[Senate Hearing 113-81]
[From the U.S. Government Publishing Office]
S. Hrg. 113-81
THE FHA SOLVENCY ACT OF 2013
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING LEGISLATION RECENTLY RELEASED BY CHAIRMAN JOHNSON AND RANKING
MEMBER CRAPO INTENDED TO STABILIZE THE MUTUAL MORTGAGE INSURANCE FUND
__________
JULY 24, 2013
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Printed for the use of the Committee on Banking, Housing, and Urban
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson, Deputy Staff Director
Erin Barry Fuher, Professional Staff Member
William Fields, Legislative Assistant
Greg Dean, Republican Chief Counsel
Chad Davis, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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WEDNESDAY, JULY 24, 2013
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
Senator Kirk
Prepared statement....................................... 22
WITNESS
Carol J. Galante, Assistant Secretary for Housing/Federal Housing
Administration Commissioner, Department of Housing and Urban
Development.................................................... 3
Prepared statement........................................... 23
Responses to written questions of:
Senator Kirk............................................. 27
Senator Coburn........................................... 28
Additional Material Supplied for the Record
Statement submitted by Enrique Lopezlira, Senior Policy Advisor,
Economic and Employment Policy Project, Office of Research,
Advocacy, and Legislation, National Council of La Raza......... 32
(iii)
THE FHA SOLVENCY ACT OF 2013
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WEDNESDAY, JULY 24, 2013
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I call this hearing to order.
Thank you, Commissioner Galante, for joining us today to
provide your insights and reaction to the FHA Solvency Act
discussion draft Ranking Member Crapo and I have released. I
want to thank Ranking Member Crapo and his staff for working
with me and my staff on this bipartisan legislation. I would
also like to thank Senator Brown, Senator Menendez, and Senator
Vitter for their earlier efforts to provide the FHA with
additional tools and flexibility.
Earlier this year, Ranking Member Crapo and I agreed that
addressing the stability of the FHA's finances would be first
on our housing agenda, followed closely by a broader housing
finance reform effort. Like our FHA bill, we will seek the
input of all the Members of the Committee to reach a similar
bipartisan agreement on housing finance reform legislation in
the coming weeks and months. To that end, I would encourage the
Committee to focus on the stability of the FHA during today's
hearing.
The FHA serves a critical role in our housing market by
insuring affordable, well-documented and underwritten mortgages
for families across the country. That insurance maintains
liquidity in the mortgage market during a recession, fulfilling
the FHA's countercyclical mission. Without the FHA, the housing
crisis would have been much deeper--by as much as 25 percent--
because mortgage credit would not have been available to most
qualified borrowers.
While the fiscal year 2012 Actuarial Report projected a
negative capital ratio for the MMI Fund, recent data show the
weakest books of business--the years 2006 through 2009--are
stabilizing, and the most recent data show serious delinquency
rates falling since the report was released. These improving
trends contribute to the future stability of the FHA, and the
bill that Senator Crapo and I have drafted would provide the
FHA with tools to strengthen its finances and maintain
stability into the future.
The FHA Solvency Act of 2013 would provide the FHA with
many of the tools Secretary Donovan requested in HUD's 2012
Report to Congress and in his testimony before this Committee.
Our discussion draft would better equip the FHA to hold lenders
accountable for fraud or inappropriate loans. The bill would
also require annual reviews of loan performance and premium
levels to ensure that pricing and underwriting standards are
appropriate.
Commissioner Galante, I would like you to give us greater
insight into how these tools and other provisions of the bill
will help stabilize the MMI Fund and strengthen the program for
current and future homeowners. I look forward to continuing to
work with you, Senator Crapo, Members of the Committee, and all
stakeholders as we proceed to a markup of this important bill
next week. I am encouraged by the positive response the bill
has received from the National Association of Realtors, the
Mortgage Bankers Association, and the Mortgage Insurance
Companies of America, and I hope the Committee can move swiftly
to approve this legislation.
With that, I will turn to Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman.
The Federal Housing Administration, or FHA, has helped
millions of Americans achieve the dream of owning a home.
Unfortunately, the FHA has also experienced higher than
expected default rates over the last several years. In addition
to placing severe financial stress on the Insurance Fund, these
defaults have caused hardships for the very people the FHA was
designed to help.
Concerns about the solvency of the FHA have been building
for quite some time. The capital reserve ratio has been
declining since 2006, and the FHA Fund has been in violation of
statutory mandates for minimum capital levels for the last 4
years.
The last independent Actuarial showed a negative economic
value of more than $16 billion and a capital reserve ratio of
negative 1.44 percent. Therefore, Chairman Johnson and I have
released the discussion draft before us today.
This draft attempts to address a number of the problems
facing the FHA through three overarching approaches:
First, it gives the FHA the tools it needs to better
protect the Fund from participants who do not follow the FHA
guidelines or who consistently do not perform to appropriate
standards;
Second, it ensures that personnel and experts with the
appropriate backgrounds will review, revise, and annually
reevaluate the FHA standards to make its lending more
sustainable;
And, third, it will increase the FHA's capital allocation
and better incentivize leadership to meet those capital
requirements so that the taxpayer is better protected in the
future.
This bill is intended to put the FHA in a better position
to function as an actual insurance fund. It will also place a
renewed emphasis on the FHA ensuring sustainability mortgages.
When the FHA helps people obtain a mortgage which they actually
have the ability to repay, it is helpful to the solvency of the
FHA.
We should also be clear that the bill is not the last
discussion this Committee will have on the reform of FHA. The
Chairman and I have indicated that, upon completion of the
Committee action on this bill, we plan to immediately turn our
attention to broader housing finance reform legislation. It
will be necessary to address many of the broader questions
surrounding the scope and mission of the FHA as a part of that
effort as well.
I look forward to working with the Chairman and all of my
colleagues on the Committee regarding both the FHA and the
broader housing market. However, before us today is a bill that
we can consider now, one that would take many needed steps
toward changing the disturbing negative trends the FHA has
experienced through the last several years.
I thank HUD for being here today to discuss this draft with
us. I also thank the number of industry, consumer, and taxpayer
advocate groups who have reviewed this draft and taken the time
to get back to us directly with their thoughts and comments. I
encourage continued public comment aimed toward further
strengthening this bill as we move forward.
As I previously noted, nearly every American has a stake in
our actions. Whether they are looking to buy or sell a home or
they are simply taxpayers who are weary of seeing news about
another bailout, our decisions today and beyond will impact
them. I hope that we can take this much needed first step soon.
Thank you very much, Mr. Chairman.
Chairman Johnson. Thank you, Senator Crapo.
Are there any other Members who wish to make a brief
opening statement?
[No response.]
Chairman Johnson. Thank you all.
I want to remind my colleagues that the record will be open
for the next 7 days for opening statements and any other
materials you would like to submit. Now I will briefly
introduce our witness.
The Honorable Carol Galante is the Commissioner of the
Federal Housing Administration. She has been at HUD since May
2009, first serving as Deputy Assistant Secretary for Multi-
Family Housing.
Commissioner Galante, please begin your testimony.
STATEMENT OF CAROL J. GALANTE, ASSISTANT SECRETARY FOR HOUSING/
FEDERAL HOUSING ADMINISTRATION COMMISSIONER, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Ms. Galante. Chairman Johnson, Ranking Member Crapo, thank
you for having me here to testify today. The Secretary and I
greatly appreciate the work you and your staffs have done on
this bipartisan bill intended to give HUD many of the tools
necessary to ensure that we have a fiscally sound and vibrant
FHA that continues to support responsible home ownership and
maintains access to affordable mortgage credit for future
generations of homeowners.
Keeping the Mutual Mortgage Insurance Fund on the road to
full fiscal health is critical to this mission. So before I
discuss how this bill helps achieve our shared goals of
improved risk management and replenishing the capital reserve
account, as well as the sections HUD feels require additional
discussion, I want to provide the Committee with a update on
the status of the Fund.
Our latest data shows that the Fund is continuing its
positive trajectory, experiencing significant improvements in
the forward loan portfolio in particular, as a result of both
the economic recovery and decisive actions taken by this
Administration. In the June 2013, the percentage of seriously
delinquent loans--that is, loans past due 90 days or more or in
foreclosure or bankruptcy--was down to 8.38 percent from a peak
of 9.83 percent in January 2012, a 15-percent improvement in
less than 18 months. This is also a nearly 1\1/4\-point
improvement since the November 12 Actuarial Report.
Early payment delinquencies have fallen to 0.25 percent,
their lowest level in 26 months, down from a historic high of
2.6 percent in July 2007. Meanwhile, real estate loss
severities have dropped 27 percent since their peak in 2011,
and average loss severities across all disposition methods are
down 10 percent since 2011, and this figure does not account
for the impact of FHA's new streamlined short sale program,
which we formally announced this month.
But we know our work is not done, and these encourage
trends can be accelerated if we are given the tools we have
requested from Congress. We are grateful for the inclusion of
these tools, some of them which were first brought to this
Committee in 2010 by Senators Brown, Begich, and Vitter, and
more recently Mr. Menendez, since they are critical to the
responsible management of the Fund. Expanding indemnification
to include direct endorsement lenders gives FHA the ability to
treat all lenders who fail to comply with FHA guidelines
equally, ensuring compliance and strengthening the financial
position of the Fund.
Other tools provided by the bill would improve FHA's
ability to identify and mitigate risk, helping us to better
protect the Fund. These tools include broader authority to
terminate lenders, a revised compare ratio, institutionalizing
the position of a chief risk officer, and the ability to
quickly make structural changes to the HECM or reverse mortgage
program. All of these tools are vital to the responsible
stewardship of the Fund, and we thank Chairman Johnson and
Ranking Member Crapo for their inclusion.
In particular, the ability to make necessary changes to the
HECM program will not only help secure the Fund and support
Americans who choose to age in place, but it also supports
HUD's mission of creating and preserving affordable, inclusive
communities.
That said, I would also like to take this opportunity to
say that if we are unable to obtain statutory authority to make
these immediate changes to the HECM program by August 1st, FHA
will have to take further blunt changes to the program which
will not properly address the identified risks and harm access
and effectiveness of the product for consumers. For that
reason, I do urge the Senate to pass H.R. 2167.
Now, while FHA is looking forward to working with the
Committee to achieve our shared goals of continuing to
strengthen the Fund and better manage risk, there are several
areas where additional conversations with Members of this
Committee will be important to producing the most effective
legislation possible.
For instance, Section 7 outlines the plan for
recapitalization, which relies exclusively on mortgage
insurance premium increases. While FHA shares the Committee's
desire to return the Fund to full fiscal health, I would point
out that premium increases are just one of many methods to
achieve that recapitalization. I am concerned that relying on
an inflexible approach here could actually hurt the Fund under
certain economic conditions and would unduly penalize future
homeowners.
For this reason, I would ask that we continue to work with
the Committee to craft language that best facilitates
recapitalization using the full range of options available.
To better mitigate risk, FHA also requested authority to
ensure that servicers of FHA-insured loans are being held
accountable for their performance. The authority to transfer
the active servicing would allow FHA to direct servicing to a
specialized sub-servicer when the original servicer is not
fulfilling its obligation under the contract of insurance. The
addition of this authority would improve loss mitigation
outcomes.
Finally, given an increasingly complex mortgage market,
aging FHA systems and infrastructure, a need for additional
skills and expertise, and difficulty responding quickly to
major risk issues as a result of contractual and statutory
limitations, FHA would benefit from additional statutory
changes to provide new risk management and operational tools to
the Fund. Therefore, we look forward to discussing the
inclusion of additional operational authorities that would best
position FHA to carry out its mission.
We remain committed to continuously improving our
stewardship of the Fund and look forward to working together to
create a 21st century FHA, one best able to serve the American
people.
Again, I want to thank the Committee for their hard work
and look forward to partnering with you on this legislation. I
look forward to your questions.
Chairman Johnson. Thank you, Commissioner Galante, for your
testimony.
As we begin questions, I will ask the clerk to put 5
minutes on the clock for each Member.
Commissioner Galante, with the changes to the compare ratio
and the national termination authority proposed in the
discussion draft, will the FHA have the tools necessary to
identify and suspend noncompliant lenders?
Ms. Galante. Yes, thank you for the question, Chairman
Johnson. The changes in the compare ratio as well as the
additional indemnification authority for direct endorsement
lenders will certainly give us increased capability to both
terminate and hold lenders accountable for defects in the
manufacturing of these loans.
Chairman Johnson. How will the expanded repurchase
authority granted to the FHA in the bill better protect the MMI
Fund from fraudulent lending practices going forward?
Ms. Galante. Yes, thank you. Today we have a situation
where the lenders that participate in our lender insurance
program, which is--they do about 70 percent of the FHA
business, but the direct endorsement lenders that do about 30
percent of the FHA business do not--we do not have the same
authority over those lenders. And if we want to seek a
repurchase, as you put it, or an indemnification, we actually
need to negotiate with them over that repurchase or
indemnification as opposed to having the direct authority to
require indemnification from those lenders.
And so this will give us additional authority over a
significant portion of our business that right now is a long
negotiation process that is very difficult to achieve on an
ongoing, regular basis. So that will substantially improve the
enforcement of lenders.
Chairman Johnson. In your testimony you raised concerns
regarding the premium increases that are required if the Fund
is undercapitalized. What alternatives would you recommend that
will give us confidence that the FHA has taken action to
achieve the required capital ratio?
Ms. Galante. Yes, so this is a challenging issue. I fully
appreciate that Section 7 is trying to ensure that future
Administrations' feet are held to the fire in terms of
increasing premiums when they are necessary to be increased,
and so we certainly support that general direction.
The concern that we have is that sometimes in a
countercyclical situation, if you took the situation today, if
this were in effect, we have already increased premiums five
times very significantly, and we clearly are at a tipping point
here, that if we increase them more, we would actually both
shut out additional home buyers. But we also would lose those
future homeowners from FHA, and, therefore, we would lose
volume, which would also hurt our activities.
So the kinds of things that I think could be added are,
one, some flexibility in how those premium increases happen. So
maybe it is not just annual but also up front, so there are
some changes there. We made changes in policy, for example,
last year on how we treated cancellation of future premium
increase, so that was not an actual premium increase, but that
policy change actually generates more money to the Fund over
the long term than a simple premium increase would.
So that plus other ideas around how we deal with
recoveries, for example, I think would be examples.
Chairman Johnson. Can you comment on how requiring the FHA
to initiate a risk-sharing program with private market
participants would impact the MMI Fund?
Ms. Galante. Yeah, so I would simply say this about risk
share: FHA does not have a great history doing a risk-share
program. We had a program in Multi-Family in the 1980s that
actually ended up costing the Fund significant dollars.
So one of the challenges with thinking about a risk-share
program is ensuring that FHA has the right analytic capability,
the right staffing capability to deal with what is, frankly, a
counterparty risk here of the private mortgage insurer.
So I would say that, you know, we can look at it seriously
as we go down the road, but we are concerned that how one
structures a risk-share program, you know, we could have some
very unintended consequences that actually could have FHA
coming out on the wrong side of such a program, and we would
want to be very cautious about how one might proceed to do
that.
The last thing I would say on this question is, as you
know, under the existing private mortgage insurance model with
the GSEs, there were some serious challenges during the crisis
with that model, and FHFA is working on new kinds of risk-share
ideas with the GSEs today. I certainly think looking at how
they resolve some of those issues would be very helpful for
FHA, you know, who would be tackling this kind of anew.
Chairman Johnson. Thank you.
Senator Crapo.
Senator Crapo. Thank you Mr. Chairman.
Commissioner, I just want to cover a couple of preliminary
matters. Some in the industry have expressed concerns that the
changes we make to HUD's authority around indemnification on a
prospective basis might be used by HUD to justify that same
treatment on a retroactive basis. Section 3 of the text quite
clearly states that that authority shall only apply to
mortgages insured under this title that were originated on or
after the date of enactment of this bill.
I just want to allay any remaining fears out there with
regard to that understanding and get your confirmation for the
record that you understand that HUD understands this authority
is prospective and that Congress would not be granting
retroactive indemnification authority.
Ms. Galante. Yes, we do understand that.
Senator Crapo. Thank you. And I want to follow up a little
on the Chairman's questions about your question about the need
for mandatory premium surcharges. And as I understand your
point, you indicate that there are other ways and other actions
that can be undertaken to deal with the issue.
The concern or the question that I have is that, as I
understand it, nothing in this bill prohibits the FHA from
undertaking any number of the alternatives that I heard you
suggest when the FHA is meeting its capital obligations to
ensure that it continues to do so. And so to me the question
becomes this--it really relates to the point in time that you
are addressing the circumstance. When the capital levels of the
FHA are in violation of Federal law and Congress needs
assurances that actions will be taken, it would seem to me that
the actions you are talking about should have already been
undertaken before we get to that point. But that when we are at
the point where literally the law is being violated, is not
that a reason to have a mandatory surcharge? Or are you
suggesting that there should be no requirement for a surcharge
even in that circumstance?
Ms. Galante. Yes, so, again, I think we have to look at
when we are certain that we are going to be below the capital
ratio, whatever that is, whether it is 2 or 3 percent,
depending on where we are in time in the bill.
Senator Crapo. Yes.
Ms. Galante. You know, that will be calculated by the
Actuarial each year, maybe more often as we go down the road
here. But as we see that happening, it is going to take time to
institute policy changes.
So some of the policy changes at the moment in time that we
hit that capital ratio or being below it will take some time to
implement policy changes that could include some things that
are not specifically a premium increase. And if we do that at a
time--if we just simply go right to the premium increase at
that point in time, again, we could be cutting off borrowers at
the wrong time and, you know, worsening the economic situation
for them and for the market.
So we want to be careful about when and how we, you know,
add premium increases, and we certainly--you know, just to be
clear, we get that that is a very important tool, and this
Administration, to the chagrin of many, you know, we have
increased premiums five times, and very significantly, during
this crisis to get us back to a point where we are
appropriately pricing for the risk that we are taking on.
Senator Crapo. Thank you. It seems to me there is a
tension, because I understand your point that the premium
increases can have an impact on volume and could actually have
an impact on the ability of the FHA to manage with the
flexibility that it needs.
I also see the point, though, that at some point, if the
other actions that you are talking about are not working, at
some point there needs to be the assurance that the capital in
the Fund will be protected, and the premium increases seem to
be that final assurance.
And so although I can see the need for the flexibility, I
can also see a concern if we simply have no point at which we
have an assurance that the capital in the Fund will be
protected. We will need to visit with you and others further
about that, I assume, as we move forward.
One other quick question. I hope we will have a couple of
rounds here today, Mr. Chairman. You have asked the Committee
to give the FHA broad authority to transfer servicing rights,
and some have suggested that even if we make it part of the
evaluation for termination from the program. Some industry
participants and experts have suggested that this authority
could in some scenarios drastically reduce the value of these
servicing rights.
Understanding why you want this authority, do you
acknowledge the possibility that this could impact the value of
servicing rights?
Ms. Galante. So I would say we are asking for authority
when servicers are not meeting their obligations, their
performance obligations, as outlined in our servicing
requirements; we would do this through a rulemaking process
where we would lay out very clearly what the benchmarks are
before this type of activity would be triggered. And I do
believe that we can have this authority without having it in a
way that will impact the value of servicing rights. What we are
really talking about is getting servicers who are not
performing to say--you know, bring in a sub-servicer. You know,
we are looking for the tools to kind of force the activity to
be what it needs to be. We are not trying to impact the value
of servicing rights here.
Senator Crapo. Thank you. My time has expired. I may come
back and visit with you a little further about that.
Thank you.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, Commissioner.
I first want to commend Senator Johnson and Senator Crapo
for their proposal and for moving very thoughtfully and very
aggressively on this issue; what is alarming is the capital
situation of FHA; and although there appears to be improvement,
this is an issue that has to be addressed; and I commend both
of them for doing it.
Let me follow up on Senator Crapo's question about
servicing. Have you done some analysis suggesting how much you
could save or avoid in terms of cost if you have the authority
to essentially redeploy servicing rights from a nonperforming
entity to a performing entity?
Ms. Galante. So, let me say this and I want to be clear. We
are not talking about transferring the actual servicing rights.
We are talking about, you know, the act of servicing could be
subserviced, could move pools of loans that need specialized
attention; and, you know, lenders are doing this today, some of
them on their own, so just to be clear about what we are trying
to help people get to here.
We have done some analysis. I do not have the numbers in
front of me but I would say it varies by servicer substantially
and that what we do see is those servicers who deploy these
specialized techniques, subservicers, specialized servicers for
defaulted loans. Higher touch servicers actually see much
better loss mitigation helping borrowers stay in their home,
for example, and then protecting losses to the fund.
Senator Reed. And again, I do not want to present a
conclusion, but it seems to be that this practice is being used
by commercial lenders rather frequently of, you know,
compelling or advising or suggesting that servicers find
qualified subservicers; and you are simply asking for what
appears to be the commercial, prevailing commercial practice
right now. Is that fair?
Ms. Galante. That is correct. This is a common practice
outside of FHA right now.
Senator Reed. Very good. In your testimony, you allude to
many factors; and one of the aspects is the FHA's aging systems
and infrastructure that you mentioned which would require, you
know, investment improvement.
Can you talk about that? Is that contributing to some of
the difficulties you are having?
Ms. Galante. Yes, indeed it is. There are really two
aspects of the aging infrastructure system that I would
mention. One is just we literally are operating a 1970s
technology and the inability to have people give us electronic
file applications or just the ease of doing business needs to
be, you know, brought up to the 21st Century.
But, I would say more importantly, you know, given how
complex that mortgage market has become, we need much better
internal risk analysis, you know, your own models, you know, to
be able to monitor the portfolio in a very detailed way, better
electronic tools to detect fraud. We have made some progress in
that area.
So, we do have a project called the FHA Transformation
that, you know, was funded partially a couple of years ago, and
we have been working to change systems. But, we have a long way
to go here and it will be very important, you know, in the
future to have these kind of systematic tools and have the
staffing capabilities and the, you know, the strength to really
be able to analyze this portfolio in a much more detailed way
than we have had in the past.
Senator Reed. So in the context of the proposed
legislation, you would need some authority or support for these
efforts is that within your current authority and now you just
lack resources?
Ms. Galante. Well, certainly resources would be great but
understanding the difficulty in this budget environment--a HUD
Bill is being discussed today as well--I think there are some
changes in legislation that could help get us there.
So, enabling us, for example, to actually, you know, tap
into FHA receipts before they go into the general budget for
certain kinds of critical investments is an example.
You know, changing the pay scale for at least a subclass of
FHA employees that deal with the risk management. FHFA, FDIC,
all of these institutions are on a different pay scale than our
economists are, for example.
Senator Reed. Just following up your point which is the
budget environment, it would be extremely helpful to myself if
you could quantify the savings, the increased efficiencies, you
know, if we are going to invest in modernization of FHA. We
want to make sure that the return is several multiples of the
investment. That is the nature of our environment. That is the
nature of good business practice everywhere.
Ms. Galante. Absolutely, I agree with you.
Senator Reed. Thank you, Commissioner.
Ms. Galante. Thank you.
Chairman Johnson. Senator Corker.
Senator Corker. Mr. Chairman, thank you and thank you and
the Ranking Member for producing a piece of legislation. I
think all of us came here to solve problems and we know we have
a major housing finance problem. We know this is a piece of
that. We thank you again for having this hearing.
Ms. Galante, I appreciate your service and glad you are in
the position you are in, and I know that in April, the FHA
suspended a fixed-rate, full-draw HECM product, reverse
mortgage. It was by far the biggest money loser by volume. It
is my understanding you all have no intentions whatsoever of
reinstating that product. Is that correct?
Ms. Galante. That is absolutely correct.
Senator Corker. And I assume that if we were to try to add
up an amendment to this piece of legislation that ensured that
that was the case from the FHA standpoint anyway, that would be
not objectionable. Is that correct?
Ms. Galante. That is correct. I just want to say we are
really looking for authorities as quickly as possible to make
additional changes to the overall HECM program that would help
that situation even more and, you know, be able to have a
financial assessment of borrowers so they understand what, you
know, what they can afford and have better limitations on what
they can take out.
Senator Corker. Listen, thank you for that.
I was interested in your testimony toward the end where I
guess this piece of legislation gives you some abilities to
deal with some solvency issues but you talked about additional
considerations and the fact is that there are other things with
this highly complex housing finance system that we have in this
country that you need to have the ability to do. So, the bill
we are looking at deals with an important piece of housing
finance but there are other pieces that FHA would like to
discuss with this and have the authority to do just to better
manage risk. Is that correct?
Ms. Galante. That is absolutely correct.
Senator Corker. Let me ask you the question. I assume that
whatever Congress happens to do relative to GSEs because of
guarantee fees and those kinds of things, all of those things
work together. Is that correct? In other words, if we do
something with GSEs that, you know, drives a bunch of volume to
FHA, that could be good or that could be bad or vice versa. So,
the two very much work hand-in-hand. Is that correct?
Ms. Galante. Absolutely, Senator. I have said in multiple
testimonies at the end of the day, these things that we are
talking about here today are just things that we need in any
event under any circumstances, right, to ensure that we can
manage our risk better.
But as we move into discussions of housing, finance reform
more broadly which I know you are quite involved in, you know,
we need to be sure that FHA's role, that we do not leave a void
in the market that we have, you know, a new system doing this
and FHA doing that and there is some gap in the middle. You
know, that we need to be sure that these efforts are synced up
at the end of the day.
Senator Corker. Well, I think everybody in the industry has
said that. I know the House is taking up all of this in a
combined way, and I would just say, Mr. Chairman, I was
interested in Ranking Member Crapo's comments about coming back
to deal with some of the other FHA issues.
I think it would be real important for the Committee to
know before the markup next week, look, I appreciate this
effort taking place, but I think we all know this is just one
component. All of this has to tie together well for it to be
successful, and I think all of us want to deal with this issue
that has been 5 years in the making.
So, I would hope that we get some direction from the
leadership of the Committee as to what we are going to do on
the floor. I would assume there is no effort or thought that we
would try to take up one piece on the floor but that we would
do housing finance in general on the floor to deal with the
complications that the FHA Director is laying out right now.
In other words, if we just deal with one component, we can
grate tremendous weaknesses in other components of housing
finance, especially those components that the Federal
Government is involved in.
So, I appreciate the effort. I thank you. I always like it
when the Chairman and Ranking Member work together and we have
bipartisan consensus on something. I believe there is a way to
develop bipartisan consensus not just on this piece but also on
GSEs and some of the other pieces that Carol needs to have
implemented, and I hope as a Committee we will be committed to
doing all of it at once so we do it the right way, because
again one piece can really get another piece greatly out of
sync.
So, I thank you very much for this and I look forward
additional testimony.
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman, and Mr. Chairman
and Ranking Member Crapo, thanks for holding this hearing today
and thank you for the work on this bill.
Even as our housing markets continue to recover, the FHA is
under severe capital strain. During the crisis, the FHA played
an important role in maintaining our housing market liquidity
but the funds capital ratio has taken a significant hit.
The FHA solvency legislation is an important way to provide
the agency with greater authority to manage and price for the
risk it is assuming to mitigate losses on its current book
business and to hold lenders accountable for proper
underwriting and it is important that it is done while ensuring
that the FHA can play an ongoing role in supporting housing for
underserved markets.
So, Mr. Chairman and Ranking Member Crapo, thanks for
taking this issue up. I also want to say just briefly that it
is my hope that after we finish this bill, we can turn to other
piece of the puzzle and that is GSE reform in a similarly
balanced, thoughtful, and bipartisan way. I think the issues
fit closely together and the interplay between each is very
important to the housing market.
Assistant Secretary Galante, in recent years FHA's single
family business shows a high average FICO scores and lower
delinquency rates which is positive for the health of the
insurance fund. However, concerns have been raised that some
deserving borrowers are being shut out of FHA because lenders
are imposing overly strict credit overlays to avoid
indemnification risk.
As Commissioner, what legislative safeguards do you think
need to be included in this legislation to ensure an
appropriate balance?
Ms. Galante. Thank you for that question. That is the
question that we struggle with everyday particularly through
this crisis which is ensuring continued access to credit for
creditworthy borrowers and at the same time ensuring that we
are rebuilding our capital reserves after, you know, the worst
recession the country has had since the Great Depression. So,
that is a balancing act we do everyday.
I would say the kinds of authorities that we are talking
about in this bill in terms of indemnification and repurchase
are very reasonable in terms of the lender's side of the
equation.
I think the changes to the compare ratio or there is some
flexibility. The compare ratio is how we measure lenders
against each other. The changes we are asking for here would
help us really be able to hone in on and target what I would
call things that are the manufacturing era of the lender as
opposed to the credit box of FHA.
As lenders can feel more comfortable that we are not going
to go after them because they lend to the whole range of the
credit box but we are going to, you know, deal with their
challenges when they make errors that they should not make or
skip steps that they should not skip in doing underwriting of
these loans.
The new compare ratio will give us a better ability to look
at that and compare lenders on that basis. So, that is
something that we are hoping will both, you know, decrease the,
quote, lender overlays that we are seeing today.
Senator Hagan. The past FHA solvency legislation has
included a programmatic review of early period delinquency.
What has been done to investigate and review these
delinquencies that become 90 days or more delinquent in the
first 24 months since the origination?
Ms. Galante. Yes. So, we now partly as a recommendation
from the IG and the GAO and partly because we got some systems
help through this FHA Transformation, we actually do monitor
all early payment delinquencies, any loan that, you know,
claims or is 90 days down in the first 6 months is reviewed on
an ongoing basis; and then we also have an algorithm where we
are looking at a percentage of all loans on an ongoing basis to
ensure that we are catching earlier patterns or problems we are
seeing from----
Senator Hagan. Then what action do you take if you notice
the ongoing delinquencies?
Ms. Galante. Yes. So again we can require indemnification
from certain lenders. We can not require indemnification from
other lenders which is part of the authority we are asking for
here.
So, in those other situations, we are essentially in a
negotiation with them on whether we are going to, you know,
come after them with a big hammer of lawsuits versus being able
to deal with this on a ongoing, one-by-one way.
Senator Hagan. In your testimony, you mentioned that the
FHA plans to launch a large scale, proactive marketing campaign
to promote the modification in short sale strategies for
delinquent borrowers. Can you describe that program in a little
more detail and when and where do you expect to focus your
efforts in these programs?
Ms. Galante. Yes, thank you. So, now that we have spent
some significant time. I think having the right programs in
place like an expedited short sale process and changed our loss
mitigation waterfall, we really want to make sure that our
servicers are actively seeking out borrowers for those tools
and not just doing this on automatic pilot.
And so, the strategy is designed to take some of the, pilot
it with one or two particular servicers where we think could
use some additional encouragement in this area and work with
them to see how much more uptake we can get on these loss
mitigation tools and the short sale tools.
So, that is what we are embarking upon.
Senator Hagan. Thank you, Mr. Chairman.
Chairman Johnson. Senator Moran.
Senator Moran. Mr. Chairman, thank you. Thank you and the
Ranking Member for this hearing and thank you for working
together to produce a bill. I hope that the stories that I have
read that GSE reform is the next step in this Committee are
accurate and I look forward to working with both of you to
accomplish a change in the current circumstance we find
ourselves in in trying to make certain that housing markets
continue to recover.
I have always thought that in the absence of a housing
recovery, our ability to have an economic recovery is
significantly diminished and I am pleased to see our Committee
focusing the attention that it is on this topic.
Ms. Galante, the FHA at least according to the President's
budget request could potentially draw down up to a billion
dollars in Federal dollars to solve the solvency problems of
FHA. Does this legislation reduce the probability of the need
for that to occur.
Ms. Galante. So, let me say this just to frame. The
President's budget, you know, is an estimate. There is a
reestimate that happens every year; and then based on both
volume and policy changes, there is an estimate of how much we
might need to draw from the Treasury.
That budget reestimate was set when the budget came out and
so these policies will not actually directly impact today,
whether we need to draw or not draw, but what it will do is
ensure that the next time the reestimate is done when these
tools are in place and we will be able to employ them, that,
you know, you will see the results of it down the road.
So, it will help the FHA's long term financial health.
Whether or not there is a draw which again is to not a cash
need, it is to, quote, I like to use the term top off our
reserves, that is a time, you know, if we need to draw that
that will be what it is for.
But this bill absolutely will help ensure that as we
continue down the pike, we are, you know, getting the
indemnifications and those kind of activities from lenders that
we need to ensure that we are properly being compensated for
the risk that we are taking.
Senator Moran. When does that next estimate occur?
Ms. Galante. It will occur with the 2015 President's budget
which normally comes out in February.
Senator Moran. What factors, what circumstances have arisen
since the last estimate, since the estimate that is in the
President's current budget that are favorable or unfavorable to
the solvency of the FHA?
In broader terms than just this piece of legislation, what
else is occurring?
Ms. Galante. Sure. A lot of different things are occurring.
One is you have seen house price appreciation significantly
more than was estimated both at the budget reestimate and the
actuarial that was done last November. So, that is a positive.
So, there are things happening in the economy that are
positive that will help the long term trajectory of the fund.
And then, all the policy actions that we have been taking
including particularly the change in loss severities. When you
go from, you know, losing 70 cents on the dollar to, you know,
losing closer to, you know, 55 or 57 cents on the dollar and
that continues to improve both as a result of the economy but
also as a result of policy changes that we have made. Those
kinds of things will impact ultimate results down the road.
Senator Moran. Are you aware of any factors, circumstances
moving us in the other direction creating greater challenges
for the FHA?
Ms. Galante. I am not at the moment. I mean, interest rates
have a big impact, you know, interest rates going up, you know,
hurts some access to credit. It helps the FHA in other ways.
Senator Moran. Thank you very much.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you, Mr.
Chairman and Ranking Member Crapo.
I am very impressed by the FHA reforms you have put
together and very much admire your having come out and put
something to try to solve this very difficult problem. I just
want to ask about some other areas that relate to this.
Ms. Galante, one of the things we have learned in the 2008
financial crisis is how important it is for different
institutions, public and private, to have an accurate
assessment of their risk exposure, and as part of them, to be
able to aggregate reliable data about the loans they issue or
insure.
Now, the FHA faces particularly big challenges in assessing
risks because of the decentralized program. As you know, the
FHA's knowledge about its insurance exposure is only as good as
the quality and consistency of the data given to it by approved
banks along with the work it does to audit then, after the
fact, the information that it receives.
So, as you may know, the FHFA and the Consumer Financial
Protection Bureau have been working to put together a uniform
mortgage data base program to track more loan level data about
origination and performance. And if it succeeds, I think it
could be very helpful in mortgage insurance pricing and
increasing general market efficiency by making it easier to
evaluate the riskiness and profitability of different pools of
mortgages.
So, I just wanted to ask about the FHA's role in that? Have
you been participating in that?
Ms. Galante. We are very interested in this issue and I
will just mention two items. One is that Ginnie Mae, which is,
you know, the securitizer, so go speak, for FHA, it is working
on making much more loan level data available to their
servicers, to their investors of those loans. I think that
additional data availability is imminent and that will be
extremely helpful for people evaluating the risk of FHA, VA,
and rural loans that are in those.
Senator Warren. Have you considered participating along
with FHFA and CFPB so that we, it helps us get apples to apples
comparisons all the way through.
Ms. Galante. Yes. So, we are very interested in
participating.
Senator Warren. Good.
Ms. Galante. I do not want to continue to whine about money
and systems.
Senator Warren. Go ahead.
Ms. Galante. But that is a challenge for us right now. We
are actually, you know, trying to work on, we need some
contractual help in order to participate in that actively. But
we are very interested.
Senator Warren. Good. But you feel like you have adequate
authority. You do not need any additional authority to do it.
You just need the resources.
Ms. Galante. Correct.
Senator Warren. OK. Good. I want to ask about another part
two. Under a recent FHA guideline, it is Mortgagee Letter 2012-
22, it appears that homeowners must be currently employed in
order to be eligible for certain loss mitigation options, in
other words, helping people who are in trouble on their
mortgages.
This concerns me because it seems to arbitrarily
discriminate against people who live on unearned income like
Social Security, veterans benefits, child support. Am I missing
something here or what is going on with this policy from FHA?
Ms. Galante. Yes, I appreciate the concern here. I would
just say I have just recently been made aware of this
particular issue and I am looking into it. I do agree that what
we are, you know, the intent of what we are looking for here in
order to be eligible for some loss mitigation activities
including modifications, we do need to see that there is a
stream of income that supports that obligation.
Senator Warren. I certainly understand.
Ms. Galante. I do think this is a reasonable concern for us
to go back and look at the employment versus source of income
but we will look at that.
Senator Warren. Excellent. Thank you very much.
Just in the few minutes I have left, the few seconds I have
left, I just want to ask you a brief question about the FHA's
role in being countercyclical in the housing market, and we had
some discussion. I heard you talking about the tension with
premium increases that as the market goes down is the time you
may need to rachet up premiums but then you are behaving in a
way that is procyclical, that is, making the booms higher and
the busts lower.
So, if you could just speak very briefly to the question of
how the proposed legislation would affect your ability to be
countercyclical and thus help us both tamp down a little on
booms and help us even out a bit on busts.
Ms. Galante. Yes, I appreciate the question, and it is
wide. I think the current Section 7 is pretty inflexible about
when that premium increases must be put in place, and we think
that will hurt in the countercyclical situation if we are at a
place where we have already, for example, raised those enough
to be covering our risk and we have other tools to get to the
same place, that we should be looking to those other tools as
much as possible.
Senator Warren. Because you would like to see more
flexibility there?
Ms. Galante. Yes.
Senator Warren. Thank you very much. Thank you, Mr.
Chairman.
Chairman Johnson. Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman, and thank you for
being here, Ms. Galante.
As you know, last week, on July 17th, I wrote to you about
a stress test that was conducted but not disclosed to Congress
or the American people, and I have not gotten anything back in
response, so I want to ask you about that.
It is really troubling to a lot of us that the only reason
we know about it is the Wall Street Journal happened to report
on it. The Wall Street Journal wrote that it was a, ``hidden
report based off of annual tests done by the Federal Reserve
Board, and it projected losses over 30 years that could reach
as high as $115 billion.''
First of all, will you submit the full, unredacted stress
test report for the record of this hearing in the next few
days?
Ms. Galante. Senator, let me say first thank you for the
question and also say that there is no, quote--and I am going
to use the quotation marks here for the transcriber, there is
no ``hidden report.'' If I could give you the background on, I
believe, what the Wall Street Journal article was referring to,
the annual actuarial review is an 8-month-long process, and
there is substantial conversation back and forth between FHA
staff and the independent Actuary performing the Actuarial on
our behalf and one that we, you know, submit to Congress and
also write a report on. That back-and-forth includes data
collection, data analysis, conversations of what model changes
we might want to deploy this year from their perspectives, what
model changes FHA might want to deploy from our perspective.
You know, they have got IG input, GAO input into what happens
to the--what goes into the Actuarial each year. And I think
what this report is referring to is the Actuary at one point in
an early draft did provide an economic scenario that included a
Fed stress test. By the way, it is not a report. It is a line
or a column in a chart with a variety of other economic range
of factors.
Senator Vitter. Let me back up. Is there a Fed stress test?
Ms. Galante. Again, the independent Actuary, in an early
draft of the report, showed two FHA staff a chart that had a
``Fed stress test'' as one of the scenarios in that report. As
conversation----
Senator Vitter. Will you submit for the record all of the
information regarding that Fed stress test that FHA has?
Ms. Galante. So, again, I would say we have--you know that
the Wall Street Journal article that you are referring to is
subject to Congressman Issa's Oversight Committee. We have been
very cooperative with his Committee in providing all of that
data that they have asked for, and so anything that, you know,
we have provided that--you know, I defer to him in terms of----
Senator Vitter. I will defer to him, too, and he tells me
that they have not gotten the Fed stress test and everything
regarding it that they have asked for. Will you make everything
FHA has with regard to that Fed stress test part of the record
of this hearing?
Ms. Galante. So, again, all I can say is we have given them
everything that we have around this----
Senator Vitter. Forget about them. Will you make part of
this record that Fed stress test and any material you have
regarding it?
Ms. Galante. I do not--you know, we have been responsive to
every request that they have asked for. We do not have any
additional----
Senator Vitter. I am making a request. Forget about them.
Will you make the Fed stress test and any information you have
regarding it part of this record?
Ms. Galante. Again, I would defer to Congressman Issa on
that.
Senator Vitter. So if he says you will, you will?
Ms. Galante. We have given them everything that we have.
Senator Vitter. I am not asking about his request. I am
making a request to make part of this Senate Committee record
the Fed stress test and material you have regarding it. I think
that is a reasonable request for the oversight Committee of
FHA.
Ms. Galante. Senator, what I am trying to say is that I do
not have that information. I have what was given to us in a
draft report with a chart----
Senator Vitter. Whatever you have regarding the Fed stress
test, whatever that is, whatever universe that is, will you
make it part of the record of this hearing?
Ms. Galante. We can do that.
Senator Vitter. Thank you. OK. I would also note with
regard to this, a senior FHA official was quoted in this
article as saying, ``While the agency still wanted to present
the results of the Fed stress test to other Government
agencies, we just do not want that analysis to be in the
Actuarial Review Report. In congressional hearings, it is quite
possible that we will be required to present this information
on the record, but that will be well after the Actuarial Review
is released and the initial media coverage takes place.
Again, my time is up, but let me just say that is very
concerning. Did you approve this strategy, this decision, the
decision that is reflected in that quote?
Ms. Galante. So, again, I cannot speak to the quote. I am
not even sure who it was from. But I can say that, you know,
there was back-and-forth between FHA staff and the Actuarial,
not just on this but on many, many items about what would
ultimately be included in the report. It is an independent
Actuary. It is their decision at the end of the day what
information they are going to include in that report.
Senator Vitter. Thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Commissioner,
welcome.
Let me start off with HECM. I heard your comments. I read
your testimony. I appreciate your acknowledging our work in
this regard on making sure that seniors can stay in their homes
as they get old, thereby borrowing against their equity. But I
get a sense when you say that your support moving the House
bill that has been sent over here is primarily because for you
time is essential. Is that a fair statement? Because there are
elements of our bill that I think are better, with all due
respect to our House colleagues, and I think give you some
greater tools to try to achieve the goal. But when you say move
the House bill, I get the sense that you are saying that
because time is of the essence. Or is that an unfair
characterization?
Ms. Galante. Senator, that is a very fair characterization.
The elements in your bill are quite good, and we appreciate
them greatly. But time is of the essence here. It is
unfortunate, but if we cannot make these more nuanced changes
that, you know, get to the core problems of the reverse
mortgage program through mortgagee letter before the beginning
of the next fiscal year when we have a new calculation of how
the reestimate will work or how the budget subsidy for this
program will work, we are going to have to make some really
radical changes to the program that I do not think ultimately
get to the core of the problem.
Senator Menendez. So while I appreciate the Chairman and
the Ranking Member looking at our provisions in the context of
this, if I were to take the House bill, substitute it with mine
and send it back to the House, assuming I could get that done,
you would not be opposed, you would be supportive of that?
Ms. Galante. Yes, sir.
Senator Menendez. All right. So understanding the urgency,
can you elaborate on some of the factors that are driving the
program's current financial situation so people understand and
what the consequences of inaction would be? You say you would
have to make some pretty dramatic changes. Maybe you could give
us a sense of that.
Ms. Galante. Sure. There are a couple of major things.
First of all, you know, the economy, both for the forward
mortgage and the reverse mortgage program, house price changes,
for example, certainly have hurt the performance of the reverse
mortgage program, in some ways more than the forward program
because it looks at--long-term house prices are more important
than shorter-term house prices. But we cannot change that fact.
But the biggest challenge is that the program has allowed
people to frankly draw more up front--and I am not talking
about how much they ultimately can take out on their reverse
mortgage, but take more money out than they really need to live
on or to pay their obligations. The program, the way it is
currently structured, encourages them to take more out up front
than they should. And, frankly, lenders are encouraging them to
take more out up front than they should.
So the changes that we are trying to make are to put in
financial assessments to make it much more clear and require
that you can only take out, you know, what you need for what
you are going to need over the projected life. And if we cannot
make those nuanced changes, we are just going to have to say
the entire amount that you can take out on this reverse
mortgage is going to be just lowered substantially for
everybody across the board, which is going to make it a much
less effective program and much less useful for far fewer
people. So we would rather try to make the more nuanced changes
to get at the right problem than to take that blunt across-the-
board cut in how much you can take out in a reverse mortgage.
Senator Menendez. OK. And then just moving for a moment to
FHA, you know, preserving the opportunity for affordable
ownership for American families is, in my mind, one of the
critical roles of the FHA. And another critical role of the FHA
has had is as a countercyclical stabilizer for the housing
market during times of economic stress.
So I have heard you generally testified favorable as to the
bill that is proposed here. What provisions that are included
in the current bill--what elements of the program, I should
say, are essential to preserve? And what changes should we not
make in order to allow FHA to continue serving those important
market roles?
Ms. Galante. A very good question. I appreciate that.
Senator Menendez. I only ask good questions.
[Laughter.]
Senator Menendez. I am just kidding.
Ms. Galante. So I would say this: I think the core mission
of FHA is both to be able to play a countercyclical role when
necessary, but when that is not necessary, to be serving lower-
wealth borrowers. So it means, you know, we want to be able to
keep the ability to do lower downpayments, for example. We
think that is an important element of providing access to home
ownership in this country, as long as it is done well and the
downpayment is considered along with other factors in ability
to repay. We certainly want people who, you know, can afford to
repay their mortgages. But we would not want severe
programmatic restrictions on who we can serve, you know,
literally put into legislation and not allow us to look at the
compensating factors that make a good borrower.
So I do not think that bill--I do not think this bill
damages our ability to do any of that, so we support the
changes that are being requested here. But that countercyclical
element with the, you know, kind of automatic premium increase
I think is something that we do need to work on.
Senator Menendez. All right. Thank you, Mr. Chairman.
Chairman Johnson. Senator Manchin.
Senator Manchin. Thank you very much, Mr. Chairman, and
mine is more basically philosophical, where we are going, and
we have talked about this before, the high-end loans are being
made when it had changed, I think back in 2008; 217 to 729 I
think is where the loan range.
Ms. Galante. So, again, for high-cost markets, we go up to
729. That is correct.
Senator Manchin. 729. The only thing, when you look at
basically nationally, the figures of 2011, borrowers with an
income of over $75,000 made up 32 percent of your loans, I
think. And in West Virginia, that number is about 28 percent.
But that is substantially higher than it was in 2006. It looks
like we are moving away from the mission that FHA had, which
was basically in the 1940s it was helping the veterans; in the
1950s, 1960s, and 1970s helping the elderly, handicapped, and
lower-income Americans. it seems that we are more focused on a
target that is much higher. And I know everything has moved,
but perceptually, we are not there for that person on that
lower end, but we are of more help to the higher end.
Ms. Galante. Yes, so----
Senator Manchin. Do you find that troublesome?
Ms. Galante. Senator, I do not for this reason, and it goes
back to the conversation we were just having on
countercyclical. When FHA stepped in, there was literally no
place to get a mortgage in 2008, 2009, and Congress gave us
authority to go to higher loan limits. They also gave the GSEs
authority to go to higher loan limits. So that was an important
countercyclical role that we were playing.
I fully expect--and as we, you know, continue down this
path, those higher loan limits do expire at the end of this
fiscal year. They were extended once. But, you know, as we are
coming out of the crisis, we should dial back to playing the
more traditional role. But that said, I think having the
ability for FHA to play the countercyclical role is an
important one for the country.
Senator Manchin. The other thing I would say, based on that
reply and the other replies I have heard, are we relying on the
pure hope that the housing market is going to recover? Or do
you think we need to be taking steps in the event that the
downturn continues based on the financial condition of FHA?
Ms. Galante. So, again, I would just say that the playing
of the countercyclical role here in terms of particularly the
larger loans, you know, they were not particularly problematic
loans for us. I mean, the loans that were problematic are the
loans that were made in the early part of the crisis,
regardless of where they were on the loan spectrum, right?
People lost their jobs, house prices declined significantly,
and that is what caused by stress at FHA but certainly stress
in other parts of the market.
But I would say decreasing the loan limits at the
appropriate point in time--and I think given that they are
expiring at the end of this calendar year, by the time we would
go through that process, I do not think it will be necessary.
Certainly not extending them would make sense given where we
are in the market recovery.
Senator Manchin. But the mandated 2-percent line, you have
been below that since 2009, right?
Ms. Galante. Yes, but we have taken, again, a large number
of steps to increase our capital, five premium increases, major
changes in our loss mitigation activities, major improvement in
our recovery rate. So we are moving in the right direction.
The 2-percent capital ratio, I think just to make a point,
I know that the bill talks about going to a 3-percent capital
ratio over time. I think that is a recognition that the 2-
percent ratio was not meant to withstand the most severe
recession we have had since the Great Depression. It was meant
to give us a cushion for a mild or a moderate recession.
So we, like other financial institutions, did not make it
through this very severe period with a 2-percent capital ratio.
So for more cushion, for more security in the future, you know,
having a larger capital reserve ratio is certainly a reasonable
thing that we can do.
Senator Manchin. Well, the legislation, I know that both
our Chairman and our Ranking Member, the minority Ranking
Member, have legislation which they are leading. You have a
House piece of legislation. Do you as the agency believe that
there is need for legislation for corrections to prevent what
has happened? Are you supportive of change?
Ms. Galante. I have expressed I am supportive of a number
of the measures here in this bill, and I think they will be
very helpful to us in ensuring that we both can rebuild capital
and hold lenders accountable and what-not moving forward. And I
think that is, you know, a very important change. So we welcome
that.
We also do see that, as we move with housing finance reform
more largely, we need to be sure that we understand FHA's role
in the larger housing finance system.
Senator Manchin. Thank you.
Chairman Johnson. I would like to thank Commissioner
Galante for being here with us today. I look forward to
continuing working with the Ranking Member and Members of the
Committee to move this legislation quickly.
This hearing is adjourned.
[Whereupon, at 11:15 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR MARK KIRK
I want to first thank Chairman Johnson and Ranking Member Crapo for
holding such an important hearing on the solvency of the Federal
Housing Administration (FHA).
Since the National Housing Act was signed into law in 1934, the
Federal Housing Administration (FHA) has helped millions of Americans
achieve home ownership. Like most creations of the Government, the
FHA's mission and statutory obligations have been muddled with
increased demands over the decades, often by Congress, which have led
to loosened lender underwriting demands and other negligent policies
all in the pursuit to achieve higher and higher rates of home
ownership.
While the goal of home ownership is laudable and does help promote
financial stability, we have all seen the adverse effects of an over-
stimulated housing market. We've also felt the pain caused when loans
are not underwritten properly and when consumers who are not
financially ready to have a mortgage are incented through Government
programs to buy rather than rent.
We also know all too well that when private market participants
know the Federal Government stands behind the risk, moral hazard is
created and private market participants take more risk than they
otherwise would if the Government didn't insure their loans. We have
seen the disasters that occur from private shareholder gains that too
often spell disaster for homeowners and the American taxpayer. We saw
this with Fannie Mae, with Freddie Mac, and we are now on the brink of
seeing this with FHA.
HUD promotes that, ``FHA is the only Government agency that
operates entirely from its self-generated income and costs the
taxpayers nothing.'' However, with a more than $16 billion negative
economic value, \1\ the Federal Government is now faced with trying to
make reforms to FHA to ensure that the taxpayer is not in fact on the
hook to bailout the FHA.
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\1\ Based on the last independent actuarial showed a negative
economic value.
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Over the years and decades, new programs have been created and more
mandates have been made for FHA to relax underwriting standards. One
such program creation was the Home Equity Conversion Mortgage, or HECM
program. The HECM program is the Government-insured reverse mortgage
program. Again, while a laudable program that was designed to be a
valuable financial tool for seniors, the HECM program is dangerously
underwater, with nearly one in ten HECMs defaulting last year.
During the latest financial crisis, seniors around the country
watched the equity in their homes plummet and saw their retirement
plans--including their 401(k)s--devalued. Many retired seniors were
forced out of retirement and back into the workforce. With limited
options, many seniors turned to the largest asset they had, their home,
and took out a reverse mortgage.
While I think that the FHA has done a poor job to date of managing
the HECM program, it is not my intention to get rid of the FHA reverse
mortgage program.
My rationale for examining the FHA program is simply this: if the
FHA HECM program were designed to best meet the needs of and protect
seniors, the rate of defaults and losses under the HECM program would
be far less. Put simply; make a program that works for seniors--that is
safe and fiscally sound--and the program will thrive and the risk to
the American taxpayer will be far less.
American seniors have worked their entire lives to improve this
country and pave a more promising path for future generations. We owe
it to them to provide safe, reliable tools so they too can meet their
financial needs.
I look forward to continuing to work with my Banking Committee
colleagues to legislatively enhance the safeguards and protections for
seniors under the HECM program and to holding FHA's feet to the fire to
ensure the program returns to solvency.
PREPARED STATEMENT OF CAROL J. GALANTE
Assistant Secretary for Housing/Federal Housing Administration
Commissioner, Department of Housing and Urban Development
July 24, 2013
Thank you, Chairman Johnson and Ranking Member Crapo, for this
opportunity to discuss the proposed FHA Solvency Act of 2013. First, I
would like to thank the Committee, particularly the Chairman, Ranking
Member, and their staffs, for all their hard work on this bill. This
effort addresses many longstanding legislative requests of the Federal
Housing Administration (FHA) in an evenhanded and forward-looking
manner. The Secretary and I greatly appreciate the introduction of a
bipartisan bill that will give HUD the tools to ensure a fiscally sound
and vibrant FHA continues to support responsible home ownership and
affordable housing for generations to come. We look forward to working
with the Committee to help FHA better respond to current and future
challenges.
As the Administration has said consistently, a strong FHA is vital
to the success of our Nation's housing market and critical to its
ongoing recovery. As we see signs of recovery, this bill represents an
important step forward, turning our collective focus away from
responding to the immediate crisis to strengthening the market by
applying lessons learned from that experience and giving FHA the
necessary tools to better protect the Fund and the market in the
future.
Historically, FHA's role has been to provide access to mortgage
credit for creditworthy borrowers not otherwise served by the market
and play a necessary countercyclical role during times of economic
stress. As recently as my testimony before your colleagues on the
Senate Appropriations committee in May, I have articulated the steps we
have taken, and continue to take, to ensure that FHA, and particularly
the MMI Fund, would be able to continue to play that role in a
responsible fashion while reducing risk to taxpayers and borrowers
alike. I can now report that these steps have had a significant
positive impact on the fund, and that major indicators show strong,
encouraging trends. However, our work is far from finished and we look
forward to partnering with this Committee to ensure that these trends
continue.
Changes to FHA Already Resulting in Positive Trends
FHA, along with the Government National Mortgage Association
(GNMA), continues to have a significant impact on the Nation's housing
market and economic recovery. The activities of the Federal Government
are critical to both supporting the market in the short term and
providing access to home ownership opportunities over the long term,
and doing both in a way that minimizes risks to taxpayers.
As has been true throughout its history, FHA is particularly
important to borrowers that the conventional market does not adequately
serve, including qualified first time homebuyers and minority borrowers
who historically have been underserved. According to the latest Home
Mortgage Disclosure Act data, half of all African Americans and 49
percent of Hispanics who purchased a home in 2011 did so with FHA
insured financing. Seventy-eight percent of the home-purchase loans
insured by FHA go to first time homebuyers.
Despite ongoing stress from legacy loans, FHA has made significant
progress and is on a positive trajectory moving forward as a result of
numerous policy changes by this Administration. The housing market, and
thus the performance of the Mutual Mortgage Insurance (MMI) Fund, is
closely linked to the state of the economy and improvements in the
housing market combined with these policy changes have placed FHA in a
stronger position.
Recently implemented changes continue to have their desired
effects--improving loss mitigation, increasing recoveries and
decreasing FHA's share of the market. 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
flexibility given to us by Congress has allowed us to price
appropriately for future risk. Today, our newest books of forward loan
originations are the most profitable in Agency history.
Improving Loss Mitigation and Increasing Recoveries
FHA has always had mandatory loss mitigation requirements for its
lenders, designed to protect borrowers and taxpayers alike, but we
implemented substantial improvements in recent years to enhance the
effectiveness of this program. Serious delinquencies continue to fall,
declining from 9.59 percent in December 2012 to 8.27 percent in May
2013. Based on data from April 2013, cures--loans that reperform--are
surpassing new serious delinquencies. Our efforts to provide effective
and efficient loss mitigation, in combination with improving economic
conditions, are working--reducing loses to the Fund.
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. FHA has also targeted deeper levels
of payment relief for borrowers earlier in the delinquency cycle and
provided greater clarity for servicers.
In addition to improving FHA loss mitigation procedures, housing
counseling plays an important role in reducing losses to the Fund. A
2011 study by the Urban Institute revealed that borrowers counseled by
HUD-approved agencies through the National Foreclosure Counseling
Mitigation program were 89 percent more likely to receive a
modification cure compared to similar, noncounseled borrowers. In
addition, counseled homeowners were at least 67 percent more likely to
remain current on their mortgage 9 months after receiving a loan
modification cure. HUD-approved housing counseling agencies provided
foreclosure prevention services to 774,000 families in fiscal year
2012. Looking forward, the Homeowners Armed With Knowledge (HAWK)
initiative seeks ways to embed housing counseling in FHA origination
and servicing in order to reduce losses to the MMI Fund and improve
household economic and social well-being.
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, preforeclosure sales, also called short sales, offer an
opportunity to transition out of their homes. This enables both FHA and
borrowers to avoid the costs and damage of the foreclosure process.
Just this month, FHA introduced a streamlined preforeclosure sale
policy which removes certain barriers for borrowers in obtaining a
short sale on an FHA-insured mortgage. Because losses from short-sales
are substantially lower than from the traditional FHA Real Estate Owned
(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.
Throughout the past fiscal year, FHA has been executing an overall
asset management strategy aimed at ramping up REO alternatives. FHA is
expanding a pilot in which properties secured by nonperforming FHA-
insured loans are offered for sale by the lender who has completed the
foreclosure process and 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.
The Distressed Asset Stabilization Program, another REO alternative
that improves Fund performance, has successfully scaled up operations
and is now selling approximately 10,000 loans per quarter. FHA is able
to dispose of the nonperforming loans, while recouping as much or more
than would be recovered from REO disposition and contributing to
community stabilization initiatives in cities hit hardest by the
recession.
Beginning in 2013, FHA plans to 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.
Again, in combination with improved market conditions, our efforts
are producing better results. Loss severity across PFS and REO are down
from their historic highs of 48 and 72 percent, respectively, in 2011,
to 45 and 61 percent today.
And while we have taken aggressive steps to reduce losses on legacy
loans, we have also taken measures to ensure that future books are
appropriately priced, so that if there is a default, FHA will have
sufficient reserves on hand. These policies include raising mortgage
insurance premiums five times since 2009 and reversing a policy that
canceled mortgage insurance premium (MIP) collections when the
principal balance of an FHA-backed mortgage reached 78 percent of the
original home value.
Improvements in Early Loan Performance
Our most recent monthly and quarterly data shows the combined
results of the housing market recovery and FHA's efforts. The 60-day
Early Payment Default (EPDs) rate continues to trend down--to .25
percent--the lowest it has been since 2007. Compared to 2012, EPDs have
fallen 9 basis points, demonstrating that the credit policy changes
made since 2009 are improving the quality of loans endorsed by FHA.
FHA has also made significant changes to credit policy, including
establishing a minimum credit score, as well as a two tiered down
payment/credit score requirement wherein borrowers with scores less
than 580 are required to have a larger downpayment. In addition, we now
require manual underwriting for borrowers with credit scores below 620
and debt to income (DTI) ratios over 43 percent, have enhanced FHA's
TOTAL Scorecard, and have increased both downpayments and premiums for
borrowers seeking loans in excess of $625,500.
These steps, as seen through the reduction in EPDs, ensure that
home buyers using FHA-insured financing are capable of meeting their
mortgage obligations and will not put undue stress on the Fund.
Simultaneously, our portfolio growth continues to slow, resulting
in a declining market share, encouraging the return of private sources
of mortgage capital to the market.
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, FHA's role will naturally recede further.
Tools for Management of the Fund and Additional Considerations
Tools for FHA
The FHA Solvency Act of 2013 provides many tools and changes that
FHA has requested to better manage the Fund--and we thank the Committee
for its commitment to their inclusion. FHA has long believed them to be
necessary in order to create a more responsive business model, better
able to react to stress in the market. The Committee's support for
these tools will provide flexibility, resources, and enforcement
mechanisms that will result in a stronger, more secure MMI Fund.
Indemnification Authority for Direct Endorsement Lenders
will allow FHA to seek indemnification from these lenders,
which account for 70 percent of all FHA approved lenders. With
this authority, FHA will be able to obtain indemnification from
all its approved lenders for loans that fail to comply with its
guidelines.
The revised compare ratio will allow comparison on
origination and underwriting criteria, defaults and claims, as
well as some other factors the Secretary determines increase
risk to the MMI Fund--enabling FHA to respond appropriately to
changes in the market and mitigate risk.
The authority to structurally change the Home Equity
Conversion Mortgage (HECM) program through Mortgagee Letters
will allow FHA to make critical changes quickly, preserving
this program, which is a vehicle that allows seniors to age in
place. These changes will help FHA ensure that new HECM
originations, now limited to three product lines, meet the
needs of the target population, reduce risks to the MMI Fund
and avoid dramatic actions that would harm the very consumers
these loans are intended to help in order to ensure actuarial
soundness. Given the high pace of change within the reverse
mortgage market and its impact on the MMIF, it is vital that
FHA be able to make program improvements quickly.
Points for Further Discussion
While the bill offers a measured approach that provides tools to
manage the MMI Fund, there are some topics which warrant further
discussion and clarification to more directly address our shared
concerns.
HECM: We thank the Committee for including the language in
Section 13 which will allow FHA to make structural changes to
the HECM product through Mortgagee Letter which will stabilize
both the product and the Fund. During this work period, we urge
the Senate to take up H.R. 2167--which has passed the House and
accomplishes the same goals of this section--and the bill
introduced earlier this year by Senator Menendez.
Servicing as a Recovery Tool: As currently drafted, Section
4 does not give FHA the tools necessary to ensure servicers are
being held accountable for their performance and to allow FHA
to shift servicing to a specialized sub-servicer if they cannot
fulfill their obligations under the contract of insurance. This
additional authority would minimize losses to the Fund by
facilitating more effective loss mitigation, yielding better
results for both borrowers and FHA.
Capital Restoration: Section 7 establishes mandatory
premium increases during times when the capital reserve ratio
falls below required levels. While we share the Committee's
desire to ensure that future FHA leadership takes the
appropriate steps to protect the Fund and satisfy the capital
reserve ratio, as we have shown since 2009, premiums are only
one factor to consider in rebuilding that supplemental account.
As written, the language does not account for the impact increased
premiums themselves will have on access to credit, endorsement
values, and ultimately the health of the Fund--potentially
undermining the goal of increasing the capital reserve.
Especially when it is necessary to respond quickly during times
of economic uncertainty or stress, this approach will have
unintended consequences for the Fund. Therefore, we ask the
Committee to continue to work with us in crafting language that
best facilitates recapitalization using the full range of
options available.
Additional Considerations
Despite many policy and organizational changes proposed in this
bill there are a number of statutory constraints which FHA strongly
feels limit our ability to manage risk appropriately and are having a
negative impact on FHA's fiscal health. These constraints include an
increasingly complex mortgage market, aging FHA systems and
infrastructure, a need for additional skills and expertise, and
difficulty responding quickly to major risk issues as a result of
contractual and statutory limitations. For FHA to manage risk and
maintain operations as 21st century mortgage insurer, these constraints
must be dealt with appropriately. For that reason, we would like to
continue to explore with the Committee tools which can be leveraged to
allow FHA to minimize risk to the Fund and taxpayers while continuing
to serve consumers.
Conclusion
Chairman Johnson, Ranking Member Crapo, I would again like to thank
the Committee, under your joint leadership, for taking up the issue of
long-term solvency of the FHA MMI Fund. The economic and housing crisis
and recovery, as well as the new, multidimensional challenges facing
our urban, suburban, and rural communities require an FHA that is more
agile and responsive to real-time market dynamics. As such, we remain
committed to continuously improving our stewardship of FHA. HUD stands
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 sophisticated and market-savvy, with the
capacity and expertise necessary to galvanize and direct a vast network
of partners. Your efforts to ensure that is possible are both timely
and necessary, and offer a strong start. I look forward to working with
this Committee to continue to strengthen and preserve FHA for future
generations.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
FROM CAROL J. GALANTE
Q.1. Part of the FHA Solvency Act of 2013 aims to ensure that
problems with various FHA lending programs that result in
negative effects for homeowners and solvency issues for FHA are
identified early, and that FHA takes the necessary steps to
ensure that the problems are appropriately diagnosed, reported
on, and remedial measures are taken to mitigate possible
affects of these problems. While these requirements are made
for FHA's MMI fund no similar specific recommendations were
required under the act for the HECM specific program.
Do you believe that a similar approach to identify problems
early, appropriately diagnose and report the problems and
recommend and implement remedial measures--should also be done
within the HECM program?
A.1. FHA has worked proactively and aggressively to make
changes to HECM to ensure program sustainability under its
existing authority, and under the Reverse Mortgage
Stabilization Act of 2013. With the support of Congress and
using the authority of bill, FHA has been able to require a set
aside for payment of property charges using HECM proceeds. FHA
also requires a financial assessment, places limitations on the
allowable draw during the first 12 months, and adds a new
Initial Lump Sum Draw option. This is an addition consolidating
the ARM Standard and ARM Saver programs and reducing the
principal limit factor, which reduced risk by lowering the
amount of equity that borrowers are able to access. These
adjustments have helped place the HECM program on a positive
and sustainable path forward.
We agree that it is important to identify solvency issues
early in the process for our programs that impact the MMI Fund.
The changes FHA has been focusing on achieving involve
proactive management of its entire portfolio, rather than
developing separate and specific recommendations for the HECM
program. FHA is pursuing greater ability to respond to emerging
needs and changing economic conditions. These tools would help
FHA better identify risks across FHA programs in the future and
adjust quickly to prevent the type of scenario which made HECM
unsustainable.
Q.2. While I think that indemnification is appropriate where
there are cases of mortgagee fraud and/or misrepresentation by
the mortgagee, I am concerned that indemnification may have
unintended consequences. In recent years, FHA's single-family
business shows high average FICO scores and low delinquency
rates, which is positive for the health of the insurance fund.
However, concerns have been expressed that some deserving
borrowers are being shut out of FHA because lenders are
imposing overly strict credit overlays to avoid indemnification
risks. FHA's current average FICO score is 695, while in May
2012, the OCC defined a prime loan as having a FICO score of
669. While we want to ensure that FHA does not revert back to
loose lending standards that are not based on credit
characteristics of borrowers that will be able to pay the loan
and that could jeopardize the solvency of the MMI, do you think
that the current standards are too tight? Do you have concerns
that overly strict enforcement standards could actually be
counterproductive to FHA's core mission? What legislative
safeguards need to be included in this legislation to ensure
the right balance on enforcement?
A.2. We share concerns about access to credit, and are
constantly evaluating our policies to ensure that we are
accomplishing our mission while simultaneously preserving the
health of the MMI Fund. FHA's mission includes stabilizing
credit markets in times of economic disruption while
maintaining access to home ownership opportunities for
responsible, creditworthy borrowers. Every policy decision made
by FHA considers the important balance between these goals.
FHA has been working diligently to revise its quality
assurance framework to help address concerns about enforcement
standards and ensure that it incentives behavior that is
aligned with FHA's mission while minimizing risk to the Fund.
We have been engaging with various stakeholders in the lending
industry as well as consumer advocacy groups and Federal
regulators, on ways to improve the efficiency and effectiveness
of the quality assurance process. These practices will balance
the goals of protecting the consumer while creating clarity for
lenders and mitigating the risk to the MMI Fund. FHA is working
towards a framework that ensures that loans are reviewed in a
reasonable time period, allows us to use loan quality findings
to improve credit policy, and allows lenders to improve their
FHA origination practices and ensures that access to credit is
not being constrained for the responsible, creditworthy,
underserved borrowers FHA is intended to serve.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
FROM CAROL J. GALANTE
Q.1. Many other countries around the world issue mortgages that
have recourse. If the borrower defaults on the loan, and the
house is not able to cover the losses, a lender can file a
claim on the borrower's other assets. What is the Federal
Housing Administration's (FHA) ability to use recourse to
recover losses from single-family forward and reverse
mortgages? In each of the last 5 years, in how many cases has
FHA pursued recourse? How much did the agency recover in these
cases? How would FHA benefit from increased pursuit of recourse
to recover losses?
A.1. FHA has the ability to use recourse to pursue single
family forward losses in some States, depending on State law.
Reverse mortgages are nonrecourse.
Federal law prevents delinquent Federal debtors from
obtaining Federal loans or loan insurance guarantees. HUD
developed the Credit Alert Verification System (CAIVRS) to
assist in these types of situations. It is a shared database of
defaulted Federal debtors, and allows identification of
potential borrowers who are in default, or are delinquent on
Federal loans with any agency. Through the CAIVRS system,
Federal agencies and financial institutions can prescreen
applicants for delinquent debts. Using this system, HUD has
avoided over $12 billion in potential claims and more than $4
billion in potential losses. The FHA Financial Operations
Center is responsible for collecting deficiency judgments for
mortgages that are assigned to HUD in connection with the
foreclosure of FHA-insured loans. Only a very small number of
these debts are currently being serviced, in compliance with
the Debt Collection Improvement Act.
The Department's position on the pursuit and collection of
deficiency judgments for recourse FHA-insured mortgage loans
was outlined in more detail in Housing Notice 94-89. This makes
it clear that HUD would require mortgagees to obtain a
deficiency judgment only with ``worst-case offenders'' to deter
program abuse. This policy focused primarily on investor
mortgagors, and the majority of FHA single-family programs have
not permitted investor mortgagors, thus Title II deficiency
judgments against borrowers are rare. In light of the
substantial costs incurred in pursing such judgments, the
likelihood of recovery to FHA to recoup losses would be minimal
in most cases. Where the likelihood of recoveries is higher,
the guidelines outlined in the above referenced Housing Notice
would be followed.
Q.2. In each of the last 5 years, how many times did FHA notify
the Department of the Treasury about outstanding, legally
enforceable debt? In how many cases did FHA collect a payment
from a borrower's Federal income tax overpayment? How much did
FHA receive?
A.2. HUD alerts all lending Federal agencies about outstanding,
legally enforceable debt through the Credit Alert Verification
System (CAIVRS). This Federal Database tracks all Federal
debtors and notifies them of any Federal liens, judgments,
Federal loans that are in default and foreclosure, and any
claims paid by reporting agencies.
Nearly all collections related to FHA programs come from
FHA approved lenders and are based on a variety of reasons
including noncompliance with program rules and indemnification.
Collection directly from borrowers is costly and generally
results in little to no recovery to the FHA.
Q.3. The Federal Housing Administration (FHA) currently uses an
accounting method prescribed by the Federal Credit Reform Act
(FCRA). FCRA takes into account expected losses from claims and
gains from premiums, but does not take into account for
variations in market risk. Using fair-value accounting, for
example, the Congressional Budget Office previously estimated
that in 2012, FHA's insurance would cost $3.5 billion. Under
FCRA, FHA estimated it would essentially save $4.4 billion.
Fannie Mae and Freddie Mac already use fair-value accounting
for their budget projects. Would using fair-value accounting
improve budget projections for FHA, similar to the procedure of
Fannie Mae and Freddie Mac? Would fair-value accounting help
FHA better calculate premiums needed to maintain the required
capital reserve during financial downturns?
A.3. The Federal Credit Reform Act of 1990 (FCRA) greatly
improved the accuracy of cost estimates for credit programs by
reflecting the estimated lifetime costs of loans and loan
guarantees up front on a net present value basis, requiring
policy makers to budget for those lifetime costs when making
programmatic decisions.
While fair-value analysis may offer some useful insights to
inform decision, fair-value accounting would not be consistent
with the goals of FCRA--to improve the accuracy of cost
estimates and resource allocation. In contrast, fair-value
accounting would include costs that are not relevant to the
Federal Government and would make it more difficult to compare
credit programs to each other, or to other Federal spending.
Fair value would make budgeting less transparent by introducing
a wedge between the cost estimates and deficit effects of the
same program, would pose significant implementation challenges,
and could introduce more distortion into cost estimates than
valuable information. Thus, fair-value accounting would not
represent an improvement over FCRA.
Q.4. The Federal Housing Administration (FHA) currently has
very little risk-based pricing. Someone with a credit score of
600 would receive the same insurance premium as someone with a
score of 800 making the same downpayment. FHA has had some
positive movement toward increased risk-based pricing in the
last few years. For example, FHA no longer insures people with
credit scores below 500 and requires a higher downpayment from
scores 500-579. FHA tried to implement stronger risk-based
pricing in 2008 but was dissuaded by critics in Congress. How
would FHA's financial solvency have been impacted if FHA were
able to implement stronger risk-based pricing, which is used
other insurance businesses? Would you support providing FHA
flexibility to use more risk-based pricing methods?
A.4. Today, due to authority provided by Congress, FHA is able
to appropriately price for the risk of the loans insured in its
portfolio. The combination of appropriate pricing, revisions in
FHA's credit and underwriting policies and the development of a
more robust risk-analytics framework have improved the health
of the MMIF. At the level of premiums FHA was legally able to
charge in 2008, it is unlikely risk-based pricing would have
improved the health of the portfolio. Today, due to the changes
made since 2009 including a shift to risk-based underwriting,
risk-based pricing would not be necessary to continue on this
trajectory. If however in assessing the risk to the Fund and
access to credit to creditworthy borrowers, FHA felt that risk-
based pricing were appropriate, the agency has sufficient
authority today to implement such an approach.
Q.5. The Federal Housing Administration (FHA) insures mortgages
at a 100-percent level of coverage, even though private
mortgage insurance is often significantly less. Please describe
the differences in FHA's level of insurance to that of other
Federal mortgage insurance programs the Departments of Veterans
Affairs and Agriculture. As housing finance reform moves
forward and private capital takes a more prominent role in the
future, should FHA continue to insure the full value of
mortgages?
A.5. The Department of Veteran Affairs' guaranty program
insures 25 to 50 percent of the original principal in the case
of a default. The USDA Section 502 Guaranteed Rural Housing
Loan Program guarantees loans at 100 percent of the loss for
the first 35 percent of the original loan and the remaining 65
percent at 85 percent of the loss. The maximum loss payable
under the USDA program cannot exceed 90 percent of the original
loan amount.
In general, both VA and the Department of Agriculture serve
a different universe of borrowers than those accessing FHA
insured mortgage financing. The USDA program only serves rural
borrowers within certain income guidelines, and the VA loans
are only available for honorably discharged military, current
members of the reserves and the National Guard, and spouses of
the military in certain circumstances. The VA provides
supplemental servicing to borrowers that have trouble making
mortgage payments. FHA programs serve a wider array of
borrowers, and FHA has the critical mission of stabilizing
credit markets in times of economic disruption. FHA also
provides access to mortgage financing for underserved
communities. In order to serve this role effectively, as it did
before and during the financial crisis and continues to do
today, FHA should continue to insure the full value of
mortgages. If FHA scales back the full guaranty, it is likely
lenders will be less likely to lend to many borrowers and,
where they do, they will subject borrowers to higher costs of
borrowing through increased fees and higher interest rates,
having an adverse impact of credit access across the housing
market. The increased risk could also further impact
communities by causing some lenders to exit the market
entirely, leading to a lack of competition and negatively
impacting the housing market recovery. These effects would be
at odds with FHA's mission. Of course, FHA must continue to
serve this mission while protecting the insurance fund and
taxpayer interest. To that end, since, FHA has taken
significant steps to ensure that loans are properly priced,
that credit policies facilitate access while managing risk and
that counterparty risk is properly managed and enforcement
actions taken where there are findings of noncompliance.
Additional Material Supplied for the Record
STATEMENT SUBMITTED BY ENRIQUE LOPEZLIRA, SENIOR POLICY ADVISOR,
ECONOMIC AND EMPLOYMENT POLICY PROJECT, OFFICE OF RESEARCH, ADVOCACY,
AND LEGISLATION, NATIONAL COUNCIL OF LA RAZA
Chairman Johnson, Ranking Member Crapo, and Honorable Members of
the Committee, I am pleased to have this opportunity to comment on the
``FHA Solvency Act of 2013'' (S.1376). I am a Senior Policy Advisor at
the National Council of La Raza (NCLR) with over 10 years of experience
conducting research, economic analysis, and policy development in both
the private and the public sectors, and I have written on policy issues
in traditional and social media, as well as in academic and nonacademic
publications. At NCLR, I conduct research, policy analysis, and
advocacy on issues that are critical to building financial security in
Latino communities, including home ownership. NCLR--the largest
national Hispanic civil rights and advocacy organization in the United
States--works to improve opportunities for Hispanic Americans.
The NCLR Economic and Employment Policy Project promotes fair and
accessible markets in which Latino families have the opportunity to
obtain assets and build wealth sustainably so that they can be shared
with the next generation. Through this project, NCLR (in partnership
with the Center for American Progress) recently released Making the
Mortgage Market Work for America's Families, a report on the need for a
housing finance system that ensures access and affordability in the
housing market. The NCLR Homeownership Network provides financial,
homebuyer, and foreclosure prevention counseling to more than 65,000
families annually. Our subsidiary, the Raza Development Fund (RDF), is
the Nation's largest Hispanic community development financial
institution. Since 1999, RDF has leveraged more than $680 million in
financing for local development projects throughout the country. This
work has increased NCLR's institutional knowledge of how Latinos
interact with the mortgage market, their credit and capital needs, and
the impact of Government regulation on financial services markets.
NCLR believes that one of the best opportunities for Latinos to
build wealth and financial security is through owning a home. The
Federal Housing Administration (FHA) plays an essential role in making
home ownership a reality for first-time homebuyers and underserved
populations, including Latinos. Therefore, NCLR supports legislation to
reform FHA in order to strengthen its financial condition. However, the
need for FHA reform must be balanced with the need to ensure access to
affordable mortgages for creditworthy low- and moderate-income
homebuyers. My statement will outline key priorities that NCLR believes
must be part of any effort to strengthen the financial standing of the
FHA.
Preserve Opportunities for Access to Affordable Credit
No one can deny the vital role FHA has played in helping the
housing sector recover from the worst economic downturn since the Great
Depression. In 2005, FHA had about a 5 percent share of the purchase
mortgage market. By 2010, FHA's market share had increased to over 40
percent. As private capital fled, FHA-insured mortgages became the only
credit option for first-time homebuyers, minorities, and those with
limited downpayment capabilities. In other words, FHA has been
fulfilling its mission of providing the Federal backstop to ensure that
every creditworthy American has access to a stable mortgage product.
Therefore, it is essential that any reform of FHA maintain an
appropriate level of Government support to ensure liquidity and
stability in the housing market, especially for Latinos and other
minorities.
Do Not Solve the FHA's Fiscal Troubles Only on the Backs of Low- and
Middle-Income Families
Over the past 3 years, FHA-insured mortgages have become more and
more expensive. Increases in mortgage insurance rates and downpayment
requirements, along with requirements to carry mortgage insurance
throughout the life of a loan, are putting FHA loans out of reach for
creditworthy low- and middle-income borrowers. Further increases in
insurance premiums and over-tightening of underwriting standards will
only continue to hurt creditworthy first-time low- and middle-income
homebuyers.
Protect the 30-Year Fixed-Rate Mortgage
For nearly eight decades, 30-year fixed-rate mortgages have put
home ownership within reach for America's middle class and first-time
homebuyers. Without this flexible financing tool, home ownership would
become a luxury reserved for the affluent. But this tool is under
threat. Recent increases in downpayment requirements are already
pricing out creditworthy first-time and low-income homebuyers. Research
shows that higher downpayments are not good predictors of loan
performance, yet downpayment increases are being used to reduce risk to
the Mutual Mortgage Insurance (MMI) Fund. Research also shows that
families who lack the cash for a high downpayment can be successful in
a well-underwritten prime mortgage. Congress must preserve the 30-year
fixed-rate mortgage by ensuring that FHA continues to provide low
downpayment mortgages. The private market by itself will not offer a
30-year fixed-rate mortgage. The credit and interest rate risks for
private lenders are too high without a Government backstop. Therefore,
FHA reform must continue to provide a Federal support to ensure that
the 30-year fixed-rate mortgage remains an available option for
homebuyers.
Ensure That FHA Continues To Play Its Countercyclical Role
FHA's financial difficulties stem from loans made during the
financial crisis. Loans made after the crisis are performing well and
contributing positively to the MMI fund. It is therefore important that
Congress does not overcorrect, introducing changes that may have
unintended negative consequences. For instance, an over-tightening of
underwriting standards could reduce both FHA's volume and the overall
size of the mortgage market. This reduction in volume could lead to a
decrease in home prices, which will limit FHA's ability to play a
countercyclical role in the housing market and adversely impact FHA's
financial condition in the long run.
Avoid Imposing Severe Programmatic Restrictions on Who FHA Can Serve
The FHA was established to promote long-term stability in the
housing market by assisting first-time low- and middle-income and other
underserved homebuyers. Reform of FHA must not interfere with this
mission. The need for financial solvency of FHA must be balanced with
the need to keep reaching underserved homebuyers, especially Latinos
and other minorities. FHA programs must not be available only to
affluent buyers who can afford high downpayments. Insurance premiums,
home price and income restrictions, and other underwriting standards
must be flexible enough to ensure liquidity for all creditworthy
buyers, not just the cream of the crop.
NCLR believes that FHA plays a significant role in the Nation's
housing finance system and that its mission of reaching underserved
populations, especially Latinos and other minorities, must continue. We
support reform of FHA to address its financial challenges, but we urge
Congress to balance this need for reform with the need to ensure access
to affordable mortgage credit for creditworthy low- and moderate-income
homebuyers. As the process continues, we look forward to working with
this Committee, other members of Congress, and the Obama administration
to achieve this goal.