[Senate Hearing 113-]
[From the U.S. Government Publishing Office]



 
TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES 
                  APPROPRIATIONS FOR FISCAL YEAR 2014

                              ----------                              


                         TUESDAY, JUNE 4, 2013

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:30 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Patty Murray (chairman) presiding.
    Present: Senators Murray, Collins, and Boozman.

              DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

STATEMENTS OF:
HON. CAROL GALANTE, COMMISSIONER AND ASSISTANT SECRETARY FOR HOUSING, 
            FEDERAL HOUSING ADMINISTRATION
HON. DAVID A. MONTOYA, INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL

               OPENING STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. The subcommittee will come to order. 
Senator Collins will be here in just a few minutes, but we'll 
go ahead and get started.
    But before we do begin, I do want to just take a moment to 
remember Senator Frank Lautenberg. He was a passionate public 
servant who wasn't afraid to fight for what he believed in. It 
goes without saying he was a wonderful member of this 
subcommittee, and he was actually former chairman of this 
subcommittee and added a really important voice to many of our 
housing and transportation issues. He was a tireless advocate 
for his State and for policies that protected Americans.
    He fought hard to make sure we funded Amtrak and banned 
smoking on airlines and raised the drunk driving standard. We 
owe him a tremendous debt. So I just wanted to start today by 
remembering him and letting his family know how much all of us 
have them in our thoughts and prayers.
    During this hearing this afternoon, we will hear from 
Federal Housing Administration (FHA) Commissioner Carol Galante 
and Housing and Urban Development (HUD) Inspector General David 
Montoya.
    I want to thank both of you for your patience with 
scheduling this hearing. Both Senator Collins and I had 
conflicts and had to move this around, and I really appreciate 
your coming and being here today. FHA is an important issue and 
your input is really valuable to this subcommittee. So thank 
you for accommodating our changes and welcome to both of you.
    It has been almost 6 years since the housing market 
collapsed. In the lead-up to that crisis, home prices were on a 
seemingly unstoppable upward climb while home ownership became 
a new reality for millions of Americans. But the promises made 
to homeowners and investors alike were too good to be true, and 
when the risks associated with these mortgages began to 
materialize, it was too late to stop the damage.
    When defaults and foreclosures skyrocketed, the impact was 
felt not only by the defaulting homeowners but by entire 
communities that watched their home values plummet, by 
investors who bet on these products and lost, and, of course, 
by older Americans who saw the value of their retirement 
savings tumble. During this crisis, FHA quickly stepped in to 
ensure a functioning mortgage market, and there's no question 
that intervening in the faltering housing market exposed FHA to 
greater risk.

                           FHA INSURANCE FUND

    But FHA took on this risk in order to support the broader 
housing market, and without its support, the cost to the market 
and to taxpayers today would likely have been far higher. 
Today, we are finally starting to see signs of recovery. New 
homes are being built. Home sales are up. Foreclosures are 
down, and home prices are now beginning to rise.
    But we are still dealing with the fallout from the housing 
market's boom and bust. While some homeowners are feeling 
relief from increased home prices, this is not true for 
everyone. I still hear from families that are underwater in 
their homes and unable to refinance. They feel trapped, unable 
to move to a new job or to a neighborhood with a better school. 
Unable to refinance at today's historically low rates, they 
remain saddled with excessive mortgage payments, money that 
could be better spent on family and at local businesses or 
saved for their kids' college education.
    We are acutely aware of the consequences for FHA and 
possibly the taxpayer, as the Mutual Mortgage Insurance (MMI) 
Fund has sustained significant losses in recent years. The 
President's fiscal year 2014 budget indicates that FHA may 
require taxpayer funding to cover the losses to its mutual 
mortgage insurance fund this year. This would represent the 
first time the fund would need taxpayer funding in its history.
    In the past 3 years, HUD has taken numerous steps to 
strengthen the fund. It has raised insurance premiums five 
times, it tightened its standards, and it placed new 
requirements on program participants. Yet the biggest drain on 
the fund continues to be those older loans originated at the 
height of the housing market when lending standards and program 
rules were too lax.
    So we must ensure that HUD has the authority it needs and 
is taking all the steps necessary to mitigate losses from those 
loans. This includes recovering money from servicers and 
lenders that did not follow HUD rules and regulations. The $25 
billion settlement that 49 States, the District of Columbia, 
and the Federal Government reached last year with the five 
largest servicers resulted in $684 million being returned to 
Federal housing programs.
    But the work determining responsibility for losses didn't 
stop with that settlement. FHA's Office of Inspector General 
(OIG) and the Department of Justice continue to investigate 
lenders to ensure that FHA is not paying for losses on loans 
that should never have been made.
    As a result, there have already been five further 
settlements, bringing the total amount returned to the MMI Fund 
to over $1.1 billion. I want to thank both the Commissioner and 
the Inspector General for the important work they're doing on 
that issue. The taxpayer should not have to pay for losses of 
lenders who did not follow the rules.
    We also need to ensure that the terms of settlement 
agreements are being honored. And I am concerned by recent 
reports that some of the banks may not be providing the relief 
to borrowers that they committed to under the terms of the 
settlement. So the work to hold the lenders accountable 
continues.

                    HOME EQUITY CONVERSION MORTGAGE

    While we must hold lenders accountable for not following 
the rules, we must also make sure that we have the right rules 
in place. As we discussed with the Secretary when he testified 
before us several weeks ago, the Home Equity Conversion 
Mortgage, or HECM, requires careful examination. This product 
can be a good option for seniors who want to stay in their 
homes as they get older. But the recent crisis has exposed 
serious flaws in this program, and it is clear that as 
currently designed, the program is not working for taxpayers 
or, in many cases, for borrowers.
    Some seniors and their families did not fully understand 
the product and are now facing foreclosure. These loans have 
resulted in significant losses to the MMI Fund. In fact, 
without the HECM mortgages, FHA's insurance fund would have a 
positive balance. HUD has suggested steps Congress can take to 
strengthen the program. I know the Inspector General's Office 
has studied this subject and suggested improvements as well.
    So I look forward today to a discussion on how we can work 
together to preserve a responsible product for people who need 
it while ending the practices and policies that add unnecessary 
risks to borrowers and to the FHA's insurance fund.
    In addition to HECM changes, HUD, its Inspector General, 
and the Government Accountability Office (GAO) have identified 
other steps that can be taken to strengthen FHA. For example, 
HUD has sought additional enforcement authority to ensure that 
unscrupulous lenders can't continue to originate FHA-insured 
loans. And the Inspector General has recommended changes to how 
HUD manages loans that experience early default.
    But it's also important to recognize many of these changes 
can't be made quickly or at all without the help of Congress. 
So we need to hear from both of you about what happens if 
Congress doesn't provide the necessary legislative authority to 
make additional program changes.
    We must also continue to ensure effective management of 
FHA's programs and operations. For many years, staffing 
challenges and outdated information systems have compromised 
effective management of FHA programs. HUD must have staff with 
the necessary skills to monitor its programs and understand the 
risks in both the market and its portfolio.
    In recent years, this subcommittee has provided HUD with 
resources to address its staffing needs, including funding for 
the recently established risk office. Since 2010, Congress has 
also invested millions of dollars in upgrading FHA's 
information technology (IT) systems to increase its efficiency 
and to better detect risk.
    The success of the FHA Transformation IT Project is 
critical to FHA's short- and long-term health. This 
subcommittee is closely following the management of this 
project, so I want to discuss its current status as well as its 
future.
    While HUD has made progress in improving its information 
systems and filling important positions, sequestration creates 
new challenges for FHA. HUD will be forced to make difficult 
decisions about which of its IT projects will continue to go 
forward and which ones will be slowed down or even canceled. 
Staff will be furloughed, and some positions lost through 
attrition may not be filled.

                             SEQUESTRATION

    The broad consequence of sequestration cuts across the 
Government could also impact FHA. Sequestration threatens our 
fragile economy and housing market. The financial position of 
the MMI Fund benefits as the housing market and economy 
improve, but it will also suffer if our economy slows. So we 
have to continue to work for a fair and balanced solution that 
provides certainty to our Federal agencies and to the American 
people.
    The budget we recently passed in the Senate provides a path 
forward that balances responsible spending cuts with necessary 
investments. I look forward to working with my colleagues in 
both the House and Senate soon, I hope, to enact a responsible 
budget compromise.

                           PREPARED STATEMENT

    Ms. Galante and Mr. Montoya, both of you serve in important 
roles as we continue to deal with the consequences of the 
housing crash and think through the future of FHA and America's 
housing finance system, and I look forward to our discussion 
today.
    [The statement follows:]
               Prepared Statement of Senator Patty Murray
                         lautenberg remembrance
    Before we begin, I'd like to take a moment to join my colleagues in 
remembering Senator Frank Lautenberg. Frank was a passionate public 
servant who was not afraid to fight and vote for what he believed in.
    As a member of this subcommittee and former Chairman, Frank added 
an important voice on the many housing and transportation issues we 
consider.
    He was a tireless advocate for his State and for policies that 
protected the safety of Americans, whether it was ensuring funding for 
Amtrak, banning smoking on airlines or strengthening the drunk driving 
standard. Frank gave everything he had to public service and those who 
served with him know that it gave him all the satisfaction in the 
world.
    He will be missed by all those who served with him on this 
committee and here in the Senate.
                          hearing introduction
    This afternoon we will hear testimony from Federal Housing 
Administration (FHA) Commissioner Carol Galante and Department of 
Housing and Urban Development (HUD) Inspector General David Montoya.
    I want to thank Commissioner Galante and Inspector General Montoya 
for their patience with the scheduling of this hearing. Both Senator 
Collins and I had scheduling conflicts that made it necessary to 
reschedule. But the FHA is an important issue and your input is 
valuable to this subcommittee, so thank you for accommodating the 
changes and welcome.
    It has been almost 6 years since the housing market collapsed. In 
the lead up to the crisis, home prices were on a seemingly unstoppable 
upward climb while homeownership became a new reality for millions of 
Americans.
    But the promises made--to homeowners and investors alike--were too 
good to be true. And when the risks associated with these mortgages 
began to materialize, it was too late to stop the damage. When defaults 
and foreclosures skyrocketed, the impact was felt not only by 
defaulting homeowners, but also by entire communities that watched 
their home values plummet, investors who bet on these products and 
lost, and older Americans who saw the value of retirement savings 
tumble.
    During this crisis, FHA quickly stepped in to ensure a functioning 
mortgage market. And there is no question that intervening in the 
faltering housing market exposed FHA to greater risk. But FHA took on 
this risk in order to support the broader housing market, and without 
its support, the cost to the market and to taxpayers today would likely 
be far higher.
    Today, we are finally starting to see signs of recovery:
  --new homes are being built;
  --home sales are up;
  --foreclosures are down; and
  --home prices are rising.
    But we are also still dealing with the fallout from the housing 
market's boom and bust. While some homeowners are feeling relief from 
increased home prices, this isn't true for everyone. I still hear from 
families that are underwater in their homes and unable to refinance. 
They feel trapped, unable to move for a job or to a neighborhood with a 
better school. Unable to refinance at today's historically low rates, 
they remain saddled with excessive mortgage payments--money that could 
be better spent on family and at local businesses, or saved for the 
kids' college education.
    We are acutely aware of the consequences for FHA--and possibly the 
taxpayer as the Mutual Mortgage Insurance (MMI) Fund has sustained 
significant losses in recent years.
              losses to the mutual mortgage insurance fund
    The President's fiscal year 2014 budget indicates that FHA may 
require taxpayer funding to cover the losses to its Mutual Mortgage 
Insurance Fund this year. This would represent the first time that the 
fund would need taxpayer funding in its history. In the past 3 years, 
HUD has taken numerous steps to strengthen the fund. It has:
  --raised insurance premiums five times;
  --tightened its standards; and
  --placed new requirements on program participants.
    Yet the biggest drain on the fund continues to be those older loans 
originated at the height of the housing market when lending standards 
and program rules were too lax. So we must ensure that HUD has the 
authority it needs and is taking all of the steps necessary to mitigate 
losses from these loans. This includes recovering money from servicers 
and lenders that did not follow HUD rules and regulations. The $25 
billion settlement that 49 States, the District of Columbia, and the 
Federal Government reached last year with the five largest servicers 
resulted in $684 million being returned to Federal housing programs. 
But the work determining responsibility for losses did not stop with 
that settlement.
    FHA, HUD's Office of Inspector General, and the Department of 
Justice continue to investigate lenders to ensure that FHA isn't paying 
for losses on loans that should never have been made. As a result, 
there have already been five further settlements bringing the total 
amount returned to the MMI Fund to over $1.1 billion.
    I want to thank both the Commissioner and the Inspector General for 
the important work they are doing on this issue. The taxpayer should 
not have to pay for losses of lenders who didn't follow the rules. We 
also need to ensure that the terms of settlement agreements are being 
honored. I am concerned by recent reports that some of the banks may 
not be providing the relief to borrowers they committed to under the 
terms of the settlement. So the work to hold lenders accountable 
continues.
                 home equity conversion mortgage loans
    While we must hold lenders accountable for not following the rules, 
we must also make sure that we have the right rules in place. As we 
discussed with the Secretary when he testified before us several weeks 
ago, the Home Equity Conversion Mortgage, or HECM, requires careful 
examination. This product can be a good option for seniors who want to 
stay in their homes as they get older. But the recent crisis has 
exposed serious flaws in the program.
    And it is clear that, as currently designed, the program is not 
working for taxpayers, or in many cases, for borrowers. Some seniors 
and their families didn't fully understand the product and are now 
facing foreclosure. These loans have resulted in significant losses to 
the MMI Fund. In fact, without HECM mortgages, FHA's insurance fund 
would have a positive balance.
    HUD has suggested steps Congress can take to strengthen the 
program. I know the Inspector General's Office has studied this subject 
and suggested improvements as well. So I look forward to a discussion 
on how we can work together to preserve a responsible product for 
people who need it, while ending the practices and policies that add 
unnecessary risk to borrowers and FHA's insurance fund.
                          other areas of risk
    In addition to HECM changes, HUD, its Inspector General, and the 
Government Accountability Office (GAO) have identified other steps that 
can be taken to strengthen FHA. For example, HUD has sought additional 
enforcement authorities to ensure that unscrupulous lenders can't 
continue to originate FHA insured loans. And the Inspector General has 
recommended changes to how HUD manages loans that experience early 
default.
    But it is also important to recognize that many of these changes 
can't be made quickly, or at all, without the help of Congress. So we 
need to hear from both of you about what happens if Congress does not 
provide the necessary legislative authority to make additional program 
changes.
                             fha operations
    We must also continue to ensure effective management of FHA's 
programs and operations. For many years, staffing challenges and 
outdated information systems have compromised effective management of 
FHA programs. HUD must have staff with the necessary skills to monitor 
its programs and understand the risks in both the market and its 
portfolio. In recent years, this subcommittee has provided HUD with 
resources to address its staffing needs, including funding for the 
recently established Risk Office.
    Since 2010, Congress has also invested millions of dollars in 
upgrading FHA's information technology (IT) systems to increase its 
efficiency and better detect risk. The success of the FHA 
Transformation IT project is critical to FHA's short and long-term 
health. This subcommittee is closely following the management of this 
project, so I want to discuss its current status, as well as its 
future.
                             sequestration
    While HUD has made progress in improving its information systems 
and filling important positions, sequestration creates new challenges 
for FHA. HUD will be forced to make difficult decisions about which of 
its IT projects will continue to go forward and which ones will be 
slowed down, or even canceled. Staff will be furloughed and some 
positions lost through attrition may not be filled.
    The broad consequences of sequestration cuts across the Government 
could also impact FHA. Sequestration threatens our fragile economy and 
housing market. The financial position of the MMI Fund benefits as the 
housing market and economy improve, but it will also suffer if our 
economy slows.
    So we must continue to work for a fair and balanced solution that 
provides certainty to our Federal agencies and to the American people. 
The budget we recently passed in the Senate provides a path forward 
that balances responsible spending cuts with necessary investments. I 
look forward to working with my colleagues in both the House and Senate 
to enact a responsible budget compromise.
                                closing
    Ms. Galante, Mr. Montoya, both of you serve in important roles as 
we continue to deal with the consequences of the housing crash and 
think through the future of FHA and America's housing finance system. I 
look forward to our discussion today.

    With that, I am delighted to be joined by my colleague, 
Senator Collins, and will turn to her for an opening statement.

                 STATEMENT OF SENATOR SUSAN M. COLLINS

    Senator Collins. Thank you very much, Madam Chairman. Thank 
you for holding this important hearing on the Federal Housing 
Administration and the future of the housing finance market. I 
join you in welcoming Commissioner Galante and Inspector 
General Montoya before the subcommittee this afternoon.
    The administration has made several announcements regarding 
our housing policies and programs. Yet there is much more that 
must be done to stabilize the housing market and to 
reinvigorate private sector participation. HUD faces many 
challenges in balancing the goal of strengthening responsible 
home ownership while minimizing the financial risk to the FHA 
and to the taxpayer.
    Eventually, FHA should play a more limited role, in my 
judgment, in the mortgage market and help encourage the private 
sector to reassert its primacy. Nevertheless, I believe there 
will always be some role for the FHA to play. Since its 
inception, FHA has provided mortgage insurance for more than 41 
million single family home mortgages and 53,000 multifamily 
mortgages.
    FHA continues to partner with current and prospective 
homeowners during these difficult economic times. In addition 
to helping FHA program participants refinance at lower interest 
rates, FHA also assists non-FHA homeowners in refinancing 
untenable mortgages. A financially sound FHA is an essential 
component in the recovery of the housing market. The weakening 
of our housing sector over the past several years has had a 
tremendous impact on families and communities throughout the 
Nation. The housing market is slowly coming back, but a 
sustained recovery is still uncertain.
    The agency's role has dramatically expanded since the 
beginning of this crisis. Prior to the housing collapse, FHA 
accounted for approximately 3 percent of the single family 
housing market, reaching upwards of 21 percent in the year 
2010. I am pleased to hear that HUD's FHA market share 
continues to decline as the housing market recovers and that 
we're now at about 14 percent of market share.
    It is, however, troubling to me that year after year, FHA 
is unable to meet its statutory requirement of maintaining a 2-
percent capital reserve ratio. The President's fiscal year 2014 
request shows that FHA anticipates drawing on its permanent 
indefinite budget authority with Treasury for $943 million 
starting this fiscal year to hold in reserve against expected 
future losses. If FHA does draw funds from Treasury, it will 
mark the first time that it has ever needed to take this 
action.
    While HUD has taken a number of steps since January of this 
year to improve the program, I am concerned about the need to 
draw this level of funding at the end of the fiscal year. This 
is attributed to the poor performance of the HECM loans due to 
borrowers' longevity, house prices declining over recent years, 
as well as a failure to pay taxes and insurance. We need to 
ensure that borrowers, especially seniors, are not taken 
advantage of and are able to make informed decisions regarding 
their mortgages, both because of the impact on them, but also 
the impact on the fund.

                           PREPARED STATEMENT

    These are not easy issues to resolve, but they are 
critically important to our Nation's long-term economic health. 
I remain concerned that we must reform our present housing 
finance programs, and in doing so, we must remain mindful of 
the need to limit the exposure of taxpayers to additional 
financial losses.
    I look forward to working with the chairman, the other 
subcommittee members, and both of you on these important 
issues.
    Thank you.
    [The statement follows:]
             Prepared Statement of Senator Susan M. Collins
    Chairman Murray, thank you for holding this important hearing on 
the Federal Housing Administration (FHA) and the future of the housing 
finance market. I join you in welcoming Commissioner Galante and 
Inspector General Montoya before our subcommittee this morning.
    The Administration has made several announcements regarding 
existing housing programs, yet there is much more that must be done to 
stabilize the housing market and reinvigorate private sector 
participation.
    The Department of Housing and Urban Development (HUD) faces many 
challenges in balancing the goal of strengthening responsible 
homeownership while minimizing the financial risk to FHA and the 
taxpayer. Eventually, FHA should play a more limited role in the 
mortgage market and help encourage the private sector to reassert its 
primacy.
    Since its inception, FHA has provided mortgage insurance for more 
than 41 million single-family home mortgages and 53,000 multifamily 
mortgages.
    FHA continues to partner with current and prospective homeowners 
during these difficult economic times. In addition to helping FHA 
program participants refinance at lower interest rates, FHA also 
assists non-FHA homeowners in refinancing untenable mortgages. A 
financially sound FHA is an essential component in the recovery of the 
housing market.
    The weakening of our housing sector over the past several years has 
had a tremendous impact on families and communities throughout the 
Nation. The housing market is slowly coming back, but a sustained 
recovery is still uncertain.
    The agency's role dramatically expanded since the beginning of the 
housing crisis. Prior to the crisis, FHA accounted for approximately 3 
percent of the single family housing market; reaching upward of 21 
percent in 2010. I am glad to hear that HUD's FHA market share 
continues to decline as the housing market recovers, with just below 14 
percent of the market share.
    It is troubling that year after year, the FHA is unable to meet its 
statutory requirement of maintaining a 2 percent capital reserve ratio. 
The President's fiscal year 2014 request shows that FHA anticipates 
drawing on its permanent indefinite budget authority with the 
Department of the Treasury for $943 million during fiscal year 2013 to 
hold in reserve against expected future losses. If FHA does draw funds 
from Treasury, it will be the first time that it has ever needed to 
take this action. While HUD has taken a number of steps since January 
of this year to improve the program, I am concerned about the need to 
draw this level of funding at the end of the fiscal year. This is 
attributed to the poor performance of the home equity conversion 
mortgage (HECM) loans due to borrowers' longevity, home prices 
declining over recent years, as well as failure to pay taxes and 
insurance.
    We need to ensure that borrowers, especially seniors, are not taken 
advantage of and are able to make informed decisions regarding their 
mortgages.
    These are not easy issues to resolve, but they are critically 
important to our Nation's long-term economic health. I remain concerned 
that we must reform our present housing finance programs. In doing so, 
we must remain mindful to limit taxpayers' exposure to additional 
financial losses.
    I look forward to working with you on these important issues.

    Senator Murray. Thank you very much.
    With that, Ms. Galante, we'll begin with you.

                    STATEMENT OF HON. CAROL GALANTE

    Ms. Galante. Thank you, Chairman Murray and Ranking Member 
Collins. I appreciate the opportunity to testify today on the 
fiscal year 2014 budget proposal.
    Before I begin, I did want to take a moment to echo your 
comments and Secretary Donovan's statement in offering my 
condolences on the passing of Senator Lautenberg. As a Member 
of this body, he was a champion of preserving access to 
affordable housing for all Americans. I join you in mourning 
his passing.
    I also want to thank HUD's Inspector General, David 
Montoya, and his entire staff for their dedication and 
partnership as we work to protect FHA and taxpayers.
    FHA has played a significant role in lessening the severity 
of the financial crisis and contributing to our Nation's 
economic recovery, temporarily increasing its market share to 
ensure stability and preserve access to credit. However, 
playing this role during the crisis was not without an impact 
to our portfolio, requiring decisive action to strengthen FHA.
    The Mutual Mortgage Insurance Fund is already seeing strong 
results from our efforts to improve lender oversight, 
strengthen credit policies, increase premiums, improve loss 
mitigation and asset management, and establish a risk 
management office and portfolio surveillance capability. FHA's 
new books of business are the strongest in agency history.

                             FHA SHORTFALL

    However, due to loans insured during the crisis as well as 
stress caused by the HECM reverse mortgage program, the 2014 
budget projects that FHA capital reserve will need support from 
the Treasury. The shortfall is estimated at $943 million. But, 
as you know, the level of support from Treasury will not be 
known until the end of the fiscal year. Second, this amount 
would be added to over $30 billion FHA already has in reserves.
    The fund's performance has continued to improve, and if 
losses from the HECM program are excluded, our actions and the 
ongoing recovery would leave the capital reserve at positive $4 
billion. We look forward to working with Congress on several 
legislative requests that will further strengthen the fund, 
increasing our ability to hold lenders accountable, improving 
recoveries on defaulted loans, and allowing FHA greater ability 
to respond quickly to risks as they emerge.
    One of these requests, granting FHA the explicit authority 
to make changes to the HECM program via mortgagee letters, is 
crucial. Given the challenges HECM currently faces, we must 
make further changes immediately, both to preserve the program 
and to minimize risk to the fund.
    FHA has also proven to be a critical source of financing 
quality affordable rental homes and healthcare facilities. In 
fiscal year 2012, FHA supported the construction, improvement, 
substantial rehabilitation, or refinance of nearly 234,000 
apartments and more than 91,000 beds in healthcare facilities. 
And while our multifamily and healthcare programs were not 
stressed as severely as the single family portfolio, we have 
nonetheless made substantial changes in our risk management and 
loan review processes, including increasing premiums for the 
first time in 10 years, protecting these programs for the 
future.
    For fiscal year 2014, we have requested $30 billion in 
commitment authority for multifamily and healthcare programs. 
Furthermore, we now estimate that the $25 billion approved for 
fiscal year 2013 will be insufficient to support the current 
level of program activity, including refinancing and 
strengthening our existing portfolio and providing financing 
for important initiatives such as the Rental Assistance 
Demonstration Program.
    Therefore, we are requesting an additional $5 billion in 
commitment authority for the remainder of the fiscal year. 
Without legislative action, we project that we will exhaust our 
current authority by mid August. In fact, this morning, I 
notified this subcommittee and others that as of today, we have 
exhausted 75 percent of our authority for the year.
    Finally, our 2014 budget request continues to support 
transforming the way HUD does business. This means addressing 
both the infrastructure and processes that support our 
operations, ensuring that they are compatible with the 21st 
century financial system. Given the dynamic nature of the 
mortgage market, it is vital that FHA has the ability to assess 
and analyze current market trends, borrowers, and lender data 
for risks.
    Through the FHA Transformation Initiative, we have made 
significant progress in developing and implementing a modern 
information technology environment. However, without dedicated 
and sustained funding, we will not be able to implement or 
maintain these improvements.
    Last, another part of our continued efforts is the 
reorganization and consolidation of the Office of Multifamily 
Housing at headquarters and in our field offices. These 
organizational improvements are being undertaken to ensure that 
even in a constrained budget environment we have an effective 
delivery model for the future.

                           PREPARED STATEMENT

    While the fiscal year 2014 budget is the result of many 
tough choices, it is also an opportunity for FHA to continue to 
support HUD's mission and our Nation's continuing economic 
recovery while effectively managing risk.
    Madam Chairman, thank you for the opportunity to testify 
today. I look forward to your questions.
    Senator Murray. Thank you very much.
    [The statement follows:]
                Prepared Statement of Hon. Carol Galante
    Thank you, Chairman Murray and Ranking Member Collins, for this 
opportunity to discuss how the Department of Housing and Urban 
Development's (HUD's) fiscal year 2014 budget proposal will grow our 
economy from the middle class out--not from the top down--while 
supporting the recovery in our housing market and economy.
    As the President has said, housing is an important part of our 
economic recovery. In 2012, rising home values lifted 1.7 million 
families back above water and created $1.6 trillion in equity. New home 
construction levels are at their highest since before the financial 
crisis and new home purchases are up 12 percent over last year. The 
number of new foreclosure actions has been cut in half since the height 
of the crisis. And the Federal Housing Administration (FHA) has played 
a critical role in ensuring that we remain on the path to a complete 
recovery.
    This budget provides FHA with the ability to assist HUD in meeting 
three goals that are critical to the Agency's mission. Using a variety 
of strategies, it allows us to focus on strengthening the Nation's 
housing market to support the economy while also protecting consumers. 
And, despite the challenging fiscal climate, this budget allows us to 
meet the need for quality, affordable rental homes across the Nation. 
Finally, this budget continues our efforts to transform the way HUD 
does business--creating a more modern, efficient, and responsive 
agency.
 goal 1: strengthen the nation's housing market to bolster the economy 
                         and protect consumers
    This Administration entered office confronting the worst economic 
crisis since the Great Depression--with mortgages sold to people who 
couldn't afford or understand them, while banks packaged them into 
complex securities on which they placed huge bets. And while this 
crisis was largely market driven, the American people have turned to 
Congress and the Administration for leadership and action in righting 
our Nation's housing market. HUD remains firmly committed to working 
together with communities and individuals to cope with the 
unprecedented challenges facing the housing market.
Responding to the Market Disruptions and Serving Underserved 
        Populations
    The Federal Housing Administration (FHA), along with the Government 
National Mortgage Association (GNMA), continues to have a significant 
impact on the Nation's economic recovery. The activities of the Federal 
Government are critical to both supporting the housing market in the 
short term and providing access to homeownership opportunities over the 
long term, and doing both in a way that minimizes risks to taxpayers.
    For fiscal year 2014, HUD is requesting $400 billion in loan 
commitment authority for the Mutual Mortgage Insurance Fund, which will 
provide an estimated 1.2 million single-family mortgages--at a 
projected $199.3 billion in loan volume for forward and reverse 
mortgage loans as well as loans insured under the FHA Short Refinance 
program for borrowers in negative equity positions. HUD is also 
requesting $30 billion in loan guarantee authority for the General and 
Special Risk Insurance Fund, which will provide an estimated 273,000 
units in multifamily housing properties and an estimated 75,700 beds in 
healthcare facilities. The need for this investment is clear as FHA 
continues to play an important countercyclical role that has offered 
stability and liquidity throughout the recession. While a recovery of 
the housing market is currently underway, FHA continues to act as a 
crucial stabilizing element in the market, by assuring ongoing access 
to credit for qualified first-time, low-wealth or otherwise underserved 
borrowers. However, FHA's expanded role is and should be temporary.
    FHA's share of the single family mortgage market (purchase and 
refinance transactions) has gone from a low of 3.1 percent of loan 
originations in 2005, up to a peak of 21.1 percent in 2010, and more 
recently down to 13.9 percent in the 3rd quarter of 2012 (U.S. Housing 
Market Conditions Report, 3rd Quarter 2012). In fact, the number of FHA 
single family loan endorsements by loan count, has declined to levels 
comparable to those seen in fiscal years 2002 and 2003, when FHA's 
market share was lower than it is today, indicating that FHA's current 
market share is primarily due to a substantial decrease in the size of 
the total mortgage market rather than exceptionally high FHA loan 
volumes. As the market continues to recover and private capital returns 
at more normal levels, FHA's role will naturally recede and FHA has 
demonstrated that it is committed to policies that facilitate this 
return. However, during this crisis, access to FHA insured financing 
has been critical to bolstering the housing market and providing access 
to credit to creditworthy, low-wealth borrowers.

    Figure 1. FHA Market Share as a Percent of Total Market

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    As has been true throughout its history, FHA is particularly 
important to borrowers that the conventional market does not adequately 
serve, including qualified borrowers who would otherwise be shut out of 
the mortgage market. According to the latest Home Mortgage Disclosure 
Act (HMDA) data, half of all African Americans who purchased a home in 
2011, and 49 percent of Hispanics, did so with FHA insured financing. 
Seventy-eight percent of the loans insured by FHA go to first time 
homebuyers.
FHA Single Family Programs
            Redoubling Efforts To Keep Homeowners in Their Homes
    While there is work still to be done, HUD is proud of the progress 
this administration has made in tackling ongoing foreclosure 
challenges. Between April 2009 and February 2013, more than 6.4 million 
foreclosure prevention actions were taken--including nearly 1.7 million 
FHA loss mitigation and early delinquency interventions.
    As part of the Administration's commitment to help responsible 
homeowners stay in their homes, we have actively sought to use our 
current programs and authorities to make homeownership sustainable for 
millions of American families. Examples of our efforts include:
  --FHA Streamline Refinance.--An option that allows borrowers with 
        FHA-insured loans who are current on their mortgage to 
        refinance into a new FHA-insured loan at today's low interest 
        rates without requiring additional underwriting, permitting 
        these borrowers to reduce their mortgage payments. This program 
        benefits current FHA borrowers--particularly those whose loan 
        value may exceed the current value of their home--and, by 
        lowering a borrower's payment, also reduces risk to FHA. And, 
        because we see potential for more widespread use of this 
        product, FHA made changes to the way in which streamline 
        refinance loans are displayed in the Neighborhood Watch Early 
        Warning System (Neighborhood Watch) to encourage lenders to 
        offer this product more widely to homeowners with FHA-insured 
        mortgages, and offered reduced premiums for borrowers who could 
        benefit most from a Streamline Refinance.
  --Changes to FHA's Loss Mitigation Waterfall.--A mortgagee letter 
        published on November 16, 2012, outlined changes to FHA's loss 
        mitigation home retention options. One of the key elements of 
        this update was moving FHA's Home Affordable Modification 
        Program (HAMP) product up in FHA's loss mitigation waterfall so 
        servicers could more quickly offer deeper payment relief to 
        struggling FHA borrowers, resulting in an increase in the 
        number of borrowers being able to retain their homes.
  --Housing Counseling.--In fiscal year 2014, HUD is requesting $55 
        million in Housing Counseling Assistance to improve access to 
        quality affordable housing, expand homeownership opportunities, 
        and preserve homeownership, all of which are especially 
        critical in today's economic climate. With this funding, HUD 
        estimates that 2,650 HUD-approved counseling agencies, 
        employing an estimated 8,000 housing counselors, will assist a 
        total of 2.5 million renters and owners. In 2012, 2,410 HUD-
        approved housing counseling agencies, with grant funds from HUD 
        and other funding sources, assisted over 1.9 million renters 
        and owners. HUD-approved counselors help clients learn about 
        purchasing or refinancing a home; rental housing options; 
        reverse mortgages for seniors; foreclosure prevention; loss 
        mitigation; preventing evictions and homelessness; and moving 
        from homelessness to a more stable housing situation.
    HUD's new Office of Housing Counseling has several initiatives to 
ensure borrowers know their rights and have access to the remedies that 
will allow them to stay in their homes. While HUD approved housing 
counselors serve all homeowners, regardless of the type of loan, 
effective loss mitigation for FHA borrowers also protects the Mutual 
Mortgage Insurance (MMI) Fund. Therefore, HUD has worked closely with 
interested States to determine effective ways in which funds from the 
National Mortgage Servicing Settlement can be used to expand housing 
counseling resources, resulting in more than $300 million in settlement 
funds committed to housing counseling or legal services for affected 
borrowers. HUD-approved housing counseling agencies provided 
foreclosure prevention services to 774,000 families in fiscal year 
2012.
    In addition, FHA and the Office of Housing Counseling are exploring 
ways to further integrate housing counseling into the home purchase 
process, as well as continuing efforts around loss mitigation, offering 
distressed FHA borrowers additional resources with which to assess 
their options and make decisions appropriate to their situation.
  --Short Refinance Option.--In 2010, FHA made available an option that 
        offers underwater non-FHA borrowers, who are current on their 
        existing mortgage and whose lenders agree to write off at least 
        10 percent of the unpaid principal balance of the first 
        mortgage, the opportunity to refinance into a new FHA-insured 
        mortgage. FHA made enhancements to the program in March of last 
        year and announced an extension to the expiration date of the 
        program in order to increase the number of borrowers who will 
        benefit from this initiative.
            Strengthening FHA and Paving the Way for Private Capital To 
                    Return
    The President's budget shows that FHA, while still under stress 
from legacy loans, has made significant progress and is on a sound 
fiscal path moving forward. Like nearly all mortgage market 
institutions, FHA sustained significant losses due to the precipitous 
fall in the housing market and home prices and is putting additional 
funds aside this year to cover those legacy losses. Moreover, like most 
other market participants, recent and future books of mortgage business 
are expected to bring healthy gains and perform well.
    Throughout the economic crisis, as FHA faced fiscal challenges, 
this administration took swift and effective action to protect the FHA 
and the American taxpayer alike, as FHA continued to fulfill its dual 
mission of supporting the housing market during tough times and 
providing access to homeownership for underserved populations. Of the 
changes made since 2009, FHA's lender oversight and credit policies 
have yielded substantial improvements in the quality of new loans 
endorsed by FHA, and premium increases have priced appropriately for 
risk. But significant opportunity remains to reduce the impact on the 
fund of poorly performing legacy loans severely impacted by the 
recession, and to provide greater assistance for distressed borrowers 
as they seek to recover and find meaningful assistance in dealing with 
their delinquent loans. With a majority of FHA's projected losses 
attributable to loans insured from 2007-2009, FHA will take several 
additional steps to maximize recovery in the areas of loss mitigation 
and asset management.
              Counterparty Risk Management and Lender Enforcement
    One of the first things this administration did upon taking office 
was to take strong actions to improve FHA's monitoring and oversight of 
lenders. This has included substantial improvements to risk analysis 
systems and procedures, and policy changes to focus resources on the 
areas of FHA's business which pose the greatest potential risk to the 
MMI Fund. These efforts have resulted in lenders being withdrawn from 
FHA programs, improvements in lender compliance with FHA requirements, 
and a number of settlements with lenders and servicers for violations 
of FHA origination or servicing requirements.
    Yet, it remains important that we continue to clarify and refine 
the rules of the road for FHA lenders. That is why last month FHA 
issued a mortgagee letter implementing a Lender Insurance (LI) Lender 
Indemnification Final Rule which was published in January 2012. This 
guidance establishes better and more consistent monitoring of LI 
lenders and establishes clearer parameters upon which HUD will require 
indemnification for loans originated by these institutions.
    Additionally, we have been concerned of late with a number of Web-
based and print advertisements that proclaim the supposed ease of 
obtaining an FHA-insured loan following a foreclosure. While FHA has 
taken a number of proactive steps in the past few years to clarify its 
requirements regarding lender advertising and to enforce those 
requirements aggressively, we determined in last year that it was 
necessary to address the issue of post-foreclosure advertising 
specifically. Therefore, on January 25, 2013 FHA issued a reminder to 
its industry partners that advertisements that imply that little or no 
qualification criteria are necessary to obtain an FHA loan are 
unacceptable and that FHA will not hesitate to take action within its 
authority to enforce its requirements related to lender advertising, 
including sanctions by HUD's Mortgagee Review Board and/or referral to 
the HUD Inspector General or the Consumer Financial Protection Bureau 
(CFPB).
              Credit Policy
    We have also worked to strengthen our credit policies for FHA 
borrowers. First and foremost, FHA implemented Congress's elimination 
of seller-funded down payment assistance programs which cost the MMI 
Fund more than $15 billion in economic value. Further, we enacted 
increased down payment requirements for borrowers with credit scores 
below 580. The long-term positive impact of these two credit policy 
changes cannot be overstated. The 2005-2008 vintages, accounting for 
less than 15 percent of total originations over the last 30 years, are 
projected by the Actuary to contribute more than one-third of total 
credit losses of the fund. Loans with credit scores below 580 and/or 
seller-funded down payment assistance will have accounted for 44 
percent of those losses. Additionally, we will continue work on 
finalizing regulations to reduce the amount of allowable seller 
concessions that increase risks to FHA arising from inflated 
appraisals.
    In late 2012, FHA announced several additional policy changes which 
continue its work to strengthen credit policy, support the ongoing 
recovery and maintain access to mortgage financing for credit worthy 
borrowers while also taking steps to recede FHA's total market share. 
These steps include requiring manual underwriting for borrowers with 
credit scores below 620 and debt-to-income (DTI) ratios over 43 
percent, enhancements to FHA's TOTAL Scorecard, and a proposed increase 
in the required down payment for borrowers seeking loans in excess of 
$625,500. Taken together with all the other measures outlined above as 
well as those detailed in Appendix A of FHA's Annual Report to 
Congress, these steps will ensure that home buyers using FHA-insured 
financing are capable of meeting their mortgage obligations and will 
not put undue stress on the fund.
              Increased Revenue
    In addition to the improvements made to the quality of new 
endorsements, we have also made the difficult choice to increase 
mortgage insurance premiums for FHA-insured loans multiple times in the 
past 4 years. Since 2009, FHA has increased premiums five times--the 
most recent increase effective April 1, 2013. Combined, the premium 
increases made since 2009 have yielded more than $10 billion in 
additional economic value for the fund to date. These increases have 
not been undertaken lightly, and FHA has been careful to balance 
changes to pricing to improve the outlook of the fund with its 
countercyclical role of providing liquidity and access to credit in the 
midst of the recent crisis and ongoing recovery.
    Additionally, effective beginning with case numbers assigned on 
June 3, 2013, FHA will cease a policy of canceling required mortgage 
insurance premiums (MIPs) on loans for which the outstanding principal 
balance reaches less than 78 percent of the original principal balance. 
Under that policy, FHA remained responsible for insuring 100 percent of 
the unpaid principal balance of a loan for the entire life of the loan, 
a period often extending far beyond the cessation of MIP payments. As 
written, the timing of MIP cancellation was directly tied to the 
contract mortgage rate, not to the actual loan loan-to-value ratio 
(LTV). That policy, which was reversed in a mortgagee letter published 
on January 31, 2013, was put in place at a time when it was assumed 
that home price values would not decline, but today we know that LTV 
measured by appraised value in a declining market can mean that actual 
LTVs are far higher than amortized mortgage LTV, resulting in higher 
losses for FHA on defaulted loans. Analyses conducted by FHA's Office 
of Risk Management projects lost revenue of approximately $10 billion 
in the 2010-2012 vintages as a result of the current cancellation 
policy. The same analyses also suggest that 10-12 percent of all claims 
losses will occur after MIP cancellation. Therefore, beginning in June, 
FHA plans to once again collect premiums based upon the unpaid 
principal balance of FHA loans for the entire period during which they 
are insured, permitting FHA to retain significant revenue that is 
currently being forfeited prematurely.
              Loss Mitigation and Asset Management
    The Actuary projects nearly $60 billion in claims costs for FHA 
from seriously delinquent loans that will go to claim by the end of 
fiscal year 2014, largely arising from loans insured between 2007 and 
2009. As a result, reducing the severity of losses derived from these 
loans will exert a demonstrable positive impact to Fund performance 
over the next few years. Throughout the past fiscal year, FHA has been 
executing on an overall asset management strategy aimed at ramping up 
real estate owned (REO) alternatives. REO alternatives (primarily short 
sales) comprised about 15-20 percent of total dispositions since 2010, 
yielding average loss severities about 20 percent lower than REO. In 
recent months, as noted, FHA also unveiled its Distressed Asset 
Stabilization Program (DASP), another REO alternative that improves 
Fund performance. These and other actions have had a measurable effect, 
as loss severities have already fallen by 9 percent in the last year. A 
reduction in loss severities will further improve fund performance. 
And, compared to March 2012, serious delinquencies are down in March 
2013, with non-seasonally adjusted serious delinquencies dropping below 
9 percent for the first time in over a year, showing that FHA and the 
market have made some progress in clearing the backlog of seriously 
delinquent loans previously withheld from a final disposition.
    FHA expects further gains on this front through a number of 
initiatives:
  --Streamlining of the FHA Short-Sale Policy.--Although FHA is deeply 
        committed to providing loss mitigation alternatives to 
        borrowers which permit them to retain their homes, home 
        retention is simply not an option for some borrowers. For these 
        borrowers, pre-foreclosure sales (short-sales) offer an 
        opportunity to transition out of their homes. This enables both 
        FHA and the borrowers to avoid the costs and damages of the 
        foreclosure process. This month, FHA will introduce a 
        streamlined pre-foreclosure sale policy which removes certain 
        barriers for borrowers in obtaining a short sale on an FHA-
        insured mortgage. This change is expected to increase the 
        number of defaulted loans that end in short sales rather than 
        in foreclosures. Because losses from short-sales are 
        substantially lower than from the traditional FHA REO process, 
        the shift of greater numbers of distressed homeowners to short-
        sale dispositions rather than foreclosures is anticipated to 
        yield better results for the MMI Fund while allowing distressed 
        borrowers to start anew without having to go through the 
        difficult and costly foreclosure process.
  --Claim Without Conveyance Pilot Program.--FHA is expanding a pilot 
        in which properties secured by non-performing FHA-insured loans 
        are offered for sale by the lender who has completed the 
        foreclosure process. At a reserve price slightly below the 
        outstanding unpaid principal balance of the loan, the 
        properties are sold to third party purchasers without ever 
        being conveyed to FHA. This method of disposing of these 
        properties is expected to yield lower losses for the MMI Fund 
        than selling them through FHA's normal REO disposition process, 
        as carrying costs associated with preserving, managing, and 
        marketing an REO property are eliminated.
  --Proactive Strategies To Further Improve Recoveries.-- In addition 
        to the policy and programmatic changes outlined above, FHA will 
        also take several innovative and proactive steps to increase 
        utilization of loss mitigation options and reduce unnecessary 
        asset disposition losses. First, beginning in 2013, FHA will 
        launch a large-scale proactive marketing campaign to promote 
        modification and short-sale strategies for delinquent 
        borrowers. This effort is expected to increase utilization of 
        these programs, which will permit more borrowers to become 
        aware of and take advantage of these opportunities, while 
        reducing foreclosures and decreasing associated losses for FHA. 
        In addition, FHA will also pursue more creative strategies to 
        dispose of REO properties in geographies where traditional 
        asset disposition methods yield net negative recoveries for 
        FHA. This approach is anticipated to both save money for FHA on 
        unnecessary losses as well as contribute to community 
        stabilization initiatives in cities hit hard by the recession.
    Due to these changes, resulting in higher quality of loans and 
reduced loss severities, and combined with the large volume of current 
loans, we project FHA will generate approximately $18 billion in 
receipts during fiscal year 2013. This includes $3 billion generated 
from the new premium increase that went into effect April 1, 2013, and 
reversal of a policy that caused FHA to forfeit collection of MIP after 
a loan reached 78 percent of its original principal balance. Further, 
as a result of these same changes, the fiscal year 2014 budget projects 
FHA receipts of almost $13 billion, even as FHA market share and loan 
volume continue to be reduced.
            Fiscal Year 2013 MMI Fund Budget Re-Estimate
    The President's budget forecasts that the FHA MMI Fund, which 
provides the fiscal capital to support FHA's single family and reverse 
mortgage guarantees, will use $943 million of its mandatory 
appropriation authority to supplement its reserves at the end of fiscal 
year 2013. The MMI Fund currently has approximately $32 billion in cash 
available to pay claims, so this is not a cash on hand problem; it is 
one of setting aside the right size of loan loss reserves. The $943 
million figure is based on an annual re-estimate of the reserves FHA 
will need to hold as of September 30, 2013, for the payment of expected 
losses over the next 30 years on its portfolio of guaranteed loans as 
of last September, based upon Federal Credit Reform Act (FCRA) scoring. 
This re-estimate is done as part of the development of the President's 
budget.
    The potential for a mandatory appropriation to the MMI Fund is 
largely due to the existing reverse mortgage (Home Equity Conversion 
Mortgage or HECM) portfolio. This product, particularly as it has been 
structured to date, is sensitive to borrower longevity, home prices, 
and economic conditions. Lower than anticipated home price appreciation 
substantially affected the expected performance of the portfolio. 
Further, changes to the ways in which borrowers utilize the HECM 
product have shifted the risk profile of the program.
    Originally designed to be used like an annuity, in recent years 
market circumstances and lender preferences have shifted greater 
numbers of borrowers to take full draws via the Fixed Rate Standard 
product. Thus, borrowers are taking all of the funds available to them 
up front and often do not have the resources necessary in later years 
to pay property taxes and insurance, thereby triggering a default on 
the loan. Due to these changes in usage and performance, the budget 
estimates that the use of the HECM program results in a negative value 
of $5.248 billion and a disproportionately negative impact to the fund.
    FHA will take immediate action under its limited authorities to 
better align the HECM program with its objective of enabling seniors to 
age-in-place. These changes, which will significantly impact consumer 
use of the program, will protect FHA from losses and reduce the 
likelihood of borrower defaults.
    In administrative guidance dated January 30, 2013, FHA consolidated 
the Fixed Rate Standard program with the Fixed Rate HECM Saver product, 
which will result in a reduction of the maximum amount of funds 
available to a HECM borrower.
    Additionally, in an effort to reduce losses associated with the 
conveyance and disposition of properties mortgaged with an HECM, FHA 
will issue new incentives for estate executors of HECM borrowers to 
dispose of properties themselves rather than conveying them to HUD. 
Executors are permitted to either sell such properties or convey them 
to HUD. Reversing the historical trend, over the past few years, larger 
numbers of executors have been choosing to convey these properties to 
FHA rather than sell them, adding costs and reducing recoveries for 
FHA. By incentivizing the sale of properties by executors, FHA is able 
to avoid property management, maintenance, and marketing costs 
associated with the REO disposition process, thereby reducing losses to 
the fund on these properties.
    Whether there will be an actual need for a mandatory appropriation 
from the Treasury General Fund to the MMI fund will not be determined 
until September 2013, and will be based on FHA's realized revenues and 
any other developments through the end of the fiscal year. Notably, any 
mandatory appropriation to FHA would not involve approval from 
Congress, as all Federal loan programs have this standing authority. As 
we consider this potential mandatory appropriation, we must also 
acknowledge that FHA played a crucial, countercyclical role in bringing 
the housing market from the brink of collapse to a place where it is 
positive and growing again. This task did not come without its stresses 
which we are experiencing today. Nevertheless, FHA will remain vigilant 
in implementing the policies and practices discussed here to protect 
the fund.
Legislative Requests To Support FHA Single Family Programs
    Since 2010, Congress has moved in important ways to strengthen and 
protect FHA. Indeed, were it not for the flexibility granted by 
Congress to FHA in setting mortgage insurance premiums, the current 
economic value of the MMI Fund would be more than $10 billion lower 
than it is today. And the work Congress has done to establish FHA's 
first ever Office of Risk Management has been instrumental to our 
improved ability to identify risks in FHA programs and take action to 
mitigate them. We appreciate the commitment to making FHA stronger and 
more secure over the long term.
    We have several legislative requests that, when coupled with 
actions taken previously and the support provided by this budget, will 
allow us to further strengthen the FHA fund and the larger housing 
market. The proposals outlined below will enhance FHA's ability to hold 
lenders accountable for non-compliance with FHA policy, allow FHA to 
increase recoveries on defaulted loans, and provide greater flexibility 
for FHA to make changes to policies and procedures as emerging needs 
and trends are identified. As a result, FHA will better be able to 
avoid unnecessary losses before they occur.
  --Indemnification Authority for Direct Endorsement Lenders.--This 
        provision, which FHA has been seeking since 2010, would allow 
        FHA to seek indemnification from Direct Endorsement lenders, 
        which represent 70 percent of all FHA approved lenders. 
        Currently FHA only has authority to require indemnification for 
        lenders with Lender Insurance (LI) approval. In granting this 
        authority, FHA will be able to obtain indemnification from all 
        of its approved lenders for loans that do not comply with its 
        guidelines.
  --Authority To Terminate Origination and Underwriting Approval.--This 
        legislation would give FHA enhanced ability to review lender 
        performance and, if a lender is found to have an excessive rate 
        of early defaults or claims, would provide greater flexibility 
        in terminating the approval of the lender to originate or 
        underwrite single family mortgages for FHA insurance. FHA has 
        been seeking this authority since 2010.
  --Revised Compare Ratio Requirement.--This provision would revise the 
        statute governing the Credit Watch Termination Initiative to 
        provide greater flexibility in establishing the metric by which 
        FHA compares lender performance so that it more effectively 
        captures the true performance of a lender during all market 
        conditions, minimizing further poor performance by FHA lenders 
        while reducing uncertainty for them. Specifically, this 
        legislation would allow the Secretary to compare the rate of 
        early defaults and claims for insured single family mortgage 
        loans originated or underwritten by a lender with those same 
        rates for other lenders on any basis the Secretary determines 
        appropriate, such as geographic area, varying underwriting 
        standards, or populations served. Further, the provision would 
        permit the Secretary to implement such comparisons via 
        regulations, notice, or mortgagee letter. This will allow FHA 
        to tailor the compare ratio so it provides meaningful 
        comparisons of lenders in varying market conditions, providing 
        greater clarity for lenders and a more refined understanding of 
        their performance for FHA.
  --Authority To Transfer Servicing.--In order to facilitate more 
        effective loss mitigation, this change would give FHA the 
        authority to require any of the following actions when a 
        servicer is at or below a servicer tier ranking score (TRS) of 
        III, or when the Secretary deems the action necessary to 
        protect the interests of the MMI Fund: (1) transfer servicing 
        from the current servicer to a specialty servicer designated by 
        FHA; (2) require a servicer to enter into a sub-servicing 
        arrangement with an entity identified by FHA; and/or (3) 
        require a servicer to engage a third-party contractor to assist 
        in some aspect of loss mitigation (e.g. borrower outreach). 
        Such authority would permit FHA to better avoid losses arising 
        from poor servicing of FHA-insured loans, yielding better 
        results for both borrowers and FHA.
  --Authority To Structurally Change the HECM Program Through Mortgagee 
        Letter.--While the HECM product is an important tool to permit 
        seniors to age in place, the challenges outlined previously 
        necessitate immediate changes to the program. To make such 
        changes in a timely fashion and preserve the program for 
        seniors, FHA is seeking statutory authority to temporarily make 
        changes to the HECM program via mortgagee letter while formal 
        rule making is simultaneously in progress. Specifically, FHA 
        would make the following changes via mortgagee letter:
    --Limit the amount of the allowable draw;
    --Mandate the use of escrow accounts to ensure continued and timely 
            payment of property charges including taxes and insurance, 
            and;
    --Require the use of a financial assessment as part of the loan 
            origination process to ensure the appropriateness of HECM 
            products for potential borrowers.
    These changes will enable FHA to ensure that new HECM originations 
meet the needs of the target population and reduce risks to the MMI 
Fund. Absent ability to make these structural changes, later this 
fiscal year, FHA will have to take more dramatic action to ensure that 
new HECM originations are actuarially sound.
    HECM Non-Borrowing Spouse.--The intent of the HECM program is to 
provide an age-in-place option for senior citizen homeowners. However, 
from an operational standpoint, those homeowners must be party to the 
reverse mortgage for HUD to manage an actuarially sound program. 
Currently, if a mortgagor dies and no other HECM mortgagor continues to 
reside in the home, the loan becomes due and payable. The Department 
believes that in order to benefit from the HECM loan, a party must be 
eligible under the terms of the HECM, including the requirement that 
one be aged 62 or older and also have legal claim to the property. In 
order to clarify the responsibilities of non-borrowing spouses under 
the HECM program, HUD is proposing a general provision in the fiscal 
year 2014 budget that amends the National Housing Act to clarify that 
the HECM becomes due and payable upon the death of the mortgagor spouse 
in order to avoid future misunderstanding. The proposed amendment would 
make clear that HUD's longstanding regulations--in effect since the 
beginning of the program--comport with Congress' original intent.
    goal 2: meet the need for quality, affordable rental homes and 
                         healthcare facilities
    At a time when more than one-third of all American families rent 
their homes and over 8.5 million unassisted families with very low 
incomes spend more than 50 percent of their income on rent and/or live 
in severely inadequate conditions, it is more important than ever to 
provide a sufficient supply of affordable rental homes for families of 
modest means--particularly since, in many communities, affordable 
rental housing does not exist without public support. Compounded by an 
aging population and increasing healthcare costs, strong support for 
quality, accessible healthcare is also an essential component in 
achieving the Department's mission of strong, sustainable, inclusive 
communities and quality, affordable housing and services for all 
Americans.
Office of Multifamily Housing Programs
            Reducing Administrative Burdens and Increasing Efficiency
    This budget recognizes the need to simplify, align, and reform 
programs to reduce administration burdens and increase efficiency 
across programs. The Office of Multifamily Housing is beginning to 
realize savings in salaries and expenses as a result of several major 
initiatives.
  --Breaking Ground.--Completed in mid-fiscal year 2012, Breaking 
        Ground was an initiative in Multifamily Housing Development to 
        reduce backlogs, improve timeframes, and create an early 
        warning system that allows for more effective risk management 
        by creating extensive tools to monitor and access credit for 
        multifamily insured loans. These tools include a stronger 
        credit review of borrowers; an early warning system that 
        targets loans early in the process that do not meet FHA 
        underwriting criteria; and a dashboard monitoring tool to track 
        accountability of field offices; and establishment of a queue 
        in order to more efficiently manage workload and provide 
        greater transparency to lenders.
    Adopting this approach has produced positive results. Offices that 
had large application backlogs prior to Breaking Ground have reported 
processing efficiency improvements, methodically clearing out older 
applications--the number of applications in process for over 90 days 
dropped from 191 to 50 in just 7 months. In addition, offices that 
began Breaking Ground without a large backlog have begun to meet 
aggressive application processing time cycles. The Department will 
continue to track these metrics and looks forward to reporting on these 
results.
  --Sustaining Our Investments.--The Sustaining Our Investments 
        initiative, which was fully implemented last month, has 
        resulted in an overhaul of the processes used to manage the 
        portfolio of the Office of Multifamily Asset Management. The 
        initiative focuses on Risk Based Management--allowing project 
        managers at both the headquarters and field level to focus day-
        to-day operations on managing at-risk loans in the portfolio. 
        Risk-based reports keyed on financial and physical risk 
        triggers direct project managers to act early on potential 
        problems with particular assets. The first step in this 
        initiative was to complete a full ranking of FHA's entire 
        multifamily market rate portfolio to better assess and address 
        potential risk factors. The ranking of the non-insured 
        portfolio is now underway.
  --Loan Committee.--FHA Multifamily has also implemented a new loan 
        committee approval process, aligning Hub and Program Center 
        commitment authority and practice to ensure consistency in 
        underwriting throughout the regional offices, as well as to 
        provide a platform to share best practices. Loan committees at 
        the hub and national levels provide oversight for high-risk 
        transactions in the multifamily insurance program, based on 
        loan size and a project's number of units. Loan committee 
        approval processes are standard practice in the lending 
        community and are an important tool to prudently manage credit 
        risks and ensure the integrity and stability of the General and 
        Special Risk Insurance (GI/SRI) insurance fund. The Loan 
        Committee has also proven to be an effective tool for 
        increasing communication and a more consistent FHA platform.
            Adjusting Premiums To Properly Price for Risk
    Given the unprecedented increase in the number and dollar volume of 
loans insured under the GI/SRI, particularly with respect to ``market 
rate\1\'' loans, in the President's fiscal year 2013 budget proposal, 
the Department announced proposed premium increases for programs in the 
GI/SRI. Implemented on October 1, 2012, this was the first premium 
increase in 10 years for these programs.
---------------------------------------------------------------------------
    \1\ Generally, market rate housing covers a range of rental housing 
opportunities. In the FHA portfolio, market rate housing is generally 
affordable to those at approximately 80 percent of area median income.
---------------------------------------------------------------------------
    GI/SRI funds provide financing for the FHA multifamily and 
healthcare loan guarantee programs and several very small specialized 
loan products. This account also continues to hold a sizable portfolio 
of single family loan guarantees (HECM, condominium, and rehabilitation 
loans) insured prior to fiscal year 2009 when responsibility for new 
lending under these programs was transferred to the Mutual Mortgage 
Insurance Fund.
    In contrast, premiums for single family programs situated in FHA 
Mutual Mortgage Insurance (MMI Fund) have been increased four times 
since 2010. As with the premium increases for MMI programs, higher 
premiums for market rate loans originated under the GI/SRI funds ensure 
that FHA products are priced appropriately to compensate for FHA's 
risk, consistent with current market conditions. This premium change 
should also have the indirect benefit of encouraging the return of 
private capital to the Nation's mortgage markets.
    Going forward, FHA will continue to examine its business models and 
practices, with an eye toward continuing to improve its risk management 
capabilities and operational efficiencies while expediting processing 
and approval timelines.
            Rebuilding Our Nation's Affordable Housing Stock
    Over the last 75 years, the Federal Government has invested 
billions of dollars in the development and maintenance of public and 
multifamily housing, which serve as crucial resources for some of our 
country's most vulnerable families. Through its mortgage insurance 
programs, over just the past 18 months, FHA facilitated lending of $4 
billion for new construction and substantial rehabilitation of over 
40,000 apartment units. FHA insured over $11 billion of mortgages that 
supported improvements and moderate rehabilitation of more than 150,000 
units of multifamily housing over the same period.
    Despite this sizable Federal investment and the great demand for 
deeply affordable rental housing, we continue to see a decline in the 
number of available affordable housing units. Unlike other forms of 
assisted housing that serve very similar populations, the public 
housing stock is nearly fully reliant on Federal appropriations from 
the Capital Fund to make capital repairs. Funding and regulatory 
constraints have impaired the ability for these local and State 
entities to keep up with needed life-cycle improvements. The most 
recent capital needs study of the public housing stock, completed in 
2010, estimated the backlog of unmet need at approximately $26 billion, 
or $23,365 per unit. Available funding is vastly insufficient to meet 
accruing needs of approximately $3 billion per year. Under the strain 
of this backlog, and without financing tools commonly available to 
other forms of affordable housing, the public housing inventory loses 
an average of 10,000 units annually through demolitions or 
dispositions. Through FHA and other programs, HUD is taking steps to 
address this shrinking inventory.
              Rental Assistance Demonstration
    In addition to the public housing stock, the Rental Assistance 
Demonstration (RAD) program targets certain ``at-risk'' HUD legacy 
programs. The 24,000 units assisted under section 8 Moderate 
Rehabilitation (MR) are limited to short-term renewals and constrained 
rent levels that inhibit the recapitalization of the properties. The 
approximately 21,000 units assisted under Rent Supplement (RS) and 
Rental Assistance Program (RAP) have no ability to retain long-term 
project-based assistance beyond the current contract term. As a result, 
as their contracts expire, we can no longer depend on these projects to 
be available as affordable housing assets.
    Conversion to long-term section 8 rental assistance, as permitted 
under RAD, is essential to preserving these scarce affordable housing 
assets and protecting the investment of taxpayer dollars these programs 
represent. Long-term section 8 rental assistance allows for State and 
local entities to leverage sources of private and public capital to 
rehabilitate their properties. While the Department expects and 
continues to process public housing conversions of assistance without 
additional subsidy, HUD requests $10 million in fiscal year 2014 for 
the incremental subsidy costs of converting assistance under RAD for 
very limited purposes. Such funding will be targeted only to public 
housing projects that are: (1) not feasible to convert at current 
funding levels; and (2) located in high-poverty neighborhoods, 
including designated Promise Zones, where the Administration is 
supporting comprehensive revitalization efforts. The Department 
estimates that the $10 million in incremental subsidies will support 
the conversion and redevelopment of approximately 3,300 public housing 
units that would not otherwise be feasible to convert and sufficiently 
stabilize over the long-term, while helping to increase private 
investment in the targeted projects and surrounding neighborhoods.
    In addition to the funding request, each of the legislative 
requests in the 2014 budget for RAD are designed to allow for maximum 
participation by those public housing agencies (PHAs) and owners whose 
current funding levels are sufficient for conversion. In the first 
component of RAD, an increase in the 60,000 unit cap to 150,000 units, 
and the exclusion of section 8 MR properties from the cap will both 
allow for a greater portion of both the public housing and MR stock 
that can convert at no cost to the Federal Government to participate in 
the demonstration. It is expected that approximately 40 percent of the 
transactions conducted through the RAD program will leverage FHA 
insured financing, actually contributing to the generation of 
offsetting negative subsidy receipts for the Government.
            Legislative Requests To Support Multifamily Housing
    Nearly a third of the Nation's renters, more than 20 million 
households, live in small, unsubsidized apartment buildings. These 5- 
to 49-unit properties tend to be owned by small businesses and are 
typically more affordable to low and moderate income families. These 
properties are at risk of continued disinvestment as small building 
owners are less likely than other multifamily property owners to be 
able to secure financing for repairs and improvements. Small properties 
are less likely to have mortgage financing and just 14 percent of all 
fiscal year 2010 FHA-insured properties were for projects with fewer 
than 50 units.
    The fiscal year 2014 budget includes a legislative provision to 
support small building finance, and to strengthen the Risk Share 
program as a rental finance tool, seeks congressional authority for 
Ginnie Mae to guarantee securities containing FHA multifamily Risk 
Share loans, thereby increasing liquidity and decreasing cost of 
capital. This proposal would apply to both State and local Housing 
Finance Agency Risk Share lenders under section 542(c) and new Risk 
Share lenders under section 542(b). The proposal would also amend 
section 542(b) of the statute to allow for flexibility in how 
affordability is determined in order to make it a more effective tool 
to recapitalize existing naturally affordable 5-49 unit rental 
properties.
    Section 542(c) HFA Risk Share.--The extension of Ginnie Mae 
securitization to the 542(c) Risk Share program would improve HFAs' 
ability to finance affordable rental housing that serves some of the 
poorest and most vulnerable Americans, without requiring any Federal 
budgetary appropriation.
    Section 542(b) Risk Share and Small Building Finance.--The 542(b) 
Risk Share authorizing statute provides HUD with significant 
flexibility to take on risk-share partners. HUD plans to partner with 
mission-driven lenders to make loans on small multifamily rental 
buildings on a 50/50 risk share basis with HUD. In order for this 
program to work for small multifamily lending, two legislative changes 
are required. Access to Ginnie Mae guarantees for small building risk-
share lenders combined with flexibility on the statutorily imposed risk 
share affordability standard which otherwise requires ongoing rent and 
income restrictions will allow us to use this tool to meet the needs of 
these smaller properties and prevent disinvestment in a valuable 
portion of our Nation's housing stock.
Office of Healthcare Programs
    FHA's healthcare programs for hospitals and residential care 
facilities (nursing homes, assisted living facilities, and board and 
care homes) have helped private lenders fill the gap left by shrinking 
conventional finance resources. Since 1934, over 4,000 residential care 
facility mortgage insurance commitments were issued in all 50 States 
under the section 232 program. In 1968, enabling legislation amending 
the National Housing Act was signed into law, creating the section 242 
program for hospital facilities. Since the section 242 program's 
inception, over 400 mortgage insurance commitments have been issued for 
hospitals in 42 States and Puerto Rico. And while the economy seems to 
be rebounding and with it, sources of private capital, we continue to 
expect high levels of mortgage insurance activity for fiscal year 2014 
due in large part to refinancing activity as healthcare facilities take 
advantage of current low interest rates. Furthermore, following 
implementation of a final rule in 2013, hospitals can now obtain FHA-
insured refinancing loans. As of December 31, 2012, the FHA's portfolio 
of healthcare loan guarantees had an unpaid principal balance of $28.3 
billion on 2,900 loans.
            Evolution of FHA Healthcare Programs--Balancing Risk and 
                    Improving Processes
    This Administration, in continuing to improve the program has 
brought in positive risk management changes to both balance risk and 
improve processes. Given the unprecedented increase in the number and 
dollar volume of loans insured under GI-SRI, in fiscal year 2013, 
premium increases for FHA's General Insurance and Special Risk 
Insurance healthcare programs were instituted to increase the stability 
of the insurance fund. With the premium increases, FHA healthcare loans 
are priced more appropriately to encourage the return of private 
capital while, at the same time, continuing to ensure sufficient levels 
of available capital in these sectors.
    Proactive Asset Management.--In FHA's Office of Healthcare 
Programs, weekly loan committees are held to review and approve loan 
submissions and to monitor healthcare industry trends and risks. By 
implementing proactive asset management using early intervention 
monitoring tools, the Office of Healthcare Programs succeeded in 
maintaining claim rates of less than 1 percent in both healthcare 
facility mortgage insurance programs in fiscal year 2012.
    LEAN Business Process Reengineering.--LEAN Business Process 
Reengineering has also played an integral part in streamlining business 
operations within FHA's healthcare programs. Despite volume increases, 
LEAN processing improvements reduced loan processing times while 
increasing risk management efforts. Revised program requirements and 
documents were established to enhance accountability for borrowers, 
operators, and lenders. To further manage risk in the healthcare 
portfolio, in areas of large risk concentrations, such as insuring 
portfolios of multiple healthcare facilities, reviews are conducted at 
both the corporate and individual loan levels. In the residential care 
facility mortgage insurance program, implementation of a Master Lease 
Structure to cross-collateralize properties not only works to improve 
the overall risk profile of FHA's healthcare portfolio, but ultimately 
reduces claims.
    The Office of Healthcare Programs is in ongoing collaboration with 
the Department of Health and Human Services (HHS), Centers for Medicare 
and Medicaid Services (CMS), and State public health departments to 
support efforts to ensure quality of care for the most vulnerable 
populations. Also, by incorporating State survey inspection results, 
cost reports, and data from other Federal and State agencies into FHA's 
underwriting and asset management procedures, the shared utilization of 
data and cross-collaboration has been instrumental in keeping 
healthcare claim rates low within FHA.
            Legislative Request To Support Healthcare Programs
    As part of the efforts of FHA's healthcare programs to strengthen 
communities by addressing specialized financing needs, HUD is seeking 
passage of the language in the Transportation, Housing and Urban 
Development, and Related Agencies (THUD) appropriations bill to permit 
rural Critical Access Hospitals to be eligible for FHA insurance. 
Before their eligibility expired in 2011, 29 Critical Access Hospitals 
received FHA-insured loans, with results that were positive, both in 
terms of loan performance and the jobs created by hospital construction 
projects. Also, quality of life improved in their communities; these 
hospitals by definition are geographically remote from other hospitals, 
and they provide not only emergency, outpatient, and acute inpatient 
services but also nursing and rehabilitation services that avoid the 
need for the elderly and recuperating patients to leave the community 
for care.
    We appreciate the Congress' longstanding support for Critical 
Access Hospitals by amending section 242 to permit these important 
facilities to be eligible for FHA insurance, and hope that this 
language will be approved to allow Critical Access Hospitals to 
continue to be eligible for FHA insurance.
              goal 3: transform the way hud does business
    A 21st century American economy that is a magnet for jobs and 
equips its residents with the skills they need for those jobs demands a 
Government that's leaner, smarter, and more transparent. The current 
economic and housing crisis; the structural affordability challenges 
facing low-income homeowners and renters; and the new, multidimensional 
challenges facing our urban, suburban, and rural communities all 
require a HUD and an FHA that can meet those challenges. As such, we 
remain committed to improving the way HUD does business. HUD remains at 
the forefront of the Federal response to the national mortgage crisis, 
economic recovery, Hurricane Sandy recovery, and the structural gap 
between household incomes and national housing prices--roles that 
require an agency that is nimble and market-savvy, with the capacity 
and expertise necessary to galvanize HUD's vast network of partners. 
HUD's 2014 budget reflects these critical roles, by investing in 
transformation, research, and development that will be implemented 
persistently over time.
Strategically Investing in Our Staff While Improving Efficiencies and 
        Processes
    HUD's greatest resource is its dedicated staff. When employees 
attain skills and are motivated to use those skills to help their 
organization reach goals, the capacity of the organization grows and 
employees in the organization grow as well. This is why HUD is 
providing its employees training and leadership development 
opportunities. HUD is also in the process of simplifying and 
streamlining programs and reforming its information technology, human 
resources, procurement, and other internal support functions to provide 
flexibility to managers and better service to HUD customers.
            Multifamily Office Reorganization and Consolidation
    Beginning in fiscal year 2013, the Office of Multifamily Housing 
will begin reorganizing its headquarters structure and consolidating 
field office operations. Phased in over 2\1/2\ years, this plan will 
increase efficiency and consistency, modernize our services, and once 
fully implemented has the potential to save an estimated $40 million to 
$45 million in annual costs.
    By taking proactive steps, the Office of Multifamily Housing 
Programs will better serve customers and stakeholders, by operating 
more efficiently and consistently and improving risk management, all in 
an era where HUD and agencies across the Government are working 
diligently to determine how best to do more with less. This 
transformation builds upon the success of Breaking Ground and 
Sustaining Our Investments through four initiatives:
  --Launching More Routine and Effective Workload Sharing Across the 
        Country.--By more equitably distributing workloads in the areas 
        of Production and Asset Management, Multifamily Housing will be 
        able to reduce unevenly distributed pressure on staff and 
        reduce customer wait times and the application backlog. A 
        workload sharing pilot is already in process throughout the 
        country, receiving positive feedback from customers and staff.
  --Introducing Risk-Based Processing and Underwriters in the Office of 
        Multifamily Production.--In order to increase processing 
        efficiencies, improving customer service and more effectively 
        manage risk, FHA Multifamily will segment and process 
        applications according to their risk profile and complexity, 
        assigning an underwriter to oversee the review of the 
        application from start to finish, drawing in technical experts 
        as needed.
  --Creating Specialist Support in the Office of Multifamily Asset 
        Management.--The newly created positions of Troubled Asset 
        Specialist and Account Executives will allow Multifamily to 
        assign the most experienced staff to focus on risky, complex or 
        troubled assets, ensuring that the most skilled staff is 
        engaged to manage risk to the portfolio. Other Account 
        Executives with less expertise will focus on non-troubled 
        portfolio while building the expertise and skill sets to manage 
        more complex transactions.
  --Streamlining Organizational Structures.--In headquarters, FHA 
        Multifamily will reduce the number of offices by merging the 
        Office of Housing Assistance and Grants Administration and the 
        Office of Housing Assistance Contract Administration Oversight 
        into other existing headquarters offices. A dedicated Associate 
        Deputy Assistant Secretary role will be created to support the 
        field while leadership also examines other offices for ways to 
        streamline and reduce duplication of efforts. In the field, 17 
        hubs will be consolidated into 5--and the total number of field 
        offices with Multifamily presence will decline from 50 to 10. 
        Affected employees will have the ability to relocate, accept a 
        buy-out, or take early retirement.
Upgrading the Department's Information Technology Infrastructure
    In fiscal year 2014, HUD is requesting $285 million to support and 
modernize its information technology (IT) infrastructure. This request 
includes $45 million for the development, modernization, and 
enhancement of key outdated systems; $116 million for the operations 
and maintenance of our current systems; and $124 million to complete 
the transition to our new IT infrastructure system, HUDNET. Department-
wide efforts will focus on transitioning the department to a modern, 
sustainable IT infrastructure, and to continue the development of a 
modern financial management system that will improve HUD's ability to 
measure, track, and report on program costs and efficacy, and 
transitioning the current FHA systems to a modern platform. These steps 
are integral to the build the FHA systems and tools needed to manage 
risk.
    FHA in particular expects to expand its portfolio evaluation tool 
capacity to get an ``early look'' at where the value of the MMI fund is 
trending, and to incorporate new business policies or products when/
where needed. HUD has begun to decommission legacy FHA applications and 
will continue this through the fiscal year 2014 request, freeing up 
those IT dollars for reinvestment. These changes will allow HUD to 
deliver services and manage its multi-billion dollar programs faster, 
more accurately and using better information for analysis. These funds 
are crucial to complement HUD's transformation efforts, providing 
resources for maintaining and improving Department-wide information 
technology systems.
                               conclusion
    Madam Chairman, the HUD budget reflects the Administration's 
recognition of the critical role the housing sector must play to ensure 
that America becomes a magnet for jobs that strengthen the Nation's 
middle class, including providing ladders of economic opportunity for 
all Americans. Equally important, it expresses the confidence of the 
President in the capacity of HUD to meet a high standard of 
performance.
    By targeting resources where they are most needed, making tough 
choices in order to do more with less, and ensuring the protection of 
taxpayer interests, FHA's Single Family, Multifamily, and Healthcare 
Programs, are ensuring more Americans have the opportunity to realize 
or maintain the economic security of the middle class. Our focus on 
transforming the way we do business will ensure that we can continue to 
remain a relevant and effective support to the housing market--one that 
helps build the economy from the middle class out and ensures that we 
create opportunity for everyone, everywhere. Thank you.

    Senator Murray. Mr. Montoya.

               SUMMARY STATEMENT OF HON. DAVID A. MONTOYA

    Mr. Montoya. Thank you, Senator. Chairman Murray, Ranking 
Member Collins, I am David Montoya, the Inspector General for 
the Department of Housing and Urban Development. We join you in 
remembering Senator Lautenberg's contributions to the United 
States.
    I want to take the opportunity to thank you for inviting us 
to discuss issues on FHA and also to thank the Commissioner for 
her collaborative efforts with my office over the last 1\1/2\ 
years that I've been there and some of the changes that we've 
been looking to make with them.
    FHA is an important spoke in the Nation's housing industry, 
as FHA-insured mortgages finance approximately one-fourth of 
all home purchases in the United States. For this reason, my 
office has been aggressive in its oversight of the FHA program. 
In fact, over the years, my office has consistently expressed 
concerns about the level of oversight and risk taken on by FHA 
and the effect this has had on its financial health.

                    PROPOSED RULEMAKING REQUIREMENTS

    Unfortunately, and for a number of reasons, FHA has been 
slow to respond to many of our recommendations. One reason is 
FHA's requirement for proposed rulemaking. This process can 
take years to finish and delays FHA's ability to make 
regulatory changes or respond quickly to market conditions and 
financial forces. Another reason for the slowness is a 
reluctance, at times, to adopt our recommendations because of 
FHA's concern over the impact changes would have on its market 
share and how such changes would affect the industry.
    One notable example dates back to 1999 regarding 
recommendations my office made back then to discontinue the use 
of seller-funded downpayment assistance. It took almost 9 years 
for FHA to change this practice, and that inaction reverberates 
today as these loans are expected to cost the Mutual Mortgage 
Insurance Fund over $15 billion.
    In another example, the Office of Inspector General 
testified in 2009 about FHA taking on new risks, such as the 
expansion of FHA's HECM program that you just mentioned. This 
product has disproportionately and negatively impacted the MMI 
Fund, and the President's budget has assigned a negative value 
of approximately $5.2 billion to the HECM portfolio for 2013. 
Overall, FHA estimates that it will need to use just under $1 
billion of its appropriation authority to supplement its 
reserves, largely due to the poor performance of the HECM 
portfolio.
    It remains that the fund has failed to maintain a capital 
ratio of 2 percent for the past 4 years and each year has seen 
a further decline in the fund's economic value, which has now 
fallen to a negative $16.3 billion. Based on current actuarial 
projections, the capital ratio will now not reach the 2 percent 
level until 2017, which would represent 8 years continually 
below the 2 percent threshold mandated by Congress.

                      REAL ESTATE-OWNED PROPERTIES

    In addition to unprecedented levels of claims, 
approximately $67 billion in just the last 4 years, FHA can 
expect to see a continuing influx of claims for the foreseeable 
future. FHA's reported default rate on seriously delinquent 
loans as of January 2013 stood at approximately 9.5 percent. 
Based on our analysis of FHA data, the total unpaid balance on 
FHA's single family loans in default now exceeds $100 billion.
    HUD also continues to face challenges in managing its 
inventory of real estate-owned (REO) properties. HUD's 
oversight will be critical to ensure that returns on property 
sales are maximized, thereby reducing further losses to the 
fund. FHA's losses on REO property sales exceeded $9 billion in 
2012.
    Another significant concern we continue to express is FHA's 
ability to perform required financial management functions on 
legacy systems that are at least 15 to 30 years old. FHA needs 
to enhance its integrated insurance and financial systems. 
Unfortunately, FHA's ability to replace the antiquated 
infrastructure on which many FHA single family applications 
reside has been delayed.
    While FHA has taken various measures to restore the 
financial health of the fund, we think more can be done with 
adjustments to their actuarial modeling and in the area of risk 
management and lender oversight. With regard to lender 
oversight, my office continues to conduct reviews that have 
shown high percentages of loans containing not only significant 
deficiencies, but material incurable violations of HUD 
underwriting requirements and standards that expose the fund to 
an unacceptable level of risk and claims that FHA never agreed 
to take on under the insurance program.
    In conclusion, we remain concerned over the lack of 
flexibility that would allow FHA to respond to market changes 
and to our recommendations in a more timely way. FHA's 
competing mandate to continue its role in restoring the housing 
market, ensuring the availability of mortgage credit, and 
continued lender participation in the FHA program should 
heighten these concerns for policy makers.
    My office is strongly committed to working with the 
Department and the Congress to ensure that FHA remains the 
viable and strong program it was intended to be.

                           PREPARED STATEMENT

    This concludes my testimony. Again, thank you for allowing 
me to speak to you today. I look forward to answering 
questions.
    [The statement follows:]
              Prepared Statement of Hon. David A. Montoya
    Chairman Murray, Ranking Member Collins, and members of the 
subcommittee, I am David A. Montoya, Inspector General of the U.S. 
Department of Housing and Urban Development (HUD). Thank you for the 
opportunity to discuss the oversight of the Department that my office 
conducts and current issues relating to the Federal Housing 
Administration (FHA).
    As part of the Department's primary mission to create strong, 
sustainable, inclusive communities and quality, affordable homes for 
all, HUD also assists families in obtaining housing by providing FHA 
mortgage insurance. HUD is an important spoke in the Nation's housing 
industry in that FHA-insured mortgages finance approximately one-fourth 
of all home purchases in the United States.
    Since becoming the Inspector General, I have had an ongoing 
dialogue with FHA Commissioner Carol Galante on the challenges that the 
Department and FHA face and the work my office has done in its 
oversight capacity.
    In a very coordinated effort, the Department and Office of 
Inspector General (OIG) worked collaboratively to achieve a historic 
result with last year's national mortgage settlement of more than $25 
billion--the largest consumer financial protection settlement in U.S. 
history. We are building on that success and have undertaken an 
initiative to review fraudulent loan originations made by some of the 
Nation's largest mortgage companies in the FHA program. These endeavors 
showcase the accomplishments that we are engaged in, not only with the 
Department, but also working closely with the U.S. Department of 
Justice (DOJ).
    While I continue to support our activities relating to these 
reviews, I also endeavor to manage my limited resources to provide 
proper oversight of the many other programs and operations within the 
Department and its role in responding to Hurricane Sandy and other 
disasters. The following testimony highlights some of the more pressing 
issues facing the Department's administration of the FHA program, 
particularly in light of its increased role in the marketplace.
           a history of oig concerns and fha's slow response
    HUD OIG has consistently expressed its concerns over the years 
about the level of oversight and risk taken on by FHA and the effect on 
its financial health. Unfortunately and for a number of reasons, FHA 
has been slow to respond to many of our recommendations and has only 
recently finally implemented some of them. For example, it has been 
noted that while seller-funded downpayment-assisted loans have been 
prohibited since the end of 2008, OIG has expressed its concern to FHA 
over the negative impact of seller-funded downpayments on FHA as far 
back as 1999. Loans using seller-funded downpayment assistance have 
proven to place a substantial stress on FHA's Mutual Mortgage Insurance 
(MMI) Fund.
    OIG completed its first comprehensive analysis of seller-funded 
downpayments in March 2000, looking in depth at this and the associated 
program risks, as these loans increasingly began to consume a larger 
share of FHA loan originations. We concluded that HUD allowed nonprofit 
organizations to operate downpayment assistance programs that 
circumvented FHA requirements. The downpayment loan transactions did 
not meet the intent of FHA requirements in that the downpayment 
assistance was not a true gift from the nonprofit; sellers raised the 
sales price of properties to cover the cost of the seller-funded 
downpayment assistance, causing buyers to finance higher loan amounts; 
and default rates for buyers receiving downpayment assistance from 
nonprofit organizations were significantly higher than for other FHA 
loans. We recommended back then that HUD implement a proposed rule to 
eliminate seller-funded nonprofit downpayment programs.
    Our long-term concerns and findings were later validated by several 
FHA-commissioned studies and by a U.S. Government Accounting Office 
(GAO) study in 2005, 6 years after we first raised concerns. However, 
FHA still resisted implementing our recommendation, in part because the 
change would have required the Department to go through the rulemaking 
process and there were concerns about whether FHA would prevail. More 
significantly, however, was FHA's concern at the time about the impact 
such a change would have on its market share. By 2006, the 
concentration of nonprofit downpayment assistance had approached 25 
percent of FHA's new business portfolio, including purchase and 
refinance loans. FHA did not act to end the practice until 2007, and 
then legal challenges caused further delay. Ultimately, legislation to 
disallow the practice was enacted in 2008, too late to prevent the 
looming losses we are now seeing.
    The legacy of this delayed inaction reverberates today as seller-
funded downpayment-assisted loans continue to place significant stress 
on the MMI Fund. According to HUD's fiscal year 2012 report on the 
financial status of the fund, these loans account for only 4 percent of 
the outstanding portfolio but are 13 percent of all seriously 
delinquent loans. Over the life of the loans, seller-funded downpayment 
loans are expected to cost the MMI Fund more than $15 billion.
    Similarly, in 2007, FHA was pressing for ``reform'' legislation 
that, among other things, would have raised loan limits and allowed FHA 
to insure loans with no borrower downpayment requirement. At the time, 
FHA's share of the mortgage market had fallen to less than 4 percent of 
the total market and less than 2 percent of the total dollars for 
mortgages originated in the United States. Indeed, with the ready 
availability of conventional subprime financing, FHA was perceived as 
becoming increasingly irrelevant, and the primary concern at FHA was to 
find ways to increase its market share. It focused more on marketing 
FHA loans than on instituting sound risk management and lender 
oversight.
    HUD OIG testified in March 2007 and expressed its concern as to 
whether FHA was headed in the same direction as the subprime market 
with its seemingly continued deregulation and introduction of 
``riskier'' products as part of its proposed reform. FHA seemed to have 
lost sight of the fact that since its inception, it has played a 
cyclical role in the housing market, sometimes gaining market share in 
times when it was needed to bolster the market and sometimes losing 
share when the conventional marketplace was addressing the constituency 
that FHA has always focused on: low- to moderate-income and first-time 
potential home buyers. However, this always remained true; whether in 
the conventional or Government mortgage programs, no loans should have 
been given if the purchaser was unable to pay back the loan.
    Finally, in April 2009, when the effects of the economic crisis and 
collapse of the housing market were becoming more and more ominous, OIG 
testified before this subcommittee and expressed its concern about the 
impact of FHA's precedence-setting increased market share and HUD's 
ability to manage the increased workload with its limited and stagnant 
resources. FHA was also taking on new risk that needed to be managed. 
As an example, the Housing and Economic Recovery Act of 2008 authorized 
changes to FHA's Home Equity Conversion Mortgage (HECM) program that 
enabled more seniors to tap into their home's equity and obtain higher 
payouts. This office, at the time, raised concerns about HUD's ability 
to provide proper oversight as there was a critical need for more 
resources for FHA. Those resources were needed to:
  --enhance its information technology (IT) systems;
  --increase its personnel to meet escalating processing requirements;
  --increase its training of personnel to maintain a workforce with the 
        necessary skills to deal with the responsibility of this new 
        portfolio;
  --oversee the many contractors it maintained; and
  --increase its oversight of all critical front-end issues, including 
        such important areas as the appraisal, lender approval, and 
        underwriting processes.
    The HECM program was originally projected to be profitable for FHA 
but has turned out to be a substantial drain on the insurance fund. I 
will discuss the HECM program in more detail later in my testimony. 
While Secretary Donovan and FHA Commissioner Galante are proactive and 
supportive of OIG and its recommendations, I have to note, as described 
above, that FHA's reluctance over the years to more quickly deal with 
its looming issues has taken a toll, a toll we are only now beginning 
to understand. FHA has been trying to improve its financial position in 
recent years with legislative and regulatory proposals. But as we said 
years ago at the beginning of the subprime crisis, movement in the 
Department is more like turning an ocean liner than driving a fast boat 
through the tempests and currents of an ever-changing mortgage market.
    A recent example of FHA's apparent inability to quickly react to 
changing conditions can be seen in its efforts to require lenders to 
indemnify HUD for serious and material violations of FHA origination 
requirements and for fraud and misrepresentation in connection with the 
origination of FHA loans. Historically, HUD has sought such 
indemnifications through agreement with the lenders. HUD already 
possesses the statutory authority to require such indemnifications for 
lenders participating it its Lender Insurance program and issued a 
proposed rule in October 2010 to, among other things, provide 
additional guidance on HUD's regulations implementing this authority. 
The rule was not finalized until January 2012, and the mortgagee letter 
to implement the change in policy was not issued until a month ago on 
April 10. According to the mortgagee letter, the revised 
indemnification policy is effective for all loans insured by Lender 
Insurance program lenders on or after that date. Thus, 2\1/2\ years 
have passed since the rule was proposed, and it remains to be seen 
whether this will be an effective tool in recovering losses since FHA's 
homeownership centers have yet to implement the change. To further 
exacerbate this situation, since 2010, HUD has been seeking statutory 
authority to require indemnifications from the remaining 70 percent of 
its direct endorsement lenders that do not participate in the Lender 
Insurance program.
    Based on OIG's experience in dealing with FHA over the years, we 
remain concerned about HUD's resolve in taking the necessary actions 
going forward to protect the fund. HUD is often hesitant to take strong 
but needed actions against lenders because of its competing mandate to 
continue FHA's role in restoring the housing market and ensure the 
availability of mortgage credit and continued lender participation in 
the FHA program. Nevertheless, OIG has generally been supportive of 
FHA's initiatives to raise premiums and better manage its risk, 
including the establishment of its Office of Risk Management. 
Similarly, we strongly agree with HUD's position that FHA needs 
legislative changes to afford it greater flexibility to make changes to 
its policies and procedures as history has shown that it needs to be 
able to react more quickly to market changes and avoid losses that can 
accrue during a lengthy rulemaking process. In this light, my office is 
developing its own set of recommended legislative initiatives that we 
believe can further strengthen FHA's ability to mitigate risk and 
recover losses to the insurance fund and enhance OIG's ability to 
address fraud, waste, and abuse in the program. We will be vetting 
these proposals with FHA and the appropriate committees.
       financial health of the fha mutual mortgage insurance fund
    FHA's MMI Fund is the largest of its four mortgage insurance funds. 
The fund consists of a system of accounts used to manage FHA's single-
family mortgage insurance programs. The Cranston-Gonzalez National 
Affordable Housing Act of 1990 mandated that the MMI Fund maintain a 
capital ratio of 2 percent from October 1, 2000, forward. The capital 
ratio is defined as the ratio of the fund's economic value to its 
insurance in force. The economic value essentially represents capital 
that exceeds the amount needed to cover anticipated losses. Clearly, 
when establishing this mandate, Congress voiced its concerns that some 
sort of cushion was important to maintain. The capital ratio has been 
below this required 2 percent level for the past 4 years, and each year 
has seen a further decline in the ratio to the point at which, based on 
the latest actuarial study in November of last year, the ratio has 
fallen below zero to negative 1.44 percent, which represents a negative 
economic value of $16.3 billion. The economic value of the forward 
portfolio was estimated at negative $13.5 billion and the HECM 
portfolio at negative $2.8 billion. These economic values represent 
capital reserve ratios of negative 1.28 percent and negative 3.58 
percent, respectively.
    Over the last several years, FHA has increased premiums and taken 
other steps to restore the financial health of the MMI Fund. 
Nevertheless, based upon FHA's deteriorating financial condition, in 
February 2013, GAO included FHA concerns in its ``high risk'' section 
relating to ``Modernizing the U.S. Financial Regulatory System and 
Federal Role in Housing Finance.'' It was not FHA itself that was 
deemed a high risk but, rather, FHA as part of the larger high-risk 
concern over the Federal role in housing finance.
    While we acknowledge the Department's actions to address the MMI 
Fund's finances, my office remains concerned about whether the actions 
are enough to make up for the losses FHA has sustained and to reach the 
required 2 percent level anytime in the near future. For example, FHA 
is now using credit scores as part of the eligibility requirements for 
FHA loans. As of October 2010, borrowers with credit scores below 500 
are no longer eligible for FHA insurance, and the maximum loan-to-value 
ratio for borrowers with credit scores between 500 and 579 is 90 
percent. At the time these changes were being proposed, we expressed 
our overall support but also took the position that the changes did not 
go far enough and would likely have minimal impact on the MMI Fund in 
terms of bringing in additional premiums. While FHA enacted increased 
downpayment requirements for borrowers with credit scores below 580, we 
noted that loans for borrowers with credit scores below 580 were less 
than 1 percent of new activity. Moreover, the 580 credit score 
threshold is well into what is traditionally considered subprime 
territory in the conventional marketplace. A higher downpayment 
requirement at the appropriate credit score level would force borrowers 
to have more personal stake and financial exposure, which we believe 
would have a more meaningful impact in protecting the fund due to the 
larger volume of loans at higher credit score levels. The more a 
borrower is personally financially invested in a loan, the more 
unlikely he or she will be willing to give up on the investment.
    As shown in the chart below from data we obtained from HUD's 
systems as of April 12, 2013, FHA has experienced high levels of claims 
in recent years compared with levels seen before the financial crisis. 
For purposes of illustration, the following chart reflects total FHA 
insurance claims from calendar years 2005 through 2008, the year that 
the current financial crisis began.

                                                                  FHA INSURANCE CLAIMS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     Forward mortgage claims       Home equity conversion        Loss mitigation claims                 Total
                                 ------------------------------        mortgage claims       -----------------------------------------------------------
              Year                                             ------------------------------
                                    Claims      Amount paid       Claims      Amount paid       Claims      Amount paid       Claims      Amount paid
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005............................     68,455     $6,562,000,000      1,187        $87,000,000     75,407       $119,000,000    145,049     $6,768,000,000
2006............................     57,243      5,595,000,000      1,514        143,000,000     82,365        170,000,000    141,122      5,908,000,000
2007............................     54,556      5,629,000,000      2,257        256,000,000     84,758        150,000,000    141,571      6,035,000,000
2008............................     62,440      6,981,000,000      3,149        381,000,000    104,092        204,000,000    169,681      7,566,000,000
                                 -----------------------------------------------------------------------------------------------------------------------
      Total 2005 to 2008........    242,694     24,767,000,000      8,107        867,000,000    346,622        643,000,000    597,423     26,277,000,000
                                 -----------------------------------------------------------------------------------------------------------------------
2009............................     83,881     10,163,000,000      4,652        567,000,000    131,115        268,000,000    219,648     10,998,000,000
2010............................    119,830     15,654,000,000      5,681        559,000,000    208,876        411,000,000    334,387     16,624,000,000
2011............................    118,475     15,144,000,000      8,684        928,000,000    173,163        563,000,000    300,322     16,635,000,000
2012............................    155,266     20,245,000,000     14,207      1,432,000,000    142,551        660,000,000    312,024     22,337,000,000
                                 -----------------------------------------------------------------------------------------------------------------------
      Total 2009 to 2012........    477,452     61,206,000,000     33,224      3,486,000,000    655,705      1,902,000,000  1,166,381     66,594,000,000
                                 =======================================================================================================================
      Grand total 2005 to 2012..    720,146     85,973,000,000     41,331      4,353,000,000  1,002,327      2,545,000,000  1,763,804     92,871,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As reflected in the charts above, the amount FHA paid in claims 
during the last 4 years was about 2\1/2\ times the amount paid during 
the preceding 4 years ($66.6 billion vs. $26.3 billion). The total 
amount of claim payments rose substantially in 2009 and has continued 
to increase.
    Apart from the obvious financial implications, this situation 
creates a challenge for FHA, since the Prompt Payment Act requires HUD 
to pay the claim on a defaulted FHA-insured mortgage within 30 days and 
only then can it go back to the lender that underwrote the loan to 
recover losses incurred if it finds that the loan was ineligible for 
insurance. Thirty days is an insufficient amount of time for HUD to 
determine whether a loan was ineligible for insurance due to fraud or 
misrepresentation in the loan origination process. The result of this 
requirement places HUD in a ``pay and chase'' situation as our past 
audits have expressed concern over HUD's exposure when paying claims on 
loans that were not qualified for insurance. In addition, FHA has been 
resistant and slow in implementing a rigorous claim review process and 
to recover losses from lenders instead relying primarily on a strategy 
to focus efforts on loans that had not reached claim status. FHA only 
recently agreed with recommendations we made as far back as 2006 and 
again in 2011 to review all loans for which a claim was paid within the 
first 24 months, claims we define as high-risk claims. This matter 
takes on even greater importance in light of the significant amount of 
claims projected to be filed by lenders in the coming months and HUD's 
current limited capacity for reviewing submitted claims.
    In addition to the unprecedented levels of claims noted above, FHA 
can expect to see a continuing influx of claims in the foreseeable 
future. The latest FHA-reported default rate (seriously delinquent 
loans) as of January 2013 stood at 9.49 percent. By comparison, the 
default rate in September 2008 was 6.91 percent. Based on our analysis 
of FHA data, the total unpaid balance of FHA single-family loans in 
default now exceeds $100 billion.

 FHA LOANS IN DEFAULT (3 MONTHS OR MORE DELINQUENT) AS OF MARCH 31, 2013
------------------------------------------------------------------------
                     Loans                            Unpaid balance
------------------------------------------------------------------------
724,173........................................         $103,324,000,000
------------------------------------------------------------------------

    While FHA has taken a position that its current losses are 
primarily from loans made from 2007 to 2009, it continues to project 
that the current and future years' books of business will be profitable 
and make up for these past years' losses. However, what we have seen in 
the past 4 years is a troubling trend, whereby the point at which the 
MMI Fund is expected to reach its mandated capital level is pushed 
farther into the future. In the fiscal year 2009 independent actuarial 
study, it was predicted that by the end of fiscal year 2011, the MMI 
Fund's capital ratio would be 1.74 percent and that the MMI Fund would 
meet the 2 percent mandate sometime during fiscal year 2012. In the 
following 3 years, that forecast has changed dramatically as the 
capital ratio has continued to move in the wrong direction and is now 
negative. In addition, we now have concerns about the fiscal year 2010 
and 2011 books of business as their profitability appears to be lower 
than projected and budgeted, as indicated and supported in the fiscal 
year 2014 Federal Credit Supplement to the Budget, although not as 
substantially different as the reestimates from the earlier years of 
2007 to 2009.
    Based on current projections, the capital ratio will not reach the 
2 percent level until 2017, marking 8 years below the 2 percent 
threshold. Moreover, these estimates are heavily influenced by the pace 
at which housing prices will recover. Any additional slowdown in the 
housing market will increase FHA losses and further delay FHA's ability 
to meet its statutorily mandated 2 percent requirement. We continue to 
work with FHA to ensure that it is instituting sound risk management 
and lender oversight practices to avoid further exposure of the MMI 
Fund to losses.
    My office also continues to stress that the FHA actuarial model is 
complicated and difficult to audit, use, and employ for risk management 
and strategic planning purposes. The model inhibits frequent updates as 
well as the ability to understand changes in specific programs or risk 
categories. Ultimately, its current design and objective are to be in 
statutory compliance and do not promote FHA's timely use of policy 
corrections based on products, cohorts, or risk classifications for 
current or interim benchmarking decisions. While we have recommended 
modeling at the midterm or quarterly, which we believe would provide 
FHA a better basis for timely policy corrections and assessing the 
actuarial value of the MMI Fund, the model cannot be easily changed 
because it is proprietary and owned by the actuarial firm. I continue 
to have discussions with the FHA Commissioner regarding these issues.
    With regard to one recent change in the modeling, the 2012 
actuarial study applied a stochastic method to estimate the net present 
value of future cash flows. This was done to a large extent because of 
recommendations by OIG and GAO, recommendations that had been made for 
some years before 2012.
                home equity conversion mortgage program
    The FHA HECM program is the only Government-insured reverse 
mortgage program. The HECM program guarantees that the lender will meet 
its payment obligations to the homeowner, limits the borrower's loan 
origination costs, and insures full repayment of the loan balance to 
the lender up to the maximum claim amount; that is, the lesser of the 
appraised value at origination or the national HECM loan limit of 
$625,500. HECM insurance endorsements in fiscal year 2012 were down by 
25 percent from fiscal year 2011 levels to 54,591. Fiscal year 2012 
marks the third consecutive year in which HECM volume has declined. 
Yet, with a declining HECM demand, FHA asserts that the fiscal year 
2014 budget request for $943 million is largely due to the existing 
HECM portfolio. This product, particularly as it has been structured to 
date, is sensitive to home prices and economic conditions. This 
condition has resulted in a negative value of $5.248 billion and a 
disproportionately negative impact to the MMI Fund from the HECM 
program.
    FHA is proposing, either through the granting of the legislative 
authority described below or via the much longer rule-making process, 
the following measures:
  --Limiting the draw at origination to mandatory obligations;
  --Addressing the issue of non-borrowing spouse language in the fiscal 
        year 2015 budget;
  --Performing a financial assessment of borrowers as a basis for loan 
        approval and determining the suitability of various HECM 
        products to protect consumers from acquiring loans not fit for 
        their situation; and
  --Establishing a tax and insurance set-aside to ensure that 
        sufficient equity or an annuity is available to pay taxes and 
        insurance on the mortgaged property so that defaults resulting 
        from nonpayment of taxes and insurance can be avoided.
    While OIG supports these proposed changes, it continues to raise 
concerns about FHA's belated actions. Since 2008, OIG has been 
proposing similar changes to the HECM program based on results of its 
audit and investigative work. The four OIG reports discussed below 
identified problems with reporting borrowers' deaths, payment of 
required property taxes and insurance, reliability of financial data, 
and compliance with the HECM residency requirement.
    A 2008 audit found that HUD did not ensure that FHA lenders 
reported HECM borrowers' deaths in accordance with Federal 
requirements. HUD could not be assured that FHA lenders appropriately 
met HUD's time requirement for initiating the foreclosure process or 
recording the deeds-in-lieu to take possession of the property, which 
impacted the amount of the lender's insurance claims.
    In an internal audit issued in August 2010, we determined that HUD 
had not tracked almost 13,000 defaulted HECM loans with maximum claim 
amounts of potentially more than $2.5 billion. The audit found that an 
increasing number of borrowers had not paid required taxes or 
homeowner's insurance premiums, thus placing the loan in default. We 
noted that HUD granted foreclosure deferrals routinely on these 
defaulted loans but it had no formal procedures to do so. HUD's 
informal foreclosure deferral policy had a negative effect on the 
universe of HECM loans and loan servicers. After canceling its informal 
policy, HUD did not issue guidance to servicers advising them of what 
action to take regarding defaulted loans. Thus, servicers continued to 
service the loan and paid the taxes and insurance for the borrowers 
without notifying HUD. As a result, four servicers contacted were 
holding almost 13,000 defaulted loans with a maximum claim amount of 
more than $2.5 billion, and two of the four servicers said they were 
awaiting HUD guidance on how to handle them.
    The servicers had also paid approximately $35 million in taxes and 
insurance on these loans. HUD was unable to identify the deferred or 
defaulted loans in its system and did not track the number of borrowers 
who were unable to pay their taxes or insurance premiums. Since 
unreported defaulted loans were only obtained from 4 of a total of 16 
HECM servicers nationwide, more defaulted loans may have existed. Since 
HUD could not track these loans, it did not know the potential claim 
amount in the event of foreclosure of about 7,700 loans of which HUD 
was aware and about 13,000 loans of which it was not aware and could 
lose an additional estimated $1.4 billion upon the sale of the 
properties.
    In June 2011, we issued a report on HECM loan payments made after 
the death of the borrower. Our results indicated a few instances in 
which unscheduled advance payments were made after the death of the 
borrower, which resulted in claims paid by HUD, although we did not 
believe this was a systemic problem. In most cases, we found that 
scheduled payments were not actually made after the death of the 
borrower but were incorrectly recorded in HUD's Insurance Accounting 
Collection System by the lenders. More noteworthy was the fact that 
loan proceeds from the sale of property and claims paid by HUD were not 
credited to the HECM loan balances in a timely manner, resulting in 
inaccurate information being reported to HUD, causing unreliable 
financial data to be used by HUD. This evaluation also noted instances 
in which HECM loan servicing files contained indications of suspicious 
or potentially fraudulent transactions; however, there was no evidence 
that such matters were referred to HUD for further action. Lender 
officials stated that HUD's guidance in this area was too broad and 
that specific fraud indicators should be included in any future 
guidance.
    Finally, in an internal audit issued in December 2012, we found 
that HUD policies did not always ensure that borrowers complied with 
program residency requirements under the HECM program. A review of 174 
borrowers indicated that 37, or 21 percent, were not living in the 
property associated with the loan as required by the residency 
requirement to participate in the HECM program. These 37 loans were 
ineligible and should have been declared in default and due and payable 
to reduce the potential risk of loss of about $525,000 to HUD's 
insurance fund. These 37 loans had already been advanced $5.8 million, 
with the $525,000 remaining to be disbursed, although the borrowers 
were not living in the home.
    In addition to the above-mentioned audits and reviews, the OIG 
Office of Investigation completed a number of criminal cases in which 
the criminals used elderly straw buyers to obtain HECM loans.
    Due to the negative value of the MMI Fund, OIG plans to work 
closely with FHA in obtaining its proposed changes to the HECM program 
and in furthering other OIG-recommended changes to the program.
  oig efforts to recover losses and address fraud against the mmi fund
    As noted earlier, FHA has taken various measures to restore the 
financial health of the MMI Fund. OIG has also played an active role in 
this regard by aggressively pursuing and recovering losses from lenders 
that were engaged in questionable and often fraudulent underwriting of 
FHA loans. In the early part of 2011, OIG, in partnership with HUD and 
DOJ, initiated a number of mortgage lender reviews, whereby statistical 
samples of claims, defaults, and all other loans were drawn to 
determine the accuracy and due diligence of the underwriters of FHA 
loans by a number of the Nation's largest lenders. The reviews 
completed to date have resulted in a total of $1.24 billion in civil 
settlements for alleged violations of the False Claims Act and for 
failure to fully comply with FHA requirements. Some of these 
settlements involved some of America's largest lending institutions.
    The loan-level reviews OIG has been conducting and which have 
resulted in large civil fraud settlements with major lenders are on the 
order of what we would expect HUD to be doing for itself as an inherent 
program responsibility. Examples of these activities include (1) 
reviews of seriously delinquent loans before claim submission and 
terminated loans upon claim submission for origination and 
misrepresentations and (2) claim mitigation in which claims are 
reviewed for documentation issues, violations of servicing 
requirements, and potential collateral-related defects. These examples 
are normal and expected practices in the private mortgage insurance 
sector. This issue relates to earlier comments about FHA's resistance 
to and slowness in implementing a rigorous claims review process and 
going back to the lenders to recover losses instead relying primarily 
on a strategy to focus efforts on loans that had not reached claim 
status.
    OIG continues to aggressively review lender origination and 
underwriting practices as part of its ongoing oversight efforts in a 
housing market that for years was reckless about lending money. 
Imprudent business practices became a pervasive problem, and now those 
loans underwritten during that time are having a significant negative 
impact on the MMI Fund. The result has been a dramatic increase in 
mortgage delinquencies, defaults, and foreclosures. Too often lenders 
ignored FHA requirements to get a loan approved. Borrowers were sold 
unsustainable mortgages, sometimes unsuspectingly and sometimes with 
their full knowledge, which encouraged widespread indifference to the 
ability of many consumers to repay their loans. Some lenders thought 
they could make money on a loan even if the consumer could not pay back 
that loan, by either banking on rising housing prices or passing along 
the mortgage into the secondary market.
    Adding to this problem was a 100 percent insurance guarantee by 
FHA, which created no real financial exposure to these losses on the 
part of the lender and in some cases, no real incentive to comply with 
the requirements of participation. The practices of many lenders were 
not just the result of poor procedures but involved real infractions of 
good business stewardship and proper behavior when participating in the 
FHA program. A failure by FHA to create a strong and meaningful 
oversight atmosphere creates an environment that virtually invites the 
abuses we have seen in our lender reviews. Quite simply, lenders are 
responsible for complying with all applicable HUD regulations and in 
turn are protected against default by FHA's insurance program for doing 
so. To provide some context, mortgage fraud is second only to 
healthcare fraud on DOJ's list of investigative and prosecution 
priorities.
    Indeed, our reviews have shown high percentages of loans containing 
significant deficiencies, loans that clearly should not have been 
underwritten. Our reviews look for major noncompliance and a failure to 
follow the rules that have long been established. We are not looking at 
close-call interpretations of underwriting but wholesale abandonment of 
the core requirements that leads to huge default and claim rates for 
FHA-insured mortgages.
    By way of example, my office is currently reviewing one lender's 
claims to FHA using a statistically representative sample of all claims 
it made in a given period. The statistical sample pool was 85 loans. 
While these results are preliminary, 91 percent of those loans had 
significant deficiencies, 77 of 85 loans. Of those loans with 
significant deficiencies, 87 percent, or 67 loans, had material, 
incurable violations of HUD underwriting requirements and standards. 
These violations were essentially incurable by the lender and exposed 
the FHA insurance fund to an unacceptable level of risk and claims that 
it did not agree to take on under the insurance program.
    In another ongoing example, we conducted a review of a 
statistically representative sample of claims at another lender. Again, 
the statistical sample pool was 85 loans. Again citing preliminary 
results, the percentage of those loans that had significant 
deficiencies was 100 percent. Of those 85 loans, 78 loans (92 percent) 
had material, incurable violations of HUD underwriting requirements and 
standards. We expanded our review to defaults for this lender using a 
statistically representative sample, which resulted in a sample pool of 
110 loans. Our preliminary review found that every one of those loans--
110 of 110 (100 percent)--had significant deficiencies. Of those 110 
loans, 95 (86 percent) had material, incurable violations of HUD 
underwriting requirements and standards that also exposed the FHA 
insurance fund to an unacceptable level of risk and claims that it did 
not agree to take on under the insurance program.
    To be clear, we are not talking about minor deficiencies. These 
reviews are exposing violations of HUD's underwriting requirements and 
standards, which constitute substantive material violations. Therefore, 
the underwriter's certifications to HUD are false, and those loans can 
form the basis of a False Claims Act case. The types of substantive 
material violations that we are uncovering amount to violating 
fundamental requirements of insuring a loan, which include failing to 
document a borrower's income and employment, failing to evaluate all 
recurring debt obligations that FHA requires an underwriter to 
consider, and failing to verify that the borrowers possess the 
necessary funds to close the loan.
    It is OIG's contention that if lenders follow a well-established 
quality control plan, exercise due diligence and good industry 
practices, follow required procedures, and submit documented conforming 
loans based on a reasonable good faith determination of a consumer's 
ability to repay the loan, their lending behavior does not have to be 
unduly constrained nor should they overly restrict making responsible 
loans.
         inventory of foreclosed-upon single-family properties
    In prior years, we have reported on various concerns relating to 
HUD's procurement and contract management, including HUD's IT 
infrastructure contracts and HUD's transition to the third generation 
of its management and marketing contracts that are used to manage and 
dispose of its extensive inventory of foreclosed-upon single-family 
properties, known as real estate-owned (REO) properties. HUD continues 
to be challenged by its overreliance on contractors in general and its 
ability to allocate sufficient resources to adequately oversee its 
contractor workforce. Since taking this position, I have made it a 
priority to take a closer look at the Department's procurement and 
contract management processes to ensure that waste, fraud, or 
mismanagement can be identified at its earliest occasion.
    HUD's inventory of REO properties had increased dramatically from 
about 45,700 properties in March 2010 to nearly 69,000 at the end of 
March 2011. The inventory declined after HUD restructured its 
management and marketing contracts and as of January 2013, stood at 
about 39,000. While the decline from the historically high levels of 2 
years ago is a positive trend, the percentage loss on the sale of these 
properties remains high but has begun to decline. Still, during fiscal 
year 2012, losses averaged about 62 percent of HUD's acquisition cost. 
In contrast, HUD's average loss during 2007 was about 40 percent. HUD's 
oversight of these management and marketing contractors will be 
critical to ensure that returns on property sales are maximized, 
thereby reducing further losses to the FHA insurance fund. During 
fiscal year 2012 alone, FHA's losses on REO property sales exceeded 
$9.2 billion.
    We recently completed an audit of HUD's oversight of its REO 
Management and Marketing program to determine whether HUD's policies 
and procedures provided for efficient and effective oversight of asset 
managers and field service managers under the program. We determined 
that HUD did not have adequate procedures in place to ensure consistent 
and adequate enforcement of asset and field service manager contracts. 
Specifically, (1) list prices were not always reduced according to the 
marketing plans, (2) bids were approved that did not meet HUD's 
flexible threshold, (3) bids were rejected that met the marketing plan 
thresholds, (4) bids that met applicable thresholds were not always 
counteroffered or forwarded to the government technical representative 
for approval, and (5) properties were not assigned to field service 
managers based on performance even when HUD identified performance 
issues.
                      financial management systems
    Since fiscal year 1991, OIG has annually reported on the 
Department's lack of an integrated financial management system, 
including the need to enhance FHA's management controls over its 
portfolio of integrated insurance and financial systems. We continue to 
report that HUD's financial management systems have not substantially 
complied with the requirements of the Federal Financial Management 
Improvement Act of 1996, which encourages agencies to have systems that 
generate timely, accurate, and useful information with which to make 
informed decisions and to ensure accountability on an ongoing basis. 
This situation could negatively impact HUD's ability to perform 
required financial management functions and efficiently manage 
financial operations of the agency, notably FHA, which could translate 
to lost opportunities for achieving mission goals and improving mission 
performance.
    In August 2009, FHA completed the Information Technology Strategy 
and Improvement Plan, which identified FHA's priorities for IT 
transformation. The plan identified 25 initiatives to address specific 
FHA lines of business needs. Initiatives were prioritized, with the top 
five being single-family related.
    To date, FHA has completed a few of the goals but not all due to a 
lack of funding. FHA is working on acquiring risk management tools but 
has only made substantive progress with its initial objective. During 
our upcoming audit of FHA's fiscal year 2013 financial statements, we 
will be reviewing FHA's progress in implementing this plan.
    The plan also called for FHA to create a program management office 
to facilitate coordination and communication, track and report 
progress, provide support to managers, and support organizational 
change management activities. This office was put into place almost 
immediately after the funding became available and is being led by a 
long-term IT staffer.
    Since fiscal year 2009, the FHA Transformation Initiative's focus 
has been on improving its counterparty management by automating the 
certification processes and acquiring risk management tools to monitor 
lender activity. In conjunction with these development activities, FHA 
has procured the IT infrastructure needed for its planned improvements 
to multifamily underwriting and single-family insurance program 
support.
    Our biggest remaining IT concern is FHA's ability to replace the 
antiquated infrastructure on which many FHA single-family applications 
reside in a timely manner. For example, FHA's general ledger is an 
Oracle system, which has to interface with multiple older COBOL 
systems. None of the older legacy COBOL systems have received 
sufficient funding to be replaced, yet they are expensive to maintain. 
Due to a lack of funding, interfaces and the related systems are still 
in place. While there may have been some programming changes, we 
understand that these were basically patches or temporary fixes to 
implement specific policy changes.
    Overall, it appears that funding constraints have reduced the FHA 
Information System Transformation project to a continuation of high-
level planning without a defined timetable to complete the new 
application systems and to phase out and deactivate the current 
outdated systems. These delays bring about another concern: the ability 
to maintain the antiquated infrastructure on which some of the HUD and 
FHA applications reside while the Transformation Initiative is 
underway. Workloads have dramatically increased and are processing on 
systems that are 15 to 30 years old. These legacy systems must be 
maintained to effectively support the current market conditions and 
volume of activity. However, the use of aging hardware and software can 
result in poor performance and high maintenance costs. If the IT 
infrastructure is not modernized in a timely manner, it will become 
increasingly difficult and expensive to maintain operations, make 
legislatively required system modifications, and maintain interfaces to 
other IT systems.
               recent oig investigative and audit results
    As mentioned earlier, HUD OIG conducts criminal investigations 
involving allegations of fraud against HUD's programs, including theft, 
embezzlement, and false statements by program participants and 
recipients. The investigations may be generated from leads provided by 
HUD program staff, the mortgage industry, and other sources and may be 
conducted jointly with Federal, State, and local law enforcement 
agencies. Our long-term investigative experience in the area of 
mortgage fraud schemes has given us proficiency and extensive knowledge 
to address these issues. Many ``traditional'' fraud schemes continue to 
affect FHA, such as appraisal fraud, identity theft, loan origination 
fraud, rescue and foreclosure fraud, and fraud in the HECM program.
    The following represent some examples of recent investigations:
  --A former mortgage company loan officer was sentenced to 54 months 
        incarceration and 3 years supervised release and was ordered to 
        pay more than $9.2 million in restitution to FHA. He conspired 
        with others to create and submit false and fraudulent FHA 
        mortgage loan applications and accompanying documents to a 
        lender on behalf of unqualified borrowers. He created false pay 
        stubs, Federal tax forms, verification of employment forms, 
        explanation letters, and other documents to ensure that 
        otherwise unqualified borrowers could obtain FHA-insured loans. 
        He enticed borrowers to obtain an FHA mortgage by paying them 
        an incentive of up to $20,000 per loan. More than 75 FHA loans 
        were approved using this false information with more than 31 
        claims identified. The loss to FHA was estimated at $6.5 
        million. The mortgage company was terminated as an FHA-approved 
        lender, and the loan officer and others were suspended pending 
        debarment action. Our investigation is continuing.
  --A former senior vice president and loan officer, a former senior 
        vice president of residential lending, a former underwriter, 
        and a former loan processor pled guilty to conspiracy to submit 
        false statements in loan applications and submitting false 
        statements in loan applications to FHA. The defendants were 
        involved in originating and approving FHA-insured loans and 
        conventional loans that contained fraudulent information. The 
        case involved approximately 1,900 FHA loans. To date, FHA has 
        incurred losses in excess of $36 million after paying claims on 
        and disposing of 234 foreclosed-upon properties. An additional 
        393 loans, with an unpaid balance in excess of $92 million, 
        have been identified as delinquent or in various stages of the 
        foreclosure process. The bank was closed by the Federal Deposit 
        Insurance Corporation and is no longer in business. The above-
        noted defendants have been recommended for suspension and 
        debarment action, and our investigation continues.
  --Two former principals of a HUD-approved mortgage company pled 
        guilty to one count of racketeering following their indictment 
        in June 2011. The defendants were involved in a complex scheme 
        to defraud FHA through a series of false statements on at least 
        65 FHA loans totaling in excess of $10 million. The fraudulent 
        acts included the use of straw purchasers, phony employers, 
        bogus bank statements and pay stubs, forged college 
        transcripts, counterfeit court documents, and phony downpayment 
        gifts. Additionally, the defendants profited from the scheme by 
        recording junior mortgages that were payable to business 
        entities or associates from the loan proceeds. The mortgage 
        company's FHA approval was terminated, and the company's 
        principals were suspended pending their debarment.
    OIG's Joint Civil Fraud Division conducts reviews of FHA-approved 
lenders. The reviews continue to disclose serious deficiencies in the 
originating and underwriting of FHA mortgages. As noted earlier, many 
of these reviews were conducted in support of our efforts to recover 
losses. These reviews and our audit work focus on areas in which HUD 
can improve its oversight and management of its single-family mortgage 
insurance programs. For example, as noted earlier, OIG reviewed the 
foreclosure practices for five of the largest FHA mortgage servicers 
(Ally Financial, Incorporated; Bank of America; CitiMortgage; JPMorgan 
Chase; and Wells Fargo Bank) due to reported allegations made in the 
fall of 2010 that national mortgage servicing lenders were engaged in 
widespread questionable foreclosure practices involving the use of 
foreclosure ``mills'' and a practice known as ``robosigning.''
    In September 2012, we summarized the results of the five reviews, 
which were used by DOJ and 49 State attorneys general to negotiate a 
settlement with the five lenders totaling $25 billion. The Federal 
settlement payment amount of more than $684 million would be used for 
(1) losses incurred to FHA's capital reserve account and the Veterans 
Housing Benefit Program Fund or as otherwise directed by the U.S. 
Department of Veterans Affairs and the U.S. Department of Agriculture's 
Rural Housing Service and (2) the resolution of qui tam actions.
    As result of this work, OIG recommended that HUD:
  --determine the changes needed to FHA's servicing and foreclosure 
        policies based on the consent judgments and ensure that the 
        servicers incorporate the necessary changes into their 
        procedures for servicing FHA-insured loans;
  --ensure that the servicers establish or implement adequate 
        procedures and controls to address the control deficiencies 
        cited in the five issued memorandums, including but not limited 
        to the withholding of claims for insurance benefits and the 
        retention of appropriate legal documentation supporting the 
        appropriateness of the foreclosure for all FHA-insured 
        properties for the life of the loans; and
  --pursue appropriate administrative sanctions against attorneys who 
        may have violated professional obligations related to the 
        foreclosure of FHA-insured properties.
    Finally, the Department continues to face challenges in ensuring 
that its single-family programs benefit eligible participants and do 
not pay improper claims. In a recent audit of FHA's Preforeclosure Sale 
Program, OIG identified that, based on a statistical projection FHA 
paid an estimated $1.06 billion in claims for 11,693 preforeclosure 
(short) sales that did not meet the criteria for participation in the 
program. This condition occurred because HUD did not have adequate 
controls to enforce the program requirements and requirements were not 
well written. Specifically, FHA relied entirely on the lenders in 
approving borrowers for the program and did not provide lenders with 
detailed instructions for reviewing borrower assets. As a result, the 
FHA insurance fund may have taken unnecessary losses while borrowers, 
who may otherwise have been able to sustain their obligations, were 
inappropriately relieved of their debt using FHA insurance fund 
reserves. FHA has agreed that existing program policy and lender 
execution against that policy are inconsistent. In response to our 
recommendations to improve alignment and ensure that the long-term 
interest of the FHA insurance fund are met, FHA is working toward (1) 
introducing a streamlined program approval policy based on loan 
characteristics and a borrower credit profile and (2) specifying income 
documentation requirements for the income deficit test that must be met 
for borrowers who do not meet the streamlined requirements.
                               conclusion
    The Department's role has greatly increased, while staffing has 
decreased, over the last decade as it has had to deal with 
unanticipated disasters and economic crises in addition to its other 
missions, which have increased its visibility and reaffirmed its vital 
role in providing services that impact the lives of our citizens. The 
Department can do more to address the internal control and program 
weaknesses in FHA. My office is strongly committed to working with the 
Department and Congress to ensure that these important programs operate 
efficiently and effectively and as intended for the benefit of the 
American taxpayers now and into the future. I look forward to working 
with the Department and this subcommittee to accomplish some of these 
goals.

    Senator Murray. Thank you very much, both of you.

                     MUTUAL MORTGAGE INSURANCE FUND

    Commissioner Galante, let me start with you. The budget 
states that $943 million may be needed to cover losses in FHA's 
MMI Fund in fiscal year 2013. This follows on the most recent 
actuarial report showing that the capital reserve account is 
expected to go negative.
    Can you explain the process HUD goes through to come up 
with these estimates, including any changes to this year's 
model?
    Ms. Galante. Certainly. Thank you, Chairman, for the 
question. To be clear, FHA goes through two different 
processes. The independent actuarial that is done and was 
released in November 2012 looks at the 30-year projections of 
what is necessary for projected losses under the fund under 
economic conditions that they are projecting through 
independent indices.
    The President's budget takes a look at the same kinds of 
conditions, but uses their own analysis of interest rates, 
house prices, and what-not in terms of how the projection of 
the budget re-estimate is made. So they're similar processes, 
but they're two different processes.
    With respect to the actuarial, I would just say we made a 
number of changes, or the actuarial made a number of changes 
this year, including going to what's called stochastic 
modeling, which models a variety of economic paths more 
clearly, more distinctly than it had done in the past, as well 
as how it looked at the defaulted loans and how they would 
transition from performing to non-performing and how that 
works--so a number of important changes in the model.
    Senator Murray. Mr. Montoya, you raised concerns about the 
2010 and 2011 books of business. Can you tell us what your 
specific concerns are?
    Mr. Montoya. Our concerns are that they aren't appearing to 
be as profitable as we think FHA has sort of rested their 
future estimates on. While they're not far off from some of the 
estimates FHA has, it's our feeling they may be weighing too 
much on how successful they will be.
    Senator Murray. Weighing too much?
    Mr. Montoya. Yes, ma'am, that they would be less successful 
than they anticipate to be.
    Senator Murray. Commissioner Galante, do you want to 
respond to that?
    Ms. Galante. Certainly. The budget re-estimate process, as 
part of the President's budget, every year re-estimates every 
cohort of business that FHA does and determines whether the 
estimates that had been done the year before, based on current 
economic conditions, would still hold. So the Inspector General 
is correct that for 2010 and 2011, the re-estimate this year 
was that those books of business were not as profitable as they 
had been anticipated to be. But they certainly still were very 
profitable and successful books of business.
    On the flip side, the 2012 cohort was demonstrated as 
actually adding value to the fund that had been unanticipated. 
So this is really the result of the budget estimation process 
requiring long-term projections in terms of looking at the 
economic success of each of the cohort years of business.
    Senator Murray. We already talked about HECM loans, that 
they continue to represent a disproportionate share of losses 
to the fund. HECM loans can be a great resource for seniors who 
want to stay in their homes, but there are a lot of problems 
with the current product.

                         HECM HIGH DEFAULT RATE

    Commissioner Galante, I wanted you to explain to us why the 
HECM loans are experiencing such high default rates and what 
reforms you are proposing to reduce the risk on that.
    Ms. Galante. Yes, thank you. There are a couple of reasons 
for the challenge with the HECM program. First, I would say 
that like the forward book of business, the HECM loans are 
suffering from projections of a decrease in home prices. And 
that affects--particularly for the HECM loans, long-term house 
price projections definitely affect the reverse mortgage 
program projections more severely than they would in a forward 
mortgage because they are for a longer period of time. So that 
is one reason.
    The other reason is that, frankly, the way they have been 
underwritten is based on the longevity of the life of the 
individual borrower, and there is improvement in longevity. So 
some folks are outliving, so to speak, the original actuarial 
projections there.
    Those things are magnified by other challenges that I would 
say are in the program design today that we really want to get 
to the heart of fixing. One is that the way the program is 
designed today encourages people to take a large amount of the 
mortgage proceeds up front, and then sometimes what happens is 
they don't have enough over the life of the mortgage to 
continue to pay, say, their property taxes and insurance 
liability and other challenges of that nature.
    So what we are really asking for, I would put in three 
buckets. One is to be able to immediately, through mortgagee 
letters, as opposed to going through 1\1/2\ years plus 
rulemaking process, make some immediate changes on the 
principal amount that borrowers are allowed to take out up 
front.
    Senator Murray. And you can do that without legislation?
    Ms. Galante. We can do that without legislation, but we 
would have to go through rulemaking. Without you giving us 
authority to do it by mortgagee letter, we would have to go 
through a longer process to get there. But, statutorily, we 
could do it.
    Second--and I know I'm taking a bit of time here. But, 
second, I would say that demanding that we do a financial 
assessment of the borrowers and their ability to pay the taxes 
and insurance on an ongoing basis--right now, we are 
encouraging lenders to look at that, but it is not a 
requirement of the program. So that's an important measure that 
we would want to do, and, also, requiring set-asides for taxes 
and insurance, for example, for those owners who really need 
that, to be sure that they can pay their ongoing charges.
    Lastly, I would say there is a challenge in the current 
environment where non-borrower spouses are not being--if 
they're not on the mortgage loan, they're not getting the 
protection of being on the mortgage loan and being able to----
    Senator Murray. In my understanding, sometimes that's done 
because of the age of the spouse.

               HOME EQUITY CONVERSION MORTGAGE COUNSELING

    Ms. Galante. Yes, sometimes--you know, what we believe is 
happening is by the age of the spouse, they are not eligible to 
be part of the HECM mortgage. But what we want to make sure of 
is that we have rules going forward where they're part of the 
mortgage and, therefore, get the protection. But their age is 
also taken into consideration in the underwriting so that we 
are actuarially pricing this according to the life of the 
borrowers.
    And so there's some confusion perhaps in the market or 
disagreement about whether that provision--whether we can do 
that correctly today based on statute. We have taken the 
position for the past 25 years that we can. But there's been 
some challenge to that, and we would like legislation to 
clarify the intent that we can continue to do that.
    Senator Murray. Mr. Montoya, what do you think about those 
proposed reforms?
    Mr. Montoya. We certainly support FHA's proposals. One of 
the concerns that we have seen through a lot of the failings 
with these loans and, quite frankly, from a lot of the fraud 
aspects that we see is that we don't believe that counselors 
are doing as good a job as they should be in really identifying 
for these seniors the loan they're getting into and really what 
they're getting into.
    They're not really instructed on how much and how expensive 
it would be, sometimes not instructed on the taxes and 
insurance and homeowner's fees that will need to be paid, 
sometimes two or three times more than what they make in a 
monthly income. Many times, they don't even see these homes 
before they get into them, if they're buying a new home under 
the HECM program, to make sure they fit their needs as they 
begin to age.
    So there's a lot of other things that we think we can work 
with FHA to do to tighten up just sort of the knowledge that 
these seniors need before they take this product.
    Senator Murray. My time--I've gone way over.
    So, Senator Collins, I'll turn to you.
    Senator Collins. Thank you, Madam Chairman. Let me follow 
up on the question on reverse mortgages.
    Commissioner, you referred very briefly to an issue that I 
want to ask you a little more about. And that is some seniors 
with reverse mortgages insured through the HECM program have 
failed to pay their property taxes and/or their homeowner's 
insurance premiums, which technically, at least, puts them in 
default on their mortgages.
    In order to avoid this problem, could HUD require lenders 
to set up an escrow account where, as with forward mortgages, 
property taxes, and insurance are paid out of that account and 
then added to the mortgage balance? Many of us have escrow 
accounts built into our mortgages to make sure we do have the 
funds available for property taxes and insurance when they come 
due.
    And second and related to that--because you did refer to 
doing something in that area, but I'm unclear exactly what--are 
you in need of legislative authority in order to avoid this 
very lengthy rulemaking that the Inspector General has referred 
to in order to implement such a change? So, first of all, are 
you considering an escrow account type requirement, and, 
second, if so, can you do it administratively quickly?
    Ms. Galante. Yes. In order to do it administratively 
quickly through a mortgagee letter, we need authority from you 
to do it by a mortgagee letter, as opposed to going through the 
full rulemaking process, because the current regulations for 
the HECM program do not permit us to do this.
    Having said that, I do want to be clear. We would really 
like that authority, but I do want to be clear, though, that we 
have been working on this with whatever tools we can in the 
interim. We actually issued a mortgagee letter asking lenders 
to go out and notify borrowers, for example, who were in 
default on their taxes and insurance, and work with them for 
repayment plans. We did that about 1 year ago, and it is being 
successful.

            HOME EQUITY CONVERSION MORTGAGE ESCROW ACCOUNTS

    That isn't going to turn the tide for the future of really 
ensuring that up front. We are setting aside the funds so that 
we know that there is an escrow there for those homeowners to 
pay those property taxes and insurance charges--and also to 
evaluate the borrower on their ability once they take out this 
mortgage to continue to be able to pay those taxes and 
insurance. In order to do that, we need to change the 
regulation, and that means either going through a 1\1/2\ years 
long process, or, if you give us the authority to do it, by 
mortgagee letter, we could do it more quickly.
    Senator Collins. Do you think it's a good idea in concept?
    Ms. Galante. Absolutely. If I didn't make that clear, we 
think it's a very necessary component to the program.
    Senator Collins. Why is your rulemaking so slow? I assume 
you follow the APA the way any other agency would.
    Ms. Galante. Yes. Let me just be clear: We are working on 
guidance today so that if we need to go through the rulemaking 
process, we will try to do it as quickly as we possibly can. 
The proposing of the notice, getting comments back, evaluating 
those comments, putting back out--you know, hopefully, you 
don't get any major controversy; if you get major controversy, 
then you may have to re-propose--it just takes a significant 
amount of time to do that analysis and back and forth.
    Senator Collins. I guess what I don't understand--if I were 
in your shoes--and you've identified this problem, and you've 
identified something you could do about it--I'd be in the midst 
of rulemaking right now. I wouldn't wait. I would still ask us 
for authority for you to do it in a more expeditious manner. 
But I wouldn't be waiting to do rulemaking. And it seems to me 
that a point that the Inspector General has made in his reports 
is this slowness of response by FHA.
    Ms. Galante. Yes. To be clear, we did spend the time to 
immediately--so 1 year ago, we put out the guidance----
    Senator Collins. But guidance isn't rulemaking, and I'm not 
a fan of agencies putting out guidance, because it means that 
it doesn't go through a public comment process.
    Ms. Galante. Right. We did that in January of last year, 
though, just to ensure that we could deal with the current 
situation that we have with people who are already in current 
defaults.
    Senator Collins. Excuse me for interrupting. But if in 
January of last year you had started the rulemaking on this, 
you would be probably done now or close to it.
    Ms. Galante. Yes. So, as I said, we are in that process of 
getting ready to put out a rulemaking. We're in the rulemaking 
process. We just haven't actually put out the proposed rule 
yet.
    Senator Collins. Well, I've got two other issues I want to 
turn to. But I guess what I would say to you is it seems to me 
you should have begun that rulemaking last January. It's now 
June. That's 1\1/2\ years. You'd be done. And I just think, 
even though it's faster if you get the mortgagee letter 
approach approved by us, you know what the legislative 
processes can be like. It's not pretty these days.
    I just would encourage you that if you think you have the 
answer to something, don't wait. Start the rulemaking. You 
don't have to necessarily go--you may be able to short circuit 
it through legislation, but don't wait. That was 1\1/2\ years 
ago.
    Ms. Galante. We are working on that.
    Senator Collins. Let me turn to another question. You 
informed us today that FHA has now used 75 percent of the 
commitment authority for the general insurance and special risk 
insurance fund, and current projections indicate that without 
additional commitment authority this year, FHA will be required 
to suspend insurance activity in mid August. This is very 
troubling to me.
    As you know, the chairman and I have been supportive of 
increasing the commitment authority for this important program. 
We would have liked to have gotten it in along with our bill, 
into the continuing resolution that was passed. It's important 
because it provides mortgage insurance for the construction of 
multifamily housing, hospitals, healthcare facilities.
    How will FHA manage the remaining commitment authority, and 
what will the effect be if the fund is forced to suspend 
activity because you've run out of commitment authority?

                          COMMITMENT AUTHORITY

    Ms. Galante. Yes, thank you, and thank you for your support 
for the additional authority. I would say a couple of things. 
First and foremost, now that we have hit the 75 percent, any 
commitments that are issued need to come into headquarters 
before they're issued so that we can literally--the first and 
foremost concern we have is to be sure that we're monitoring 
daily each commitment that's issued and now allowing a 
commitment to be issued if we don't have the authority. So, 
particularly, as we get closer and closer to the end of the 
fiscal year or to exhausting 100 percent of the authority, we 
need to pay attention to that.
    We have also had a number of conversations with industry 
about how to prioritize if we don't get additional commitment 
authority, you know, the best ways to prioritize the 
remaining----
    Senator Murray. If I could just--how many projects do you 
have in the pipeline right now?
    Ms. Galante. I don't know the exact number of projects, but 
we have in the pipeline more than the amount of authority we 
have left for the balance of the year. So if we need to stop 
issuing commitments in mid August, really, what we're talking 
about is new construction projects that were ready to close or 
soon to be ready to close and get under construction. We'd lose 
those jobs. We'd lose that economic activity.
    For properties that are being refinanced, you know, and are 
rehabilitating properties, they won't get their rehab done. 
They might be refinancing to take advantage of lower interest 
rates and, therefore, really be in a position to be as 
financially sound as possible going forward and protect the 
property. So those activities would need to be delayed. This 
really is a problem of delay if we run out of authority between 
now and the end of the year.
    Senator Collins. Thank you, Madam Chairman. That is of 
great concern.
    Senator Murray. Senator Boozman.
    Senator Boozman. Thank you, Madam Chair.
    Ms. Galante, I have the same problems as the Senator from 
Maine with the guidance issues, as far as not going forward and 
going through the process, where you have guidance which 
essentially has the same force of a rule, but the process isn't 
done. You said that you hadn't done it yet. I guess my question 
is when is yet? When do you expect a rule to be forthcoming?
    Ms. Galante. We're in a position that we are driving as 
hard as we can to get a proposed rule out by July or August of 
this year, because, again, we really need to get it in place as 
soon as possible so that we can continue to operate the 
program.
    Senator Boozman. So July or August is a reasonable 
expectation of the----
    Ms. Galante. That's the proposed rule, and then there's the 
back and forth process, yes.
    Senator Boozman. Let me ask you this. Last summer, the FHFA 
released a public request for comment on proposals to use a 
municipality's power of eminent domain to seize mortgage loans. 
At that time, the FHFA expressed concerns with such proposals 
and said that action may be necessary on its part to avoid a 
risk to safe and sound operations at its regulated entities and 
to avoid taxpayers' expense.
    What is your view on the proposed use of eminent domain in 
that regard?

                             EMINENT DOMAIN

    Ms. Galante. Yes, thank you for the question. We certainly 
think it's premature for FHA to issue any guidance on this. 
There are a few places that have adopted the policy, but not 
actually implemented it. We believe the eminent domain process 
at its core is a local issue, and how localities use their 
eminent domain is something that is subject to a lot of local 
review.
    We also believe that the idea of it being used on mortgages 
is trying to get at an important issue of people's inability to 
refinance their mortgages that are in private label securities, 
and I think that's the primary driver behind that concept. And 
we do think that there are other ways of working to get more 
people refinanced who are under water, and we certainly look 
forward to continuing to work with Congress on some of those 
solutions.
    Senator Boozman. So if they are refinanced under that 
system, they are done into FHA-backed loans, potentially?
    Ms. Galante. Again, you know, if a community gets to a 
point where they are through all of the significant issues that 
are still to go to work out whether this is a viable concept, 
if all of that happens, then FHA will obviously need to be in a 
position to look at its approach to those loans. We just think 
it's premature in terms of how those proposals are being 
implemented.
    Senator Boozman. It seems like, though, that you would 
weigh in, in the sense that if it is such, that you're going to 
be in a position that they are FHA-backed, and that could 
potentially affect the solvency of the insurance fund, it seems 
like you would take a position.
    Ms. Galante. Again, Senator, we think it's premature in 
terms of even beginning to understand how they would operate in 
an individual localized context at this point.
    Senator Boozman. Do you have any comments about this?
    Mr. Montoya. No, sir. We have not actually looked into the 
matter. Certainly, it's an area that we're going to monitor and 
have some concerns over, but I would echo what the Commissioner 
said. I think these are very localized issues, and how those 
would be addressed in the local areas is probably the biggest 
question we would have.
    Senator Boozman. Personally, I think it's a huge problem if 
you're taking mortgages that are current in their payments from 
individuals. I mean, that, to me, is a huge departure from 
what's been done in the past. So are you starting to weigh in? 
Are you looking into this?
    Ms. Galante. Again, I would just say we think it's 
premature at this point. Some of the concerns that you have 
about how one values these mortgages is a big----
    Senator Boozman. But you wouldn't do that through guidance. 
You'd go forward somehow where somebody could weigh in in 
regard to----
    Ms. Galante. I'm sorry?
    Senator Boozman. I said if that were to happen, we wouldn't 
just have guidance in how to deal with that. You'd do some sort 
of rulemaking process or something.
    Ms. Galante. I think it's hard to say what kind of guidance 
would be necessary until we understand the details of how these 
programs might work in an individualized way.
    Senator Boozman. Thank you.
    Mr. Montoya, you acknowledge that FHA has been slow to 
respond to many of the recommendations and has only recently 
implemented some of them. Can you comment on what you see as 
the primary cause for the delay?
    Mr. Montoya. Well, going back to the earlier discussion on 
the HECM program with regard to the taxes and insurance, a lot 
of those changes or recommendations came out of an audit that 
happened 3 years ago, and we're only now getting to the point 
where something is being done. It's our feeling that FHA may be 
resting too much on the reliance, if you will, on the granting 
of legislative authority as opposed to beginning the proposed 
rulemaking process early.
    That kind of goes in line with what we've been saying. It's 
just very slow to address a lot of these forces that in the 
financial world, if you will, you've got to be able to address 
pretty quickly. You know, 2 or 3 years down the road, you've 
not only surpassed it, but you're into another problem. So, 
again, to echo back to the taxes and insurance issue, that's 
sort of a more recent example.
    Senator Boozman. Can you comment on where you feel the 
glitches are in not responding quicker to the Inspector 
General's suggestions?

                        CHALLENGES TO FHA REFORM

    Ms. Galante. Let me just say on a more global level, as 
opposed to just the HECM program, there are several challenges 
here. The first and foremost, I would say, is to think about 
the crisis that we've been in for the past number of years. We 
have had massive amounts of policy changes and rulemaking to 
do, and we have needed to prioritize at some level our own 
resources, our analytical resources, our process resources.
    All of this goes through our risk management office of 
evaluation, the Office of Management and Budget (OMB), and so 
this, you know--we've had a lot on our plates. And when you 
look at the forward mortgage, which is most of the trillion 
dollars of portfolio, we certainly have been spending a lot of 
effort there.
    The second point I would make here goes to the resource 
question of both staffing and also to the FHA transformation 
project, the information technology. So one of the Inspector 
General's recommendations to us about how we look at defaulted 
loans or non-performing loans--they made some recommendations 
that also took us a while to implement.
    But through use of the FHA transformation project, we were 
able to put in a very robust claims review process that is 
meeting all of the Inspector General's recommendations and 
more. But it took the time and the resources to get the 
information technology in place in order to perform the 
reviewing of all loans that went to claim in 2 years, all early 
payment defaults, plus an algorithm to pick out other high risk 
loans to review.
    So, you know, I think it's very successful that we're doing 
it. But it took that time to get the systems in place to be 
able to do it.
    Senator Boozman. Thank you.
    Thank you, Madam Chair.
    Senator Murray. Thank you. As everyone is so aware, many 
families experience a sudden crisis--it could be a health 
issue, a job loss, or some kind of unforeseeable situation--
that leaves them unable to make their mortgage payments, and 
many of them are today desperately seeking a way to stay in 
their homes. I've had a lot of constituents come to my office 
to get help with some kind of loan modification.
    We all know appropriate modifications can benefit everyone. 
It can benefit the homeowner, who can stay in their home; the 
lender, if they want to avoid some kind of lengthy, costly 
foreclosure process; and for FHA, loan modifications can help 
avoid or reduce claims, which is why FHA requires its lenders 
to provide loss mitigation services to borrowers that fall 
behind on their payments.
    But it seems that lenders may not be adequately fulfilling 
this requirement. One of the new reforms that FHA is proposing 
to us would allow HUD to transfer the servicing of loans to a 
different servicer who could better assist the borrower with 
some kind of modification.
    Ms. Galante, what problems have you seen or can you 
describe for us in FHA's loss mitigation programs that led you 
to request that new authority?

                            LOSS MITIGATION

    Ms. Galante. Yes, thank you for the question. One of the 
things we see is that while you may be able to see any 
individual servicer looking at their overall record, they are--
I don't want to say checking the box--but they are meeting the 
individual steps. But when you look at certain servicers and 
you see that their particular portfolio has a much smaller rate 
of successful loan modifications, you say to yourself, 
``There's something deeper going on in that servicer's shop 
that somehow our reviews just aren't able to pick up.''
    So we really want to be able, particularly for those 
servicers that we see that are not having good outcomes or not 
having outcomes as good as some of the other servicers--we want 
to be able, if we can't get them there through other means, to 
ultimately say, ``Look, we've got to take this part of your 
portfolio and require it to be transferred or require you to 
subservice and really, you know, just require that you show 
that you can perform at a different level or have someone else 
perform for you.''
    Senator Murray. Mr. Montoya, do you think this would 
improve loss mitigation efforts, this proposal?
    Mr. Montoya. Well, I think, on its face, we would certainly 
be supportive of that. Anything that would keep any more losses 
from the fund occurring would be certainly beneficial.
    It's not something we've audited, although we are 
contemplating doing that later this year because, like 
anything, there will be risks, I'm sure, and we'll want to find 
out what that might be to work with the Commissioner early on 
in addressing them. But I would certainly support anything that 
would keep any more losses from occurring as beneficial, not 
only for the fund, but for the communities that they serve and 
the individuals that are being impacted by these issues.
    Senator Murray. Mr. Montoya, the work you're doing in 
partnership with HUD, Department of Justice, and some State 
attorneys is helping HUD recover money from claims that are 
paid on mortgages that weren't properly underwritten. In your 
testimony, you highlighted some of the egregious errors that 
you uncovered in your review of loans from 2007 to 2009.
    I understand that, to date, your office has helped recover 
hundreds of millions of dollars from these settlements in 
addition to the funding FHA received from the servicing 
settlement. Can you explain the investigations you and your 
partners are undertaking and what exactly you're finding?

               OFFICE OF INSPECTOR GENERAL INVESTIGATIONS

    Mr. Montoya. Sure. Yes, ma'am, absolutely. Thank you for 
the question. I think all total, to date, my office has 
recovered over $1 billion. It would probably pay for ourselves 
a number of times over. But the types of reviews that we're 
doing are not minor technical reviews. We are looking at 
wholesale disregard for the FHA insurance program.
    We're looking at material type violations that we call 
incurable, things you can't fix, things like borrowers who 
never had the income in the first place to afford the home 
they're buying; no debt to income ratio analysis that would 
tell us what other bills they have to pay that would impact 
being able to make the mortgage; and, quite frankly, something 
as basic as whether they have the funds to come to closing to 
close on the loan. So these are the types of things that we're 
seeing and that seem to be rampant in some lenders.
    So, again, what I'd want to stress--because we've heard 
from a lot of stakeholders, mortgage bankers and others, that 
we're sort of nit-picking, that we're looking at technical 
violations, and that couldn't be further from the truth. We've 
got a number of other lenders we're currently looking at, and 
we've got more in the pipeline. Quite frankly, I'd have to say 
we have more than we can deal with, and we've actually had to 
turn some United States attorneys' offices away that would like 
to pursue some of these, because much like the Commissioner, we 
have limited resources, and there's only so much I can do. So 
we're trying to pick the worst of the worst, if you will.
    But, again, just to reiterate, we're talking about 
wholesale disregard of the program, something as fundamental as 
whether they can afford the home in the first place, and 
whether they have the resources to afford it.
    Senator Murray. You've also recommended that HUD take some 
steps to avoid paying unnecessary claims, including delaying 
payments to lenders and reviewing early default loans. What are 
the specific actions that you would like HUD to take to address 
some of those recommendations?
    Mr. Montoya. Well, to reiterate something the Commissioner 
said, we certainly recognize that staffing is always an issue, 
and limited resources. But some of the things that we've been 
recommending are reviews of what we call high risk defaults. 
These are defaults that have defaulted in the first 24 months 
of the loan. Those are always red flags for us of how we got 
there in the first place that early.
    You know, reviewing these while they're in the foreclosure 
process before they become claims, so that--because the 
foreclosure process can take months and months, that's a very 
good time to sort of look at these things to see if there was 
fraud or some sort of mismanagement, if you will, of how they 
underwrite these loans in the first place, so that HUD could 
avoid paying these loans if at all possible.
    These are the kinds of things that take staff resources, 
but they're also the kinds of things that the private mortgage 
insurance companies do. So in a perfect world, we'd like to see 
more of that happen. Recognizing, too, that HUD has an 
obligation to pay on these loans within a very short amount of 
time--you know, the Prompt Payment Act requires them to pay 
these claims within 30 days. That is insufficient time for them 
to do really any kind of review of the loan to see if there was 
any fraud or mismanagement in the underwriting of the loan.
    One of the recommendations that we have shared with the 
Commissioner and would like to talk to Congress and work with 
this subcommittee on is certifications, an idea concerning 
certifications by these lenders, where they're certifying that 
the loan that they're providing to FHA for a claim has been 
reviewed by them and it meets all the qualifications of a 
properly underwritten loan. It puts the onus back on the 
lender, if you will, and kind of keeps the exposure to FHA 
down.
    While there's a lot of discussion yet to be had on the 
issue, these are the kinds of things that we are recommending.
    Senator Murray. Commissioner Galante, do you want to 
comment on whether that's doable and what you think of it?
    Ms. Galante. Sure. I would say two things. First of all, we 
really appreciate the partnerships we have with the Inspector 
General on improving our quality assurance, our loan review 
process. I think their recommendations on looking at early 
payments defaults, for example, and looking at loans on an 
ongoing basis, we are now doing in a robust way with the help 
of our technology, which is from your help. Thank you.
    We think we're on the right path now going forward for some 
of those processes. We recently have talked about additional 
legislative items we might need or administrative actions that 
we could take, including looking at how good the certifications 
we have are. We're certainly willing to work with the IG on 
looking at that.
    Senator Murray. My time has expired, so I'll turn to 
Senator Collins.
    Senator Collins. Thank you.
    Commissioner, you have mentioned that the FHA's market 
share is decreasing and beginning to return to more traditional 
levels. Is a reduction in market share a goal of this 
administration?

                           FHA'S MARKET SHARE

    Ms. Galante. It is a goal of this administration that FHA 
return to a more normalized, traditional role in the 
marketplace. How one measures market share is an interesting 
challenge, in that one of the things that we've seen through 
this whole crisis is that the whole market has shrunk. So even 
though FHA's absolute dollar amount could stay the same, you 
need to have private capital come back in so that you're 
growing the whole market in order for our market share to begin 
to drop.
    We are beginning to see that, and I think there's a couple 
of reasons for that. One is that the premium increases that 
we've made and some of our other policy changes are encouraging 
private capital to come back. But I also think private capital 
is starting to come back because they're seeing the--you know, 
we've played a countercyclical role, the market is getting 
better, and we're seeing that private capital is now willing to 
put more financing available in the marketplace.
    Senator Collins. Let me talk about the premium increases 
that you mentioned and what strikes me as a possible unintended 
consequence of some of the policy changes. FHA, as you 
mentioned, has announced several premium increases in an effort 
to improve the financial health of the fund.
    I was surprised to read that one of the changes that was 
also included was to not allow borrowers to cancel their annual 
mortgage insurance premium when they reach the level where they 
have sufficient equity in their homes. This strikes me as not 
fair, but it also strikes me as leading to a perverse outcome 
where that borrower who has clearly been paying on time and has 
reached a certain level of equity is going to refinance out of 
FHA and leave you with a pool of more risky borrowers.
    So why would you want to implement that change?
    Ms. Galante. Thank you, Senator Collins. This may be a bit 
counterintuitive, but I think this is a hugely important policy 
that FHA is doing, and let me explain why. First of all, the 
policy of allowing cancellation of the premium did not come 
into effect at FHA until about 2000, 2001. So for most of FHA's 
history, the policy we're talking about reversing now was not 
in place.
    There's a bit of history that I don't really know, but I've 
heard, about why FHA back in 2001 did this. It was because the 
private mortgage insurers were going in this direction. But the 
challenge here is--and this is why it's important to have a 
good risk management office--the risk for the private mortgage 
insurers is entirely different than the risk for FHA. They're 
only insuring the top part of the loan. FHA is insuring the 
entire part of the loan.
    Even if you buy on an amortizing basis, have more equity, 
theoretically, in your home, we still have risk that if home 
prices go down, as they did during this crisis, we're still on 
the hook for the risk for that loan. In fact, one of the things 
we saw is that we were continuing to see claims, have defaulted 
loans on loans after they had stopped paying on their MIP, 
because it was an automatic cancellation.
    So we lost during the crisis by having that old policy in 
place. We lost, our risk manager believes, probably $10 billion 
of revenue that we would have otherwise had, and as prices 
declined, we would have had more revenue to deal with the 
losses. So we think this is an important reversal of policy for 
the future. As long as home prices are going up, up, up, maybe 
you'll have some people refinance out of these loans. But in 
the long term, ensuring that your premium matches the risk that 
you're taking on was the most important thing here.
    Senator Collins. Have you seen homeowners refinancing out 
of FHA-insured loans in order to avoid that mortgage premium 
insurance payment?

                      MORTGAGE INSURANCE PREMIUMS

    Ms. Galante. This policy just went into effect, so we 
haven't----
    Senator Collins. It's too soon.
    Ms. Galante. It's too soon to tell. But I would also just 
say that, primarily, what's going to drive people to refinance 
is our interest rates.
    Senator Collins. Right.
    Ms. Galante. So that's really going to be what drives 
people to decide to refinance or not.
    Senator Collins. Let me talk to you about the financial 
health of the FHA single family mortgage mutual fund. We've all 
mentioned the fact that the budget request shows that you 
anticipate drawing on your authority with the Treasury during 
this year to hold in reserve against expected future losses. 
Obviously, $943 million is a lot of money and is of great 
concern to us, or to me, because it would be the first time 
that you have taken this step. We thought it was going to 
happen last year, and then it didn't because of the settlement.
    Have conditions changed since that budget request, or do 
you still anticipate drawing that amount of money from the 
Treasury? What's your current prediction?
    Ms. Galante. Two things I do want to say. While we 
projected that we might draw last year and we didn't, and we 
certainly did get a number of settlements, we also made a 
number of policy changes that impacted, and we had volume that 
went up. So we would have ended up not drawing--even without 
the settlement dollars, we ended up with $3 billion positive as 
opposed to the draw of--I think it was $688 million that we 
thought we might take.
    And I say that because this year, the main thing that will 
drive whether we draw or not draw is whether our--this year, we 
have done all the premium increases and the policy changes 
before this budget came out, so those are kind of baked in. 
Those expectations of revenue are already baked into the 
budget. So the one thing that will change is whether we have a 
significant increase in volume. Then we would be less likely to 
draw or to draw that amount of money.
    And the other thing that I just would want to get out on 
the table here is if we, through the policy changes that we've 
been making, see significant improvements as a result of those 
policy changes in our recoveries, you know, on defaulted loans, 
on our real estate owned, that could, in consultation with OMB, 
change the trajectory.
    Senator Collins. What's your current estimate? You said 
that your premium increases are already baked into the budget. 
So, presumably, that's baked into the $943 million.
    Ms. Galante. Yes. The premium increases are already baked 
in. So, again, it will depend primarily on volume and whether 
there is a significant credit given to the recovery efforts 
that we've been taking on in terms of getting better on our 
recovery of our loans.
    Senator Collins. So do you have an estimate for us, a new 
estimate?
    Ms. Galante. We do not.
    Senator Collins. Thank you, Madam Chair.
    Senator Murray. Senator Boozman?
    Senator Boozman. Thank you, Madam Chair.
    Mr. Montoya, you mentioned that we have situations where 
you have just wholesale disregard for the rules, the high risk 
defaults, where you just know there's something going on based 
on that. Is there adequate legislation in place to deal with 
that right now? Do we have the safeguards to deal with the 
individuals who everybody in the room would agree are blatantly 
playing the system to their advantage?

                      FRAUDULENT LENDER SAFEGUARDS

    Mr. Montoya. Well, I appreciate the question, sir. Thank 
you. I think in one regard, the answer would be no. I think we 
could strengthen some of that. Right now, the way the laws are 
set up, a lender, i.e., being the company, that's found to be 
in violation of FHA's underwriting standards and that we're, in 
essence, going after, can simply shut their doors today. The 
very individuals who were running that lending company could go 
start up a new lending company tomorrow and be back in the 
business.
    So, unfortunately, we're not set up so that we can go after 
an individual. Shy of proving that they, specifically, they, 
themselves, have committed a fraud, which is very difficult to 
do, there's no way to sort of tack onto them the effects of the 
fact that they were running a poor company that poorly 
underwrote loans. So, in other words, there's no way for us to 
suspend them, specifically, individually, from being involved 
in the FHA program.
    So that's an area that we will be recommending some 
legislative language on. That would probably be the biggest 
thing. And I think until you can tag individual responsibility 
onto individuals for this kind of stuff, I'm not sure that 
we'll do much to change the culture of somebody who wants to 
defraud us.
    There's risk in any insurance program, as you well know, 
and we're never going to be 100 percent risk free. To the 
extent we can mitigate that, that would, to me, be one big 
mitigating factor to consider.
    Senator Boozman. Very good.
    Ms. Galante, do you agree, or can you add to that?
    Ms. Galante. Yes. I would just say I think this is an 
important issue and a very tricky one, and we share the concern 
with the Inspector General. What you're struggling with here is 
basic corporate law, in terms of if you're a corporate officer 
and you're doing things in the name of the corporate officer. I 
think there are some ways that we could explore to address this 
particular issue, but it is tricky.
    The other thing I would say is there are other items, in 
terms of help with enforcement, that we certainly legislatively 
would like and some of which we have asked for and were passed 
twice by the House. And we would very much like to work with 
the Senate to get those particular authorities to be able to 
terminate lenders based on their national work. Right now, if 
they operate in different geographies, we have to go after them 
in each of the geographies in which they're operating, which is 
obviously a challenge.
    And we don't have what's called indemnification authority 
for every class of lenders that we have. We have it for most of 
them, but not all of them. Those are two additional legislative 
asks that we would have in terms of enforcement authority.
    Senator Boozman. Very good.
    Mr. Montoya, I guess the only other thing I'd ask is what 
are the top couple--I read your testimony. What are the top 
couple of things that you feel that we as a Congress--you know, 
we're talking about this, and you said that you were prepared 
to perhaps come forward with some suggested legislation that we 
could look at and be more helpful. What other things are out 
there? What are your top couple of things that you'd like to 
see us maybe step forward on?
    This is a huge issue, and it affects those in the housing 
market, in the sense of trying to get in a home. All this stuff 
does is increase costs, and then also the cost to the 
taxpayers. Do you have any other things that you could dwell on 
for a second?
    Mr. Montoya. Yes, sir. Thank you for the question. 
Certainly, FHA faces a difficult challenge in striking that 
balance between protecting the fund, making the program 
attractive to prospective homeowners, lenders, that sort of 
thing.
    I think one of the things we're concerned with is that FHA 
is sort of too concerned, really, with regards to market share. 
While I understand they're coming down from that market share, 
I think, historically, we've seen too much of a concern on 
market share. By that, you end up taking risks, you know, for 
the simple reason of do you want to keep these lenders in the 
program. So that's one concern.

                 INFORMATION TECHNOLOGY INFRASTRUCTURE

    I think sort of the biggest concern for really what is a 
financial institution is their aging IT infrastructure and 
their ability to manage this high finance world, if you will, 
on systems that are 15 and 30 years old. I think in the budget 
request, if I remember correctly, that FHA submitted, they're 
asking for over $100 million in one budget cycle just for 
maintenance of these aging systems, and they're just going to 
get older every year.
    My major concern from an IT perspective when we come and do 
the financial information security type reviews is could we end 
up having a major, major issue with the IT portion of it, i.e., 
losing data, is it vulnerable to manipulation, these sorts of 
things. So that would probably be my biggest concern, and as 
appropriations go, that takes money. I recognize that.
    But when you're spending $100-plus million a year on just 
maintenance of old systems, at some point you've got to pull 
the bandage and say, ``Okay, we've got to upgrade these 
things.''
    So those are probably my two biggest issues, you know, too 
much emphasis on the lenders in the program and trying to keep 
that market share, as opposed to just letting FHA do the 
cyclical rule that it's always done; and the IT infrastructure.

                           STAFFING CONCERNS

    I think the other thing I would add is the staffing 
concerns that FHA and, quite frankly, their sister counterpart 
in the Department, Government National Mortgage Association 
(GNMA), has, and that's staffing. I think some of the critical 
roles that both of these organizations have--I don't believe 
the pay structure allows them to recruit and retain the best 
that we could probably get because we're competing with the 
private sector market.
    And much like FHFA, as you mentioned earlier, the 
Securities and Exchange Commission, these organizations have 
additional budgetary salary authority to allow for that 
increased salary for key positions. I would certainly support 
something like that on behalf of FHA and GNMA to get the right 
qualifications you need to deal with some of these issues. So 
probably those three things.
    Senator Boozman. Thank you.
    Madam Chair, with your permission, could I ask if she 
agrees?
    Senator Murray. Absolutely.
    Senator Boozman. I think he's trying to help you. Do you 
agree with the aging infrastructure and the things like that 
that Congress perhaps needs to help out with to help you do a 
better job?
    Ms. Galante. Absolutely, I do, and it's very difficult. You 
can't retire the old systems until you build the new systems. 
You still have to continue to function in an ongoing 
environment--so the aging infrastructure. I agree with the 
staffing issue, and I would disagree a little bit on market 
share, but I think I would say it a little differently. We are 
concerned about the balance between access to credit for folks 
and the variety of controls we need to put on enforcement. So I 
think we're in the same basic place.
    Senator Boozman. Thank you, Madam Chair.
    Senator Murray. For the record, would you give us what your 
priorities are on the IT? We have invested quite a bit, and I'm 
worried about that as well.
    [The information follows:]
    For the last 80 years, the Federal Housing Administration (FHA) has 
played a critical role in support of the housing market. FHA has 
provided sustainable affordable housing for millions of Americans while 
also playing a critical countercyclical role during times of economic 
stress.
    FHA's capacity to deliver on this mission is increasingly at risk 
due to operational constraints and technology challenges. FHA's 
budgetary constraints, its uncompetitive compensation structure, and 
outdated technology put its core mission at significant risk and expose 
taxpayers to potential financial losses that can be avoided.
    The outdated technology challenges start with the two, core FHA 
information technology (IT) systems known as CHUMS and FHAC. These 
systems, which manage hundreds of billions of dollars of transactions, 
are between 30-40 years old. These core systems are surrounded by more 
than 20 other fragmented systems, which handle ancillary, but critical 
functions.
    While the technology already at FHA's disposal is challenged, there 
are also technology tools that FHA does not have, but desperately 
needs. These include effectively risk-monitoring tools, portfolio 
evaluation systems, and risk modeling technologies. These are all 
standard systems in the mortgage markets, which FHA lacks.
    These technology issues lead to a number of significant management 
challenges, including:
  --Lack of access to timely and useful data to inform risk management 
        and mitigation decisions;
  --Reliance on volumes of paper and manual processes that lead to 
        significant errors and suboptimal allocation of resources;
  --Persistent data integrity issue--different systems say different 
        things; and
  --Challenging operational constraints which make it difficult for FHA 
        to implement new quality assurance and risk mitigation actions.
    FHA generates more than $10 billion in receipts and pays out 
billions in claims each year.
    And while FHA Transformation--an initiative launched to address 
these challenges--has clear and significant payback (e.g., estimated at 
more than a billion dollars over the next several years), lack of 
funding has put the program at risk.
                           fha transformation
    FHA Transformation was launched several years ago to remedy the 
exhaustive list of IT challenges. Specifically, the initiative aims to 
address three main management challenges through better technology 
infrastructure:
  --Detect and prevent fraud, waste, and abuse:
    --Automate the aggregation of lender, borrower, and asset 
            information of inbound data;
    --Automate the aggregation of lender and appraiser past behavior 
            and violation history; and
    --Synthesize high-risk profile information and past, actual fraud 
            data.
  --Prudently manage credit risk at both the portfolio and loan level:
    --Develop comprehensive portfolio, borrower, and collateral risk 
            analytics;
    --Implement a portfolio evaluation tool to enable default, 
            prepayment, home price, and cash flow modeling and loan-to-
            value (LTV) analysis;
    --Support the Office of Risk Management by enhancing forecasting 
            capabilities and analytical;
    --Run situation-specific ad hoc reports and scenarios on the Single 
            Family Housing (SFH) portfolio; and
    --Provide monthly refreshed credit data at the loan level for 
            borrowers.
  --Respond rapidly to changing market conditions:
    --Provide a common, modern platform that supports rapid deployment 
            and continued modification of current and new FHA business 
            systems and processes;
    --Deliver a single source of authoritative data from which to 
            perform risk analytics and other operational reporting;
    --Following migration of functionality, decommission legacy systems 
            within SFH, Multi-Family Housing (MFH), and Healthcare; and
    --Simplify process of making changes to underlying system business 
            rules.
    At the time this initiative was launched, the estimated cost was 
set at approximately $115 million. Given FHA generates more than $10 
billion in receipts and billions in losses, this investment has clear 
and immediate payback.
                     progress on fha transformation
    Significant progress has been made on FHA Transformation to date. 
This includes:
  --Investment in basic infrastructure that will replace the core 
        systems;
  --Launch of front-end system that accepts lender certification;
  --Portfolio analytics that has identified billions of dollars of 
        improvement potential in how FHA disposes of assets; and
  --Piloting and testing electronic application processing tools.
    About half the investment FHA needs has been made to date to 
achieve this progress.
                                appendix
    IT challenges in the Single Family portfolio:
  --Unclear picture of full credit risk on a loan and inconsistent 
        referral of higher-risk loans for manual underwriting;
  --TOTAL system allows lenders an unlimited number of pre-
        qualification submissions with only a limited audit trail;
  --Reliance on multiple automated underwriting systems not owned by 
        FHA;
  --Heavy reliance on manual processing and paper case binders sent in 
        by lenders;
  --Manual application verification processes;
  --Inability to automatically validate appraised value prior to loan 
        closing and endorsement and unable to receive appraisal 
        information through direct interface with lenders;
  --Lack the capability to accept eSignatures;
  --Post endorsement and appraisal reviews based on outdated algorithms 
        and thus unable to effectively target most risky loans;
  --Lack ability to track lender activity and interactions with lenders 
        over time, increasing risk of fraud; and
  --Data integrity and data reporting issues leading to manual data 
        entry, processing delays and limited accuracy.
    IT challenges in the Multifamily and Healthcare portfolios:
  --Inability to proactively identify and mitigate risk due to lack of 
        capability to share and analyze data (no central data, paper 
        based application processing);
  --Processes are entirely manual, relying mostly on MS Word and Excel, 
        for credit analysis and write-ups;
  --Difficult, and in many cases, impossible to implement new programs 
        in existing systems; and
  --Limited management reporting.

    Senator Murray. But I just had one final question, and that 
is that you recently announced a significant reorganization of 
the Office of Multifamily Housing. It's going to affect about 
900 HUD employees over the next several years. The 
administration has rightfully said this move will reduce costs, 
create efficiencies, and improve program delivery.
    But those changes are going to mean fewer staff available 
to oversee and manage HUD's programs, and it means that HUD 
staff will not be located in many areas of our country, a 
concern that some multifamily housing providers in my State 
have raised with me personally. Can you just tell us how you 
can ensure that oversight will not be compromised under this 
new structure and that customers will continue to see the same 
level of service, particularly in places where HUD is no longer 
going to have an office?

                     OFFICE OF MULTIFAMILY HOUSING

    Ms. Galante. Yes, thank you. Clearly, it is challenging to 
operate on a national platform with the demand on the 
multifamily office. I just want to say that in terms of long 
term, this is critical to get our workload balanced across the 
country.
    So just to give you a quick example of why I believe that 
we will be able, long term, to operate in a more consolidated 
fashion across the country is that we have severe imbalances in 
all these 50 offices in the number of assets. We have some 
offices where project managers are responsible for over 200 
assets, and in other parts of the country, they're responsible 
for 30 assets per project manager. So what you see is just a 
vast imbalance of workload.
    We're trying in a whole variety of ways to balance that 
out. But one long-term way of doing it is consolidating the 
personnel into larger geographic areas so that they can share 
that work more evenly and stay within our very severe budget 
constraints. At the same time, given how we are in an 
electronic world, we believe that through technology and 
through other means, including travel, we will ensure that 
customers are served in all locations.
    Senator Murray. And they know the areas that----
    Ms. Galante. In local areas. And we'll have specialized 
teams within these larger consolidated teams with local 
knowledge and connections to the local community.
    Senator Murray. I appreciate that very much.

                     ADDITIONAL COMMITTEE QUESTIONS

    I do want to remind my colleagues that we're going to leave 
the hearing record open for 1 week for additional questions.
    I thank both of you for appearing before this subcommittee 
today.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
               Questions Submitted to Hon. Carol Galante
           Questions Submitted by Senator Barbara A. Mikulski
           consolidation of the office of multifamily housing
    Question. Federal agencies must always be frugal. And they must use 
taxpayer dollars responsibly. But in the current budget environment, 
it's even more important for agencies to think of reforms to make sure 
that every dollar of the taxpayers' money is being used as wisely as 
possible. This consolidation will have an impact on the employees at 
field offices across the country, and the Americans who rely on the 
work that they do. How did you determine that consolidating down to 
five hubs and five satellite offices was the best way to achieve your 
efficiency goals?
    Answer. Please see the end of this response for several exhibits 
that illustrate this explanation of the decision to consolidate to five 
hubs and five satellite offices. The current field structure has 17 
hubs and employees in over 50 field offices. This structure leads to 
five key areas of concern:
  --Unmanageable spans of control at the top of the organization. 
        Currently, the Multifamily deputy assistant secretary (DAS) has 
        nearly 25 direct reports, with 17 hubs and 6 headquarter (HQ) 
        functions (see Exhibit 1);
  --Inconsistent operations across 50+ locations, leading to 
        inconsistent customer service across geographies (particularly 
        for our largest customers), and inhibiting effective risk 
        management (see Exhibit 2);
  --Misalignment between Multifamily's structure and the established 
        Federal regions, leading to inconsistent coordination between 
        Multifamily and the rest of the Department of Housing and Urban 
        Development (HUD);
  --Over 4x workload imbalance across hubs in Production, and 3x in 
        Asset Management (worse within individual offices), leading to 
        long queues in some markets and underused staff in others (see 
        Exhibit 3); and
  --Low spans of control in many field offices (e.g., one manager over 
        two staff), creating unnecessary layers and stifling employee 
        engagement.
    The proposed structure will directly address each of these failures 
in the following ways:
  --The new five-hub model significantly reduces the number of direct 
        reports to headquarters, making management of the field 
        organization simpler and more streamlined (see Exhibit 4):
  --Consolidating to 10 locations enables greater consistency in 
        Multifamily's operations, enabling us to deliver more 
        consistent service to our customers while more consistently 
        managing the risk of the entire Multifamily portfolio;
  --The new five-hub model is more in line with the established Federal 
        regions, which will allow for better coordination between 
        Multifamily and the rest of HUD (see Exhibit 5);
  --Workload across each of the five regions will be more evenly 
        distributed; each region will handle a similar volume in both 
        Production and Asset Management (see Exhibit 6); and
  --The reorganization will produce greater spans of control--in line 
        with HUD policies and Federal standards--ensuring all locations 
        operate at scale, allowing us to make the most of scarce 
        financial resources.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

    Question. How was the decision made to close the HUD Maryland 
Office of Multifamily Housing and all the offices in Region 3?
    Answer. Within this response are two exhibits that illustrate this 
explanation, including a detailed breakdown of the comparison of 
Boston, New York, Philadelphia, and Baltimore. First, it is worth 
noting the Multifamily is not closing any HUD field offices; other HUD 
staff will remain in the Baltimore field office. However, we do 
understand the concern about consolidating Multifamily's field 
structure, which means that Multifamily staff will relocate from the 
Baltimore office. To determine which 10 offices would serve as the 
future Multifamily hub and satellite offices, we first began by only 
considering locations that were already hubs (see Exhibit 7).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    In order to then streamline the Multifamily leadership structure, 
balance workload, and align with Field Policy and Management (FPM) 
regions, we then organized the hub offices into five geographic 
regions: the first covers Federal regions I, II, and III (the Boston, 
New York, Philadelphia and Baltimore offices); the second covers 
Federal region IV (the Atlanta, Jacksonville, and Greensboro offices); 
the third covers Federal region V (the Chicago, Detroit, Columbus, and 
Minneapolis offices); the fourth covers Federal regions VI and VII (the 
Fort Worth and Kansas City offices); and the fifth covers Federal 
regions VII, IX, and X (the San Francisco, Denver, Los Angeles, and 
Seattle offices) (see again Exhibit 7).
    Finally, we compared offices from within the proposed five regions 
based on several factors: the full-time equivalent (FTE) count in each; 
the Production workload (average annual firm commitments); the Asset 
Management workload (total assets); and whether an FPM Regional 
Administrator sat in that office (see again Exhibit 7).
    In determining which two offices to select from Federal regions I, 
II, and III, we ranked Boston, New York, Philadelphia, and Baltimore 
against each other based on these criteria. Based on these criteria, 
Baltimore and Philadelphia were ranked lower than other offices in the 
new Multifamily region (see Exhibit 8).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Question. What will be the effect on HUD's processing of 
multifamily loans and the review of projects during consolidation and 
after it?
    Answer. We believe that this transformation will improve the way we 
do business by enhancing our efficiency, risk management, and 
consistency--which will in turn improve our ability to deliver on our 
mission of providing affordable housing.
    Prior to the consolidation of field offices, we will roll out 
workload sharing nationally across Multifamily offices. Once 
consolidation begins, workload sharing will allow us to take work 
``offline'' from impacted offices and move it to other areas of the 
country in order to ensure continuity of operations and excellent 
customer service.
    As we complete the implementation of each wave, all Multifamily 
loans will be reviewed through a formalized ``risk-based processing'' 
approach that segments incoming applications based on risk and 
complexity. Staff will be assigned to applications based on the 
particular expertise and experience that assessing those loans will 
require. More experienced underwriters will process riskier, more 
complex applications. These underwriters will oversee an end-to-end 
review of each application, continuing to draw in technical experts 
such as construction analysts and appraisers as needed. While our staff 
already considers risk and complexity in their work, we believe that 
formalizing this process will improve the consistency of our risk 
management and service delivery. This process complements tools 
introduced in the Breaking Ground initiative like the ``Early Warning 
System,'' which allowed Production staff to rapidly identify 
applications that required further review by the submitter before being 
processed.
    In addition to clarifying roles, we will also be identifying 
opportunities to streamline the underwriting process to ensure that 
simple applications are not being over-processed. We believe that this 
approach to Production will improve risk management by focusing expert 
attention on the most challenging applications, improve customer 
service by providing a clearer point of contact and more streamlined 
processing, and improve the overall efficiency of Multifamily's 
Production operations. This model has already proven successful in the 
Rental Assistance Demonstration and Low-Income Housing Tax Credit 
pilot. Many field offices are already experimenting with variants of 
this model, and through the Transformation we will formalize it and 
make it more consistent.
    A similar approach will also be adopted in Asset Management, 
whereby complex and troubled assets will be assigned to Multifamily's 
most expert staff. This approach is again consistent with the risk-
based approach introduced to Asset Management by Sustaining Our 
Investments. We will continue conducting on-site inspections and 
reviews as required by our policies and procedures. Today, we already 
manage assets and review applications from around the country, even 
when we have no nearby field office. We plan to continue this approach 
in the future.
    Question. How will this consolidation affect smaller banks and 
lenders?
    Answer. Like all Multifamily stakeholders, smaller banks and 
lenders will continue to have the same level of access to dedicated 
Multifamily staff that they have today. Due to shorter processing times 
and improved consistency across sites, banks and lenders should expect 
improved customer service from Multifamily.
    Question. I understand that you have promised the employees 
transparency and that you will keep them informed of changes; what 
steps have you taken, and what will you do as the process continues, to 
make sure that employees are kept up-to-date on the consolidation?
    Answer. In order to maintain an open dialogue between leadership 
and staff, the leadership at HUD and within Multifamily has conducted 
an extensive series of in-person, on the phone, and Web casts with 
staff. So far, this has included over two dozen different interactions, 
including 10 visits to field offices across the country. Multifamily 
leadership plans to continue these conversations into the foreseeable 
future. After the initial announcement, FHA Commissioner Carol Galante 
and Deputy Assistant Secretary Marie Head conducted a series of 
conference calls with each hub, during which they answered questions 
and collected feedback. Secretary Donovan, Deputy Secretary Jones, 
Commissioner Galante, and Deputy Assistant Secretary Head are all 
conducting site visits to field offices to meet with and take questions 
from Multifamily staff in person. During several biweekly conversations 
with the Deputy Secretary, which are broadcast every other Friday, the 
Deputy Secretary has provided answers to frequently asked questions and 
has hosted subject matter experts to describe employee options for 
relocating, buyouts and early retirement.
    Multifamily is committed to providing ``on demand'' resources to 
staff. We have created dedicated Web sites on HUD.gov and on the 
internal HUD@work site. We also continue to track incoming questions 
from individual employees, and regularly update the Questions and 
Answers found online\1\. Finally, we have set up a call center in the 
Office of Housing that directs employees to the appropriate subject 
matter experts.
---------------------------------------------------------------------------
    \1\ http://portal.hud.gov/hudportal/documents/
huddoc?id=052813TrnsfrmMF_FAQs.pdf.
---------------------------------------------------------------------------
    We are preparing local supervisors to hold conversations with 
individual staff members regarding their relocation destination, so 
that employees know, to the maximum extent possible, where we are 
proposing to relocate them. Once union negotiations are complete, we 
will launch a new series of communications with employees in order to 
inform them of the outcomes of negotiations and to provide individuals 
with the location of their directed reassignments and the timing of 
buyout offers.
    We expect that this regular cadence of communications will continue 
throughout the multi-year implementation of the transformation, as we 
remain committed to informing staff of the latest developments.

                         CONCLUSION OF HEARINGS

    Senator Murray. This hearing is recessed until Thursday, 
June 13, at 10 a.m. We'll have a hearing on our need to invest 
in our Nation's transportation infrastructure.
    So thank you again to both of you.
    [Whereupon, at 3:55 p.m., Tuesday, June 4, the hearings 
were concluded, and the subcommittee was recessed, to reconvene 
at 10 a.m., Thursday, June 13.]
