[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]









                        THE FUTURE OF HOUSING IN
                         AMERICA: OVERSIGHT OF
                          THE FEDERAL HOUSING
                         ADMINISTRATION_PART II

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 26, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 114-5
                            
                            
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
ROBERT DOLD, Illinois
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                 Subcommittee on Housing and Insurance

                 BLAINE LUETKEMEYER, Missouri, Chairman

LYNN A. WESTMORELAND, Georgia, Vice  EMANUEL CLEAVER, Missouri, Ranking 
    Chairman                             Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey            MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            WM. LACY CLAY, Missouri
ROBERT HURT, Virginia                AL GREEN, Texas
STEVE STIVERS, Ohio                  GWEN MOORE, Wisconsin
DENNIS A. ROSS, Florida              KEITH ELLISON, Minnesota
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DANIEL T. KILDEE, Michigan
ROBERT DOLD, Illinois
ROGER WILLIAMS, Texas

















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 26, 2015............................................     1
Appendix:
    February 26, 2015............................................    43

                               WITNESSES
                      Thursday, February 26, 2015

Gordon, Julia, Director, Housing and Consumer Finance, Center for 
  American Progress..............................................     7
Gupta, Rohit, President and Chief Executive Officer, Genworth 
  Mortgage Insurance, and Chairman, U.S. Mortgage Insurers (USMI)     5
Holtz-Eakin, Douglas, President, American Action Forum...........     4
Rossi, Clifford V., Professor-of-the-Practice and Executive-in-
  Residence, Robert H. Smith School of Business, University of 
  Maryland; and Chief Economist, Radian Group, Inc...............     9

                                APPENDIX

Prepared statements:
    Gordon, Julia................................................    44
    Gupta, Rohit.................................................    64
    Holtz-Eakin, Douglas.........................................    72
    Rossi, Clifford V............................................    79

 
                        THE FUTURE OF HOUSING IN
                         AMERICA: OVERSIGHT OF
                          THE FEDERAL HOUSING
                        ADMINISTRATION--PART II

                              ----------                              


                      Thursday, February 26, 2015

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:01 a.m., in 
room 2220, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Members present: Representatives Luetkemeyer, Westmoreland, 
Royce, Garrett, Pearce, Hurt, Stivers, Ross, Barr, Rothfus, 
Dold, Williams; Cleaver, Velazquez, Capuano, Green, Moore, and 
Kildee.
    Also present: Representative Sinema.
    Chairman Luetkemeyer. The Subcommittee on Housing and 
Insurance will come to order. Without objection, the Chair is 
authorized to declare a recess of the subcommittee at any time.
    Before we begin, I would like to thank the witnesses for 
traveling to 2220 Rayburn for today's hearing. I apologize for 
the confined quarters, but they tell us that we are going to be 
able to get into these new remodeled, wonderfully decorated 
environments here shortly. And we will see. If it is like 
everything else around here, maybe August. But we will try.
    The audio-visual system in the Financial Services Committee 
hearing room is being replaced. And so, we are going to just 
bear with that for a short period of time here.
    Today's hearing is entitled, ``The Future of Housing in 
America: Oversight of the Federal Housing Administration--Part 
II.'' We had a hearing a couple of weeks ago with Secretary 
Castro, and it was very enlighting with regards to his interest 
and his informational working knowledge of his own agency, 
which was, quite frankly, embarrassing.
    But anyway, I know that all of you today are very well-
versed on your subjects. And we are looking forward to that.
    With that, I recognize myself for 3 minutes for an opening 
statement.
    Earlier this month, the Financial Services Committee 
received the testimony of HUD Secretary Julian Castro in part I 
of the hearing we hold today. His testimony, or lack thereof, 
was alarming. Let me be clear from the start. I support the 
underlying mission of the Federal Housing Administration. There 
is a purpose for the agency. Some qualified first-time and low-
income individuals and families need assistance in securing 
their first home.
    But FHA has suffered a severe case of mission creep. And 
the unfortunate truth is that the lack of sound underwriting 
and risk management puts both homebuyers and U.S. taxpayers at 
risk. Today, FHA falls far short, in my opinion, of its 
required capitalization level in the Mutual Mortgage Insurance 
Fund, or MMIF, pulling only four-tenths of a percent capital, 
instead of the salutorily-required 2 percent.
    When you remove the $1.7 billion taxpayer bailout of FHA 
and the billions of Justice Department settlements that pad 
FHA's books, the MMIF capital level falls to a dismal .08 
percent. We are told time and time again that FHA finds itself 
in its current fiscal situation because of the financial 
crisis. But FHA's shaky principles were not born out of the 
crisis alone. In fact, since 2000 FHA has hit the targeted 
economic value for MMIF only twice.
    We should take little comfort in FHA's projections that all 
is well and will get better. We have heard it for years, and it 
has never proven to be the case. In 2009, then-HUD Secretary 
Shaun Donovan said FHA would reach the capital requirement in 
the next 2 or 3 years. That didn't happen. In 2011/2012, he 
said FHA would hit the target in 2015. We are nowhere close to 
those targets today, despite no catastrophic changes to the 
housing market.
    The underlying problems at FHA have existed for years, and 
continue to pose a threat to all Americans. If a private 
business like the ones represented on our panel today operated 
in a similar fashion to FHA, it would be placed into 
receivership. Yet, FHA continues unapologetically down a 
dangerous path that we have traveled before.
    To make matters worse, the agency has decided to cut its 
income stream by lowering premiums. Anyone who understands the 
fundamentals of lending and insurance knows you can't cut your 
income stream when you are in desperate need of capital. The 
bottom line is that FHA keeps trying to grow itself out of a 
problem. That hasn't worked in the past, and isn't going to 
work this time. We need to focus on common-sense reform and the 
creation of a more stable housing market and housing finance 
system.
    I look forward to hearing all of our panelists today and 
continuing this important discussion.
    And with that, I yield 3 minutes to our ranking member, Mr. 
Cleaver from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. And to our panelists, 
thank you for being here.
    Today we have convened a hearing entitled, ``The Future of 
Housing in America: Oversight of the Federal Housing 
Administration--Part II.'' Our full Financial Services 
Committee held a similar hearing earlier this month and 
received testimony from Secretary Castro regarding the current 
state and plans of FHA. We are here now to hear private sector 
perspective on the recent actions undertaken by the FHA.
    I have never been shy about my support for homeownership, 
having some difficulty as a boy growing up in terms of our 
homeownership and having lived in public housing. I think that 
it provides people with a level of ``somebody-ness'' that they 
might not otherwise get. It encourages families to become 
neighbors, and it creates neighborhoods.
    Recently, the FHA announced that it would lower the 
mortgage insurance premiums by .5 percent from 1.35 percent to 
.85 percent. And though this is a reduction in fees, the 
premiums--and I think this is important--are still 50 percent 
higher than they were before the financial crisis. Though the 
FHA has weathered stinging criticism for this action, the 
decision was not made in a vacuum.
    Other changes were made at FHA, and they have increased the 
stability of the MMFI fund, resulting in a pool of strong 
borrowers. For example, the FHA now requires premium payments 
for the entire life of a loan. A credit score floor has also 
been introduced. And a 10 percent downpayment is now required 
for credit scores below 580.
    Again, I would like to welcome our witnesses. The private 
mortgage insurance market plays a very, very significant role 
in our housing market. And I look forward to hearing from the 
panelists. Thank you for being here today.
    Chairman Luetkemeyer. Thank you. I think we also have the 
gentleman from Texas, Mr. Green, who would like to have 2 
minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the ranking 
member, as well. And I also thank the witnesses for appearing 
today.
    I would like to, if I may, just take a moment to cite the 
Center for American Progress, because I am interested in 
hearing more about what they are presenting today. On page four 
of your presentation, you indicate that FHA has increased its 
annual mortgage insurance premiums significantly, even after 
the recent decrease, which is what our ranking member talked 
about just a moment ago.
    After the decrease announced in January by President Obama, 
the annual fee is still 50 percent more than it was in 2008. It 
has also raised its up-front insurance fee by 75 percent and 
required that the premiums be paid for the life of the loan, 
rather than being cancelable when the loan reaches a 78 percent 
loan-to-value ratio. I think that is important. I would like to 
hear more about that.
    And finally, over on page nine you make a significant 
statement, that even after the premium cut, the Office of 
Management and Budget, or OMB, projects that the new loans in 
Fiscal Year 2016 will make a net profit to taxpayers of 3.7 
percent on average on an average FHA; that is a gross profit to 
the taxpayers of $6.423 billion.
    It appears to me that FHA is on its way back. And I am 
proud to be associated with FHA. I believe in FHA. I believe 
that this hearing can be very meaningful if we are talking 
about strengthening and improving FHA.
    I yield back.
    Chairman Luetkemeyer. Thank you.
    With that, we want to welcome today's guests: Dr. Douglas 
Holtz-Eakin, president of the American Action Forum; Mr. Rohit 
Gupta, president and chief executive officer at Genworth 
Mortgage Insurance, and chairman of U.S. Mortgage Insurers; Ms. 
Julia Gordon, director of housing and consumer finance, the 
Center for American Progress; and Dr. Clifford Rossi, 
professor-of-the-practice and executive-in-residence, the 
Robert H. Smith School of Business, the University of Maryland, 
and chief economist of Radian Group, Inc.
    Thank you all for being here today. I look forward to your 
testimony. Each of you will be recognized for 5 minutes to give 
an oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Dr. Holtz-Eakin, you are first. You are recognized for your 
5 minutes. Welcome.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
                             FORUM

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, Ranking Member 
Cleaver, and members of the subcommittee. It is a privilege to 
be here today to discuss--I will make three points very 
briefly, and I look forward to your questions.
    Point number one is that the FHA mortgage insurance fund 
remains in perilous financial shape. As the chairman mentioned 
at the outset, the current capital ratio is .4 percent, well 
below the statutory requirement of 2 percent. And that .4 
percent has been bolstered by a series of one-time infusions of 
about $4 billion: $1.7 billion from the U.S. Treasury; and $2.3 
billion from one-time settlements of lawsuits.
    And the projection that it will hit the 2 percent required 
ratio by 2016 is one in which I don't think we can place a lot 
of confidence. There is a history of mis-projections outlined 
in my testimony and Dr. Rossi's testimony, as well. And I think 
that the committee should be quite cautious about counting on 
that projection becoming a realty.
    The second major point is that the recent premium reduction 
appears quite unwise. Number one, it cuts into the revenue 
stream for an insurance fund that is short of capital. Number 
two, it shifts the capital away from the private sector. 
Inevitably, this is going to cut into the private mortgage 
insurance market. There has been in the aftermath of the 
financial crisis a bipartisan agreement that it would be wise 
to bring private capital into backing mortgages and have less 
reliance on the taxpayers as a backstop. This goes against 
that.
    And in the process, it will shift the risk of the portfolio 
in a bad direction. The people most likely to take advantage of 
this are going to be high-loan-to-value, high-risk borrowers. 
And the quality of the portfolio will be worse than it would 
otherwise be in the absence of this reduction.
    I find it puzzling that this reduction was done in such a 
rapid fashion. If you look at the history of changes in the 
premiums, this was done in 9 business days, far from the 
typical pace at which there is some chance to comment on the 
wisdom of such a change. So, I think the committee is wise to 
revisit this.
    And then more generally, I think this is a reminder of the 
need for this committee and the Congress as a whole to 
undertake a comprehensive revision to the GSEs and the FHA. In 
the last Congress, the Financial Services Committee did a lot 
of work on the Path Act. I commend the committee for that. But 
the overall job remains undone.
    And it is not enough to look at premiums or the FHA 
mortgage insurance fund in isolation. The entire backstop for 
mortgage financing in the United States needs a rethinking with 
the hope that the FHA will end up with a mission that is 
clearly defined, one where assistance is well-targeted, and 
where capital adequacy is restored.
    So I thank you for the chance to be here today, and I look 
forward to your questions.
    [The prepared statement of Dr. Holtz-Eakin can be found on 
page 72 of the appendix.]
    Chairman Luetkemeyer. Thank you, Dr. Holtz-Eakin.
    Next, we have Mr. Gupta. And you have 5 minutes.

    STATEMENT OF ROHIT GUPTA, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, GENWORTH MORTGAGE INSURANCE, AND CHAIRMAN, U.S. 
                    MORTGAGE INSURERS (USMI)

    Mr. Gupta. Chairman Luetkemeyer and Ranking Member Cleaver, 
thank you for the opportunity to testify this morning.
    My name is Rohit Gupta. I am the president and CEO of 
Genworth Mortgage Insurance. I also serve as the chairman of 
U.S. Mortgage Insurers, a trade association that began--USMI 
represents six of the industries, seven private mortgage 
insurers, and is based here in Washington. As private mortgage 
insurers, we play both a complementary role, as well as a 
competitive role with the FHA by making it possible for home-
ready borrowers to buy a home without saving for a 20 percent 
downpayment.
    In my testimony this morning, I am going to cover three 
topics: first, how private mortgage insurance works and how our 
industry differs from the FHA; second, how we weathered through 
the housing crisis and the lessons we have learned; and third, 
how our industry is positioned to play a bigger role moving 
forward.
    Mortgage insurance (MI) is the primary form of private 
capital-backed credit enhancement for low downpayment loans. We 
are regulated by State departments of insurance, who oversee 
our business conduct. They also set our pricing and review our 
capital requirements at a risk-to-capital ratio of 25:1, or 4 
percent of risk insured. In addition, Fannie Mae and Freddie 
Mac set additional qualification criteria that we must satisfy 
in order to be eligible to do business with them.
    Today, private MI's insure loans with downpayments as low 
as 3 percent for borrowers with FICO scores as low as 620. We 
underwrite loans based on a variety of factors. Our 
underwriting is grounded in the three Cs: credit; capacity; and 
collateral. In the past year, U.S. Mortgage Insurers helped 
almost 600,000 borrowers purchase or refinance their homes. 
Almost half of the homes we insured were for first-time 
homebuyers, and 40 percent went to borrowers with incomes of 
less than $75,000.
    On the other hand, the FHA's primary mission is to target 
low- and moderate-income borrowers, members of underserved 
communities, and first-time homebuyers. The insurance fund is 
subject to a minimum statutory requirement of 2 percent of the 
risk insured. And their capital ratio, as the chairman stated, 
is currently at .41 percent, a fifth of the minimum required.
    The very business of the private mortgage insurance 
industry is to put our own capital at risk in the first-loss 
position. This matters for several reasons. First, because we 
put our own capital at risk, we have a powerful incentive to 
verify that the loans that we insure are prudently underwritten 
and they are sustainable. Our capital at risk aligns our 
interests with those of borrowers, mortgage lenders, investors, 
and the overall housing market.
    Second, taxpayer risk is extremely remote on the loans we 
insure. If a loan goes into default, borrower equity and our MI 
claim payment stand ahead of any GSE guarantee. In many cases, 
losses to the GSEs are far less on defaulted loans with MI than 
on loans that actually do not have MI coverage in front of 
them.
    Third, the MI business model builds capital during strong 
markets. And that capital becomes available to pay for losses 
in weak markets and in times of stress. Today, our industry is 
highly-capitalized and is well-positioned to pay claims and 
write new business.
    Like all of the housing finance market, our industry faced 
unprecedented challenges in the recent housing crisis. But USMI 
member companies never stopped paying claims, and we never 
received any bailout money from the Federal Government.
    Since the GSEs went into conservatorship, our industry has 
covered $51 billion in claims. Let me repeat that. Our industry 
has covered $51 billion in claims, out of which $44 billion 
went to GSEs alone, claims that otherwise would have been on 
the shoulders of taxpayers. And we have attracted approximately 
$10 billion of new capital in the industry.
    Coming through the housing cycle, we addressed many of the 
lessons we learned. We have significantly shored up our 
capital. All MI companies at this point are operating at 
capital ratios of 5 percent or better. In October 2014, we also 
implemented new master policies and new contracts that give 
more certainty around how and when we pay our claims.
    Later this year, the GSEs and the FHFA will finalize 
revised Private Mortgage Insurer Eligibility Requirements 
(PMIERs). These revised PMIERs will include new risk-based 
capital requirements that will be significantly higher than our 
current capital requirement.
    The committee asked us to comment on the FHA's role as it 
relates to reentry of private capital. FHA and private MIs can 
and should serve as complementary forces that enable the FHA to 
remain focused on it goal of serving underserved communities, 
especially the communities that the private sector is not 
suited to reach.
    But for this model to work, it is critical that FHA not 
stray too far from that mission. The recent decision to lower 
annual insurance premiums at FHA, for example, has two 
immediate consequences: first, it slows the path of FHA to 
reach its 2 percent minimum capital requirement; and second, it 
limits the ability of private mortgage insurance companies to 
serve the market. Both of these actions will increase the 
exposure of taxpayers to housing risk. And both are directly in 
contrast to FHA's own stated goal of bringing more capital into 
the housing market.
    To summarize, the private MI industry is in the best 
position to continue to serve the housing market as it exists 
today and as housing is reformed going forward. The current 
application of standard cover private mortgage insurance is a 
very good place to start, as recognized in most of the GSE 
reform efforts included in the 113th Congress.
    But more can be done to make the risk for the Federal 
Government even more remote. In addition to standard cover, 
encourage supplemental or deeper private mortgage insurance to 
further distance the government exposure, and encourage the use 
of additional risk-sharing to transfer real risk from the 
government balance sheet, both the GSEs and the FHA, over to 
private MIs.
    As Congress continues the important work on comprehensive 
housing finance reform, we strongly believe that reform should 
include: a common-sense approach to FHA loan limits; current 
home prices in each geographic region; a single industry-wide 
standard on Qualified Mortgages; and a single industry standard 
for permissible seller concessions.
    We appreciate the opportunity to testify this morning and 
look forward to responding to any questions you may have.
    [The prepared statement of Mr. Gupta can be found on page 
64 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Gupta.
    Ms. Gordon? You have 5 minutes.

   STATEMENT OF JULIA GORDON, DIRECTOR, HOUSING AND CONSUMER 
             FINANCE, CENTER FOR AMERICAN PROGRESS

    Ms. Gordon. Good morning, Chairman Luetkemeyer, Ranking 
Member Cleaver, and members of the subcommittee. Thank you so 
much for convening this hearing on the Federal Housing 
Administration, which is more important than ever to provide 
responsible mortgage credit for borrowers who cannot afford a 
large downpayment or whose neighborhoods are not well-served by 
the conventional market.
    This morning I want to talk about three things: the high 
credit quality of today's FHA loans; the important role the 
agency is playing in supporting the housing market; and the 
agency's financial health.
    Throughout its history, FHA has supported mainly plain 
vanilla, long-term, fixed-rate mortgages with no resets and no 
prepayment penalties. Even in the run-up to the crisis, FHA 
never insured the toxic loans securitized by Wall Street. Those 
loans featured extremely low teaser rates with steep resets, 
prepayment penalties that locked people in beyond the reset 
dates, and numerous other confusing features, such as the pick-
a-pay mortgages where people could pay an amount that didn't 
even cover principal and interest.
    While many of these predatory loans had low downpayments, 
those low downpayments were layered with multiple additional 
risks and had little or no underwriting done. Many of these 
products are now prohibited by the Dodd-Frank Act mortgage 
rules.
    Studies show that portfolios of properly-underwritten low 
downpayment mortgages performed well, even throughout the Great 
Recession. And since the crisis, FHA lending has become even 
safer. As Ranking Member Cleaver noted before, FHA now 
specifies a minimum credit score, requires a much higher 
downpayment for borrowers with credit scores below 580, and 
requires manual underwriting for several other potentially 
riskier categories.
    What is more, contrary to a discussion in this committee 
when HUD Secretary Castro was here, FHA loans do follow the 
Dodd-Frank Act's requirement that lenders assess a borrower's 
ability to repay before making that mortgage. And, in fact, 
Dodd-Frank required FHA to issue its own parallel safe harbor 
standard, what some people call the QM standard, the same as 
the Consumer Financial Protection Bureau (CFPB) had created for 
the private market. Loans made under these policies will have 
an extremely high chance of success. And, in fact, the 
independent actuary projects that the books of business from 
recent years will be among FHA's most profitable in its 
history.
    FHA also plays a very important role in supporting the 
market throughout the business cycle. If FHA had not been 
around to provide liquidity when private capital withdrew from 
the market in 2008, home values might have declined twice as 
far as they did, potentially causing a double-dip recession and 
far higher unemployment rates.
    Now, that countercyclical role that FHA played was not 
without cost. And it took a serious toll on the insurance fund. 
But a combination of strong management, policies that reduce 
risk, and a number of premium increases have put the agency 
back in the black now in a relatively short timeframe. Those 
who claim that HUD may be violating the law by reducing its 
annual premium at a time when the ratio has not yet returned to 
2 percent are taking that ratio out of context of the entire 
statute.
    The statute says that when the insurance fund is 
undercapitalized, the HUD Secretary may propose any adjustments 
to the insurance premium, but must consider FHA's capital 
requirements alongside other operational goals, including 
meeting the needs of homebuyers with low downpayments and 
first-time homebuyers by providing access to mortgage credit.
    FHA had gotten into a situation where the amount that it 
had raised its premiums by was causing borrowers to pay about 
$17,000 in premiums for less than $5,000 in risk. Clearly, 
things had gotten out of whack. And the .5 percent reduction in 
just the annual premium, without even touching the up-front 
premium or changing the new requirement that premiums be paid 
for the life of the loan, was a modest and sustainable way to 
readjust that overcharging without materially changing the date 
by which FHA expects to get back to its capital ratio.
    I want to close by mentioning a couple of important areas 
where I think FHA can reduce risk further to the taxpayers, 
while enhancing access to mortgage credit for qualified 
households and strengthening neighborhoods.
    One is encouraging and funding broader availability of 
housing counseling. FHA had developed a pilot program to do 
this, called the Homeowners Armed With Knowledge (HAWK) 
program, which would have connected new homebuyers with high 
quality housing counseling. But unfortunately, Congress used 
the Fiscal Year 2015 spending bill to prohibit FHA from 
implementing HAWK. I urge Congress to reconsider this decision.
    My organization has also recommended a series of changes 
that HUD can make to its distressed assets sales program to 
keep more homeowners in their homes and better support 
neighborhood restoration.
    Finally, when it comes to competition with the private 
sector, I think it is very important that we look across both 
FHA and the GSEs. The GSEs right now are engaged in some very 
steep risk-based pricing that is new to them. They just started 
this after the crisis. If they were to readjust that pricing 
back to pre-crisis levels, I think private mortgage insurers 
would be in a much better competitive position. And I think 
when we talk about pricing generally, it is important to look 
across both FHA and the GSEs.
    With that, I look forward to your questions. Thank you 
again.
    [The prepared statement of Ms. Gordon can be found on page 
44 of the appendix.]
    Chairman Luetkemeyer. Thank you, Ms. Gordon.
    Dr. Rossi, you have 5 minutes.

 STATEMENT OF CLIFFORD V. ROSSI, PROFESSOR-OF-THE-PRACTICE AND 
  EXECUTIVE-IN-RESIDENCE, ROBERT H. SMITH SCHOOL OF BUSINESS, 
UNIVERSITY OF MARYLAND; AND CHIEF ECONOMIST, RADIAN GROUP, INC.

    Mr. Rossi. Thank you. Chairman Luetkemeyer, Ranking Member 
Cleaver, and members of the subcommittee, thank you very much 
for inviting me to testify today.
    My testimony is actually going to focus on three areas: 
concerns with the actuarial report; the impact of the FHA's 
decision to lower mortgage insurance premiums; and 
recommendations on reforming FHA.
    As you have heard, the MMIF is in an extremely weak 
position. The 2014 actuarial report estimates that the fund 
will actually reach the 2 percent capital reserve ratio 
threshold by 2016. However, the report relies on an 
extraordinarily complex model to reach that conclusion, and it 
did not factor in the recent 50 basis points reduction in the 
annual premium for new loans and eligible refinanced loans.
    Unfortunately, flaws in the model raise serious questions 
about that conclusion. Let me just highlight three of these. 
First, it does not appear that the FHA tested its models for 
accuracy using data that was used to develop the model itself, 
such as different samples of loans. As a result, the model 
appears to have far less predictive ability than we would hope.
    One example is that the diagnostic statistic used to 
forecast national home price changes, which happen to be a 
major factor explaining mortgage default, are not viewed as 
typically having a particularly strong prediction.
    Second, a key piece of information used to develop FHA's 
credit risk profile of future risks and business was provided 
by HUD, rather than the actuary or another independent source. 
So in my opinion, this actually calls into question the 
validity of the estimate.
    And then third, the approach taken for generating an 
estimate of the economic value of the fund requires estimating 
borrower defaults as a function of home prices, interest rates, 
and unemployment rates. The process of simulating various 
possible macroeconomic outcomes is called a Monte Carlo 
simulation. This is a valid approach. But the number of 
possible outcomes used in the report is woefully insufficient. 
The FHA actually used only 100 simulated paths. Compare that to 
a recent study of the fund by the CBO, which simulated 1,000 
economic paths.
    Beyond the flaws in the report, the FHA's recent decision 
to reduce its premiums will exacerbate the funds's financial 
condition and extend the time to build the 2 percent capital 
reserve.
    The FHA premium reduction also disadvantages private 
capital that is currently in the market. Let me illustrate. 
With the FHA premium reduction, borrowers with a 5 percent 
downpayment and a FICO score of 680 or above are at risk of 
going to FHA when previously, private mortgage insurance was a 
great option for them. In my estimate, approximately 8 percent 
of private mortgage insurance is at risk of being taken by FHA 
if pricing or execution are the only factors in the decision.
    So you might ask why private mortgage insurers don't simply 
reduce their premiums to match FHA. But this question ignores a 
fundamental difference between the two: FHA does not have to 
cover its cost of capital, because it has none.
    So finally, Mr. Chairman, I would like to actually quickly 
highlight a few specific FHA reform recommendations.
    First and foremost, FHA needs to get back to its historical 
focus of providing access to mortgage credit for low- and 
moderate-income borrowers. Under normal conditions, FHA should 
stick to its historical share of about 10 to 15 percent of the 
downpayment market--low downpayment market. To accomplish this, 
FHA should adopt an area median income target to determine 
program eligibility and should phase out the use of area-based 
loan limits.
    Second, FHA should be permitted to engage in risk-sharing 
arrangements. Private mortgage insurance provides first-loss 
coverage between 25 and 35 percent, protecting the GSEs, and 
thus the taxpayers. But FHA still holds 100 percent of the 
credit risk.
    The benefits of risk-sharing are widespread from a taxpayer 
protection standpoint, as well as introducing some degree of 
private sector discipline and price discovery into the process. 
FHA should immediately begin testing a wide variety of credit 
risk transfer structures with MI companies and other qualified 
counterparties.
    Third, we have to endeavor to view FHA policies and GSE 
policies in tandem if we are at all serious about adopting a 
consistent national homeownership policy. Right now, FHA and 
GSEs use different numbers in calculating key metrics in their 
respective risk models, which allows them to draw different 
conclusions about how to price future risk and the fees 
associated with that insurance. Those calculations should be 
the same in order to avoid incongruous pricing policies between 
the agencies and the FHA.
    So in conclusion, let me just state this and emphasize 
this: Without question, FHA has been and is an essential part 
of the housing finance system. While maligned for the current 
financial challenges of the fund, it is important to keep in 
mind that FHA has served this country well for nearly 80 years. 
But it has strayed from it historic mission. And the result has 
been to deplete the fund and to undercut the role of private 
capital in the market.
    Thank you for the opportunity again. And I look forward to 
any questions that you may have for me.
    [The prepared statement of Dr. Rossi can be found on page 
79 of the appendix.]
    Chairman Luetkemeyer. Thank you, Dr. Rossi.
    We have a situation this morning with this new room. And I 
apologize to all the folks who are here in the cramped 
quarters. But we also have a problem with our Members on the 
dais here from the standpoint of our clocks. My clock doesn't 
work. The clock in front of Mr. Stivers, which I can see since 
I do have my bifocals on, is apparently working. And 
apparently, you all don't have any clocks at all. Is that 
correct? Okay.
    What I am going to do is, I will watch the time. And we 
will try and be as judicious as possible. But when we get to 
the 30-second mark where you are without time--in other words, 
when you get down to about 4 minutes and 30 seconds of your 
time, I will tap this gavel to let you know you have 30 seconds 
left so that you can have some time to sort of wrap up your 
questions or know where you need to be going with it. But we 
will try to work with you on the time here. This is very 
inconvenient. But if everybody sort of works together, I think 
we can get through this.
    Let me recognize myself for 5 minutes and begin the 
questions with Dr. Holtz-Eakin here.
    I appreciate your testimony today. And I am kind of 
curious. I was reading through your testimony. And in the 
testimony--well, let me ask this question first. Two weeks ago, 
Secretary Castro was in front of us. And he truly believes that 
the projected mortgage premium is not going to hurt FHA and 
that they will still be able to come up with enough money, and 
can grow themselves out of this mess. Can you give us your 
educated opinion on this, please?
    Mr. Holtz-Eakin. I would make two points. The first is that 
historically that has just not been true. If you look at the 
projections--the chart in my testimony is pretty clear on 
this--again and again, there is a forecast of reaching capital 
adequacy. And again and again, FHA falls short. So I just think 
that if you are a prudent curator of the taxpayers' money, you 
can't really count on that forecast, and you shouldn't.
    The second point is that what the Secretary is essentially 
saying is that we can cut our prices and raise our revenue. And 
it is similar to assertions that were often disdained by the 
Administration, that you can cut taxes and raise revenue. It is 
exactly the same argument in a different setting. And I don't 
think it has any more credence coming from the Secretary than 
from anyone else.
    Chairman Luetkemeyer. In your testimony, there is a chart 
there that shows that over the last--well, since January of 
2010 there have been eight increases and one decrease. So I 
assume that whenever they increased premiums, the revenue went 
up.
    Mr. Holtz-Eakin. Yes.
    Chairman Luetkemeyer. How did this affect the volume of 
loans that were being mad? Did it go up or down?
    Mr. Holtz-Eakin. It is hard to isolate just the premium 
impact, quite frankly, because we have been through this 
extraordinary housing cycle. And so the share of FHA market 
went up in large part because of the cycle. I think you have to 
pull that out. And in general, it is going to--if you raise the 
premium, you are going to shift things into the private sector 
and let the private market back it.
    Chairman Luetkemeyer. Okay. So whenever they decreased 
premiums, what happened?
    Mr. Holtz-Eakin. It is going to cut into the FHA and put 
the taxpayer behind it.
    Chairman Luetkemeyer. So basically, the one time they did 
decrease it, did it increase volume?
    Mr. Holtz-Eakin. Yes.
    Chairman Luetkemeyer. The volume of loans went up?
    Mr. Holtz-Eakin. Yes.
    Chairman Luetkemeyer. But how much--
    Mr. Holtz-Eakin. --but how much it raised revenue--I could 
get back to an exact number.
    Chairman Luetkemeyer. Okay. I was just kind of curious. 
Because I was doing some numbers here, just to try to come up 
with some--let's say they start out with $100. And they cut 
their premiums roughly 40 percent. I believe that is correct.
    Mr. Holtz-Eakin. Sure.
    Chairman Luetkemeyer. So that makes 60 percent of the 
revenue that they had been taking in, which means in order to 
get back that hundred dollars, they would need a two-thirds 
increase in the volume of loans. Is that--is my--
    Mr. Holtz-Eakin. That is right.
    Chairman Luetkemeyer. --math correct here? Okay.
    They have roughly a trillion dollars worth of loan 
portfolio right now, so they would have to have then roughly a 
$1.67 trillion or almost $1.7 trillion portfolio to still make 
the same amount of money--
    Mr. Holtz-Eakin. Right.
    Chairman Luetkemeyer. --to be able to get back to where 
they were and get back to the projections of meeting their 
capital by 2016. Is that--am I--
    Mr. Holtz-Eakin. You are doing that right.
    Chairman Luetkemeyer. Okay. So the problem is--as I think, 
Dr. Rossi in your chart, and also Dr. Holtz-Eakin indicated 
here on the previous page, everything under 680 is where FHA is 
going to be competent and be competitive. And therefore, it 
would seem to me they are going to take all of the risky loans. 
And the private market then would be able to be more 
competitive on the upper loans. So you are taking two-thirds 
more--you are increasing your loan portfolio by two-thirds and 
increasing the riskiness significantly. Am I missing something 
here?
    Mr. Holtz-Eakin. That is one of the concerns that I tried 
to highlight at the outset.
    Chairman Luetkemeyer. So it seems to me that we are going 
the wrong direction fast. And if we are taking on more risk, do 
you think that our reserve is adequate there to handle the 
increased risk? Or the risk we have right now, quite frankly.
    Mr. Holtz-Eakin. No. In the past, I have expressed my 
concern that even 2 percent isn't an adequate capital ratio. 
Certainly, the fund is well below that now, and has taken steps 
to diminish its ability to get to two percent.
    Chairman Luetkemeyer. Mr. Gupta, I think that the private 
market--you are looking at 4 percent capital. And I think there 
are some rules coming or some suggested rules coming that are 
going to raise that. What is that going to be coming to?
    Mr. Gupta. It is going to be coming to 7 to 8 percent.
    Chairman Luetkemeyer. Eight percent.
    Mr. Gupta. Yes.
    Chairman Luetkemeyer. So why is the private market going to 
have to go to 8 percent and the Federal Government can be at .4 
of 1 percent?
    Mr. Gupta. I think this is definitely one of the 
discrepancies in the housing finance system right now; every 
sector of mortgage finance actually has higher capital right 
now than they did before this cycle. Whether you are talking 
about banks, mortgage servicers, mortgage insurance companies, 
every single sector actually has increased capital requirements 
in the last 6 years, except for FHA.
    Chairman Luetkemeyer. Okay. One of the things we talked 
about the other day with the Secretary was to ask him what his 
past due percentage was of his portfolio. He couldn't answer 
the question. Can you tell me what your past due percentage of 
portfolio is?
    Mr. Gupta. For general it is 5 percent--90 days.
    Chairman Luetkemeyer. Five percent. So theirs was--the 90 
days-plus, the high delinquency, was 7 percent.
    Mr. Gupta. Yes.
    Chairman Luetkemeyer. And they have .4 of a percent. And 
they are asking you with 5 percent total past due to go to 8 
percent?
    Mr. Gupta. Yes.
    Chairman Luetkemeyer. That is a head scratcher, isn't it?
    Mr. Gupta. Yes. Absolutely.
    Chairman Luetkemeyer. Okay. With that, I will end my 
questioning and go to the ranking member, the gentleman from 
Missouri, my good friend Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Gupta, do you believe that the lowering of interest 
rates propels the awarding of bad loans?
    Mr. Gupta. Just the reduction in premium rates?
    Mr. Cleaver. Yes.
    Mr. Gupta. The premium reduction by itself doesn't propel 
promotion of bad loans. The guidelines itself could propel bad 
loans. Right now, FHA guidelines go all the way to 3 percent 
downpayment, down to 580 FICO. Credit agencies that issue this 
FICO typically will say that FICOs below 630 approximately are 
sub-prime prime FICOs. So layering that type of FICO with a low 
downpayment does stack risk factors against the loan and 
increases the probability of default.
    Mr. Cleaver. Yes. I would just like to remind everyone that 
the VA does zero percent, and they have the lowest foreclosure 
rate, which I think should be at least taken into consideration 
during this discussion.
    But one of the things that I think is troublesome, at least 
for me, is that I am not sure if there is a concern about FHA 
having an unfair advantage in terms of business over the 
private sector, or is there just a general concern for the 
taxpayers? Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. My primary concern is the taxpayer. The 
government shouldn't be in the business of competing with the 
private sector. It sets up programs for social goals. And the 
assistance to low- and moderate-income individuals to have 
housing is an important social goal. It should look to achieve 
the goal and no more.
    Mr. Cleaver. So do you think that we have encouraged 
competition between FHA and the private sector? Is that what 
has just happened?
    Mr. Holtz-Eakin. What I think has just happened is that the 
FHA has exposed the taxpayers to unnecessary risks by lowering 
its premium. That is my primary concern. It hasn't, in my view, 
taken the right steps to restore the capital adequacy. And it 
has, in the process of lowering premiums, attracted a riskier 
portfolio.
    Mr. Cleaver. When the bubble burst in 2008 and the recovery 
began, the only car in the garage was FHA. The private sector 
left. So why would we want to do anything that would make 
potential homeowners more vulnerable, to prevent them from 
being able to buy a home? If the private sector left--and I 
don't blame you for the private sector leaving. I am a 
capitalist. You are in the business of making money. But the 
problem is, who takes care of the people who are being left 
behind because the credit has been tightened?
    Mr. Rossi. Actually if I could, Mr. Gupta actually said a 
little earlier that private mortgage insurance actually wound 
up paying claims of, what, $55 billion or $51 billion; $44 
billion from the GSEs. So from that standpoint, they actually 
didn't retreat fully from the market, and, in fact, were there 
to pay claims during one of the worst periods that we have 
actually ever faced.
    Mr. Cleaver. Let me ask Ms. Gordon.
    Ms. Gordon. It is hard to know where to start. But there 
were also quite a lot of claims PMI did not pay. And, in fact, 
several private mortgage insurance companies went out of 
business. There were many disputed claims. There were many 
claims that were eventually paid, but not at the time they were 
initally due. So I think you have to look at that to get the 
full picture.
    But I don't want to focus on the PMI. I think the PMI 
companies are a very important part of the system. I am glad to 
see them coming back to strength. And I would like to see the 
pricing of the GSEs change so we could have more robust low 
downpayment lending going on over there, too.
    But the fact is when the rest of the system failed, FHA was 
there to prevent a real liquidity crisis in this market. And 
when you look across the sectors at the bailout numbers, the 
amount of money we spent to bail out the banks, to bail out 
AIG, and the amount that we spent to bail out the GSEs, those 
were huge, huge figures; whereas ultimately, FHA required an 
incredibly small draw very briefly for 1 year. It is actually 
incredible how cheaply the taxpayer was able to save the 
housing market. It turns out FHA was a better value than, 
frankly, anyone had ever really thought it would be.
    Mr. Cleaver. Thank you.
    Chairman Luetkemeyer. Thank you, Mr. Cleaver.
    With that, we go to the vice chairman of the subcommittee, 
the gentleman from Georgia, Mr. Westmoreland.
    Mr. Westmoreland. Thank you. And I thank the panel for 
being here.
    Ms. Gordon, you wrote in an article about one way that FHA 
could get rid of some of these loans, I guess, and the fact 
that they could sell them in bulk?
    Ms. Gordon. Yes. They are doing that.
    Mr. Westmoreland. Okay. And in that article, you mentioned 
that there are 2 million homeowners who are behind on their 
mortgages and headed to foreclosure, I think is what you said. 
And there are another 10 million homeowners who are underwater 
on their mortgages. How many of those are FHA-insured?
    Ms. Gordon. I don't have the exact number of underwater FHA 
borrowers with me here. I could get that to you.
    Mr. Westmoreland. Okay.
    Ms. Gordon. But it is--I think you will find that the 
places where homeowners are underwater right now are very 
concentrated geographically. There has been a geographically 
uneven bounceback in home prices. So if you live in Arizona or 
California or some places like that, your home values have gone 
way back up. If you live in the Midwest, you might be in a 
different situation.
    Mr. Westmoreland. I understand.
    Now, when you sell these FHA-guaranteed mortgages en bloc, 
I guess, to investors--I think you mentioned that there were 
about 100,000 at the time that you wrote the article that had 
been sold. How does that relieve the FHA? Does that cost the 
FHA money? Do they have to discount these loans?
    Ms. Gordon. It actually ends up saving the FHA a bunch of 
money. Because what is happening is most of these loans are in 
that shadow place between the homeowner not paying but the 
foreclosure not being done, in many cases because the servicer 
just doesn't think it is worth it or hasn't gotten around to it 
or whatever.
    So what FHA is able to do is to sell these loans before 
they devalue completely. Before the houses become vacant and 
become part of neighborhood blight, you want to sell them and 
get them into the hands of somebody who is actually going to do 
something about them. So, that is a really good idea.
    You also save yourself the carrying cost if that loan does 
go through to foreclosure and goes into FHA's Real Estate Owned 
(REO) portfolio. That is going to cost FHA money. So this is a 
short-circuiting of that. And because there is a lot of demand 
for nonperforming mortgages right now, there is a market for 
it, the price that FHA has been able to get on these bulk sales 
has been surprisingly good.
    Mr. Westmoreland. And so these people who buy these loans 
on bulk sale, do you know how they treat the homeowners after 
they have purchased a loan?
    Ms. Gordon. That is what we are trying to get more 
information about. FHA released a small amount of data last 
summer. We are hoping that they will release more, and more 
robust data. We have noticed that in the pools that have 
neighborhood stabilization outcomes required, a lot of the 
homeowners seem to be re-performing, meaning they are paying 
their loans again; whereas on the pools that don't have that 
requirement, it looks like a lot of these things are getting 
resold to other investors.
    Mr. Westmoreland. So these private investors that are 
buying these loans--let's say the loan is $100,000, the loan 
balance is $100,000. What would an investor typically pay for 
that loan?
    Ms. Gordon. Maybe somewhere between $60,000 and $70,000.
    Mr. Westmoreland. Between $60,000 and $70,000, okay. And 
then, do they reduce the loan amount for the homeowner, the 
person who--
    Ms. Gordon. That is what we don't know yet. That is what we 
are looking for more information about. Theoretically, they now 
have much more latitude to do that.
    Mr. Westmoreland. So, you are just clearing your books. You 
are just trying to save the FHA money, and not really 
concentrating on what happens to the homeowners?
    Ms. Gordon. No, actually, we are very interested in seeing 
principal reduction on these loans. And the FHA can't do that, 
which is one of the reasons that we would like to see these 
things get into the hands of either responsible investors or, 
even better, nonprofits or people partnered with mission-based 
nonprofits in order to make sure these loans are restructured 
properly.
    Mr. Westmoreland. Okay. Good. The loan amount is $100,000, 
and you sell it for $70,000. Now, that is a $30,000 gap. Do you 
have to pay that $30,000 to the person who had the original 
mortgage?
    Ms. Gordon. The claims get paid in full by FHA.
    Mr. Westmoreland. That is what I am talking about. So out 
of these $100,000, if it got reduced 30 percent, that is money 
the FHA had to pay out--
    Ms. Gordon. It is money the FHA had to pay out. And what 
they are doing it is comparing it with the amount they would 
have to pay out if this didn't happen. And believe it or not, 
it is actually smaller.
    Mr. Westmoreland. I find that amazing, but--
    Ms. Gordon. Yes. Some of these homes cost a great deal of 
money to just keep on and on and on, maybe have them vacant, 
have them sit in REO portfolios. That is a big waste of 
taxpayer money. I think it is really important to get these 
homes back to productive use. And it is really a good 
opportunity to leverage the private sector in this goal.
    Mr. Westmoreland. Just one comment: You talk about saving 
the taxpayer money. The taxpayers are actually paying the 
difference in that loan balance.
    Ms. Gordon. The difference is actually negative because of 
what they are saving on the back end.
    Mr. Westmoreland. Okay. Thank you. I yield back.
    Chairman Luetkemeyer. Thank you.
    Next is the gentlelady from New York, Ms. Velazquez, for 5 
minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Ms. Gordon, while FHA's move to reduce insurance premiums 
will help first-time and minority homebuyers, there has been 
little discussion about FHA's multifamily business, which helps 
support the development and preservation of affordable rental 
housing. And in places like New York and Boston, we are facing 
a shortage of affordable rental housing.
    How has FHA's multifamily portfolio performed in recent 
years, and can FHA do more to support affordable rental 
housing?
    Ms. Gordon. So first, thank you for mentioning rental 
housing. We are having a genuine rental housing crisis in this 
country right now, where for the first time since we have been 
tracking it, more than half of all renters pay more than 30 
percent of their gross income for rent. Anybody who has tried 
to rent in D.C. knows about this. So it is very important that 
FHA and the other HUD programs that support affordable housing 
production and especially preservation of aging stock continue 
in place.
    The portfolios--the multifamily portfolios across-the-board 
have been doing well. And I will tell you that I am not an 
expert on multifamily. I didn't come here today with an agenda 
for what FHA should do. But it is extremely important to 
continue to fund the production and preservation of rental 
housing, or this crisis is going to become even worse.
    Ms. Velazquez. Thank you.
    Mr. Rossi, you have said that FHA's dual missions to 
provide access to affordable credit and to protect the MMI fund 
are often at odds with each other. However, many argue that the 
recent premium rust will, in fact, address both missions.
    Isn't the right pricing of FHA's insurance an integral 
piece of ensuring that FHA's market share is large enough to 
provide for the recapitalization of the MMI fund?
    Mr. Rossi. Actually--and this is to my testimony--I am not 
sure that the actuary report, even we know whether or not we 
have actuarially fair pricing today, even before the 50 basis 
point reduction. That is part of what I am discussing here.
    And so from that standpoint, we have to step back and focus 
more, I think, on the pricing as we see it today and make sure 
that is all right before we actually move further into deciding 
whether to expand or whatnot in terms of market share.
    Ms. Velazquez. What is your take on that, Ms. Gordon?
    Ms. Gordon. I don't think that FHA is taking this action 
based on just a market share projection. It is really that at 
this point, they had hiked the premiums up so much that they 
had really sort of overshot with the credit quality remaining 
really, really high.
    I do think it is important to remember about this whole 
actuarial report--and I am neither an actuary nor an 
accountant. But this actuarial report and the number that they 
come up with for that capital ratio, this is a very 
conservative approach. This assumes that if FHA were to shut 
its doors today, does it have enough money to pay every claim 
for the next 30 years? I know that if we applied that test to 
my family balance sheet, I would be in big trouble. So, it is 
an extremely conservative approach.
    And so, again, while I can't get into the details of 
exactly how the actuary does their work, I think it is 
important to remember that right now these books of business 
are so clean that they are throwing off these record profits 
and will certainly be continuing to shore up the fund.
    Ms. Velazquez. Thank you.
    Mr. Gupta, you described in your testimony how FHA and 
private mortgage insurers can and should serve as complementary 
forces with FHA focusing on underserved markets that the 
private sector may not be suited to reach.
    Mr. Gupta. Yes.
    Ms. Velazquez. While the U.S. Mortgage Insurers trade 
group, which you Chair, has expressed concern with a recent FHA 
premium reduction, saying that private insurance has the 
capacity to expand access to mortgage credit, how can this 
position be reconciled with your testimony that many FHA 
borrowers are not good candidates for this type of product?
    Mr. Gupta. That is exactly the point in my testimony, 
Congresswoman. If we think about FHA and private mortgage 
insurance serving complementary roles, that is exactly what I 
mean. Private mortgage insurance, as I stated in my testimony, 
still offers 3 percent downpayment loans all the way down to 
620 FICO. Once we start going below 620 FICO, from an 
underwriting guidelines perspective, it is difficult for a 
private company to actually price loans and put borrowers in 
homes who are going to be in those homes long term.
    Second, from a pricing perspective in competing with FHA, 
once we go below 620 FICO it is not possible for private MI 
companies to compete with FHA in that space, given the FHA 
pricing. So we believe that we have the right complementary 
roles when it comes to low-credit borrowers. Of our challenges, 
when FHA reduces price--and we are talking about 680 FICO and 
760 FICO, the chart we included in Appendix C of my testimony--
you can see that after this price reduction, FHA becomes very 
competitive--
    Ms. Velazquez. So you are telling me that at that score, 
lower than 620, they should pay more?
    Mr. Gupta. Based on--for a private MI company, absolutely. 
We price a risk based on risk-based pricing, because we have to 
generate a return for our investors.
    Ms. Velazquez. Ms. Gordon?
    Ms. Gordon. And the FHA does not risk-base price, which is 
one of the key differences between what FHA does and what the 
GSEs do right now. And they do it because they have difficult 
policy objective.
    Ms. Velazquez. Thank you, Mr. Chairman. I yield back.
    Chairman Luetkemeyer. Thank you.
    With that, we will go to the gentleman from New Mexico, Mr. 
Pearce.
    Mr. Pearce. Thank you, Mr. Chairman. And I thank each one 
of you for being here today.
    Mr. Rossi had made comments about the model that was used 
to get the predictions. And those seem fairly compelling to me.
    Mr. Holtz-Eakin, are you familiar with that model? Do you 
have the same concerns?
    Mr. Holtz-Eakin. I am not intimately familiar--
    Mr. Pearce. It is not your thing.
    Ms. Gordon, did you have an opinion on his comments on the 
model that was used and the complexity and the unpredictability 
and kind of the weakness of it?
    Ms. Gordon. Like I said, I am not an expert on the 
modeling. But I do know that because the number they are 
calculating is so conservative, there is some room for 
differences.
    Mr. Pearce. Okay. At the end of the day, if I am trying to 
sort through who would be accurate and who is not accurate, I 
generally think if it were a stock on the stock market, would 
it sell? If you were given the parameter that there would be no 
more government bailouts--in other words, Ms. Gordon makes her 
case very strongly that it is okay, it is operating fine. But I 
wonder if it were on the stock market, and you were able to buy 
into that, would you buy into it, Mr. Holtz-Eakin?
    Mr. Holtz-Eakin. I would not.
    Mr. Pearce. Mr. Gupta?
    Mr. Gupta. No. And in fact, let me--
    Mr. Pearce. Ms. Gordon, would you put in 30 percent of your 
personal wealth?
    Ms. Gordon. If it had been on the stock market, the housing 
market really would have collapsed after the financial crisis. 
I don't think you can--
    Mr. Pearce. No, no. I am just talking about FHA--
    Ms. Gordon. I don't think you can compare a public agency--
    Mr. Pearce. We are talking about a model that--and is it 
true or is it not true that it is in bankruptcy, or that it is 
very stressed? You make the compelling point that it is not. 
And I am just asking, would you invest in it?
    Ms. Gordon. I think it is yes. I think it is very 
strongly--
    Mr. Pearce. Okay. You would invest in it then.
    Mr. Rossi?
    Mr. Rossi. I believe that we have an extraordinary amount 
of model risk in the actuarial model. And that is--
    Mr. Pearce. So you wouldn't probably invest in it?
    Mr. Rossi. No.
    Mr. Pearce. One of the comments that was made, I think by 
Ms. Gordon, was that the FHA was there to prevent a real 
liquidity crisis.
    Mr. Holtz-Eakin, would you comment on that perspective 
again? It sounded credible, but I would like a little bit more 
historical knowledge than I have.
    Mr. Holtz-Eakin. Certainly. A well-capitalized FHA is--
    Mr. Pearce. No. The comment was that in the 2008 crash, 
that they were there to provide liquidity when nobody else was 
there.
    Mr. Holtz-Eakin. Yes. I think they did play an important 
role--
    Mr. Pearce. Okay.
    Mr. Holtz-Eakin. --in the crisis. There is no doubt about 
it.
    Mr. Pearce. Okay. Would we have gotten into the problem if 
the GSEs--in 2008, would we have gotten into that problem if 
the GSEs had not moderated, had not changed their underwriting 
standards? I will just go down the line again.
    Mr. Holtz-Eakin. Congressman, I think there was a 
deterioration in underwriting standards at the GSEs. The FHA, 
as well. They had zero percent down policies. Those were all--
    Mr. Pearce. Sure. In other words--
    Mr. Holtz-Eakin. --bad decisions.
    Mr. Pearce. Ms. Gordon pointed out all the things, the 
kinds of loans that caused the problems. But if GSEs had not 
been buying those loans, they would have dried up at the 
source. Isn't that more or less correct?
    Mr. Holtz-Eakin. The GSEs contributed to the housing 
crisis.
    Mr. Pearce. Mr. Gupta?
    Mr. Gupta. Let me actually add two points to that. I agree 
with that. I frankly think the GSEs pulled back too far in 2008 
and 2009. And when we talk about private capital backing away 
from the market, in 2008 the private mortgage industry insured 
$200 billion of mortgages in the United States, in 2009 the 
private mortgage industry insured $76 billion of mortgages, and 
in 2010 the private mortgage industry $55 billion of mortgages. 
So I think the statement that private capital completely backed 
away might apply to private label securities. But we were still 
there to serve the market.
    Mr. Pearce. Back to the original question: Ms. Gordon, if 
the GSEs had not been buying those loans that you were critical 
of--and you have the right to be critical of them--would the 
problem have persisted, and would it have grown the way it did?
    Ms. Gordon. I think the fact that the GSEs were buying 
those loans, the securities, definitely contributed to the 
problem. Although there was lots and lots of cash around the 
globe contributing to that problem.
    I also think in the last couple of years right before the 
crisis, the GSEs contributed to the problem by buying those 
loans in what some people call the front door. They were buying 
some alt-A and subprime loans they shouldn't have been buying. 
And they were chasing market share. They were responding to the 
demands of private shareholders.
    And I think the GSEs had some very misaligned incentives 
there, where they had responsibilities to private shareholders 
but also had this sort of implicit but everybody knew--
    Mr. Pearce. Yes. The top officers were paying themselves 
very well too; right?
    Ms. Gordon. --right. And now we are hearing a lot of 
calls--
    Mr. Pearce. --based on the cooking of books.
    Mr. Rossi, I need to get you in before the light turns red 
here.
    Mr. Rossi. Sure. Actually, I would say that this goes back 
to the point that I made earlier, which is that we have a 
considerable amount of overlap between FHA and the GSE market 
these days for which we are talking about today. And so there 
certainly was a deterioration in what we call the credit box by 
the GSEs, as well as most market participants out there at the 
time.
    Mr. Pearce. Okay. Thank you, Mr. Chairman. I yield back.
    Chairman Luetkemeyer. Thank you, Mr. Pearce.
    And with that, we have the gentleman from Massachusetts, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. And I thank the 
witnesses for being here.
    I want to be clear that I am not an actuary, either. None 
of my colleagues here are actuaries. But we all play one on TV. 
So we pretend to know all these things, but we don't. And I 
just want to tell you that Mr. Kildee just asked a serious 
question that I thought--but I am not going to ask the 
question. He might when it is his turn. Would any of you invest 
in the Department of Homeland Security today? I would think if 
you do, good luck to you, because I wouldn't. But I want to get 
to my issues.
    Honestly, this is the 85th hearing--I think that is an 
official count--that we have had on the FHA in the last year. 
It is always the same. The concerns are legitimate. The 
differences are statistical in they are not objective; they are 
subjective. What should society be doing? How much should we be 
risking? Good questions. Serious questions.
    At the same time, since we started these hearings, the MMI 
fund has stabilized. Not a single penny of taxpayer dollars has 
been used. The only reason it was accessed is because a law 
said it must be accessed. On top of that, private capital has 
come back into the market. And the FHA's share has been 
reduced--the numbers I have are from $1.8 million in 2009 to 
$786,000 last year. We are heading in the right direction by 
anybody's measure. We are not arguing basics here. We are 
arguing--again, not arguing. We are discussing details and 
where the margins are, all good, all important.
    But to be perfectly honest, it is not worth an 85th, 86th, 
87th, and 88th hearing, unless there is a change in that 
direction. We are heading in the right direction by everyone's 
estimate. Is that wrong? Does anybody disagree that we are 
heading in the right direction? I think the answer is, you 
agree.
    Mr. Gupta. Congressman, just one comment in terms of Mr. 
Holtz-Eakin's testimony. One thing that changes with this price 
increase is that trajectory and market share has a potential to 
change.
    Mr. Capuano. Everything has a potential to change. I could 
lose an election. You could lose your job. Anything can change. 
But at the moment, based on recent history, things are heading 
in the right direction. So I think--not that these direction 
discussions aren't important--we should have hearings on other 
things.
    So all that being said, I want to talk about a couple of 
things that are still--Mr. Rossi, really, I want to start with 
you. For a couple of years now, I have been arguing--and it 
turns out apparently you have also been arguing--that the 
receivership of Fannie and Freddie has now overstayed its need 
and necessity and should be ended and we should stop this 
ridiculous sweep of profits. Now you might want to--then we can 
argue about Fannie and Freddie fees and what to do with the 
money. Different issue.
    Right now, it is being used as a piggy bank by the Federal 
Government for no particular purpose. It doesn't help the 
housing market. It doesn't help anybody in private industry 
that I know of.
    Mr. Rossi, did I read your stuff right, that you think the 
receivership should be ended because it is no longer necessary?
    Mr. Rossi. Yes. And the context for that, Congressman, was 
the following. It was as much out of exasperation when--I have 
been following this too; it almost feels like Groundhog Day at 
times--where we have had proposals to reform the GSEs at 
various times. And for whatever reasons, it hasn't come to 
fruition.
    So my point of writing that piece or pieces was just to 
acknowledge that maybe we could take a more pragmatic approach, 
look at HERA and decide whether an administrative solution was 
the answer.
    Mr. Capuano. And HERA, for all intents and purposes for 
those who don't know, are those reverse mortgages that every 
movie star in the world apparently wants to sell me on TV; is 
that right?
    Mr. Rossi. HERA is the legislation that, among other 
things, created the Federal Housing Finance Agency, as well as 
established, if you will, the way in which the GSEs--
    Mr. Capuano. Dr. Rossi, I would love to talk to you more 
about this. Because this is--honestly, I feel like I am a voice 
crying in the wilderness here. Here I am, Mr. Pro-market, 
apparently. I guess I am not as liberal as some people think.
    Ms. Gordon, I want to talk to you about something else, 
something I talked to the Secretary about a little while ago. 
These batch sales, these bulk sales of foreclosed homes. I, for 
one, think that we are not getting the top dollar we should be 
getting. I think you would get much more money if you broke 
them up and sold them in very small batches or even 
individually, which might be--the overhead might be a little 
too much individually. But certainly in small batches.
    And on top of that, I think you get a better bang for your 
buck relative to community needs. Each community is different. 
And if you sold them in small batches, you would give an 
opportunity for people who actually know the local market to 
bid on them and to fix them up and put--have a much higher 
incentive to fix them up and help the neighborhood. Do you 
think that is wrong? Do you think we should continue these 
massive bulk sales to investors, as opposed to more community-
based sales?
    Ms. Gordon. We agree it would be much better if these could 
be sold to nonprofit organizations or--in many cases, you see 
private investors partner with nonprofits, which sometimes can 
be the best of both worlds. Small pools and geographically-
concentrated pools really help that. You can't do all of it 
that way.
    Mr. Capuano. Right.
    Ms. Gordon. Because, of course, some of the stock is just--
it is not going to work out that way. We have a whole country 
to cover. But that would be a good idea. It would also be a 
very good idea to require all investors, whether they are or 
nonprofits or private investors, to make sure that they give 
the homeowner a chance to re-perform, or avoid foreclosure 
before taking them through foreclosure. And that requirement 
isn't in place for all of those loans right now.
    Mr. Capuano. I appreciate that. I will see you all at the 
86th hearing.
    Chairman Luetkemeyer. Thank you, Mr. Capuano, for those 
insightful remarks.
    With that, we go to the gentleman from Virginia, Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. Thank you for holding 
this hearing. And I appreciates our witnesses being here today.
    I guess one of the things that I think is most important 
for Congress to tackle, considering we are 7 years after the 
crisis, is housing finance reform. We have to deal with that. 
And it is remarkable that 7 years after the fact, we still 
haven't dealt with it. With that said, the Administration 
released a report in January of 2011. And I would like to ask 
you, Ms. Gordon, and then maybe have Dr. Holtaz-Eakin follow 
up.
    But there was a report in 2011 entitled, ``Reforming 
America's Housing Finance Market: A Report to Congress.'' I 
don't know if you are familiar with that. But in that report, 
the Administration reports several things: ``FHA has also 
implemented important changes and reforms over the last 2 
years, including strengthening underwriting standards, 
improving processes and operations, and raising premiums to 
improve its financial condition.''
    It went on the say that as Fannie Mae and Freddie Mac's 
presence in the market shrinks, the Administration will 
coordinate program changes at FHA to ensure that the private 
market, not FHA, picks up that new market share. Finally, as we 
begin to pursue increased pricing for guarantees at Fannie Mae 
and Freddie Mac, we will also increase the price of FHA 
mortgage insurance.
    Now, I guess my question is, in 2011, 3 years afterwards, 
was it a mistake for the Administration to take those actions 
and have those objectives? And if it was a mistake, I would 
like to hear your thoughts on that. If it was not a mistake, 
then why are we doing--why is the Administration's position 
changing?
    Ms. Gordon. First of all, I don't think the 
Administration's position has changed at all. FHA increased its 
premiums very significantly, and they still remain very 
elevated. That was a very small adjustment the other day to 
only one out of the various components of the premium 
structure. So I respect the conversations, but it was a little 
bit of a nonissue in some ways.
    What is important is that we still have not had this 
conversation about housing finance reform in the past--we have 
started to have it. Congress has started to have it. But it 
keeps petering out because it is one thing to say that private 
capital should come in, but if you talk to people in that 
sector, they don't have any certainty yet about what this 
system is going to look like. They have no idea about what the 
future of the government guarantee is. And they are just going 
to do other things with their money until we actually figure 
out a national housing policy here.
    Mr. Hurt. So you don't think that the Administration has 
changed its policy or is getting away from these three points 
that it made 3 years after the crisis?
    Ms. Gordon. No, I don't think it is. The group that FHA is 
going after right now is the group that private capital doesn't 
want. Mr. Gupta has explained that he doesn't want borrowers 
under a 620 credit score. The purely private sector only wants 
the very most pristine ones.
    Mr. Hurt. Okay. My time is limited. Let Dr. Holtz-Eakin 
respond. And then if Mr. Gupta would also like to also respond.
    Mr. Holtz-Eakin. The reduction in premium is not 
exclusively for those under 620. It is a reduction in premium 
for everyone. So it is not like this is a targeted policy on an 
under--an unserved group. And it is, however modest or large 
you want to characterize it, a change in their position from a 
couple of years ago.
    I think the important thing here is that everyone focuses 
on the countercyclical role of the FHA, which is real; but that 
is an automatic thing. And this isn't countercyclical. This is 
a discretionary procyclical cut in the premiums. And that is an 
unwise thing to do.
    Mr. Hurt. Mr. Gupta?
    Mr. Gupta. I will illustrate three things. First thing, a 
40 percent reduction in premium is not an immaterial reduction. 
And in private industry, if we reduced our premium by 40 
percent, we would not be generating a return for our investors.
    Second thing, private capital is ready and is there today 
to expand its market share. Every MI company has been raising 
capital through equity, through debt. Our parent company raised 
$400 million in December of 2013 and downstreamed all that 
money into our mortgage insurance unit. So in terms of being 
there and being ready to insure more borrowers, private capital 
is there.
    Third thing, when we are talking about borrowers below 620, 
that is where private market insurance does not have guidelines 
currently. To Dr. Holtz-Eakin's point: above 620, down to 3 
percent downpayment, 50 percent debt-to-income ratio. These 
guidelines are available in the marketplace and have been 
available in the marketplace over the last 3 years.
    Mr. Hurt. Thank you. Mr. Rossi, do you--it looks like I 
have--
    Mr. Rossi. Yes. One other thing I would say is with the 
advent of the GSEs now, with their new credit policy around 
allowing 97 percent LTV loans, they are pushing into that 
market even before what they had.
    The other thing that I would say too is that I believe the 
latest annual report for FHA actually cites the fact that they 
still are looking to have market share--or private capital, 
rather, reenter into the market. So, just to kind of state 
that.
    Mr. Hurt. Thank you. I yield back my time.
    Chairman Luetkemeyer. I thank the gentleman from Virginia.
    With that, we have the distinguished gentleman from Texas, 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. And I thank the ranking 
member and the witnesses, as well.
    Let's move to Dr. Holtz-Eakin. Sir, I believe I heard you 
indicate, comparing FHA to another circumstance, that you can't 
cut taxes and raise revenue. I think that is what I heard you 
say. Is that what you said, that you can't cut taxes--
    Mr. Holtz-Eakin. I pointed out that this is exactly the 
same argument people make, and most people don't believe it.
    Mr. Green. So it is your position that if you cut taxes, 
you are probably not going to raise revenue?
    Mr. Holtz-Eakin. Yes. I am on record and that is--I did 
studies on that at the Congressional Budget Office in 2003.
    Mr. Green. All right. Would it surprise you to know that a 
good many of your friends on the other side would differ with 
you on that basic premise of cutting taxes and raising revenue?
    Mr. Holtz-Eakin. The next time everyone agrees with me will 
be the first.
    Mr. Green. I believe you. But the first won't happen today.
    Mr. Holtz-Eakin. I am not waiting.
    Mr. Green. I will allow my colleagues on the other side to 
entertain further debates.
    Let's move on to Ms. Gordon. Ms. Gordon, you mentioned the 
HAWK program. And you wanted to give some examples of things 
that we could do to strengthen FHA, and you mentioned HAWK. You 
also in your testimony give an indication that there was a part 
of this that was not properly implemented. Would you care to 
elaborate on HAWK and that portion that wasn't implemented and 
how that can be of benefit to FHA?
    Ms. Gordon. HAWK stands with Homeowners Armed With 
Knowledge. I had nothing to do with naming it. And this was a 
program that would have helped support getting more housing 
counseling, possibly both pre-purchase and post-purchase. The 
studies that have been done out there--and we now have some 
very good studies--demonstrate both for pre-purchase counseling 
and post-purchase counseling after a homeowner is in trouble, 
the counseling can significantly increase the chance of success 
of the homeowner.
    It remains a mystery to me why the entire mortgage industry 
is not focused like a laser on trying to get housing counseling 
to every person who is going to buy a house. This is an 
incredibly complex transaction involving more money than most 
consumers will ever spend on anything else in their lifetime, 
and we expect them to just go out into the marketplace to do 
this themselves. That just doesn't make any sense when for 
really just a very small amount of money, we could 
significantly increase the success rates of mortgages and do a 
better job of working with servicers when mortgages get into 
trouble for some reason, due to a life event.
    So it is very unclear to me why--and this program never got 
implemented. But Congress, in the spending bill just basically 
eliminated it, essentially. I don't think there was much debate 
or discussion over this. And so I think it is really important 
to go back to the drawing board and try to figure out how we 
can make sure that high-quality housing counseling is available 
for every purchaser who wishes to use it.
    Mr. Green. Mr. Rossi, would you concur?
    Mr. Rossi. I would. I would actually go further and say 
that Radian, in fact, has a partnership in place with a diverse 
segment to train, teach, and coach folks to be able to get into 
mortgages.
    Mr. Green. Mr. Gupta?
    Mr. Gupta. I would concur that housing counseling should be 
there. But whether housing counseling actually makes borrowers 
perform better or not, we have not seen that in our experience. 
But we also conduct housing counseling for free for borrowers.
    Mr. Green. Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. I have not studied the issue.
    Mr. Green. Okay. Would you care to the respond to the 
indication that the empirical evidence is not there, Ms. 
Gordon?
    Ms. Gordon. For a long time, there hadn't been a lot of 
studies of pre-purchase counseling. Because a lot of the 
studies that happened, happened post-crisis, when most of the 
activity was in the loan modification space. But there has been 
a study--it is cited in my testimony--that does indicate pre-
purchase counseling does improve outcomes. And I think the best 
kind of counseling at all is not just pre-purchase counseling, 
but is counseling that continues to be available after the 
person is already in the home.
    Mr. Green. I want to thank all of you for your testimony. 
And my assumption is--and if I am incorrect, kindly extend a 
hand into the air--that you would all like to see FHA remain a 
part of the housing finance system, that no one on this panel 
believes that we should not have an FHA. Is that a fair 
statement?
    Perhaps I should revise my statement. If you concur with 
me--we will do that this as we do it in court--raise your hand, 
please, if you concur. Thank you very much.
    I yield back, Mr. Chairman.
    Chairman Luetkemeyer. Thank you, Mr. Green.
    With that, we will go to the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    Every time the government gets in the business of business, 
it draws some concerns. Because if the markets could not 
sustain the business, then what makes us think that government 
can sustain it any better? And I think that is where we are 
today. We have seen a housing crisis, which has been 
precipitated by a housing policy that encouraged people to buy 
houses that they could not afford. And we, as a government, set 
them up for failure.
    And today, I heard Mr. Gupta say, and I want to confirm 
this, that since 2007, you have not only paid every claim that 
you have had, but you also continue to raise capital at a 
fairly significant rate?
    Mr. Gupta. Yes. Genworth has paid $6.2 billion in claims 
since 2007.
    Mr. Ross. And so while there appears to be a supply side of 
the product, the capital, and there clearly is, Ms. Gordon, I 
believe a demand for this capital, as there is a desire for 
housing. Then what gets in the way?
    Ms. Gordon. There are a few things that get in the way 
right now because the market does not work perfectly. For one--
    Mr. Ross. And does the market not work perfectly because 
some of the prices that are involved in the market are 
competitively low and set by government?
    For example, private mortgage insurance. Now, we have 
reduced the premiums on private mortgage insurance, as my 
chairman pointed out, in an effort to try to make it more 
affordable, but also to increase the amount that is going to go 
into the MMIF. In order to do that, again using the example of 
the chairman, if you have a trillion dollars in liability, and 
you have to come up with 66 percent more, and you are now up to 
$1.6 trillion in liability because you have had to increase 
your volume, makes me feel that the only scenario is that you 
have to drink yourself sober in order for this to be 
successful. And I don't think that is realistic or possible.
    And to that end, I would suggest that we might want to 
start a 12-step process. Because I know the government has 
involved itself in a business transaction, and we just can't go 
cold turkey. We have to wean ourselves. Because what I am 
hearing today is that the capital is out there. The buyers are 
out there. But we are prohibiting them. And if we allow them, 
some of them, we are setting them up for failure.
    So Dr. Rossi, I would just submit to you, is there not a 
possibility that we can take a hybrid method by which we can 
accommodate the demand in the market and the supply from both 
the private sector and the government to create a hybrid 
product that would allow for private capital into the market, 
qualification of mortgagors, and wean the government's exposure 
off time?
    Mr. Rossi. Absolutely. And let's not forget, a lot of what 
we are talking about here is an overlap and sort of a lack of 
mission clarity of what FHA is really supposed to do, which--
    Mr. Ross. We don't have a mission, do we?
    Mr. Rossi. Not that--
    Mr. Ross. It has been suggested that it is for first-time 
homebuyers who can't afford a home and allows them to enter 
into the market. Because a house is not a savings item. It is a 
consumption item.
    Mr. Rossi. Right.
    Mr. Ross. And we want to make sure that they are using it 
for the right purposes by giving them that opportunity. So 
shouldn't we statutorily gave a mission statement to the FHA as 
a first step?
    Mr. Rossi. I believe that would help quite a lot, to 
clarify exactly where one ends and one begins. I think right 
now we have this fusion, if you will, between both of these. 
And we are having this conversation in part because of that.
    Mr. Ross. And shouldn't we cede some of that liability that 
FHA has to the private sector that is waiting on the sidelines, 
the same way a reinsurance company would be there to take some 
of the risk away from us in the Terrorism Risk Insurance Act 
(TRIA) or any other government insurance program that we have.
    Mr. Rossi. HUD's annual report has actually said that.
    Mr. Ross. Wouldn't you agree, though, that reducing--and I 
am going to ask you this, Dr. Holtz-Eakin--the premium has 
actuarially no basis in fact?
    Mr. Holtz-Eakin. I hope that it is clear that is what I 
believe. This is a mistake.
    Mr. Ross. So aren't we then at the crossroads where we must 
engage the private market, otherwise we are going to relive our 
failures of 2007 or 2008? Dr. Rossi?
    Mr. Rossi. I would say this--I would think that the private 
sector does a much better job of pricing that risk of an 
insurance fund than the Federal Government can do. So from that 
standpoint alone, as I said in the testimony, we can't--at 
least in my opinion--be sure that what we have today priced is 
priced correctly for the type of risk that is in that 
portfolio.
    Mr. Ross. Pricing that risk and also managing that risk, as 
well; correct?
    Mr. Rossi. Correct.
    Mr. Ross. Lastly, I will--
    Chairman Luetkemeyer. --30 seconds.
    Mr. Ross. Oh, okay.
    Ms. Gordon, there was a report in May 2012 from the George 
Washington School of Business that indicated that 30 percent of 
FHA loans are going to families making 115 percent--115, one-
one-five percent--above our average median income.
    If the goal of FHA is to serve low- and moderate-income 
families, what good are we doing trying to serve those who are 
above that? Shouldn't we change that, or at least identify in 
the mission that that is not the market we are going after?
    Ms. Gordon. I think it is important to distinguish income 
from wealth. There are some people who have a higher income, 
but may not have enough wealth from the bank of mom and dad or 
what have you to put down a very big downpayment. They may need 
FHA. They may be able to get a loan through the Enterprises. 
Fannie and Freddie are really serving a very--a high credit 
score borrower right now--
    Mr. Ross. And they should.
    Ms. Gordon. --not the average--well, maybe they should. 
Maybe they should come down. That depends on what you believe 
the mix should be between FHA and the GSEs.
    But I do think the place to start--and I think I agree with 
a lot of people on this panel about this--is to look at loan 
limits. The problem with loan limits is you have to be very 
careful to take into account the radically different costs of 
homeownership in different geographies.
    Mr. Ross. And the qualification of the buyer. I yield back.
    Chairman Luetkemeyer. Thank you, Mr. Ross.
    We go to the gentleman from Michigan, Mr. Kildee, for 5 
minutes.
    Mr. Kildee. Thank you, Mr. Chairman. And I thank the panel. 
I don't know how many hearings we have had on this, but I don't 
mind. This is a really important discussion, and it is one that 
we ought to continue.
    Before I have a couple of questions for Ms. Gordon, I want 
to follow up on a comment Mr. Gupta made and just make sure I 
understand it.
    I took your comment to say that you--regarding the value of 
counseling, pre-purchase counseling particularly, that you were 
not aware that it had a significant impact as being an 
indication, that it is something that you haven't studied?
    Mr. Gupta. We actually have studied it. We offered pre-
purchase counseling for many years prior to this cycle as a 
company and as a industry. For Genworth, in our data--and we 
insure close to 600,000 loans, so we actually have good 
delinquency data--we did not see any meaningful difference 
between borrowers who went through pre-purchase counseling and 
borrowers who did not go through pre-purchase counseling.
    That being said, I am supportive of the fact--we are 
supportive of the fact that pre-purchase counseling is 
generally good for the housing market.
    Mr. Kildee. I think I understood what you just said, that 
it is good for the housing market, but it doesn't make any 
difference?
    Mr. Gupta. From a performance perspective, it doesn't 
demand any price discount.
    Mr. Kildee. The reason I ask the question is, first of all, 
I think the statement might be somewhat incongruous here in 
Congress.
    We had a hearing last year, where I posed the question to 
some of the country's biggest mortgage lenders. And they 
indicated it was their experience that made a difference and 
that when we look at--particularly among those borrowers who 
are having a difficult time accessing the housing market, that 
it really does make a difference.
    I think it is important that we make it clear that there is 
data that shows it is a positive thing. In my own personal 
experience, having worked in the field before I came here, I 
know that it made a significant difference. So I think I would 
like to see the research.
    And I think one of the questions that it begs is what kind 
of counseling were these individuals getting? Because the 
quality of the counseling is a significant factor in 
determining its outcome. So it might be a distinction. But it 
might be more attributable to the quality of the counseling 
that is being received.
    If I could turn to Ms. Gordon, we have heard a lot about 
the premium reduction. Could you just help clarify for us, who 
benefited? Who benefits from that change?
    Ms. Gordon. The people who benefit from those changes the 
most are the ones who were probably unable to get into 
homeownership at all before because the costs were too high. 
This does reduce the costs for families on the low end of FHA, 
where there isn't this competition. It is absolutely true that 
the premium reduction does slide the scale over to where if you 
compare the exact same GSE loan with the exact same FHA loan, 
it changes the price point at which one versus the other makes 
sense. That is virtually never from the way that homeowners 
actually end up in the home.
    Lots of homeowners, particularly homeowners of color, tend 
to be steered to FHA whether or not they can qualify for a less 
expensive Fannie or Freddie loan. And then, there are many 
folks who want a Fannie or Freddie loan because they want to 
avoid the paperwork and what have you with the FHA loans.
    So the people who are being helped most here are the ones 
who weren't going to be able to afford to do it, but were 
close. And I know it has been said that if somebody is only 
close to affording homeownership but isn't there yet, they 
shouldn't have homeownership, but I don't understand that at 
all. If you are at appropriate debt, and you have appropriate 
income, you have been underwritten appropriately.
    And particularly, in the many geographic areas right now 
where it is considerably less expensive to own a home with a 
responsible mortgage than it is to rent, I don't see why as a 
public policy matter, we would not want to encourage that.
    Mr. Kildee. That is a very good point. And I wonder if you 
would comment on the distinction that a publically-charged 
agency has for the positive externalities that it creates. In a 
purely private side of the market, it is obviously driven by 
the profitability of the enterprise, and often does not include 
the positive externalities that come in a community or a 
neighborhood including access to homeownership in the first 
place, the stability of neighborhoods, and the effect on equity 
of others who are not affected by that transaction.
    And then there was a discussion earlier about principal 
reduction. The value of principal reduction in preservation of 
homeownership is not simply realized by the borrower and the 
lender, but by people who live in proximity to that property. 
And I wondered if you could just briefly comment on--
    Ms. Gordon. Absolutely. Every foreclosure brings down the 
values of neighboring properties. If that home is not 
immediately reoccupied, it raises the risk of blight. It 
increases cost to fire and police. It reduces the tax base. And 
having lots of foreclosures in one place--we have seen this 
happen--can take a neighborhood and start a downward spiral 
that is very, very hard to reverse.
    We should be trying across-the-board, whether it is an FHA 
or a Fannie or Freddie or a private label loan to not have 
unnecessary foreclosures. When a home is vacant, on the other 
hand, it should be foreclosed on quickly--
    Mr. Kildee. Right.
    Ms. Gordon. --and rehabbed and reoccupied.
    Mr. Kildee. Thank you very much. I appreciate it all.
    Chairman Luetkemeyer. Thank you, Mr. Kildee. With that, we 
will go to Mr. Rothfus, from Pennsylvania.
    Mr. Rothfus. Thank you, Mr. Chairman. And I appreciate the 
panel being here today.
    Dr. Holtz-Eakin, when Secretary Castro was here a couple of 
weeks ago talking about these issues, I raised an issue that 
was described in a recent Politico magazine article entitled, 
``The Real Bank of America.'' Specifically, the article 
discussed a September 2013 taxpayer-funded bailout of FHA, 
going on to state, ``in fact the FHA had been receiving silent 
taxpayer-funded bailouts throughout President Obama's first 
term; bailouts that went unnoticed because of the odd process 
the government uses to calculate the budget costs of credit 
programs.''
    Separately, a CBO blog post from October 2013 reviewed and 
explained that FHA's guarantee programs had not produced the 
estimates FHA anticipated of a $45 billion savings, but rather 
a cost of $15 billion.
    Could you elaborate a bit further on what the cost to 
taxpayers has been for bailing out the FHA?
    Mr. Holtz-Eakin. I don't have the precise number. But for 
well over a decade now, CBO has been examining the performance 
of credit guarantees and loans under the Federal Credit Reform 
Act which, as written, forces the budget process to leave out 
market risk and, as a result, understates the risk being 
absorbed by taxpayers, and often leads in the course of 
watching loans through time to reestimates of the credit loss 
by the Office of Management Budget.
    No one ever notices those. They come out every year. If you 
look at the credit tables, you will find that, for example, 
this year the student loan portfolio had a $22 billion 
reestimate. The FHA has continual reestimates. Those are losses 
that are not very visible, but they are real.
    Mr. Rothfus. Dr. Rossi, when I asked Secretary Castro 2 
weeks ago whether he could reassure the committee that the FHA 
would not need another taxpayer bailout, the answer he gave us 
was no, that he didn't know. However, the Administration and 
folks on the other side of the aisle have been saying that the 
$1.7 billion taxpayer bailout did not mean the FHA needed cash 
to pay claims.
    Is the FHA poised to need another bailout in the future?
    Mr. Rossi. This gets exactly to my own testimony about this 
issue about whether it does or it doesn't. And quite honestly, 
given sort of where I see the modeling within this actuary 
model, there is always a possibility that can be the case.
    Mr. Rothfus. So under what circumstances could you find the 
need for another bailout?
    Mr. Rossi. Certainly, over the next several years, if we 
were to find that there was pressure on home prices, that 
somehow we got a hiccup in the marketplace again, we had a 
recession, if not a mild recession, even a more severe 
recession, that could certainly put the numbers into doubt.
    Mr. Rothfus. Dr. Holtz-Eakin, there have been concerns that 
the Administration, which controls the FHA, coordinates 
management and policy decisions with outside advocates that may 
or may not be equipped to understand the complexities of a 
trillion dollar portfolio or the risks posed to the U.S. 
taxpayers.
    Do you believe the FHA's policies are influenced by 
political events and outside groups, as opposed to the business 
model used by private mortgage insurance companies?
    Mr. Holtz-Eakin. Yes, I do. If you look at this premium 
reduction, it was foreshadowed before the President's State of 
the Union address. It was then announced in the State of the 
Union Address. Simultaneously, there were letters of support 
for it, which miraculously arrived. And the entire thing was 
done in 9 business days. It is unprecedented.
    Mr. Rothfus. Do you believe that the FHA should be 
regulated just like any other financial company?
    Mr. Holtz-Eakin. The FHA is not a business. And we 
shouldn't pretend it is a business. It is a government program 
to subsidize homeownership for certain people. Unfortunately, 
we don't know who those certain people are. There is no clear 
mission statement. And we aren't making transparent the subsidy 
that we are giving them. And those are the kinds of reforms we 
need in FHA.
    Mr. Rothfus. Would it be the kind of enterprise, if it were 
under the private sector, that might be deemed a significantly 
important financial institution--
    Mr. Holtz-Eakin. Yes.
    Mr. Rothfus. --because a failure--
    Mr. Holtz-Eakin. And it would be in receivership right now.
    Mr. Rothfus. Dr. Rossi, under Dodd-Frank, FSOC designates 
significantly important financial institutions, or SIFIs, when 
a financial institution is regarded as so important to the 
economy that its failure could lead to a widespread economic 
crisis.
    Should the U.S. Government also review government-owned 
companies or institutions that could pose a risk to the U.S. 
economy?
    Mr. Rossi. Absolutely. Given the size of the fund that we 
are talking about, at $1 trillion-plus, that is significant in 
its own right for further oversight.
    Mr. Rothfus. Should the U.S. Government have its own 
institutions subject to a SIFI destination in order to be 
watched by more than one Federal department?
    Mr. Rossi. I am not sure we would have to go so far as to 
have it designated specifically, as in the case of bank or 
nonbank SIFIs. But at the same time, I still maintain that it 
needs much greater focus.
    Mr. Rothfus. The Administration has stressed that its $46 
billion in assets is more than enough to meet any expected 
claims in 2015 or 2016. Do you believe that $46 billion in 
assets is enough to protect taxpayers from problems that could 
be encountered by a trillion dollar portfolio?
    Mr. Rossi. Is that question directed at me?
    Mr. Rothfus. Yes.
    Mr. Rossi. Okay. If you look at the capital reserve number, 
I believe the capital reserves are something like $20 billion. 
And when you look at the present value of cash flows, I think 
that is where we get to this $5.9 billion.
    Based on what I said earlier about changes in home prices, 
economic conditions, there is a possibility, of course, that it 
could encounter problems in the future.
    Mr. Rothfus. I yield back. Thank you.
    Chairman Luetkemeyer. Ms. Moore--
    Mr. Holtz-Eakin. I would just like to point out that--
    Chairman Luetkemeyer. Very quickly, please.
    Mr. Holtz-Eakin. I just want to point out that when I was 
at CBO in 2003 and 2004, we did exactly the kind of simulation 
modeling that Dr. Rossi is talking about for Fannie Mae and 
Freddie Mac. We calculated there was an implicit guarantee of 
$20 billion a year provided by the taxpayers. Everyone told us 
exactly the same thing; we have all these reserves, it will 
never happen. We know what happened.
    Chairman Luetkemeyer. Thank you.
    Next, we go to Ms. Moore, from Wisconsin, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    Chairman Luetkemeyer. Let me just interrupt, Ms. Moore. You 
got here a little late. What we are going to do, since we don't 
have the clocks around, is when you get down to the 30-second 
mark, I will give a little rap so you know you have have 30 
seconds left to ask questions and get answers. Okay?
    Ms. Moore. Thank you so much.
    Chairman Luetkemeyer. Okay.
    Ms. Moore. Thank you, Mr. Chairman and Mr. Ranking Member. 
And to our esteemed panel here, thank you so much for 
appearing.
    My question is for Mr. Gupta. You mentioned in your written 
testimony that lowering the mortgage insurance premiums at FHA 
has a couple of immediate consequences.
    I support the policy of FHA lowering its charges for 
mortgage insurance. But I am wondering, could you expound on 
how you think this pricing impacts the upcoming rule-making 
process for private mortgage insurance eligibility 
requirements?
    And since you put yourself in--since you are in the first-
risk position, how will this structure, the PMIER rules, better 
put the private capital in first-risk position, while retaining 
that strong counterparty creditworthiness?
    Mr. Gupta. Absolutely. Thank you for the question, 
Congresswoman.
    The first thing, with this FHA premium reduction, FHA 
actually will take longer to actually get to their 2 percent 
minimum required statutory capital. Right now, they are at .41 
percent. And their estimate was to get there by 2015 or 2016. 
And by some estimates out there it, it could delayed by 1 to 2 
years.
    FHA already has a lower capital regime than private 
mortgage industry, which is currently at a 4 percent statutory 
requirement. And we expect that 4 percent statutory requirement 
to go up to 7 to 8 percent.
    So in terms of private mortgage industry being well-
positioned in the marketplace to play a bigger role, this move 
reverses that. This move challenges the possibility of private 
mortgage insurance and private capital playing a bigger role 
than it plays right now.
    As far as PMIERs are concerned, GSE eligibility guidelines, 
as GSE eligibility guidelines get finalized, the perception of 
the industry having strong capital and being a strong 
counterparty significantly improves across all sectors. And the 
possibility of either GSEs or the FHA doing more risk-shares 
with private mortgage industry actually also gets higher.
    I would say that is a very important element or initiative 
that we should focus on. Because as we are thinking about FHA's 
pricing, doing a risk-share with the private mortgage industry 
actually lets you validate that pricing because you get a 
market price from a private entity. So as we talk about 
sufficiency of price, that will be a very good initiative.
    Ms. Moore. And it won't have a chilling impact on borrowers 
being able to come in and qualify for the loans?
    Mr. Gupta. Absolutely not. Private mortgage insurance 
industry rates are very competitive. Before I came in, we 
talked about 3 percent downpayment, 620 FICO, all the way to 50 
percent debt-to-income ratios. So, the guidelines are 
expansive, and the rates are extremely competitive, and I don't 
see any challenges with that.
    Ms. Moore. Ms. Gordon, you seem like you are just champing 
at the bit to say something.
    Ms. Gordon. I just think--I have nothing against the 
possibility of FHA trying risk-sharing, in theory. And it has 
been tried before and hasn't worked particularly well.
    I think it is important to recognize a few things. First of 
all, when you bring two parties in who have some interest in 
the outcome and disposition of that loan, it can be very 
difficult to get them all on the same page. That has been a 
problem with loan modifications for some people.
    One of the things that the new FHFA rules will do is have 
private mortgage insurers essentially delegate their 
responsibility to the GSE servicers so that they can handle 
things more efficiently and effectively for borrowers.
    And so any time you do any kind of risk-sharing, it is 
important to recognize the different incentives of the parties 
and the different missions of the parties and make sure that 
you are structuring any program to account for those different 
incentives and different structures properly. Actually, for 
most of these loans, if you have any downpayment at all, the 
borrower is in the first-loss position, then the mortgage 
insurer.
    So, I am just adding a word of caution in terms of these 
different structures. What I do want to say is that right now, 
if Fannie and Freddie were to change their policies with 
respect to the very steep risk-based pricing in which they have 
been engaged, I think you would see a lot more borrowers able 
to go to Fannie and Freddie, and then PMI would be able to 
insure those loans.
    Ms. Moore. Do you agree, Mr. Gupta?
    Mr. Gupta. Yes. We do--I do agree.
    Ms. Moore. Thank you for your indulgence, Mr. Chairman.
    Chairman Luetkemeyer. Thank you. Thank you, Ms. Moore.
    With that, we go to the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I am increasingly concerned here. And I would ask this of 
Mr. Gupta and Mr. Holtz-Eakin. The government actions here at 
both the GSEs and the FHA could, over the long term, fuel 
another bubble. And when I say ``fuel another bubble,'' I 
remember talking to the Fed in 2004, 2005, about their worries; 
right? And I had legislation in 2004 and 2005 in order to 
regulate the GSEs for systemic risk. Unfortunately, we were 
unable to get that through.
    Now, you look at requirements with a low 3 percent 
downpayment requirements where you have seller concessions that 
add up to about 6 percent; right?
    Mr. Gupta. Yes.
    Mr. Royce. You look at the FICO scores now as low as 580. 
So we know from the lead-up to the financial crisis that it is 
all gravy as long as prices continue to go up. If we could pass 
a law that mandates that housing prices continue to go up, 
there is no problem.
    But if you are not going to allow a system of checks and 
balances in the economic system but instead, you are going to 
step in with a Government-Sponsored Enterprise here, and with 
all the moral hazard that implies, and you are going to drive a 
policy where we have the former FHA Commissioner saying that 
FHA's financial condition is not where it should be yet in 
terms of wholesale rollback of the premiums.
    Here is the concern: Have we once again created a situation 
where individuals with no equity in their homes end up 
leveraged to an almost personal Ponzi scheme with the 
consequences to them afterwards of losing their homes? The 
consequences to the taxpayers of dealing with another bailout. 
The consequences to the financial system of dealing with the 
shock. The consequences to the neighborhoods of going through 
what we went through in 2007, 2008.
    What are your thoughts on the end game here, Mr. Gupta, 
with the level of government involvement that we have here and 
the moral hazard that would imply?
    Mr. Gupta. Thank you for the question, Congressman.
    Going back to Dr. Rossi's statement, I do think that there 
is a risk here that we are putting borrowers in homes who 
actually may not be able to withstand that financial stress, 
any financial stress on the economy. If you look at FHA's own 
actuarial report, there are scenarios in that actuarial report 
which actually point to negative capital if the financial 
environment--if the housing and economic environment does not 
turn out to be the expected environment.
    So there is a scenario here where these prices are not 
sufficient, and a lack of an actual way of getting to these 
pricing, that is the risk it creates. I think from a financial 
system perspective, there is also a cost to it. For comparison, 
as a private MI company, if we were running at one-fifth of our 
required statutory capital, first thing, we would be in run-
off; we would not be writing any business. Second thing, if we 
were writing any business, we would never be allowed to 
actually lower our prices by 40 percent, because part of that 
capital is what actually replenishes your capital to get to the 
statutory minimums.
    So yes, there is the risk of that financial burden, as well 
as borrower burden.
    Mr. Royce. Now, I would like to go to Dr. Holtz-Eakin, 
because the other aspect of this that is confusing to me, is 
that the Administration says on the one hand, the President's 
budget said that we needed to require more private capital in 
the housing system. That makes sense based upon what we have 
been through. And this comes on the heels of cutting FHA 
premiums by 40 percent. Is there a contradiction here?
    Mr. Holtz-Eakin. I believe so, yes. And to the earlier part 
of your question, I agree with what Mr. Gupta said. And if you 
think back to the early part of the lead-in to the housing 
bubble, we saw then-HUD Secretary Andrew Cuomo cut premiums. We 
saw diminishment in downpayments. We saw the kinds of mortgages 
that Ms. Gordon described. And we saw it worldwide.
    We now have FHA, Fannie Mae, and Freddie Mac, all agencies 
of the Federal Government for all practical purposes, making 
exactly the kinds of discretionary policy moves we saw in the 
lead-in. The only thing that is missing are the worldwide 
aspects and the exotic mortgages. But I think that while it is 
not quantitatively the same phenomenon, it is qualitatively 
going in that direction. I am concerned.
    Mr. Royce. Is my time expired?
    Chairman Luetkemeyer. You have 30 seconds.
    Mr. Royce. Any other--
    Ms. Gordon. I think it is important to say that FHA 
actually was the only entity that didn't get into the business 
of the loans without underwriting and the loans with all the 
predatory features. If we are--everybody here raised their hand 
before in answer to the question, do we think FHA has an 
important role.
    Mr. Royce. That is true. We all agree with that.
    Ms. Gordon. Okay. But if FHA is to remain strong enough we 
can't say--
    Mr. Royce. Maybe the role is so important that everything 
should be FHA and there should be no private capital. Clearly, 
what we are debating here is where is the role of private 
capital to make certain there is an offset to the risk? Because 
clearly, based upon the government coming in with GSEs in the 
past, you are not going to adequate price risk in the 
marketplace. You are going to put a penny in the fusebox, and 
you are going to short-circuit the whole system in terms of 
supply and demand in this. And the consequence of it can be a 
huge bubble in the marketplace.
    Ms. Gordon. Sure. What happened--
    Mr. Royce. That is what we don't want to see happen.
    Ms. Gordon. What happened during the crisis was actually 
the private sector wildly--
    Mr. Royce. It was because of the moral hazard put in there 
by the government. We tried to regulate against that.
    Chairman Luetkemeyer. Thank you, Mr. Royce.
    Next up, we have the gentleman from Texas, Mr. Williams.
    Mr. Williams. Thank you, Mr. Chairman.
    What this country needs, I believe, is a mortgage finance 
system that is not only sustainable, but reduces taxpayer risk 
while giving hardworking Americans the opportunity to buy homes 
they can actually afford to keep.
    Yet, this is not what the FHA has become. With over a 
trillion dollars worth of backed mortgages, which represents 
half of the insurance market, and only $46 trillion in assets, 
FHA has put the taxpayer at risk. With such a large portfolio, 
FHA's recent actions indicated it could potentially put another 
250,000 new homeowners on the books by reducing annual 
premiums.
    By adding riskier buyers and lowering premiums, I believe 
FHA is operating outside of its historic mission, which is 
supposed to operate with a high degree of public and fiscal 
responsibility. Like many, I believe that the answer to fixing 
these problems is in the private sector.
    Now, with that said, let me just go over some numbers 
really quick that concern me. We have heard in testimony that 
$670 billion in additional growth in the portfolio is to just 
get us back to present income levels.
    Now, we also heard from Secretary Castro that he feels like 
there is probably between the new portfolio and the existing 
portfolio $12 billion in total loss on these portfolios. He 
also said that $8 billion is estimated income at the new level 
of fees that we are talking about. When you put math to that, 
we are $4 billion short.
    My question to you, Ms. Gordon, would be how do we cover 
that and where does it come from?
    Ms. Gordon. So FHA--those numbers aside, FHA is making 
money right now and--
    Mr. Williams. But those are the numbers. And we have a 
loss.
    Ms. Gordon. --FHA is likely to continue making money.
    I do not know exactly what those numbers refer to enough 
for me to comment on FHA's balance sheet. What I can comment on 
about FHA's balance sheet is that the current books of business 
are very strong, are making a lot of money, and they are 
positioned to do that in the future.
    The books of business that we are losing the most money 
over time are running off and will be losing less money. The 
policies that allowed--in fact, one of the policies that 
allowed the most losses was the seller-funded downpayment 
program, a policy that FHA actually tried to end, but Congress 
didn't want them to end. Had it not been for that policy, FHA 
would never have been in the red at all.
    So I think we have the look at the policies and the 
direction of where things are going, which is a very positive 
direction. At the same time, the HUD Secretary has an 
obligation to make sure that the FHA is serving homeowners.
    Mr. Williams. All right. Possibly you can get back with us 
on the best way--
    Ms. Gordon. I can get back with you on the numbers.
    Mr. Williams. If you would do that, I would appreciate it.
    Mr. Gupta, do you have an answer to that? You are a private 
sector man, as am I.
    Mr. Gupta. Yes, well--
    Mr. Williams. There is a $4 billion shortfall.
    Mr. Gupta. Yes. So the math is very simple. When you lower 
your premiums by 40 percent, you actually need a volume 
increase of something larger than 40 percent to get back to 
revenue neutral itself. And I do not believe that FHA thinks 
about getting their market share higher by 40 percent. So it 
would be a net negative.
    Mr. Williams. I agree with you.
    The other question I have for you, Ms. Gordon, is that I 
think it was back in September of 2013, that FHA drew $1.7 
billion out of the Treasury to continue to do business. That 
money belongs to taxpayers.
    Ms. Gordon. Actually, it wasn't to continue to do business. 
It was because there is--
    Mr. Williams. To shore up your balance sheet.
    Ms. Gordon. There is a certain amount that is--there are 
different accounts in different parts of the government. And 
you are required to have--
    Mr. Williams. You agree that it was the taxpayers' money?
    Ms. Gordon. All of this money is the taxpayers' money.
    Mr. Williams. Okay. With that being said--
    Ms. Gordon. It was not any more the taxpayers' money coming 
from FHA's account than from Treasury's account.
    Mr. Williams. Ms. Gordon, with that being said, should the 
FHA pay that back to the taxpayers?
    Ms. Gordon. I believe the FHA already has.
    Mr. Williams. I asked Secretary Castro that, and he 
couldn't give me an answer.
    Ms. Gordon. This is all--
    Mr. Williams. So you agree with me--
    Ms. Gordon. These are accounting mechanisms. Just the same 
as someone will tell you that technically, the GSEs have not 
paid back the Treasury yet. Of course, they have paid back the 
Treasury.
    Mr. Williams. You agree with me then that the taxpayers 
should get their money back at some point in time?
    Ms. Gordon. I think the taxpayers already have.
    Mr. Williams. We disagree on that.
    I yield back, Mr. Chairman.
    Chairman Luetkemeyer. Thank you.
    With that, the gentleman from Tennessee, Mr. Barr.
    Mr. Barr. Thank you, Mr. Chairman. Just to correct the 
record, Kentucky. And the Wildcat fans would be offended to be 
associated with the Volunteers. But thank you, Mr. Chairman. 
And thank you to our witnesses.
    I have only been in Washington for a little over 2 years, 
but it never ceases to amaze me that Washington doesn't seem to 
be able to learn the lessons of history, and recent history, at 
that. So here we have Fannie Mae and Freddie Mac jumping back 
into offering 30-year loans for borrowers who can only afford a 
3 percent downpayment. These loans are exempt from the 
requirements that another Federal agency, the Consumer 
Financial Protection Bureau, says are required under the 
Qualified Mortgage Rule, which is supposed to prevent a 
recurrence of loose lending.
    And now the FHA has reduced its premiums in a move designed 
to expand its market share, but which is certainly going to 
hurt its capitalization. In lowering these premiums, the FHA is 
once again luring people who are unprepared for the obligations 
of homeownership into risky loans they are unable to repay. And 
this risk goes right to the taxpayers.
    So Ms. Gordon, let me start with you. In an August 2012 
White Paper that you coauthored for The Center for American 
Progress--you will recall that it is entitled, ``It's Time to 
Talk About Housing''-- you decried the practice of loan 
originators who steered borrowers into risky subprime loans, 
even when they qualified for better loans, citing predatory 
pricing gimmicks that both encouraged borrowers to borrow far 
more than they could manage and required the borrower to 
refinance every couple of years. You noted that such loans 
tended to default at significantly higher rates than 
conventional mortgages.
    So now let's look at what the FHA is doing: Employing 
pricing gimmicks, exceedingly low downpayments, low credit 
scores, inadequate up-front pricing, and high maximum dollar 
value loan limits. And the FHA loan default rate is nearly 150 
percent higher than prime loans. And I have read that FHA loans 
are defaulting one out of eight, right?
    So why aren't the FHA's practices squarely within the 
subprime practices that you decried in that 2012 White Paper?
    Ms. Gordon. Actually, first of all, let me correct the 
record. FHA is not exempt from the Dodd-Frank mortgage rules. 
That is a very important point. The Dodd-Frank mortgage rules 
put a floor under this market that did not exist before. Had 
the Dodd-Frank mortgage rules been in place in 1995, we would 
not have had the crisis that we had. FHA has to abide by the 
ability-to-repay requirements. FHA has a Qualified Mortgage 
safe harbor that is extremely similar to CFPB--
    Mr. Barr. If I could jump in. It is similar. Let me jump in 
right there. Because I have asked this question of Secretary 
Castro, and he acknowledges it. It is not the QM rule. It is a 
different rule. It is a different underwriting standard than 
what the Bureau says is a Qualified Mortgage. So, it is a 
double standard.
    Ms. Gordon. It is almost identical. The reason it is 
different is because the statute tells FHA to do its own QM, 
and specifically says the CFPB is doing a QM for the private 
market.
    Mr. Barr. Let me jump in there and let's follow on this 
theme of a double standard. Okay? Because it is very troubling 
to me that Washington continues to live by one set of rules 
while they impose an entirely different set of rules on the 
private sector.
    And to Mr. Gupta, I want to just ask you, so the capital 
reserve requirement by law for the private mortgage insurance 
industry is 4 percent, and could go up to 8 percent?
    Mr. Gupta. Yes.
    Mr. Barr. And the rule for the FHA is 2 percent. Which they 
can't even comply with, by the way.
    Mr. Gupta. Yes.
    Mr. Barr. Totally different rules apply to the government 
than apply to you. And for the rules that apply to the 
government, which are different than the rules that apply to 
the private sector, the government is in noncompliance.
    Mr. Gupta. Yes. You are correct, Congressman.
    Mr. Barr. Even though they got a bailout. Did you get a 
bailout, a $1.7 billion taxpayer bailout in the private 
mortgage industry?
    Mr. Gupta. Absolutely not.
    Mr. Barr. This is a double standard. The American people 
are tired of Washington living by one set of rules and the 
private sector and the American people living under another set 
of rules.
    Let me quickly go to Dr. Rossi. I was interested in your 
testimony speaking of applying the same set of rules to the 
government. Your recommendation that there be Qualified 
Mortgage rule harmonization, can you amplify that testimony?
    Mr. Rossi. Yes, I can. With regard to FHA, for example, 
today it is my understanding that they allow lenders, as long 
as there are compensating factors, to actually underwrite the 
loans. So they are relying on the lenders to do the review here 
for DTIs, debt-to-income ratios, above the bright line 43 
percent test that is in QM for everybody else.
    Mr. Barr. So you would disagree with Ms. Gordon that--
    Mr. Rossi. There is a different set of rules.
    Ms. Gordon. Actually, right now, almost all loans go 
through either the GSEs or the FHA. And the GSEs also permit 
loans over 43 percent DTI if there are compensating factors. 
And they also leave the underwriting up to the lenders. So 
frankly, it is exactly the same across the vast majority of the 
book right now.
    And I should also add, since you quoted me and I would like 
to correct the record, that the kinds of loans I was talking 
about in that August 2012 paper are precisely the kinds of 
loans FHA has never done. FHA has always required underwriting, 
it does not have pricing gimmicks, and it does not have steep 
rate resets.
    Mr. Barr. Mr. Gupta, I think you wanted to comment on that?
    Mr. Gupta. I would agree with Dr. Rossi that for FHA, 
greater than 43 DTI is permitted, because that is the rule they 
make. And for private label securities or for portfolio loans, 
a bank would actually not be permitted to actually use that 
rule.
    So FHA does have an advantage in terms of creating their 
own definition of QM. That also applies to the definition of 
safe harbor applied on--so FHA actually calculates that safe 
harbor coverage differently than private label securities.
    Mr. Barr. Thank you. I yield back.
    Chairman Luetkemeyer. Thank you, Mr. Barr. My apologies to 
you. As contrition for my sins, I did allow you a significant 
amount of time over your 30 seconds.
    Thank you. Well done.
    It looks like the last gentleman today to ask questions is 
the gentleman from Illinois, Mr. Dold.
    Mr. Dold. Thank you, Mr. Chairman. And I want to thank our 
witnesses for coming. And I also want to thank my colleague 
from Kentucky for his questions. I am going to kind of dovetail 
off of some of those.
    I think as we look at FHA, there is no question that we all 
want FHA to be healthy and that we certainly think that they 
provide a service. We have a requirement in terms of 
capitalization that FHA needs to be at 2 percent. That is not a 
recommendation, is it? Does anybody think that is a 
recommendation? I think that is written actually as part of the 
law. Can I just ask each and every one of you, in your opinion, 
is FHA abiding by the law?
    Mr. Holtz-Eakin. No.
    Mr. Gupta. No.
    Ms. Gordon. The statute has a number of provisions--
    Mr. Dold. Wow. I am just--okay. A number of provisions?
    Ms. Gordon. It has a number of provisions. And they are 
also required to balance the mission of providing homeownership 
while they are rebuilding to the capital ratio.
    Mr. Dold. So is that a yes or a no, they are not abiding by 
the law?
    Ms. Gordon. I believe they are following the law right now.
    Mr. Dold. Okay. How about you, Dr. Rossi?
    Mr. Rossi. No.
    Mr. Dold. Let me go to you, Mr. Gupta. We asked Secretary 
Castro about this. And again, I am in the private sector. Or 
was, certainly. And we want FHA to succeed. There is a reason 
why, again, your threshold is 4 percent, potentially going up 
higher, correct?
    Mr. Gupta. Yes.
    Mr. Dold. What happens if you are under the 4 percent?
    Mr. Gupta. We go into remediation immediately. So 
regulators actually have to make sure that we are on the path--
    Mr. Dold. But what happens if you just say no, we are 
trying, we are going to to get there soon.
    Mr. Gupta. You go into run-off.
    Mr. Dold. What?
    Mr. Gupta. Going out of business.
    Mr. Dold. So they take and they actually--they put you out 
of business?
    Mr. Gupta. Yes. You go into run-off.
    Mr. Dold. The FHA hasn't been at their 2 percent threshold 
in a long time, anywhere close to it. When we asked the 
Secretary, he basically said, well, we are working on it.
    Now FHA has a different mission, of which we say is kind of 
a little foggy in terms and we would like to have some more 
highlighting in terms of what that mission is. But what we know 
is that FHA is going down a path where they have a 2 percent 
threshold. And yet, they don't factor risk. They are not 
supposed to. They don't do that. Which would--I would argue, 
Dr. Holtz-Eakin, would that make it a riskier proposition by 
not factoring the risk?
    Mr. Holtz-Eakin. Absolutely.
    Mr. Dold. Okay. And so I guess my take is in the private 
sector, if you don't hit the threshold, the regulators come in 
and take you over. And yet, you are assessing market risk; is 
that correct?
    Mr. Gupta. Yes.
    Mr. Dold. So for me I just, again, share this frustration 
that certainly some on the panel recognize, that we want FHA to 
be healthy. We want them to be able to be at these capital 
standards. And yet, they kind of look at us cross-eyed when we 
say, you are not even meeting the 2 percent threshold. Which, 
ultimately, is putting the taxpayers at risk. And we recognize 
that they have a different mission.
    What do we have to do, do you think? What would your 
recommendation be for us to get FHA to where it needs to be, 
according to the letter of the law? Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. Two things: first, in the narrow, you 
don't lower premiums when you need to build capital.
    The bigger problem is the mission. Ms. Gordon said, when 
asked who benefits in this, ``It is the people who were just 
short, and now they can buy a home.'' That is true now with the 
lower premiums. So you could lower premiums again and help some 
more people who were just short, and there would still be some 
people who were just short. And in the process, you would 
worsen the taxpayer's exposure while you are helping these 
people who were just short.
    The question is, when do you stop? What is the mission of 
FHA? You can always justify a premium reduction by that logic. 
So you have to find a mission and then stick to it.
    Mr. Dold. One of the things I would also like to talk 
about, Ms. Gordon, because when you talk about the HAWK 
program--actually one I agree with--I have worked with one of 
my colleagues on the other side of the aisle about saying, what 
can we do in terms of a program, a pilot program to say, does 
the counseling actually help, does it actually reduce that risk 
in terms of the mortgage market? And I would still like to see 
a study done.
    Because, Mr. Gupta, if we could prove that with counseling 
it would actually lower the rates, would that impact how you 
assess market risk?
    Mr. Gupta. Absolutely.
    Ms. Gordon. Actually, footnote 53 in my testimony will show 
you cites to a study from the Philadelphia Fed and from Freddie 
Mac that demonstrate that.
    Mr. Dold. Okay. Last question for you, Ms. Gordon. And I 
appreciate that.
    You said that you thought FHA was abiding by the law with 
regard to its 2 percent threshold. They are lower than that 
now. Do you think that percentage should be lowered? Or should 
there be any percentage at all?
    Ms. Gordon. No. I think we should get back to the 2 
percent. I think that is very important. And I think they need 
to get back there responsibly. Just as if my family had a rainy 
day fund, and say I lost my job, and we blew through our rainy 
day fund. I would like to rebuild that rainy day fund. At the 
same time, I have to continue to buy groceries and put gas in 
the car.
    So I think it is very important for FHA to continue moving 
in that direction. They are moving in that direction. They did 
not wholesale roll back premiums. And if they were to stop 
moving in that direction, I think they have to reevaluate 
again.
    Mr. Dold. Thank you all very much. My time has expired.
    Chairman Luetkemeyer. I thank the gentleman from Illinois.
    We were hoping Mrs. Beatty would get here. She was supposed 
to be on her way. But we have no idea if she is going to be 
here in 2 minutes or 20 minutes from now. So, let's proceed.
    I just want to summarize here. I think there is a general 
consensus that FHA has a place in housing finance. And the 
consensus of the group seems to be that the guarantee fees are 
endangering the viability of that agency by reducing those. 
Also, that there is plenty of room in the private market to be 
able to come in. They are ready, capable, and they have proved 
that they can be a viable alternative and part of the 
marketplace. And I think all of these things are important.
    We certainly appreciate your testimony today. It was 
knowledgeable and insightful. And thank you for bearing with us 
and going through all the inclement weather. I know it wasn't 
easy to get here today. So I appreciate your efforts.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And with that, the hearing is adjourned. Thank you.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]
    
    
    
    
    
    
    
    
    
    
    
    
                            A P P E N D I X


                          February 26, 2015




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