly in difficult financial times. Thank 
you, Mr. Chairman.
    [The prepared statement of Mr. Kelly can be found on page 
50 of the appendix.]
    Chairman Neugebauer. Thank you, Mr. Kelly. Ms. Wartell, you 
are recognized for 5 minutes.

    STATEMENT OF SARAH ROSEN WARTELL, PRESIDENT, THE URBAN 
                           INSTITUTE

    Ms. Wartell. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for the opportunity 
to testify about FHA.
    I am focused today on steps that Congress can take now to 
improve FHA's financial health by strengthening its ability to 
manage risk and mitigate loss. You can help the agency to 
better protect taxpayers with additional loss mitigation 
measures.
    Some of these measures won broad bipartisan support from 
this Chamber just last year. I urge you to enact these now 
rather than let more time pass while costs that could be 
avoided continue to mount.
    At the same time, I hope you will hold off on decisions 
about FHA's mission until the design of the larger housing 
finance system is clear. Some measures under discussion would 
limit access to FHA in ways that could impair its ability to 
provide countercyclical support to the economy, and help 
creditworthy borrowers.
    Once we have a plan to wind down the GSEs, and bring more 
private capital to housing finance, while preserving liquidity 
and long-term financing, FHA's place in the market will be 
clear. Unfortunately, Congress is, at a bare minimum, many, 
many months away from enacting legislation to reform the 
broader system. And in the meantime, costs that FHA could avoid 
today continue to amount.
    It appears no deep differences prevent you from protecting 
taxpayers now in taking these modest steps. One caveat: I do 
believe that the time is right now to bring down the FHA loan 
limits gradually, recognizing that the different market 
conditions exist in high-cost areas.
    Fortunately, FHA's market share is falling on its own, and 
private mortgage insurance is serving more of the market, as it 
should. Although the credit quality of FHA-insured loans is 
high right now, the majority are in terms the private insurers 
and the GSEs will not yet accept.
    As the GSEs and MI credit standards ease, FHA's market 
share will continue to shrink, even while its capital position 
strengthens, just as it has in the past, after each period 
where FHA fills a gap in the market.
    So I urge you to take up now the provisions of the 
legislation passed overwhelmingly by this Chamber last year, 
with some modest changes I detail in my written testimony. 
Please also consider four additional management proposals that 
could help FHA to control costs.
    First, you can provide the Secretary with what I call 
``emergency risk mitigation powers,'' so that he may suspend 
issuing insurance upon terms that are risky to the taxpayers, 
if he makes a finding that continuation under those terms 
exposes the taxpayers to elevated risk of loss, and fails to 
serve the public interest.
    The emergency authority would be time-limited, rulemaking 
would follow, and Congress could, at any time, vote to 
disapprove the use of those emergency powers.
    Second, you can direct the HUD Secretary to continuously 
improve its early-warning risk indicators. To my mind, the 
Administration's proposal regarding specific changes to the 
compare ratio is too timid. You can empower the Secretary to 
use any early-warning indicator that evidence suggests is 
predictive of loss, provided it is lawful and 
nondiscriminatory.
    It shocks the conscience that FHA officials must continue 
to accept loans for insurance pending administrative 
procedures, when they know the taxpayers are being exposed to 
unnecessary risk from a particular lender. Of course, lenders 
must have a mechanism to challenge these determinations. But 
taxpayers, not program participants, should get the benefit of 
the doubt.
    Third, you can authorize FHA to pilot new insurance 
policies to test their costs, including carefully designed 
risk-sharing, consistent with principles I detail in my 
testimony, and understand better those costs and benefits 
before implementation.
    Finally, provide FHA with the flexibility to use insurance 
premiums to pay for systems, contractors, and even employees 
with special skills at compensation akin to the bank 
regulators, to strengthen its capacity to mitigate risk. It 
will be some time still before broader housing finance reform 
legislation is enacted.
    The system that results will determine the role that FHA 
must play long into the future. In the meantime, I hope that 
Congress will tackle what is possible, non-controversial, and 
urgently needed, improvements to FHA's ability to manage risk 
and reduce losses. A practical bill will be a helpful 
prerequisite to broader housing finance system reform. I thank 
you.
    [The prepared statement of Ms. Wartell can be found on page 
114 of the appendix.]
    Chairman Neugebauer. Thank you. Mr. Rossi, you are 
recognized for 5 minutes.

  STATEMENT OF CLIFFORD V. ROSSI, EXECUTIVE-IN-RESIDENCE AND 
  TYSER TEACHING FELLOW, ROBERT H. SMITH SCHOOL OF BUSINESS, 
                     UNIVERSITY OF MARYLAND

    Mr. Rossi. Chairman Neugebauer, Ranking Member Capuano, and 
members of the subcommittee, thank you for the opportunity to 
testify on how to reform the Federal Housing Administration.
    I am currently an executive-in-residence and Tyser teaching 
fellow at the Robert H. Smith School of Business at the 
University of Maryland. Prior to my role at the University of 
Maryland, I spent more than 20 years at major financial 
institutions, managing or leading risk management functions.
    My testimony today focuses on the effectiveness of FHA 
structure, its policies, risk assessment, and operational 
capabilities to ensure the long-term financial sustainability 
of its programs. In addition, I highlight several 
recommendations that would secure the financial viability of 
FHA, while also clarifying and sustaining its role in the 
housing finance system.
    Unquestionably, FHA has served a critical role in our 
Nation's housing market by providing affordable credit to about 
40 million first-time homebuyers, and other borrowers with 
limited resources who would otherwise have difficulty in 
obtaining access to credit through more traditional private 
sector sources.
    The recent financial crisis and its aftermath underscore 
the importance of FHA's countercyclical role in providing much-
needed liquidity and credit to mortgage markets reeling from 
the withdrawal of private capital during this period.
    At the same time, FHA in its capacity as public steward of 
the $1 trillion-plus Mutual Mortgage Insurance Fund, has 
responsibility for maintaining the financial sustainability and 
integrity of that fund, which according to recent actuary 
analyses, has lately experienced considerable stress.
    The current state of the fund can be directly attributed to 
a lack of clarity in the scope of its programs; mission 
conflict between maintaining actuarial soundness of the fund 
and advancing homeownership opportunities to prospective 
borrowers; a lack of resources to effectively identify, 
measure, and manage risk consistent with an insurance fund of 
the scale and complexity of the fund; and a lack of systematic 
and proactive countercyclical policy mechanisms to guide the 
agency as economic circumstances change.
    The question for policymakers is what changes should be 
made to FHA to provide the agency with the best opportunity to 
fulfill its crucial mission in housing, while also protecting 
the taxpayer? Ensuring the long-term viability of the fund, 
while clarifying FHA's mission, can be achieved by implementing 
a number of reforms aimed at addressing the contributing 
factors to the current challenges facing FHA.
    These reforms include the following: clarifying the role of 
FHA vis-a-vis other market participants by requiring the FHA to 
adopt an area median income target to determine program 
eligibility, and to phase out the use of area-based loan 
limits.
    In conjunction with establishing income-based eligibility 
requirements, FHA should strengthen its requirements to ensure 
all eligible borrowers have the best chance of staying in their 
homes, restructuring the FHA to provide the agency with the 
flexibility and tools to manage its risk.
    An optimal structure for an agency the size of FHA would be 
to establish it within a new Federal corporation overseen by a 
commission comprised of the heads of the various Federal 
agencies with housing and mortgage responsibilities, and 
chaired by the HUD Secretary.
    This entity would bear some resemblance structurally, in my 
opinion, to the Federal Deposit Insurance Corporation. Such a 
structural arrangement would yield a number of benefits for FHA 
specifically, and for housing markets generally.
    A set of countercyclical policies and practices should be 
developed. Taking a cue from the Federal Reserve's targeting of 
key macroeconomic factors in developing its monetary policy, a 
set of policy targets for housing and mortgage markets would 
provide FHA with clear direction on when to expand and contract 
its business.
    Such policy targets as local home--market home price 
trends, market credit spreads on mortgage securities, and other 
pertinent housing and mortgage metrics could provide FHA with 
direct feedback on the health of these markets. Permit FHA to 
enter into risk-sharing arrangements with suitable 
counterparties consistent with other market participants. And 
finally, provide greater pricing flexibility to the FHA, 
including the ability to initiate risk-based pricing of 
mortgage insurance premiums reflective of the inherent risk of 
a loan.
    Without question, FHA is an essential part of the housing 
finance system. While maligned for the current financial 
challenges of the fund, it is important to keep in mind that 
the FHA has served this country well for nearly 80 years.
    However, like many institutions, FHA has not kept pace with 
important structural changes in the market. The advent of 
securitization, and other sophisticated capital markets' risk-
transfer mechanisms, have left the FHA at a competitive 
disadvantage vis-a-vis other market participants.
    The lack of a clearly defined mission for FHA, along with 
potential conflict between its social and financial missions, 
are contributing factors to the current state of the fund. The 
agency requires a number of major reforms in order to put it on 
a secure financial footing that would ensure its important 
legacy for borrowers for the next 80 years. Thank you very 
much.
    [The prepared statement of Mr. Rossi can be found on page 
67 of the appendix.]
    Chairman Neugebauer. I thank the gentleman, and I thank our 
panel. We will now go to Member questions. Each Member will be 
recognized for 5 minutes in order of seniority. With that, the 
Chair recognizes himself for 5 minutes.
    Before I get into some questions, I want to just have a 
little poll here with the panel. How many people on the panel 
agree that the core mission of FHA is as a mortgage insurer, 
that is the core business? Would you raise your hands, please?
    And if the core mission is that it is a mortgage insurance 
company or entity, should it be run on an actuarially sound 
basis? Does everybody agree with that?
    I think the question then--and I appreciate the testimony--
is I think every one of you mentioned the fact that FHA should 
engage in risk-sharing as one of the ways to get the taxpayers 
off the hook. Is there unanimity on that? Ms. Wartell?
    Ms. Wartell. If I may just clarify, I think that 
appropriate pilots for parts of FHA's business are a reasonable 
way to proceed, but to mandate FHA risk-sharing across the 
portfolio would not be something I would support.
    Chairman Neugebauer. I think some people mentioned a pilot 
program, or something like that. But one of the parts of the 
risk-sharing piece that has been brought up is that there has 
been discussion about reducing the guarantee on FHA from 100 
percent to some percentage more in line with what the private 
market insures.
    Is there anybody who disagrees with that concept? Mr. 
Stevens?
    Mr. Stevens. I think that is the right way of approaching a 
pilot like this, Mr. Chairman. The thing I would emphasize is 
that we have to separate the guarantee against the mortgage-
backed security versus the insurance guarantee that private 
capital has to make up at the loan level up front.
    And in the event of catastrophic loss, the way it works for 
VA, or even Freddie Mac or Fannie Mae, is in the event the 
institution ultimately fails, the guarantee still exists on the 
mortgage-backed security, which keeps capital flowing into the 
market.
    Chairman Neugebauer. Ms. Wartell, did you want to comment 
on that?
    Ms. Wartell. I just want to note that if we were to use a 
structure like that, Ginnie Mae would then continue to have a 
significant amount of counterparty risk. And so, it is very 
important that we--and that would be very different than for 
the VA portfolio, which serves a very discrete set of 
borrowers, with a different set of incentives.
    So proceeding with real caution, as opposed to funding, 
would be very important for FHA to--
    Chairman Neugebauer. I am reminded, though, that Ginnie Mae 
actually does that for VA loans, and they are not 100 percent 
guaranteed.
    Mr. Stevens. You are absolutely correct. And I think for 
the most part, we all agree that a pilot is worthy of testing. 
I think the point that Sarah is making is that there are a 
fewer number of counterparties in the VA program. And FHA is 
widely distributed amongst a couple thousand institutions that 
participate in that program.
    And so therefore, the ability to manage the counterparty 
risk for that large number of lenders which participate in FHA 
will clearly add some cost to Ginnie Mae, which would have to 
be offset in some measure, either higher Ginnie Mae guarantee 
fees, or some way for them to build resources, because we also 
know that they are fairly underresourced as well.
    Chairman Neugebauer. Mr. Marzol?
    Mr. Marzol. Mr. Chairman, what I wanted to offer is I think 
the spirit of the suggestion of the limited guarantee is a 
worthy one, because it is an alignment of interests between 
private sector and public when there is risk-taking. I just 
wanted to point out that the approach to risk-sharing we 
suggest in our testimony is a fairly well-established one.
    We are risk-sharing partners today with the taxpayers when 
we put our first-loss insurance on loans that go into GSE 
securitizations. And so our proposal would be to at least try 
to take that approach, which is fairly well-established, and 
see if it can have merit, and can be utilized for some of the 
borrowers who are ending up in FHA. So, I just wanted to offer 
that thought.
    Chairman Neugebauer. And then, I want to go in one other 
direction here. One of the proposals is that we make FHA a 
separate entity, and possibly decouple it from HUD. Because if 
it is, as the panel said, an insurance entity, then it might be 
better served being an independent agency, building up its 
reserves, and pricing to build up the reserves.
    But also, I think one of the witnesses--maybe it was you, 
Ms. Wartell--said that they needed some investment and 
technology, and to upgrade that. Right now, they are dependent 
on the normal budgetary process to be able to get the resources 
they need, maybe to have the state-of-the-art underwriting.
    Would anybody disagree that this committee shouldn't 
consider looking at partitioning that entity from HUD? Mr. 
Marzol?
    Mr. Marzol. It is not that I disagree with that suggestion. 
But what is important from our perspective--because you are 
right, FHA is a mortgage insurer. But I think we should be 
clear as to whether it is a government-owned mortgage insurer 
whose role is to compete broadly in the marketplace, and try to 
serve everyone it can, or is it a government program that is 
supposed to help expand access where the private sector can't, 
and then within that framework, should be run appropriately as 
a mortgage insurer.
    I just think that is, from our perspective, an important 
clarification.
    Chairman Neugebauer. Mr. Kelly?
    Mr. Kelly. Thank you. NAHB would support an independent 
agency housed within the Department of Housing and Urban 
Development for the reasons I stated in my testimony.
    It is an organization that needs to be modernized. It needs 
to be freed from the bureaucratic constraints that currently 
hamstring the organization and its effectiveness. So we would 
support its independence, but it should be housed within the 
Department of Housing and Urban Development.
    Chairman Neugebauer. I see my time has expired. I now 
recognize the ranking member, Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman, and again, I want to 
thank the panelists. So far, the testimony and the discussion 
has been exactly what I had hoped for, the least ideological 
discussion I think I have ever heard on this committee on an 
important issue.
    But that doesn't mean we don't have differences. It just 
means we are having an adult conversation, which is nice for a 
change. So thank you for that.
    I guess the only thing--I think I agree pretty much with a 
lot of generalities that I have heard. Again, details are 
details. But Mr. Stevens, I just want to clarify one thing that 
you did say.
    You said you want to see the limits lowered. And I don't 
have a problem with that. But I want to be clear about it. I 
want you to clarify--would you agree that there are regional 
differences in real estate costs, and therefore, the limit 
should be adjusted from one region to another?
    Mr. Stevens. Yes. Thank you, Congressman, for asking a 
follow-up on that question.
    We clearly think loan limits are worthy of consideration. 
It is not that easy. We all know that it is really not a matter 
of risk when it comes to FHA. First and foremost, the higher 
loan limits are actually additive in terms of negative subsidy 
to the budget, in terms of how it is calculated. And it is also 
a very small percentage of the portfolio.
    The other key point is obviously, the $729,000 is only in 
higher-cost markets. So it is just a handful of select markets 
around the country that are important--
    Mr. Capuano. I haven't had one of them.
    Mr. Stevens. --to those markets. And the thing we really 
believe is important in the event loan limits are not extended, 
because as you know, they automatically roll back, is we need 
to test and find out who is going to support those markets in 
the absence of those loan limits falling back.
    Mr. Capuano. I want to follow up on an important point, 
because I presume you are all relatively familiar with the 
congressional process, and how long we take to do anything. It 
is actually a good process.
    I know it is frustrating to a lot of people, but it works 
well, because we don't take things like FHA and throw them out 
one day, and bring them in the next day. That is what it is 
meant to do. But because of that--and I agree with you--a lot 
of concerns were thrown out.
    Even the risk-sharing. I like the concept. But I will be 
honest with you, I am a little concerned about it. I would like 
to see it tested in certain pilot areas to see where it should 
go, exactly how it should work. Conceptually, it sounds fine. 
Ideologically, okay, let's try it.
    But I would be very hesitant, probably, about just doing 
it. Because we are getting into something, and we don't know 
where it is going to go. So for me, I would love to see some 
general pilot programs to try to specify and see exactly how 
all these new ideas work before we mess around with something 
that has worked so well for so long.
    That being the case, it is going to take us time. And in 
order for me--I come from the approach that says, ``Look, let's 
do what we can while we can. And then on the things we are not 
sure of, let's take some time.''
    Again, I think that the FHA discussion is slowly moving 
away from the ideological debate and into something more 
realistic that we can eventually work out. But in the meantime, 
I think it is a mistake to sit here and do nothing. Because I 
am watching FHA kind of slowly fade away.
    The multi-housing stuff, the reverse mortgage stuff, is a 
real problem that we are doing nothing about because we want to 
do the whole thing or nothing. I feel just the opposite. I 
would like to get some pilot programs going in the meantime, 
and in the meantime, do what we can.
    We had a bill last year, that I am assuming you are all 
familiar with, which got 402 votes on the Floor of the House. 
Would any of you oppose the concept of taking that bill and 
passing it? Again, I fully admit it is not the bill I want, but 
it is something we have already agreed to.
    Pass that bill, and in the meantime, work on the other 
things that we want to try. Maybe get some pilot programs 
going, and move on other issues. Do any of you think that we 
should do nothing until we can do everything? Or do you think 
that we should do what we can do as quickly as we can to fix 
it?
    I guess I would ask you, Mr. Marzol, and then just go right 
down the panel.
    Mr. Marzol. We are for making as much practical progress as 
can be made. And as I said in my oral testimony, we certainly 
thought the bill that passed last year, plus the additional--
some additional authorities at HUD has requested a specific 
mention on the seller concessions. Those would certainly be 
progress. And if more can be done, more can be done. But we are 
all for progress.
    Chairman Neugebauer. Mr. Stevens?
    Mr. Stevens. The most recent version of the bill is very 
similar to the one that was introduced when I was FHA 
Commissioner, which also passed, I think, by 404 votes as well. 
There were some minor changes to it. And we would like the 
opportunity to be able to work with you on a couple of 
concerns.
    I could address them now if you would like. They are 
technical in nature. But we do agree generally that there is 
opportunity to put an FHA reform proposal through in the 
context as you stated.
    Chairman Neugebauer. Mr. Thomas?
    Mr. Thomas. Yes. We are in full support of the bill that 
you and Congresswoman Waters have proposed. It is very similar 
to the one last year that we supported, and we support yours as 
well.
    Mr. Kelly. Congressman, NAHB supported that piece of 
legislation last year. We think it gives--it is a platform to 
revisit the subject this year. But again, we would urge that 
FHA reform be donned in the broader context of overall reform 
to the housing finance system, including GSE reform.
    Mr. Capuano. Mr. Kelly, just to clarify, and again, I agree 
with what you say. Getting back to the reality of Congress, you 
realize that broader discussion may take a long time to 
finalize. And a very clear question, do you think we should not 
do anything until we get the whole thing done? Because that is 
really the question we have.
    Mr. Kelly. As I say, the legislation--as opposed to doing 
nothing, something is better than nothing. But again, a 
preference would be to try and work on all of the moving parts 
at the same time, to develop a comprehensive reform to the 
mortgage finance system.
    Ms. Wartell. Congressman, if there are ways in which this 
body can protect the taxpayers from additional losses that are 
agreed to today, I think it would be very difficult to justify 
failing to act on those now while additional costs are 
incurred.
    So, I fully agree. There are changes that could be made. 
They are technical in nature. They can be quickly worked out. 
You should do what you can do now.
    Chairman Neugebauer. Mr. Rossi?
    Mr. Rossi. I embrace pragmatic change that can happen 
quickly, but at the same time, I am a big believer that we have 
absolutely no national housing policy. And for that reason 
alone, I think that we have an excellent opportunity to finally 
step back and make the changes that we need to make to make 
both the secondary market or what we see in the conventional 
conforming side, as well as on the fully guaranteed side, the 
right steps going forward.
    So, in my opinion, quick legislation isn't always 
necessarily good legislation. And so, I would at least caution 
the subcommittee to really kind of take a closer look at those 
things.
    Chairman Neugebauer. I thank the gentlemen. And now the 
gentleman from Missouri, Mr. Luetkemeyer, is recognized for 5 
minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Just to kind of 
follow up on Mr. Capuano's question, you all were talking about 
different changes. Are there things that the Administration 
could do right now? I know it takes a long time for Congress to 
get anything done. It is like watching paint dry on a wall 
here, what we do.
    Mr. Stevens, you are an interesting gentleman to have on 
the panel today, having been in the Administration before and 
FHA. Are there things that the Administration could do now 
through Executive Order, through some administrative rule, that 
could impact this, and make a big difference?
    Mr. Stevens. There are some things. As you know, they have 
already done a lot that only came from the help of Congress 
when the ability to raise mortgage insurance premiums was 
initiated in this body, and ultimately went through the Senate. 
So that has been very helpful to the 2010, 2011, and 2012 
portfolios, which are all, by all expectations--CBO, OMB, and 
otherwise--expected to be very profitable.
    There are measures that could be done. As an example, today 
FHA is being further protected beyond their own guidelines by 
lender criteria that is more conservative than what FHA allows 
for. And I think one of the things that should be considered, 
particularly as competition increases in the market, is will 
lenders in the broader lending community erode the credit of 
FHA by using the broadest scope of the FHA underwriting 
guidelines? Or should FHA take some measure to try to at least 
lock in and protect some of the credit that is being originated 
today?
    An easy example is that FHA's minimum FICO credit score 
requirement is 580. Most lenders don't do FHA loans at 580. 
They do them somewhere in the low 600s, due to performance 
concerns.
    That gap should be looked at closely by FHA policy experts, 
and it should be determined whether those should be locked in 
at some level to avoid the risk of potential erosion downstream 
as the market becomes more competitive. So there are some 
things that can be done by mortgagee letter that don't require 
Congress.
    Mr. Luetkemeyer. Ms. Wartell, in your response to Mr. 
Capuano, you made a comment, too, that there are some things 
that can be done. Are there things you are aware of, or 
suggestions you could make, that the Administration or FHA 
itself could do right now that would be impactful?
    Ms. Wartell. There are a couple of measures that FHA is 
pursuing right now, but that require rulemaking for them to 
complete, and in some cases, because program participants have 
objected, there has even been litigation about that.
    So one of the reasons why I think some of the provisions in 
this legislation would be helpful is it would clarify FHA's 
authority to take those actions through mortgagee letter. And I 
would be happy to specify those. I don't have them off the top 
of my head.
    But I do think that giving FHA more flexibility to act 
sometimes without regulatory procedure speeds up their ability 
to protect the taxpayers.
    Mr. Luetkemeyer. Thank you. Mr. Stevens, I know that in 
your position with the Mortgage Bankers Association, you see a 
lot of the housing market activity. Do you see from the actions 
being taken by the government regulators, or the government 
agencies here, that they are forcing the private market away 
from this by the fees or their criteria that they are using?
    And if so, are there ways that we can draw--bring it back 
in so the private market can come back in and be effective?
    Mr. Stevens. Thank you for that question. I think it was 
actually referred to in Gary Thomas's testimony as well, is 
that the extraordinary uncertainty in the lending community, 
through a morass of regulation coming from multiple bodies, not 
that regulation is wrong, because we need good regulations in 
the marketplace, but it is the inconsistency, the overlap, the 
lack of coordination in housing policy in Washington that is 
really causing much of the lending industry and private capital 
trepidation to re-engage in the system.
    If you are private equity today, you don't know where QRM 
is going to end up. So why would you extend credit into the 
marketplace, knowing the risks associated with that? There are 
rules coming out from multiple regulators, and there is no 
coordination point at all within Washington.
    We have advocated strongly that this Administration could 
identify an individual or body to coordinate all of these 
policy efforts, and clearly articulate the sort of end-state, 
and try to move in a coordinated fashion so that the confusion 
can subside, and private capital can find a pathway to re-enter 
the market.
    Mr. Luetkemeyer. Yes, sir? Mr. Marzol?
    Mr. Marzol. I wanted to make a comment. If uncertainty had 
paralyzed us, Essent wouldn't be here today, because it took 
getting started in 2008 to be able to be in the market in 2013.
    And I would like to just, for ourselves, we think we have 
the capacity to do more. We think capital is interested in 
doing more through private mortgage insurance. I would like to 
give you the sense that if there is opportunity, we think at 
least our company, and broadly, our industry, is positioned to 
do more, while other private capital sources are trying to get 
their feet under them and resolve their uncertainties.
    Mr. Luetkemeyer. I think my time is up. I certainly 
appreciate everybody being here this morning. It is a great 
discussion. Thank you. Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. Thank you. And now, the ranking member 
of the full Financial Services Committee, Ms. Waters, is 
recognized for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. I would like 
to get a little clarification discussion from Mr. Thomas about 
the requirement that FHA has sufficient reserves to pay 
predicted claims over 30-year period.
    The recent report released by FHA's independent actuary 
states that FHA's single-family insurance fund has an economic 
value of a negative, what, $16.3 billion? But FHA's current 
cash reserves total about $30.4 billion. Notwithstanding this 
fact, FHA's independent actuary estimates that it does not 
currently have sufficient reserves to pay predictive claims 
over a 30-year period.
    Can you discuss FHA's requirement to hold reserves to cover 
claims over a 30-year period? How does that compare to the 
Financial Accounting Standards Board's requirement for the 
reserves that need to be held by private financial 
institutions? And are you aware of any other Federal loan 
program that has such stringent accounting requirements?
    I am speculating that this is I guess, some protection with 
the 30-year loan. But most people refinance about every 5 years 
or so. So what is this? And is it time for us to start looking 
at a repeal of this, and do something that makes good sense?
    Mr. Thomas. If you look at it compared with the private 
side, it is completely wrong. So I would agree with you, that 
we do need to take a look at it.
    We also need to take a look at the fact that the 
Administration, in the budget that they are proposing, is 
asking to take a certain amount of money to put in, if in fact 
it is needed. It is not needed yet. And so why in the world are 
we even putting that in there when it is not needed?
    Also, the fund is performing extremely well, and should 
be--I don't think they are even going to need it, from 
everything that we have researched, by the time we get to the 
end of the fiscal year.
    So, I agree with you. I don't think that we need to have 
that type of a requirement on the government side that isn't 
required on the private side.
    Ms. Waters. I know that sometimes when we begin to look at 
repealing certain things have replaced in law that people are 
very skeptical. They must have done it for a good reason.
    However, they don't take into consideration everything that 
has happened since the law was first instituted. And I think it 
is time to take a look at this.
    And so since I am talking to you about it, I am going to 
come back and talk to you again about the possibility of a 
review of this that would help to rearrange our reserve 
requirements in ways that will not in any way put FHA at risk, 
but rather, relieve them of a requirement that makes it appear 
that somehow they are insolvent, or they are in trouble.
    And I just think that we should be a little bit more 
forward-looking than this, and not be held to this law, that 
perhaps does not--is not relevant at this point in time, as we 
look at what happens to the 30-year mortgage, for example.
    Again, I said that I think people refinance, or sell, or do 
something every 5 years. That is an amount of time that I 
remembered. I don't know if that is still about the right 
amount of time.
    Mr. Thomas. A little longer now. But that--
    Ms. Waters. Seven years or what?
    Mr. Thomas. Yes.
    Ms. Waters. About seven--so I do think that it is worth 
review. Thank you very much. Mr. Chairman, I yield back the 
balance of my time.
    Chairman Neugebauer. I thank the gentlewoman. And I now 
recognize Mr. Miller, from California for 5 minutes.
    Mr. Miller. Thank you, Mr. Chairman. One thing Congress 
excels at is looking back. We really do a good job there. But 
if you look at the current market, and the uncertainty of QRM, 
Basel III, where the secondary market is going, we have created 
tremendous uncertainty in the marketplace right now.
    There has been debate that FHA is crowding the private 
sector. I think the private sector is just afraid to crowd back 
in. They are just not coming in.
    And there has been some debate that FHA should work more 
like a private business. But Mr. Stevens, had that occurred 
when the downturn existed, and had FHA worked more like a 
private business, and slowed our exit to the marketplace during 
the downturn, what would have been the result on the housing 
market and the economy?
    Mr. Stevens. It would have been devastating. And, 
Congressman, as you know, we worked closely during that period 
of time. There was nobody providing low-downpayment financing 
in the marketplace.
    And quite frankly, even HMDA data for last year clearly 
shows that for first-time homebuyers and other demographics 
with low downpayments, there is no source of access to the 
housing finance system. As the market recovers, and its rules 
create greater certainty, Adolfo's point aside, I think there 
is clearly not the interest in private capital to engage in a 
way that reflects sort of a normal lending environment as we 
have seen over past decades.
    Mr. Miller. Even last year, you could look at the 
marketplace. And when you were applying for loans, FHA was one 
of the few out there, because the private sector just wasn't 
filling that void.
    Mr. Stevens. Yes. If you look at--just take for example, 
Fannie Mae's recent quarterly statement release, if you look at 
the average loan-to-value of their purchase transactions, or 
excluding HARP, which is in their financial statement--HARP is 
refinanced activity--it is in the high 60 percent range.
    So there is very little financing still coming into the 
market outside of FHA, VA, or USDA in the low-downpayment 
sector. And I think that will come in with confidence around a 
variety of things you suggested.
    Mr. Miller. You are starting to see the private sector come 
back a little bit. But when you became FHA Commissioner, you 
took a number of steps to improve the risk management 
capability of the FHA. And can you help us understand how far 
behind the FHA was with risk management when you became 
Commissioner?
    Mr. Stevens. Thank you for that question. As you well know, 
there was no risk management role at all at HUD when I came 
into the FHA job. It didn't exist.
    So we actually had to come to this body. We had to get an 
approval to get it created as an office. We had to get 
appropriations to create the office.
    And that is one of those flexibility impediments that 
really makes it difficult for FHA to respond quickly in times 
of crisis. Because we had to go through a variety of steps, 
which took months, in fact almost a full year to get the Office 
of Risk Management established and funded so that we could 
create it, and to have an insurance company of any size, let 
alone the size of FHA, to not have an independent risk 
management oversight function was deplorable. And that could 
not have happened without the support of Congress.
    Mr. Miller. Nobody expected the collapse to be as rapid as 
it was, or as significant when it did occur. That was part of 
the problem. And if FHA had appropriate capabilities during 
this crisis, do you think the losses would have been much 
smaller than they were?
    Mr. Stevens. Yes. The budget is going to be released here 
any second. And I think as we look at the numbers, the two 
provisions that I think people are going to look at most 
closely is first, that the seller-funded downpayment assistance 
program, which actually FHA tried to stop and was sued to 
continue the program, will have cost the FHA over $13 billion 
cumulatively against what is likely to be less than a billion-
dollar net loss.
    And second, the reverse mortgage program also was very 
costly. And that was a program that they had difficulty making 
changes to. If you could avoid those kinds of, what I call sort 
of ``inability to respond to risk management issues,'' as Sarah 
Wartell discussed earlier, and FHA could respond to those, 
there would have been a way to avoid actually any need for a 
draw whatsoever, had those two programs been addressed 
appropriately up front with their own authority.
    Mr. Miller. They played a good countercyclical role. Could 
they have played that part if they were much smaller than they 
are today?
    Mr. Stevens. No. We have come through a recession that had 
34 percent home price declines from peak to trough. We had a 9 
percent national unemployment rate, the worst recession since 
the Great Depression, the worst housing recession in anybody's 
history here in this room.
    And FHA became sole-source provider for housing finance. 
Now, granted, it is well beyond what we would describe as their 
mission. But in the absence of FHA playing that role, I am not 
sure where the financing would have come from in this country.
    Mr. Miller. Dr. Rossi, you gave examples of what private 
companies can do, but FHA cannot. Can you give us some examples 
of that?
    Mr. Rossi. The one example that comes to mind as we think 
about the risk management--and I would applaud Dave Stevens' 
efforts to revitalize, or actually establish a risk management 
office--but I will tell you that if FHA, in my opinion, was 
overseen by the Office of the Comptroller of the Currency or 
the Federal Reserve, their Board would be under consent 
decrees, or for still, some of the problems that exist today 
for the size and complexity of the fund that they had.
    There is no question in my mind that they need to--for the 
size of that fund, they definitely need to reinvigorate their 
practices around risk management. That is in my mind job number 
one for them to establish themselves in that critical role of 
being there for--
    Mr. Miller. I want to applaud Mr. Stevens for his movement 
on risk management, on what you said.
    Mr. Rossi. Yes, oh, absolutely. In fact, that, as a first 
mover on that, that was absolutely critical.
    Mr. Miller. Yes. Thank you. I yield back the balance of my 
time.
    Chairman Neugebauer. I thank the gentleman. The gentlelady 
from New York, Ms. Velazquez, is recognized for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Stevens, could 
you please explain to us, or discuss the difference between the 
steps taken by FHA to improve its solvency versus some of the 
proposals today, as increased FICO score, downpayments, and 
mortgage insurance premiums?
    Mr. Stevens. Let's start with the fundamental point that is 
going to come out in the budget, which I understand was just 
released. It shows that FHA will need a draw of just under a 
billion dollars.
    That is solely the result of the 2006 through the first 
part of 2009 books of business. The 2010, 2011, and 2012 books 
by OMB, CBO, and the independent actuary for all those shows 
their books being very profitable, and well-managed.
    And I think the result, what has made those books 
profitable, made them less risky to the taxpayer, is the 
authority that was given to them, quite frankly, to raise 
premium, and some overlays that were put in around putting a 
minimum FICO score in place that would require a much larger 
downpayment beyond that.
    And I would say fundamentally, FHA's risk profile is a far 
different picture today, in terms of new loans being generated, 
than the kind of risk that was put on those books during those 
peak years.
    Ms. Velazquez. So can you tell me what specific reform, if 
any, you believe that is necessary today?
    Mr. Stevens. I think they need greater flexibility, to 
Sarah's point around emergency powers, which by the way, I 
don't think is in the last bill that was presented. And that 
needs to be added.
    I do think there needs to be some additional capabilities 
for FHA to require indemnification of lenders that clearly 
violate the program. I think we have to be careful in some of 
that indemnification language, because it could also cause 
additional tightening. And there is a provision in there we 
need to talk about. But those are components.
    I think the third area is we need to think about risk-based 
underwriting. So rather than attach provisions that would put 
hard-line vigor downpayments, for example, in the portfolio, 
which would be a wealth barrier to access, you can accomplish a 
similar outcome by putting better underwriting characteristics 
with lower downpayments, and first-time homebuyers, that might 
cap, for example, the debt-to-income ratio to a lower level, so 
that you can ensure sustainability for low-downpayment 
borrowers, while not excluding access to homeownership.
    Ms. Velazquez. Thank you, Mr. Stevens. Mr. Thomas and Mr. 
Kelly, what do you think will be the unintended consequences of 
implementing better work requirements than those that are in 
place today? Could they potentially harm the single-family 
mortgage market for first-time, lower-income or minority 
homebuyers, particularly those in high-cost areas like New York 
City?
    Mr. Thomas. I am from California, so I understand that, 
too. Yes, it could. And so, I agree with Mr. Stevens. That is 
what you need to take a look at, not just coming up with a 
minimum downpayment, or anything like that.
    It needs to be looked at actuarially, as to that borrower 
and their ability to repay. It should not be just a hard line. 
That would harm the fund, and it would harm the ability of 
people to get into the--
    Ms. Velazquez. So how do we strike that balance?
    Mr. Thomas. You are going to have to give them the 
flexibility to make the adjustments without having to come back 
to Congress to get those things implemented. They can do it if 
you give them the ability to do it.
    Ms. Velazquez. Yes, Mr. Kelly?
    Mr. Kelly. The National Association of Home Builders 
surveys its members on a fairly regular basis. In our recent 
surveys, when we asked, ``What are the greatest impediments to 
builders selling homes?'', they are telling us--and this has 
changed over the last couple of years--that it is buyers' 
access to an availability of credit.
    So I think FHA has played a vitally important role in 
supporting the housing market during this downturn, and this 
Nation's economy. I think we have to move very carefully in 
looking at the types of adjustments that were talked about by 
the other speakers.
    I am a builder and developer who, on the for-sale side, 
build to first-time homebuyers, often in lower-income, urban 
areas. And quite frankly, we periodically examine and go back 
in those developments.
    The last 120 homes or so that I have sold in two 
developments in urban areas in Wilmington, Delaware, none of 
the buyers had more than a 3 percent downpayment. And out of 
the 120 over the last, I think it was 4 years, last time we 
checked, which was about a year ago, there was one default. All 
those buyers had to go through very extensive housing 
counseling. They all had FHA insurance.
    But again, I suggest that we have to do it carefully, and 
very thoughtfully.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Neugebauer. I now recognize Mr. Bachus, the 
chairman emeritus of the full Financial Services Committee, for 
5 minutes.
    Mr. Bachus. Thank you. Looking at this various data about 
the HECM program, the home equity mortgage conversion, and the 
reverse mortgage program, it seems like that is 
disproportionately affecting the FHA insurance fund.
    I know there have been premium increases. But I would ask 
the panel, Mr. Kelly, Mr. Stevens, maybe any of you who would 
like to respond, are you aware of any changes to minimize FHA 
losses other than maybe increasing premiums? And does the 
industry have any--is there any consensus between, say, the 
agency and the industry on how to minimize these losses?
    Mr. Stevens. Congressman, as we all know, the reverse 
program is a very unique program for seniors which extends to a 
senior citizen all the principal balance, interest accrues over 
time, and they make no payments. The only way the program 
works, quite frankly, is if home prices are appreciating over 
time, or if you keep the draw low enough so that it can 
compensate for flat home prices.
    The program, up until this point, did not allow for that. 
It was a full-draw, 30-year fixed-rate program that allowed too 
much of a draw up front to the senior. And when home prices 
didn't appreciate, it put the fund underwater, and that is what 
has caused this disproportionate outcome.
    I actually think Commissioner Galante has made the right 
move in her most recent announcement that they are going to 
curtail the fixed-rate, full-draw HECM, in replacement for what 
they call the ``HECM Saver Program,'' which is actuarially 
sound, at least the last time I looked at the actuarial review 
of that program. It reduces the draw amount.
    Raising premiums really doesn't help at this point, because 
if the home doesn't appreciate, and you can't pay it back, you 
are not going to get the premium anyway. So we need to have a 
program which accommodates for a flatter home price market, 
while maintaining a program that still provides seniors access 
to some sort of ability to draw down their equity.
    And I think that HECM Saver, and eliminating the full-draw 
HECM is the way to get there.
    Mr. Bachus. Mr. Kelly, do you want to make any comments? I 
know that home prices have started to appreciate again. That 
may take some pressure off. But we can't assume that will 
continue.
    Mr. Kelly. I would just reiterate that some of the things 
that have been done on the overall fund, not necessarily the 
HECM fund, I will be honest with you, I am not that familiar 
with it; haven't utilized it.
    But some of the things that FHA has put in place in the 
last couple of years--higher mortgage insurance premiums, 
tighter underwriting standards, recently the requirement that 
the MIP continues to be paid by homeowners when their loan 
drops below 78 percent, and the debt-to-income ratios that are 
currently being mandated for buyers with scores under 680--I 
believe are all very prudent measures that, again, will stand 
the fund in good stead over the long--
    Mr. Bachus. Mr. Thomas, I should be asking you, I am sure, 
that first question. But what are your thoughts about 
minimizing the loss and HECM program?
    Mr. Thomas. Those are the two areas that have caused the 
fund the greatest hazard. And I would agree that the most 
recent changes are going to do very well for the fund. And so, 
we support those.
    Mr. Bachus. That is reducing the draw, basically, I think, 
may be a sure way to say that. And should FHA be in the 
business of insuring reverse mortgages, given their current 
financial situation? Would anyone like to answer that?
    Mr. Stevens. It is a delicate subject, as you know better 
than anyone. The ability for seniors to particularly have 
access to equity in their homes is something that is important. 
And I do think you can do it in a sound manner.
    I think FHA was limited in terms of what they could have 
done in the past. I think the latest move, we will prove--
although it will limit the amount seniors can draw, it still 
gives access to the program.
    I think eliminating it in its entirety is a question about 
public policy and support for the elderly, who own real estate, 
and have fewer other means to have income.
    Mr. Bachus. It is a social mission. And I think you have to 
decide as a matter of policy whether that--and I think if it 
undermines the fund, the answer has to be no, if the changes 
work. Would anyone else care to make a comment? Also, what you 
would advise us to do. Mr. Rossi?
    Mr. Rossi. Yes, thank you for asking that question. 
Actually, if I put myself back in the day when I was heading 
risk for several large institutions, one of the things that our 
regulators would tell us is, ``Make sure you have your risk 
infrastructure in place ahead of any growth.''
    And that goes to programs like the HECM program. In my 
opinion, you need to go back and do the basic blocking and 
tackling of understanding the risk that you are taking on. And 
while I think that program is very important, you really have 
to go back and ask yourself, ``Do we have the wherewithal to be 
able to take those risks on at this time?''
    Ms. Wartell. Congressman, I think the important thing to 
emphasize is what Dave Stevens said earlier, that if at the 
time officials at FHA in the Bush Administration, or in the 
Obama Administration concluded they should change the rules of 
certain programs, either the seller-funded downpayments, or the 
HECM program, if they had been able to swiftly implement the 
changes they wanted, the FHA fund would be positive today.
    And so I think it really--I agree with Cliff about risk 
mitigation tools for FHA. But I also think we need to create 
the ability for them to protect the taxpayer by being able to 
act more swiftly. So the HECM program is a perfect example of 
the kind of flexibility that is required.
    Mr. Bachus. And if any of you have recommendations on how 
we can be of assistance or supply statutory language, we would 
welcome that.
    Ms. Wartell. Absolutely.
    Chairman Neugebauer. I thank the gentleman. Now the 
gentleman from Missouri is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. And I am pleased we 
are having this hearing. I think we need to deal with the 
issues that have been raised here with FHA.
    Ms. Wartell, do you believe that the FHA is already 
independent of anything that may come out of this committee, 
moving in the right direction?
    Ms. Wartell. I am sorry. Absolutely. FHA, as I mentioned in 
my testimony, market share has already fallen as it should. And 
history has shown us in prior circumstances where they played a 
similar countercyclical role, they took a hit to the health of 
the fund.
    In both cases, their share fell, and their solvency was 
restored. And there is this ability to essentially share risk 
intertemporally that is built into the mechanism of FHA and it 
is working again.
    Mr. Cleaver. The reason I asked you, is because I thought 
you were suggesting what I already--except I am wondering if 
the other panelists agree that the FHA, independent of anything 
we are doing, is moving in the right direction? Does anybody 
believes the opposite is true? I am not particularly thrilled 
about some of the things they are doing, but I think they are 
trying to correct the problem internally. I am not really sure 
about the cancellation of the mortgage insurance premiums when 
they hit 78 percent. I think that is going to send people to 
the GSEs. Does anybody disagree with that?
    Mr. Stevens. Congressman, I think the difference is that we 
have to consider, as we look at taxpayer protection, that while 
FHA used to cancel the premium at 78 percent loan-to-value 
(LTD), they still guaranteed the risk to the bondholders, 
regardless of loan-to-value.
    For Freddie Mac and Fannie Mae, they cancel mortgage 
insurance if you can get an appraisal, or it amortizes down. 
But then, you have no more mortgage insurance on the 
transaction whatsoever. And if the loan goes into default, 
there is nothing there to back it up. So it is hard to 
guarantee the risk without collecting a premium for it.
    The second thing--and this is more for the Builders and the 
REALTORS--I am not sure if consumers realize when they are 
buying a home that 15 years from now, they are not going to 
have to make that mortgage insurance premium, if it gets 
canceled when they get to 78 percent loan-to-value.
    And if they don't, then perhaps protecting the taxpayer 
should be the first priority. It doesn't change your 
qualification ability. And it probably is not a decision at the 
point of sale. Although, again, I think that is a better 
question for Mr. Thomas or Mr. Kelly.
    Mr. Cleaver. Mr. Thomas, would you please address that?
    Mr. Thomas. Sure. Congressman, to my knowledge, that never 
comes up in the discussion when you are sitting with a 
potential homebuyer, as to the fact that they might be able to 
cancel the FHA premium at some future date.
    Mr. Cleaver. But would you agree that they probably don't 
even know anything about that?
    Mr. Thomas. Absolutely.
    Mr. Cleaver. So they can't bring up what they don't know.
    Mr. Thomas. That is my point. The REALTOR doesn't explain 
it to them, nor does the mortgage person explain it either.
    Mr. Cleaver. Mr. Kelly?
    Mr. Kelly. I would agree with Mr. Thomas. They don't 
recognize that is an eventuality. I don't think it is a factor 
in the decision-making process.
    Mr. Cleaver. Let's continue in my line of thinking about 
FHA moving in the right direction. Rising home prices, it is 
believed, are also going to very likely reduce the $16.3 
trillion problem that we thought we would have for the first 
time in 79 years of FHA. So--
    Mr. Stevens. The budget that was just released is a re-
evaluation. Although I haven't read it, I think we will find in 
the budget that what changed it from billions of dollars of 
expected loss to the current budget, which looks at it being 
less than a billion dollars, I think the home price changes are 
obviously a key driver there.
    And that also lowers what we call ``severity costs'' to 
FHA, because when a home goes into default and it sells in a 
rising home price market, that loss per foreclosure also ends 
up being less. I think both of those variables will likely be 
significant in what ultimately ended up being a much smaller 
loss than what was expected several months ago.
    Chairman Neugebauer. So my final question is, if the entire 
panel believes and even with the actual report from November 
which said we were going to have a problem, that FHA is moving 
in the right direction. Is there any concern that tinkering 
with the FHA now that it is moving in the right direction, 
might create problems that don't even exist today?
    Mr. Rossi. I would just venture to say that we may be more 
lucky than anything else at this point that home prices are 
rising, and so the fund is down to maybe $1 billion or so, as 
opposed to getting any place, the right changes that they need 
to be made so that the sustainability of the fund is there for 
any kind of housing price market that we come up against. So 
that is my perspective on it.
    Ms. Wartell. But Congressman, I think that there are two 
sets of changes. There are changes that will give FHA the 
ability to better manage its risk, which are the kinds of 
changes that I think you find every single member of this panel 
strongly supports.
    And then I think there are another set of changes which 
could have the effect of limiting access to FHA and whether 
those limits are appropriate or not is very hard to know, 
because we don't know what the policy framework for the rest of 
the housing market is going to look like when all of these 
changes come to there. So I think it is really important to act 
as quickly as you can on the things where there is consensus 
and make sure that we are doing the rest of those reforms in 
the context of broader reform.
    Chairman Neugebauer. Good point.
    Thank you. And I thank the gentleman. Just a point of 
clarification in the budget's number for the President. This is 
actually an increase of what was in the President's budget from 
last year. It doesn't actually make any representation of what 
the actuarial numbers are at this particular point in time.
    So I think sometimes, we have to make sure we are talking 
about the same numbers. I now recognize Mr. Garrett, from New 
Jersey, for 5 minutes.
    Mr. Garrett. I thank the chairman, and I thank the panel 
again. First of all, let's start this way. Is there anyone on 
the panel who thinks we should not be as transparent as we can 
with the American taxpayer as far as the risk that FHA 
potentially poses to them? Good.
    So we know that collectively, when we are talking about 
investors in the private sector, we want to make sure that we 
protect the investors by having appropriate accounting 
standards for them, so they know what they are investing in. Is 
there any reason, does anyone suggest that we should not then 
have appropriate accounting standards for FHA, have them 
account for their books like any traditional insurance company 
would?
    Ms. Wartell. Congressman, I think the question is, what is 
appropriate for the taxpayer, and I think the rules that are 
embedded in the Federal Credit Reform Act are designed to 
accurately account for the cost taxpayer actually could bear.
    And I think there is a concern that former CBO Director Bob 
Reischauer, the Center on Budget Policy Priorities, and many 
others have mentioned about potential changes to the Credit 
Reform Act in ways that could essentially inflate the cost that 
the taxpayers might incur from potential risks in a way that 
could be inconsistent with actual costs to the government.
    Mr. Garrett. So would you say that the initial subsidy 
estimates that FHA has given over the years have been accurate 
and transparent to the taxpayer and accurately reflect the 
risks to the taxpayer?
    Ms. Wartell. I think that the taxpayer generally has all 
sorts of contingent liabilities, costs from the Social Security 
fund and from Medicare and many other different--
    Mr. Garrett. But let's just focus here on FHA for a moment. 
We can fix those on another day. Are they accurate as far as 
what they have been doing at FHA, in protecting that in a 
transparent and accurate manner over the years?
    Ms. Wartell. I think FHA has generally been as good at 
predicting loss to a mortgage insurance fund as the private 
sector, actually probably better, but I take your point that it 
is very hard to know how housing prices and economy and 
unemployment will vary.
    Mr. Garrett. So, let's take a look at that. Does anybody 
disagree that they have been fairly accurate? Mr. Marzol?
    Mr. Marzol. Mr. Congressman, the comment I would make on 
the issue of mortgage credit risk, particularly with low-
downpayment borrowers, is that the future outcomes depend a lot 
on what happens to the economy, home prices, and jobs.
    So there is uncertainty about those future outcomes. If the 
economy and jobs are good, the mortgages should perform fairly 
well. One of the tools that we use, and I am not an expert in 
GAAP or government accounting, but as a businessman, a tool 
that we use a lot is stress-testing our portfolio.
    It is not just assuming that times are going to be good, 
but it is asking ourselves, what will it look like if times are 
bad, including if they looked like the Great Recession that 
was--
    Mr. Garrett. And does FHA do that now?
    Mr. Marzol. Not, there are in the actuarial report, there 
are downsides--
    Mr. Garrett. Right.
    Mr. Marzol. --scenarios provided, and that is something 
that is just--people we try to look out a lot.
    Mr. Garrett. So that is one thing that they are not doing 
as well as you would suggest, as you are doing. The other area 
is not incorporating a premium for market risk. And before I go 
to you, Mr. Stevens, let me just throw up some numbers to put 
this in perspective, so we can show the chart.
    If you really squint at that chart, this is from CBO, it is 
from 1992 to 2011. Just to poke off some years, this is the 
initial subsidy estimate recorded as provided in the budget 
appendices from the CBO, in the first chart. And the next chart 
shows latest re-estimates as provided in Fiscal Year 2013 
credits supplement.
    What do these charts show? To Ms. Wartell's comment, yes, 
they show that FHA was predicting, and each year from 1992 to 
2011, but basically, it is a negative number, which means the 
effect on the budget is that they would be ahead of the game, 
right? By $852 million, in 1992, to 6 billion, 738 million 
dollars in 2011. How close were they to their predictions in 
all there? Well, let's see.
    They were wrong in every single year. That is not a great 
track record. They were off by $205 million in 1992. In 2011, 
they were off by 3 billion, 376 million dollars. On a scoring 
level of one out of 100, zero isn't that great, is it? So I 
would not say the level of accuracy is great. And yes, the 
private sector may not be that good at this, but if the private 
sector had a zero accuracy level, they would be out of 
business.
    But when the Federal Government has a zero accuracy level, 
the American taxpayers are the ones who foot the bills. So I 
would hope that we could agree, as was said at the beginning, 
that we all want more transparency and one of them would be to 
go into CBO with success.
    Or others have suggested doing corporate premium for market 
risk and also we go into fair value accounting, which perhaps 
along with what Mr. Marzol has also suggested, give us a more, 
true reflection of what this is affecting and the cost to the 
American taxpayer. With that, I see my time is up now.
    Chairman Neugebauer. I thank the gentleman. And now the 
gentlelady from Arizona, Ms. Sinema, is recognized for 5 
minutes.
    Ms. Sinema. Thank you, Mr. Chairman. Actually, I don't have 
any questions. And that might make me the most popular member 
of the subcommittee today, actually.
    [laughter].
    Thank you.
    Chairman Neugebauer. With that, we will recognize Mrs. 
Beatty for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member. First, let me thank all of the panelists who joined us 
today as we look at your perspectives on how to reform FHA. We 
have obviously had a number of these meetings, and we have had 
our Director from FHA come in and provide us highlights.
    In listening and reviewing your materials, I think many of 
you, and especially as I look at the document from you, Mr. 
Kelly, let me thank you for the third paragraph on page 2, 
where you give us the 80-year history and what FHA has gone 
through from the Great Depression.
    And in that last line, you talk about it being a testament 
to its ability to meet the mission in these difficult economic 
times, that we weren't there 4 years ago, when we were really 
in the height of it.
    So my question to you or any one or two of the other 
panelists, is I take a more laser focus on the mission of FHA, 
to serve those low- and moderate-income homeowners, often 
first-time homeowners, and then for fun, let's just throw in 
what happens when we look at a 620 credit score, or lower, 
because that is the population in my district, when I look at 
having the richest and the poorest.
    For you, the question is, let's focus on those who are on 
the lower end. In looking at, and listening to the testimony, 
what I would like to hear is, what one specific thing, assuming 
we are all in favor in keeping it to its mission, and only 
tweaking it, what is the one thing that you could give me, that 
you would support or suggest to us, that we do for those low-
income folks who aren't going to have another opportunity?
    And certainly, we know that the housing market spurs the 
economy and I don't think anyone here, and I don't want to 
speak for you, would be against saying that this low- and 
moderate-income, first-time homeowner, who has had some life 
crises, as many of us might have had, should still deserve to 
have that opportunity to be insured for a home. What is it that 
you would do from your perspective?
    Mr. Kelly. I would tell you from my own experience, as I 
shared with the committee earlier, our company has built and 
developed a lot of first-time entry-level housing. We have used 
the FHA programs, often in conjunction with State and local 
programs.
    What I have viewed again, and this is anecdotal more than 
scientific, my own experience is the fact that in every 
instance where we have done these programs, there has been a 
mandatory housing counseling component to that. I think you are 
also going to find that probably, fairly universal, with State 
housing finance agencies, and their first-time homebuyer 
programs across the country.
    And I think if you look at the rates of foreclosures in 
those programs with State housing finance agencies, their 
portfolios are performing very well. I think it is very 
important that those who are unaccustomed to the obligations 
and responsibilities of buying a home and maintaining that 
home, understand what the total cost and real cost are for it, 
so they can prepare.
    Unfortunately, when they don't get that counseling, many 
only think about the fact that they have to pay a mortgage. 
They have no idea that mortgage payments are going to include 
taxes and insurance escrows, and they don't think about the 
cost of heating and cooling and maintaining the property.
    Mrs. Beatty. Thank you.
    Mr. Kelly. The one thing I would say to your quote, what I 
think is at the root of your question is that recessions are 
hardest on those with the least means. And so if you are in a 
State that is dependent on manufacturing, for example, Ohio and 
Michigan, they got particularly gutted by the automobile 
industry. You find yourself unemployed, and you don't have a 
lot of wealth in the bank to survive that period of 
unemployment.
    Your credit score is going to be hurt harder than those who 
have large amounts of inherited wealth, or relatives who help 
you out through those times. We do need to find a way to ensure 
that we have responsible access for consumers who don't have 
those kinds of resources available to them, to get the 
advantages of homeownership, which is good for society, good 
for the community, and good for the economy.
    I think there are solutions that provide access. And one 
suggestion is to consider ensuring that they have a debt-to-
income ratio that allows for enough residual income after their 
fixed costs to cover their liabilities, not necessarily allow 
50 percent back into that income ratio, which could be 
unsustainable for a person who has other marginal means for 
paying their monthly obligation, lowering that debt-to-income 
ratio to a more reasonable level, while not excluding them 
entirely from the opportunity for homeownership. It is a 
balance of sustainability and access that is critical to the 
market.
    Mr. Thomas. I would follow up too, Congresswoman, that we 
want to make sure that FHA remains available and affordable to 
all classes. We don't want to see the increase in cost or 
downpayments that will disenfranchise these borrowers. If it 
was raised to 5 percent down, that would disenfranchise 300,000 
borrowers a year.
    Chairman Neugebauer. I thank the gentlewoman, and now the 
gentleman from Mr. Ohio, Mr. Stivers, is recognized for 5 
minutes.
    Mr. Stivers. Thank you, Mr. Chairman, and I want to thank 
the witnesses for being here today. I also want to thank the 
chairman for calling this very important hearing on how we can 
shore up FHA because to my fellow Ohio Congresswoman, FHA does 
have an important mission, and we want to make sure they are 
there to perform that mission.
    But I have heard some things that you have pretty much all 
agreed on today. Number one, and I will call it a consensus, 
there seems to be some mission conflict, and there seems to be 
a discussion about when it is appropriate to deal with that. 
FHA has to do a better job of allocating resources to risk 
management. They need to at least look at risk-sharing.
    They need to do something with risk-based pricing and they 
need to do something with their risk exposure and decide what 
level they feel comfortable insuring, and I think all these 
things together can move us forward, and so I am going to ask 
some questions on each one of those things in turn, with regard 
to mission conflict, and my predecessor just talked a lot about 
how important FHA is to low-income folks.
    But I saw a recent study from the George Washington 
University School of Business which showed that 30 percent of 
FHA loans were going to families making more than 115 percent 
of the average median income, and I guess something looks like 
it is missing to me, and I will ask this question to Mr. 
Stevens, but why does FHA not have an income limit?
    There is a limit on the home price, there is a limit on 
lots of things but if it is really a mission geared toward low- 
and moderate-income buyers, why don't we look at some type of 
cap on how much folks can make and be eligible?
    Mr. Stevens. Congressman, I think virtually every 
economist--and I am not one--would agree and have advised over 
time that income is a better measure for an FHA program. The 
challenge is if we want a market that functions, income is one 
of the most disputed measures when it comes to backing up 
representations and warrantees.
    So if you put a minimum income, a maximum income level for 
a particular community, and an underwriter and a lender is 
underwriting, a self-employed borrower who has a part-time job 
as well, and there is a dispute ultimately upon default, as to 
what income level was used, that can become a problem.
    And I would just tell you anecdotally, I ran a large 
financial institution, and I brought 20 underwriters into a 
room. I handed them each a thick pair of tax returns, a set of 
tax returns. I had them all underwrite the same return 
separately, and then put their number on the white board in 
front of the room. And I had about 12 different numbers out of 
that group of underwriters.
    And that is the risk we ultimately create for the lending 
community to advance capital. I think loan limits have become a 
proxy for that.
    Mr. Stivers. Can I ask you, so you are the head of the 
Mortgage Bankers Association, do your members use income in 
their underwriting?
    Mr. Stevens. They do.
    Mr. Stivers. Should it be considered, maybe not a hard 
limit, but shouldn't it be considered as a component?
    Mr. Stevens. Again, I agree underwriting--
    Mr. Stivers. It is--
    Mr. Stevens. --the loan income level is the better and more 
accurate variable to ensure access to homeownership measures, 
and if it can be done with precision, in a way that can be 
implemented in the--
    Mr. Stivers. Sure.
    Mr. Stevens. --housing and system, we would absolutely be 
open to that.
    Mr. Stivers. Does anybody disagree that FHA should spend 
more time and resources on their risk management? If they are 
going to do that, they need to make sure they have the money, 
and I would just tell you that FHA does not charge the maximum 
premium allowed by law.
    But let's move to the next topic that relates directly to 
that, and that is risk-based pricing, and I do have a question, 
sort of for Mr. Thomas, although kind of for Mr. Kelly. A lot 
of people brought up risk-based pricing. Mr. Thomas, in your 
testimony, you talked a lot about the problem with condominiums 
and I recognize that problem.
    But to the extent there is a problem there, would--and I 
know the REALTORS, the organization you represent hates 
increasing FHA premiums or dislikes it. But would you rather 
have the ability of people who need condos to buy them at a 
risk-based premium, or have the current rules on condos?
    Mr. Thomas. The interesting thing is that condos actually 
perform better than single-family homes.
    Mr. Stivers. Sure.
    Mr. Thomas. And condos are also typically the entry point 
into housing. So, we need to make sure that is available to 
them and currently, with some of the things that FHA requires 
of condo associations, the condo associations are not renewing 
their ability to have FHA loans in their complexes. So there 
are a lot of problems around the FHA in the condo area, and 
that is just one of them, Congressman.
    Mr. Stivers. It looks like my time is up. I will yield back 
and hope for a second round of questions.
    Chairman Neugebauer. Thank you. Now the gentleman from 
California, Mr. Royce, is recognized for questions.
    Mr. Royce. Thank you, Mr. Chairman. And let me start with 
Mr. Marzol. In your testimony, you describe a resurgence of 
capital to the private mortgage insurance industry, $2 billion 
raised this year.
    What is the state of the industry? How many companies are 
currently offering coverage? And do you expect more capital to 
be raised in the near term?
    Mr. Marzol. --actually, the question comes at a good time. 
I think there have been some very positive developments in 
terms of the state of the industry, and there are six or seven, 
I think, active companies. I should probably go through and 
name them all.
    Mr. Royce. No, no, no, don't do that.
    Mr. Marzol. I--
    Mr. Royce. Spare me that.
    Mr. Marzol. But the question comes at a good time. The 
industry has, and companies have had access to capital. There 
is another new entrant which came into the market this year, 
along with Essent having come into the market a couple of years 
ago. Another large corporation announced the acquisition of a 
smaller industry company in an attempt to turn that company 
into a full service provider.
    Mr. Royce. --so--
    Mr. Marzol. Our feeling is that the capital markets are 
open now for mortgage insurers to raise capital.
    Mr. Royce. What is the number one thing Congress can do to 
ensure that capital gets off of the sidelines?
    Mr. Marzol. I think capital comes where it thinks it sees 
business opportunity and need. Things have been moving in the 
right direction, and I think the extent that Congress continues 
to take steps that signals that there is demand and need for 
mortgage insurance in the system, like the risk-sharing idea 
that has been talked about. Those are the kinds of things that 
will be very helpful to continue to bring capital to the 
industry.
    Mr. Royce. You raised another issue, and it is one that I 
raised at the last hearing. You raised this issue on the impact 
of the QRM rule and Basel III capital rules on FHA's 
attractiveness to lenders and to banks. I am very worried that 
the net impact of these rules is that government policies are 
going to steer borrowers to the FHA and further crowd out the 
private markets.
    So let me just ask you, what do you think needs to be done 
to change those proposed rules to ensure a level playing field 
for private mortgage insurance?
    Mr. Stevens. I think on Basel III, it would be any help 
that we could get, and we will make our own case, of course, to 
the bank. If there has been any help that we can get to 
persuade that private MI continues to be recognized for capital 
purposes, for banks, assuming that the MI is being provided by 
a financially sound mortgage insurance company.
    And then on risk retention, actually, our view is that the 
thing which would be most helpful would be to actually get 
mortgage insurance thought about the right way in the rule. And 
what I mean by the right way, is that private mortgage 
insurance is long-term risk retention. If we could get private 
mortgage insurance recognized as long-term risk retention in 
the rule, then wherever lenders end up, potentially having to 
have a risk retention obligation, if they don't have the 
capital and balance sheet to bear that risk, we would then be 
able to step and be that risk retention source for the lender.
    Mr. Royce. Okay. Thank you. I want to go to Mr. Stevens and 
ask a question about eminent domain, because these proposals 
have been under consideration in a number of States, certainly 
California being an example. These proposals would use the 
eminent domain power to seize mortgages at a deep discount, and 
then refinance them using FHA insurance. Should FHA be used to 
back loans acquired through eminent domain?
    Mr. Stevens. Thank you, Congressman. I believe strongly 
that the FHA should block the ability for eminent domain rules 
to use their insurance fund. Director DeMarco of the FHFA has 
said explicitly in a public statement that Freddie Mac and 
Fannie Mae will not be a source, as an outlet, for this eminent 
domain process and has gone further to say they may ultimately 
exclude financing being made available in those communities 
where eminent domain is used.
    That would leave the FHA solely there to be adversely 
selected by these communities and that should not be allowed.
    Mr. Royce. Do you want to jump in, too, on the QRM rule and 
the Basel III, Mr. Stevens?
    Mr. Stevens. I think Adolfo's point about recognizing other 
credit enhancements in these rules is critically important. But 
I don't think it is enough to recognize credit enhancements in 
QRM, because still the cost of capital for a government 
guarantor is cheaper, and so if there is a downpayment 
threshold, even if a private credit enhancement is recognized, 
that ultimate cost of capital for the private credit 
enhancement won't compete with a government-guaranteed credit 
enhancement.
    So, we really need to make certain that the QRM rule is 
defined as equaling the Qualified Mortgage rule and not set 
another barrier in place that creates an additional cost for 
private capital to engage in the market.
    Mr. Royce. Thank you, Mr. Stevens.
    Chairman Neugebauer. I thank the gentleman. The gentleman 
from California, Mr. Sherman, is recognized for 5 minutes, and 
my apologies for not acknowledging you before.
    Mr. Sherman. You got the State right. I want to pick up on 
what Mr. Royce had to say. I am a bit confused on what basis--I 
don't know if the other side is represented here--someone would 
argue that private mortgage insurance is not a risk mitigant.
    How is it that the folks defining both QRM and Basel III 
would say, just ignore this? Does anybody have any insight into 
how these two regulatory processes are going the wrong way? I 
see nothing but heads shaking and I look forward to working 
with you and with others on this subcommittee to try to make 
sure that both processes recognize the obvious, which is, if 
you own a mortgage that is insured, you have less risk than if 
you have a mortgage that is not insured. Mr. Thomas, maybe you 
could tell us a little bit about what it is like in the 
marketplace? Is PMI now thought of as a way to help, making 
some headway, expanding its share?
    And particularly with regard to condominiums, it is 
difficult to get FHA insurance for condominiums. What role does 
private mortgage insurance play there?
    Mr. Thomas. We are not seeing the private mortgage 
insurance back into the market back in a big way. We would love 
to see it. And we would love to see the lenders back in as they 
were before the crisis.
    But, the rules that are still out there, the QM, the QRM, 
and the Basel III, once those are finally finalized, I think we 
will then start to see the restructuring of our whole mortgage 
system, so that we understand where the rules are and everybody 
can play by them.
    The problem is now, the lenders are not ready to get back 
into the market until they know what the game is that they have 
to play. And so, we are seeing just a continuing tightening of 
credit, both from the availability of it, to the qualification 
of it. I tell any of the borrowers I deal with that they are 
going to go through an inquisition, not a normal process.
    And so, that is what the borrower is facing today. It is 
much more difficult than it needs to be, but a lot of it is 
because of the regulations and the unintended consequences of 
not knowing what they are going to be.
    Mr. Sherman. Does anyone else have a comment on what is 
actually happening in the marketplace? Yes?
    Mr. Marzol. Just a comment. Individual markets are 
different, but the private mortgage insurance industry in 2012 
did write $175 billion of--
    Mr. Sherman. And that is a substantial--
    Mr. Marzol. --of insurers, and definitely were up from the 
bottom when we were only at one time in 2010, I think between 4 
and 5 percent of the market. So we are a little bit of the 
invisible man of private capital in the mortgage market, but it 
is, it is not an insignificant sum of mortgages that are 
getting access to mortgage credit with private capital on them 
through private mortgage insurance.
    Ms. Wartell. Congressman--
    Mr. Sherman. Yes, go ahead.
    Ms. Wartell. I think the one thing to remember is that FHA, 
with its premium increases has now, and for many loans, not all 
of them, gotten to the point where it is more expensive than 
many of the MI products. The real barrier, one of the real 
barriers for the MIs, strictly in the purchase money as opposed 
to refinance market, is that they are limited to what the GSEs 
will purchase in much of their business.
    And so the dynamics here about where, how FHA market share 
can shrink and the MIs can grow, is not principally determined 
by FHA policy. There are other factors in the economy, 
including the regulation of the GSEs by the, in 
conservatorship. And so, I think we are getting--
    Mr. Sherman. So--
    Ms. Wartell. --to a place that will be--
    Mr. Sherman. --if I can interrupt--
    Ms. Wartell. --in that process.
    Mr. Sherman. --but we all want to see mortgage insurance 
play its role in the economy. We all want to see more private, 
less FHA, with returning FHA to more its traditional role, but 
ultimately, it is the lenders and the securitizers that control 
this process.
    And if you have the lenders affected by Basel III and QRM 
rules, that prefer FHA to private mortgage insurance, if you 
have Fannie Mae and Freddie Mac rules that prefer FHA to 
private mortgage insurance, then our whole goal of having 
private mortgage insurance return to its traditional role is 
distorted.
    Ms. Wartell. A level playing field is absolutely the goal 
and I think there is sometimes too much emphasis on making FHA 
change the rules to level up the playing field. And I think 
often it is these larger structural issues that are going to 
create the opportunity for us to see more private capital 
return.
    Mr. Sherman. I believe my time has expired, but I look 
forward to working with my colleagues to try to push the 
securitizers and those who draft QM and QRM and Basel III in 
the right direction.
    Chairman Neugebauer. I thank the gentleman. And now the 
gentleman from Wisconsin, Mr. Duffy, is recognized for 5 
minutes.
    Mr. Duffy. First off, Mr. Kelly, did you want to make a 
final comment there? I see you had your hand up.
    Mr. Kelly. No, simply that I mentioned this earlier in the 
hearing, that in response to Mr. Sherman's question regarding 
what are we seeing, as I indicated, NAHB does a regular survey 
of its members and asks questions regarding the challenges they 
face in producing and selling homes, and the top of the heap at 
the moment is the credit access and availability and standards 
that their prospective buyers face.
    Mr. Duffy. Thank you. I am one who supports the traditional 
mission of FHA. I think it is important, however, that we 
balance that traditional mission of FHA with securing American 
taxpayers from having to step in and bail out more housing 
programs.
    Last year, we were in the hole $688 million at FHA. We had 
a mortgage settlement of a billion dollars that was able to 
plug that hole, per Mr. Stevens' insightful comments, the 
budget came out with a request for $943 million for FHA, right 
under a billion dollars per year.
    To the point, a lot of us are concerned about the solvency 
of the program and taxpayers stepping in and bailing out the 
program. I think all of you on the panel had agreed that you 
are in favor of some form of risk sharing, is that correct? I 
think Mr. Neugebauer asked that question, and you all agreed to 
it.
    What kind of ratio do you think is appropriate? And I open 
it--is it 80/20, is it 50/50?
    Mr. Stevens. Congressman, there are a couple of things that 
I would suggest. One is that FHA already has the authority to 
implement a risk-share pilot and that has not been done to date 
for a couple of reasons, but one of which is just resources to 
get it going.
    Mr. Duffy. But what ratios? What kind of ratio do you have?
    Mr. Stevens. The thing that I would suggest, and a ratio is 
a difficult one for the pilot, but I would suggest that we need 
to make sure that we do it in a way that doesn't, that creates 
a clear market where there is not an option other than risk-
sharing and the FHA for the pilot. Because otherwise, the 
execution will never work, and the pilot won't work, so--
    Mr. Duffy. But you--
    Mr. Stevens. --and I--
    Mr. Duffy. --start off with, what, 10 percent as a goal, or 
some small percentage to test the pilot before you expand it?
    Mr. Stevens. I think that is where you need to stop.
    Mr. Duffy. I want to give everyone a chance to answer, but 
I am a little confused on why we are asking for a pilot? Isn't 
our pilot the VA and isn't the VA really a pilot program for 
us, and it has worked? Why do we have to do another pilot? If 
we are talking about pilots, I wish we would have talked about 
pilots with regard to Dodd-Frank, not FHA.
    But we have already tested it out with the VA. Why are 
you--it seems like we are kind of slow walking this thing a 
little bit when we have seen it tested, and we have seen it 
works. Why don't we just do it?
    Mr. Stevens. Sarah, do you want to take that?
    Ms. Wartell. Well, a couple of things. First of all, VA is 
a much smaller program, and although it has a much lower 
default rate, the borrower pool that is eligible is different. 
They tend to have better FICO scores and there is a set of ways 
in which--
    Mr. Duffy. By its very nature--
    Ms. Wartell. --the VA has indirect--
    Mr. Duffy. --the definition of a pilot, it is a smaller 
program.
    Ms. Wartell. It is more than a smaller program. It has very 
different and targeted borrowers who are eligible, and most of 
us would not predict that you would see the same behavior and 
the same performance on a pilot that was applicable to the 
entire FHA borrowers.
    Mr. Duffy. What leads you to believe that?
    Ms. Wartell. Because the borrower is in VA, first of all, 
they are all military and eligible through their service in the 
military.
    There are ways in which they may have lost some eligibility 
for other VA benefits, if they fail to perform on their FHA, 
which creates a different incentive for them to perform on 
their loans, and they also tend to be concentrated in 
particular markets where some of the risks that FHA has borne 
aren't there. So if this were expanded to the FHA's traditional 
markets, you may see very different performance.
    That is why we would propose taking an FHA-eligible 
borrower, and find ways to share risk. In many loans, it is not 
risk sharing at all, because it is a 25 percent top loss 
coverage, and many of us would propose that FHA design a real 
true sharing of risk through the borrower, to align incentives 
better between the insurer and FHA.
    Mr. Duffy. I appreciate your quick answer, getting it all 
in there. Maybe we can continue a dialogue on it. There are 
some more questions I have on the pilot program. In regard to 
premium increases, we are at 1.35 percent, we have a cap of 1.5 
percent, so we are not there yet.
    But I think you all indicated that you support the 
legislation that passed last year which would bring us up to a 
cap of 2.05 percent. Do you all support raising that 
percentage, where you pass the 1.5 percent, something closer to 
the 2 percent that was in the legislation that you all said you 
support? Anybody? My time is up, but I am not getting called, 
so I am going to ask you to answer the question.
    Mr. Stevens. Congressman, the one thing I would say is that 
FHA, the good news is FHA has risen their premiums, raised 
their premiums multiple times and it wouldn't--
    Mr. Duffy. And it hasn't--
    Mr. Stevens. --they wouldn't have that--
    Mr. Duffy. --and it hasn't worked yet, we are--
    Mr. Stevens. --they wouldn't have--
    Mr. Duffy. --still short.
    Mr. Stevens. --that capability if they hadn't done it here, 
they just raised premiums April 1st by another 10 percent and 
our, and application activity was in the FHA, dropped 14 
percent this last week. We are already losing share as a result 
of raising those.
    Mr. Duffy. A $943 million shortfall this year. So I guess--
    Ms. Wartell. It is on the HECM program.
    Mr. Duffy. Go ahead. What is that?
    Ms. Wartell. The shortfall this year has to do with losses 
on loans that they have already insured, and the predicted 
performance--
    Mr. Duffy. Are you--
    Ms. Wartell. --of the forward-looking--
    Mr. Duffy. --are you calling Mr. Stevens out for his 
performance at a--
    [laughter].
    I will yield back and maybe we can we can chat further on 
this at some other time.
    Chairman Neugebauer. I thank the gentleman, and now the 
gentleman from Delaware, Mr. Carney, is recognized.
    Mr. Carney. Thank you, Mr. Chairman, and thank you for 
giving me an opportunity to ask a few questions and to welcome 
my friend Kevin Kelly at the outset. I am not a member of this 
subcommittee, but I have to tell you, this hearing has been 
great.
    It has been very thoughtful, a great discussion. Starting 
off with your questions, Mr. Chairman, and there was quite a 
bit of agreement among the panelists which is not something 
that we often see in this hearing room, and it was really good 
to see, for me.
    Mr. Kelly knows that we have something in Delaware that we 
call the ``Delaware way.'' And when we have a problem, we kind 
of put our political differences aside, we get the experts in 
the room, and we try to figure out how to address the problem.
    It seems like if we did that here, on this issue, how to 
reform the FHA, we could put this panel together, maybe add 
some other folks and you all could write legislation that would 
represent a consensus among your groups.
    And I know we have done that in Delaware. We have done it 
on occasion where Mr. Kelly has led those kinds of initiatives 
and I just throw that out there as a suggestion, maybe to bring 
the Delaware way to resolve some of the differences we have 
around these issues here over the FHA and the reforms that are 
necessary.
    We very much appreciate all your input. I had to leave, and 
I really apologize for that. I don't know if you had any 
discussion about the GSE reform, but I would be particularly 
interested in hearing your perspective on what we should do.
    The President asked us, a couple of years ago, actually 
Secretary Geithner came here to this committee with their White 
Paper, which included a continuum from complete privatization 
to some sort of public/private partnership there, and I would 
be interested if any of you have some--Ms. Wartell is leaning 
forward. I suspect she has some views and I would her first, my 
friend Mr. Kelly, and Mr. Stevens, and anyone else who would 
like to add your thoughts on that? Thank you.
    Ms. Wartell. Clearly, it is appropriate for the Congress to 
remedy some of the failures of the past in the GSEs. That means 
that we should not have an unpriced and unpaid-for implicit 
guarantee.
    We need the government's role to be limited to stand behind 
private capital, to be priced and paid for in some kind of 
catastrophic risk insurance fund, which will--and I think over 
time, that fund should stand behind a smaller portion of the 
market and gradually be phased out over time.
    The mechanism by which private capital can stand ahead of 
the taxpayers in that, I think can be diverse, but they--we 
don't--the advances made by FHFA in creating a new 
securitization platform means that we can separate what the 
GSEs have been doing between securitization and credit 
enhancement, and come up with a way to ensure that there is 
well-capitalized entities with access to capital market 
mechanisms to stand ahead of the tax--
    Mr. Carney. Does the Urban Institute have a proposed 
solution or on--
    Ms. Wartell. I am working on a proposal that may come out 
in some weeks with some bipartisan colleagues.
    Mr. Carney. Thank you very much. Mr. Kelly?
    Mr. Kelly. Thank you, Congressman. NAHB has taken a 
position and I will reiterate it that we believe the most 
effective means of benefiting the taxpayer is a comprehensive 
reform, both to FHA as I said earlier in my remarks, as well as 
GSE reform. That--
    Mr. Carney. And we have heard that from many people who 
have come before our committee to do it--
    Mr. Kelly. And--
    Mr. Carney. --in a comprehensive way.
    Mr. Kelly. And we always encounter the law of unintended 
consequences. We think the mortgage finance system in America 
is in need of a holistic reform. We are in favor of reforming 
Fannie Mae and Freddie Mac. That should be done. We think that 
is a paramount concern. But we, again, think FHA reform should 
march along at the same time.
    With that said, we are emphatic in our position that it is 
essential that there be a government backstop, back in the 
primary and secondary mortgage markets to ensure continued 
access to credit for all homebuyers.
    Mr. Carney. Thank you--please.
    Mr. Thomas. Yes. The National Association of REALTORS has 
had a White Paper out for about 3 years on this, and I think if 
you read through it, you will see that we agree that there 
still needs to be a Federal backstop, and we need to have 
access to capital in any kind of a market.
    But there are many things that need to be contemplated in a 
reform of the GSEs and we are in support of that, and if you 
read through our White Paper, you will see that.
    Mr. Carney. Thank you very much, Mr. Stevens?
    Mr. Stevens. The only thing I would say is, we have a White 
Paper out also. All of our papers generally recommend the same 
relatively similar construct. In fact, the BPC is in all that--
    Mr. Carney. So why is it so hard for us?
    Mr. Stevens. We believe strongly that we have to start 
taking steps in that direction, having these institutions 
perpetually on, in conservatorship is untenable. They are 
controlling 70 percent of the liquidity in the housing finance 
system today. The decisions they make are extraordinarily 
impactful.
    The housing finance, both in terms of the government's role 
and the private sector's role and we really would encourage 
steps now while interest rates remain low, while the market's 
in recovery, to deal with the future of the state of these two 
institutions in an organized way, because if we fail to do so, 
down the road when rates rise and tinkered with guaranteed fees 
for legislative purposes and otherwise we will be in a much 
worse position.
    So doing this now, we--in an organized way, is very 
important.
    Mr. Carney. I see my time has long expired. I appreciate 
the chairman for his forbearance and I will look at your White 
Papers, and I may call you and we can discuss it further. Thank 
you very much, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman and I thank our 
panelists. I think we have had a good discussion today, with a 
lot of good ideas. I would just encourage the panel and the 
groups that you recommend that we are--the next step in this 
process is to begin to take some of these ideas and to put them 
into some sort of an action plan, which would probably be some 
legislative reform.
    If you have any other ideas--we don't want to just limit it 
to the ones that you had today. As this debate begins to 
unfold, if you have thoughts and ideas, we certainly would 
welcome them.
    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, this hearing is adjourned.
    [Whereupon, at 2:20 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             April 10, 2013


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