[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]





 
                     AN EXAMINATION OF THE FEDERAL

                     HOUSING ADMINISTRATION AND ITS

                   IMPACT ON HOMEOWNERSHIP IN AMERICA

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

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON HOUSING,
                         COMMUNITY DEVELOPMENT,
                             AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 5, 2019

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-72
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]        


                           
                         ______                      


             U.S. GOVERNMENT PUBLISHING OFFICE 
42-629 PDF           WASHINGTON : 2020 
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           PETER T. KING, New York
WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia                 BILL POSEY, Florida
AL GREEN, Texas                      BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri            BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
BILL FOSTER, Illinois                SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio                   ROGER WILLIAMS, Texas
DENNY HECK, Washington               FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan              TED BUDD, North Carolina
KATIE PORTER, California             DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa                     TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts       JOHN ROSE, Tennessee
BEN McADAMS, Utah                    BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York   LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia            DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts      WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
                  Subcommittee on Housing, Community 
                       Development, and Insurance

                   WM. LACY CLAY, Missouri, Chairman

NYDIA M. VELAZQUEZ, New York         STEVE STIVERS, Ohio, Ranking 
EMANUEL CLEAVER, Missouri                Member
BRAD SHERMAN, California             BLAINE LUETKEMEYER, Missouri
JOYCE BEATTY, Ohio                   BILL HUIZENGA, Michigan
AL GREEN, Texas                      SCOTT TIPTON, Colorado
VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
CAROLYN B. MALONEY, New York         DAVID KUSTOFF, Tennessee
DENNY HECK, Washington               ANTHONY GONZALEZ, Ohio
JUAN VARGAS, California              JOHN ROSE, Tennessee
AL LAWSON, Florida                   BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas, Vice Ranking 
CINDY AXNE, Iowa                         Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 5, 2019.............................................     1
Appendix:
    December 5, 2019.............................................    33

                               WITNESSES
                       Thursday, December 5, 2019

Montgomery, Hon. Brian D., Commissioner, Federal Housing 
  Administration (FHA)...........................................     4

                                APPENDIX

Prepared statements:
    Montgomery, Hon. Brian D.....................................    34

              Additional Material Submitted for the Record

Clay, Hon. Wm. Lacy:
    Written statement of the Association of Independent Mortgage 
      Experts....................................................    42
    Anthony Kellum article entitled, ``National Mortgage News 
      Opinion FHA's strong financial showing points the way on 
      policy''...................................................    44
Montgomery, Hon. Brian D.:
    Written responses to questions submitted by Representatives 
      Luetkemeyer, Beatty, Stivers, and Velazquez................    48


                     AN EXAMINATION OF THE FEDERAL

                       HOUSING ADMINISTRATION AND

                      ITS IMPACT ON HOMEOWNERSHIP

                               IN AMERICA

                              ----------                              


                       Thursday, December 5, 2019

             U.S. House of Representatives,
                           Subcommittee on Housing,
                             Community Development,
                                     and Insurance,
                            Committee on Financial Services
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Wm. Lacy Clay 
[chairman of the subcommittee] presiding.
    Members present: Representatives Clay, Cleaver, Sherman, 
Beatty, Green, Vargas, Lawson, Axne; Stivers, Luetkemeyer, 
Huizenga, Tipton, Zeldin, Kustoff, Gonzalez of Ohio, Rose, 
Steil, and Gooden.
    Also present: Representative Hill.
    Chairman Clay. The Subcommittee on Housing, Community 
Development, and Insurance will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of this subcommittee are authorized to 
participate in today's hearing.
    Today's hearing is entitled, ``An Examination of the 
Federal Housing Administration and Its Impact on Homeownership 
in America.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    There was a time when the Federal Housing Administration's 
(FHA's) policies explicitly denied access to the American Dream 
of homeownership to Black families and people of color, making 
owning a home a privilege afforded primarily to white Americans 
and contributing to the racial wealth gap as we know it.
    As of the third quarter of 2019, the white homeownership 
rate is 73 percent, compared to nearly 48 percent for Latinos 
and 43 percent for Black homeowners.
    Today, FHA plays an important role in our housing finance 
system that is helping to ensure that access to homeownership 
is broadly available. In Fiscal Year 2019 alone, FHA helped 
over 615,000 borrowers become homeowners for the first time, 
with over 33 percent of FHA market endorsements serving 
minority borrowers, and over half serving low- to moderate-
income borrowers.
    FHA also plays a vital role in expanding access to 
affordable rental housing through its multi-family insurance 
program. Yet, in the midst of the current affordable housing 
crisis, it burdens so many families with unaffordable rents. 
Secretary Carson chose to terminate FHA's partnership with the 
Federal Financing Bank, which provided low-cost financing for 
affordable multi-family housing loans.
    FHA is designed to play a countercyclical role in the 
housing market, meaning that its market share expands when the 
private market recedes. This helps provide long-term stability 
to the housing market, particularly during economic downturns. 
Thankfully, the markets and overall economy have been trending 
well, due in large part to the focus and driven policies of the 
Obama Administration.
    Yet, there remain concerns that FHA is failing to take 
adequate measures to help borrowers avoid foreclosure, 
including elderly borrowers with reverse mortgages. In 
addition, immediately following President Trump's inauguration, 
HUD suspended a planned quarter-point decrease in annual FHA 
insurance premiums for most FHA-insured mortgages.
    According to research from the National Association of 
REALTORS, roughly 234,000 creditworthy borrowers were priced 
out of the home buying market in 2014, solely due to FHA's high 
premiums. Despite the strong financial health of FHA's Mutual 
Mortgage Insurance Fund and calls from advocates and 
stakeholders to lift the suspension, HUD leadership has 
maintained this suspension indefinitely. This decision has 
diminished the homeownership opportunities in St. Louis and 
across the State, and the nation, locking many hard-working 
families into rentership and exacerbating the racial wealth 
gap.
    With that, I look forward to hearing the testimony of Mr. 
Montgomery today. I yield back.
    I now recognize the gentleman from Ohio, Mr. Stivers, the 
ranking member of the subcommittee, for an opening statement.
    Mr. Stivers. Thank you, Chairman Clay. I really appreciate 
you holding this hearing today.
    Commissioner Montgomery, I appreciate you being here before 
the subcommittee today. I know you wear multiple hats at HUD, 
and today we welcome you in your capacity as Commissioner of 
the Federal Housing Administration (FHA).
    FHA has a critical mission: helping individuals achieve 
their dream of homeownership. Achieving that dream has real 
consequences. Homes act as savings vehicles and are long-term 
investments that generally appreciate in value. In other words, 
owning a home and building equity helps families generate 
wealth. In fact, according to a 2018 study by Duke University, 
reducing disparities in homeownership by race would narrow the 
racial wealth gap by 31 percent.
    Earlier this year, when some of my colleagues on the other 
side attacked the idea of gentrification, I urged them to join 
me in addressing a real solution to the real problem, and that 
is the disparity in racial homeownership. And I want to call on 
the chairman today to work with me on those efforts because I 
think we both believe in that and want to work on that in the 
future.
    And, Commissioner Montgomery, I would ask you to join us as 
we try to address that effort because I think it is a very 
important effort to help ensure everybody can achieve the 
American Dream, and I want to talk more about that.
    FHA, I think, is a very important tool in that, and we 
should view FHA and private mortgage insurance as important 
tools for helping people climb the economic ladder. But, that 
ladder needs to be stable. Families cannot climb the FHA ladder 
if the insurance fund is imploded before they get there.
    Commissioner, you have now served in HUD in different roles 
in three Administrations--for President Bush, President Obama, 
and President Trump--so I know you have real bipartisan 
credentials of working in three Administrations of different 
political folks.
    Your time spent in public service gives you some unique 
insights into the housing sector and how it has evolved during 
and after the financial crisis. I want to hear some of that 
today. I am sure your experience has given you an appreciation 
for FHA's importance as a countercyclical buffer, as the 
chairman talked about, and I think that is really important, 
particularly important during downturns, but also understanding 
how razor-thin the FHA insurance fund is right now. And 
although it is a lot better than it was, it is still not where 
we want it. That puts taxpayers at risk.
    I appreciate all the work you have done to rebuild FHA's 
fund, in fact, to its highest level in 12 years, and I want to 
congratulate you for that. I think there is still more to be 
done, and I am glad that we are not putting it at risk by 
artificially cutting rates before the fund is stable.
    It also begs the larger question of, how can we further 
reform and strengthen housing finance reform by transferring 
risks from the taxpayers to the private sector? The Federal 
Government has a terrible record of pricing risk, and you only 
need to look as far as the Federal Flood Insurance Program to 
see that. FHA sometimes does that, too. But by the same token, 
government can also be less capable of determining which 
individuals are good risks and therefore should pay less.
    So, I think there are some reforms we can do on pricing. 
Instead of a one-size-fits-all approach that uses the private 
sector for price discovery, some unique partnerships in the 
future. And I look forward to talking with the chairman and you 
about that because I think some folks deserve to actually do a 
little better.
    With that, I ask unanimous consent to insert an opening 
statement from Ranking Member McHenry, the ranking member of 
the full Financial Services Committee, into the record this 
afternoon, Mr. Chairman.
    Chairman Clay. Without objection, it is so ordered.
    Mr. Stivers. Thank you, and I yield back.
    Chairman Clay. The gentleman from Ohio yields back.
    Today, we welcome the testimony of Commissioner Brian 
Montgomery of the Federal Housing Administration.
    The witness is reminded that your oral testimony will be 
limited to 5 minutes. And without objection, your written 
statement will be made a part of the record. You are now 
recognized for 5 minutes to give an oral presentation of your 
testimony.

 STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, COMMISSIONER, 
              FEDERAL HOUSING ADMINISTRATION (FHA)

    Mr. Montgomery. Thank you very much, Mr. Chairman, Ranking 
Member Stivers, and distinguished members of the subcommittee. 
I am honored to appear before you to discuss the progress and 
improvements FHA has made recently in the areas within our 
programs that warrant further attention.
    FHA has made significant progress in improving the 
financial performance of its insurance fund, mitigating risks 
within its programs, reducing regulatory burdens, and 
modernizing its technology platforms. The successes of these 
actions were presented to you last month in our 2019 Annual 
Report to Congress on the State of the Mutual Mortgage 
Insurance (MMI) Fund.
    As you know, Congress has a statutory minimum 2 percent 
capital ratio with the MMI Fund. The capital ratio is a strong 
indicator of the fund's financial health and includes our 
forward and reverse mortgage products.
    Our annual report showed that the capital ratio increased 
from 2.76 percent last year to 4.84 percent in Fiscal Year 
2019, well above the mandatory 2-percent minimum. Additionally, 
the MMI capital, what we used to refer to as economic net 
worth, was $62 billion, more than its $27.5 billion from the 
previous year.
    While the improved health of the MMI Fund is welcome news 
to us all, the number of households served by FHA is equally 
good news. In Fiscal Year 2019, FHA insured forward mortgages 
for almost one million households, of which 616,000 went to 
first-time home buyers.
    FHA remains an important option for minority communities, 
as well. In fact, last year, minorities represented 36 percent 
of all FHA purchase mortgage borrowers, compared to just 20 
percent in conventional lending channels.
    HUD's Housing Finance Reform Plan submitted to the 
President in September proposes a number of recommendations to 
further reduce risks to the MMI Fund, to protect taxpayers, and 
to ensure that FHA maintains its focus on providing mortgage 
financing for low- to moderate-income families not served by 
traditional underwriting.
    All of the recommendations in HUD's plan are important. 
Several priorities are particularly noteworthy for the purposes 
of today's hearing.
    One priority is the need to radically modernize FHA's 
information technology infrastructure. Our single-family 
business currently runs on 15 different systems, many of them 
on antiquated mainframes, and some of which are more than 40 
years old.
    In early 2019, HUD formed a highly-qualified FHA 
Modernization Project Team, started by gathering business 
requirements for every element of the loan life process, from 
application to origination, servicing, and through claims 
processing. Working with single-family staff at headquarters 
and in the field, this team has an ultimate objective of fully 
digitizing the entire loan lifecycle.
    HUD is very grateful that Congress appropriated an initial 
$20 million specifically to modernize our single-family 
technology systems earlier this year, and that both the House 
and Senate Appropriations Bills for Fiscal Year 2020 would 
provide an additional $20 million.
    However, we have a ways to go. Ultimately, we need $80 
million to $90 million in total funding to complete these 
critical and long-overdue modernization projects.
    Beyond our financial health and IT infrastructure, 
improving FHA's operational ability to serve our customers is 
also a critical priority, and this is an area where we have 
made great strides. For example, we have dedicated significant 
focus to improving single-family default processes. This is 
making it less burdensome to service FHA loans, while ensuring 
that our loss mitigation options protect taxpayers and promote 
sustainable homeownership.
    Additionally, our Disaster Standalone Partial Claim 
implemented last year to assist homeowners impacted by 2017 
disasters will now be a standard mortgage relief option 
available for all people impacted by major disasters. This 
allows many homeowners to resume payments without modifying 
their loan or re-amortizing the loan term, avoiding both the 
foreclosure process and payment increases. It also streamlines 
income documentation and other requirements to expedite relief.
    Looking forward, we must focus on seeking the right balance 
between facilitating access to mortgage credit and better 
managing our risk. Our mission is to make certain FHA remains a 
stable and reliable resource to provide housing finance support 
to first-time home buyers and other underserved borrowers. I 
believe that is a mission that we all share.
    Again, I want to thank the subcommittee for your time 
today, and I look forward to your questions. Thank you.
    [The prepared statement of Commissioner Montgomery can be 
found on page 34 of the appendix.]
    Chairman Clay. I want to thank you, Commissioner, for your 
testimony today.
    Also, we are in the middle of a vote series on the House 
Floor, so at this time, we are going to recess, and we will 
immediately reconvene after the last vote and get back over 
here. Thank you for your patience with us.
    We stand adjourned for votes.
    [recess]
    Chairman Clay. The subcommittee will return to order.
    Let me thank our witness for your patience. We are now 
ready to proceed under the 5-minute rule, and I will yield 
myself 5 minutes to begin the question phase of the hearing.
    Over the last year, HUD has taken a number of actions to 
reduce the ability of FHA borrowers to utilize down payment 
assistance programs from governmental entities to purchase a 
home, and has indicated that it again intends to issue a 
proposed rule affecting government down payment assistance in 
January.
    Secretary Carson testified before this committee in June 
that he was not familiar with the HUD data that identifies 
which government entity is providing down payment assistance. 
It appears that HUD cannot determine which government programs 
are providing down payment assistance on any FHA loan, which is 
critical before attempting to issue new regulations for any 
government down payment assistance program.
    Will you commit to not moving forward on any rulemaking or 
other administrative changes related to down payment assistance 
provided by governmental entities until HUD is able to collect 
data on individual governmental entities and has analyzed a 
statistically significant amount of data on the performance and 
pricing of FHA loans with down payment assistance from each 
specific governmental entity? Can you expound on that, 
Commissioner?
    Mr. Montgomery. Yes. Thank you, Mr. Chairman.
    As you know, down payment assistance (DPA) has a long 
history at FHA. When I was Commissioner last time, a certain 
type of down payment assistance ultimately cost FHA more than 
$16.5 billion in losses, according to our independent actuarial 
review.
    Chairman Clay. Did you say 16 or 60?
    Mr. Montgomery. Sixteen and a half billion dollars in 
losses.
    Chairman Clay. On down payment assistance? Tell me how that 
worked.
    Mr. Montgomery. Sure. This type of down payment assistance, 
which is no longer permitted, actually put the down payment on 
the mortgage. So while it was technically called a gift, it was 
a gift you ended up paying for. As you can imagine, the default 
rate on those loans was almost--
    Chairman Clay. Wait, wait, wait.
    Mr. Montgomery. --5 times as much.
    Chairman Clay. Okay. Down payment assistance is normally 
used to help first-time home buyers or those who qualify in 
that manner to help them get into a home. It is not a 
significant amount, but it closes the gap to get cheaper loans. 
So, tell me what the problem is?
    Mr. Montgomery. I just want to make sure that any down 
payment assistance provider is doing so within what our rules 
permit, whether it is jurisdictional, whether it is if they 
financially benefit off of the transaction, which the Housing 
and Economic Recovery Act (HERA) does not permit.
    So, I will commit that any effort to undertake rulemaking 
will be deliberate. It will be based on research and facts as 
we know them.
    Again, we just want to make sure that any DPA is done in 
the best interest of the borrower and is not there to enrich 
the people who are providing it.
    Chairman Clay. No, and I agree totally with that 
perspective, that the DPA should be done in the interest of the 
borrower. And you and I know it goes to close the homeownership 
gap, and there are other benefits to the DPA. And, so, I would 
just hope we could reach some kind of accommodation that the 
data would back up any decision made by the Department.
    Let me ask you, one of the first actions that the Trump 
Administration took upon being sworn into office was to suspend 
a planned reduction in FHA's annual premiums by 25 basis 
points, which would have saved the average borrower $500 in the 
first year alone.
    In response to calls from advocates to allow the premium 
reduction to be implemented in light of the FHA's improved 
financial health, Secretary Carson stated that he would keep 
the rate as low as he could, consistent with the law. But since 
then, the Secretary has not only maintained the suspension on 
premium reduction, but he has proposed to arbitrarily increase 
the capital ratio far above what is statutorily required.
    Does Secretary Carson still stand by his original statement 
that he will keep premiums as low as possible, consistent with 
the law?
    Mr. Montgomery. Thank you, Mr. Chairman.
    In many ways, I run a $1.4 trillion corporation, so I have 
to carefully monitor our cash inflows and obviously our cash 
outlays. We consistently look at premium structure, whether--it 
is hard to say this one is too much or too little.
    We are looking at, do we have the right structure in terms 
of how much is on the upfront or how much is on the annual? 
This is something we consistently look at and will continue to 
do so through this first term.
    Chairman Clay. I thank you for your responses. I now yield 
5 minutes to the ranking member of the subcommittee, my 
colleague from Ohio, Mr. Stivers.
    Mr. Stivers. Thank you, Mr. Chairman. I want to thank you 
for holding this hearing. It is very important, and I think 
there are a number of issues that I want to try to illuminate 
and work on.
    Commissioner, thank you for being here. I appreciate your 
service in three Administrations--two Republican, one 
Democrat--and the fact that you have worked to shore up the FHA 
insurance fund to meet the 2 percent statutory capital 
requirement. That is a very important--that is already not a 
lot of money, but that is the minimum required, and I 
appreciate you getting it there and keeping it there. That is a 
great accomplishment. It is something I have been concerned 
about for a long time.
    I mentioned a couple of things in my opening statement, and 
I would like to follow up on them if that is okay with you. The 
first thing I talked about was whether you might be willing to 
work with the chairman and I and stakeholders to address the 
disparity in homeownership by race. Is that something that you 
might be willing to work with us on?
    Mr. Montgomery. Absolutely, sir. In fact, we convened an 
internal working group on this several months ago to look at 
minority homeownership because, as you have articulated in your 
statement, it is down.
    Mr. Stivers. I think the chairman mentioned the statistics 
in his opening statement. Obviously, that disparity is too 
great, and it leads to a disparity in wealth, as well, because 
it is the biggest savings vehicle that most people have.
    So, I want to again thank you for your willingness to work 
with us. We very much look forward to working on that topic. It 
is a very important topic because the American Dream needs to 
be accessible by every American. It is something all of us 
believe in. It is something that you believe in. We want to 
work together to find a way to figure out what is driving the 
disparity and figure out how to address that disparity. So, I 
really appreciate that common-sense approach. We look forward 
to working with you on that.
    The second thing I mentioned was the fact that the one-
size-fits-all FHA premiums do not give a potential risk-based 
discount for people who are of lower risk. Would you be willing 
to work with us and potentially stakeholders and even folks in 
the private sector, because, given the government's history of 
mispricing risk, I think there are a lot of private sector 
mortgage insurance companies and others that could help in a 
partnership with you as we try to figure this out.
    Is that something that you would be willing to work with 
us, and maybe some outside private entities on, to figure out 
if we can find a way to do something like that to make sure 
that people who deserve a little bit of a break, get a little 
bit of a break, even if we limit that break?
    Mr. Montgomery. Absolutely, sir, and thanks for your 
question.
    As I mentioned, we just want to make sure we are not 
intruding on private capital. As you know, there are private 
mortgage insurers out there that work with the Government-
Sponsored Enterprises (GSEs).
    Mr. Stivers. And I think they can be part of the solution. 
They have very elaborate systems and data.
    And one of the other things that I did not mention to you, 
but we have talked about privately is, I am so happy that 
Congress gave you $20 million, a down payment to update your IT 
infrastructure.
    I understand you are now using Abacus 2.0, so that is a 
start. But I would really like to make you a little more modern 
than that, so I know we need to work to make sure we continue 
to give you the resources you need to upgrade that. The 
chairman and I had a little aside where we both acknowledged 
that we need to help you invest in your technology.
    But, I think, I want to again acknowledge you can partner 
with some outside industry that have the data and the computing 
systems to help you as you do this, including our private 
mortgage insurers. There is no reason you need to compete 
against them when you could actually work with private industry 
and make it a win-win for everybody. Is that something you 
would be open to?
    Mr. Montgomery. Absolutely. There are certain things we are 
prohibited from doing by statute, but--
    Mr. Stivers. The great thing about statutes is that we can 
change them, Mr. Commissioner.
    Mr. Montgomery. Absolutely. We are certainly open to that, 
and we are very thankful for the down payment on our technology 
upgrades. This is something I tried to get through when I was 
Commissioner last time. I know the previous Administration 
tried, as well, so we are very happy that Congress got us on 
the good trajectory to get us to a better place in our 
technology.
    Mr. Stivers. Thank you. I just want to mention one other 
program that sometimes gets much maligned, and let you talk 
about it for a minute, because what you guys have done to make 
the reverse mortgage program work--and reverse mortgages are 
not for everybody. But just because they are not for everybody, 
does not mean they are not for anybody.
    I want to give you a second to talk about what you have 
done to help make sure that those programs have the right 
guardrails around them to protect senior citizens, but also are 
there for people who might need cash flow and have that biggest 
saving vehicle I talked about, their home.
    Mr. Montgomery. The reverse mortgage program provides a 
great social motion; it helps seniors age in place. You are 
right. It is not for every particular senior; it depends on 
their situation.
    But it is, obviously, like a lot of things, impacted by the 
housing collapse. It seemed to be the very top of the apathy in 
terms of volume, was at the time when house prices came down, 
obviously the Home Equity Conversion Mortgage (HECM) Program 
was impacted by that.
    The previous Administration made some headway in dealing 
with this, working with Congress through the Reverse Mortgage 
Stabilization Act.
    We, thankfully, because of good house price appreciation 
and some other changes that we made, seem to be heading in a 
much better place than we were last year, and thus being able 
to help seniors age in place.
    Mr. Stivers. Thank you. I yield back, Mr. Chairman. Thank 
you, Mr. Chairman.
    Chairman Clay. Thank you.
    The gentleman from Texas, Mr. Green, who is also the Chair 
of our Subcommittee on Oversight and Investigations, is 
recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the witness for appearing. How are you, sir? It is 
good to see you again.
    I am concerned about the role of expanding access to 
homeownership, as well, and it is good to hear that the 
chairman and the ranking member are working in this area.
    One of the things that we have been looking at is 
additional credit scoring. Some call it alternative credit 
scoring. Have you any intelligence on this, any research that 
has been done, anything that you are doing in-house that might 
be of benefit?
    Mr. Montgomery. Thank you for that. When I was Commissioner 
last time, you may recall that we worked together with your 
office and some of the affinity groups in real estate saying, 
well, we are not quite sure which way to go with alternative 
trade lines, alternative credit score models. It struck me at 
the time, and it still does today, that if we were to do a 
pilot program looking at that, that FHA, I think, would be the 
appropriate place to conduct that pilot.
    Technology has moved substantially since 2006, 2007, and 
there are more players in the industry. And if you look at the 
statistics, 25 to 35 million Americans either have low credit 
scores or they have thin-file credit.
    And I just think, I believe my R&Rs. I want the data to 
back it up. I think there is a way to responsibly, and in the 
best interest of borrowers, look at non-traditional credit in 
ways that might open the aperture somewhat.
    Mr. Green. For those who may not understand the term, 
``non-traditional credit,'' would you kindly give some 
explanation, please?
    Mr. Montgomery. There are several different models out 
there. There are some that look at so-called traditional 
credit, credit cards, auto loans, things of that nature, and 
maybe score them a little differently than others.
    There are others that look at cell phone bills, utility 
payments, rent payments, things of that nature, and factor your 
payment history into that, as well. And there are some that do 
a little of both.
    So, again, I do not have all the answers to it today. I 
just think a prudent approach would be to conduct a pilot and 
to see where that would take us, which, as you know, sir, was 
put into HERA in 2008 but for whatever reasons, the pilot was 
never implemented.
    Mr. Green. Yes. I think--
    Mr. Montgomery. And the authorization ran out.
    Mr. Green. I do recall that it was legislation that I had 
the good fortune to sponsor. And you did work with me.
    As you know, we have tried to maintain the traditional 
model and only add additional information, additional 
information about the lights, gas, water, phone, and cable 
bills. And I have to continually emphasize, we do not decide 
that we are going to eliminate the traditional model. All of 
that stays there. But there are some people who benefit from 
having a rich payment history in these other areas, and that 
helps them.
    I find it interesting to note that at yesterday's hearing, 
we had representatives from five agencies here, including the 
Fed, the FDIC--actually, it was three; the OCC was not present. 
They have a joint communique where they have indicated that 
this is something worthy of consideration.
    So, it looks like we are moving in that direction. It is 
just a question of, how long will it take us to have that pilot 
program that you are talking about?
    I am working with my friends on the other side to see if we 
can collaborate and come to some reasonable conclusion as to 
how to move forward with this.
    Would you just respond to the notion of maintaining the 
traditional model and simply adding additional credit? This is 
why I say ``additional'' as opposed to ``alternative'', because 
it causes some people to believe that we are going to forego 
the traditional model, and that is not at all what we are 
talking about. Your comments, please?
    Mr. Montgomery. Sure. Again, sir, I think there is a way to 
do it. I think we would both agree it should be done 
responsibly and in the borrowers' best interests.
    But remember, that will be a two-way street. So, whereas 
you may have a good payment history in some of those non-
traditional trade lines, if you also begin to pay late, you are 
going to feel that, as well. It's no different than if you pay 
your credit card bill late or make your automobile payment 
late, as well.
    So, again, I just want to make sure, sir, that the 
committee understands that if we were to do it, we think we 
should look at it in ways that are in the best interests of the 
consumer and done responsibly, and it strikes me that FHA would 
be the appropriate vehicle to use to do that.
    Mr. Green. Thank you.
    Mr. Montgomery. And HUD, in general.
    Mr. Green. And you and I have talked before. Why don't we 
have an additional conversation on this? My time is up now, but 
let's have my staff get with you so that we can make an 
appointment and flesh this out.
    Mr. Montgomery. Yes, sir.
    Mr. Green. Okay.
    Mr. Montgomery. I'd be happy to. Thank you.
    Mr. Green. Thank you. I yield back. Thank you for the extra 
seconds, Mr. Chairman.
    Chairman Clay. The gentleman's time has expired.
    The gentleman from Missouri, Mr. Luetkemeyer, is recognized 
for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Welcome, 
Commissioner Montgomery.
    I want to start off with a question with regards to the 
False Claim Act. A Memorandum of Understanding (MOU) was 
recently announced between HUD and the Department of Justice on 
the use of the False Claim Act. I am just curious, could you 
give me some details on this, what you hope it will accomplish, 
and I guess from the standpoint of how big a barrier has the 
False Claim Act been? And what do you hope the MOU would--how 
will it affect the mortgages and make them more accessible or 
whatever? Can you help us out?
    Mr. Montgomery. Sure. Thank you, sir.
    When I was Commissioner last time, we had a pretty good 
balance between the percentage of lenders who were depositories 
and non-depositories. We are kind of out of balance now. About 
13 percent of our originations now come from depositories. As 
recently as 2010, it was about half.
    Most of them will tell you they point to the False Claim 
Act as the reason they got out of the FHA program. Some of them 
got out of the VA Program.
    It is not my intent to take sides in that argument between 
independent lenders and depositories. I just think, for a lot 
of reasons, we need to find equilibrium there, and a lot of the 
consumer advocate groups agree with me on this point. They see 
it as an access-to-credit issue because a lot of families who 
have banking relationships at a large depository, who are 
first-time home buyers, are finding that their depository does 
not offer the FHA program, which has been the nation's flagship 
homebuying program since 1935. To me, that just seems a little 
odd.
    That is not to say that we look the other way with fraud or 
people who do not follow by our rules. Quite the contrary. We 
just think somewhere between an indemnification and the 
equivalent of a drone strike on a lender that--in this case, 
they just got out of the program. There needs to be something 
in between.
    The Justice Department, working with our general counsel, 
and our staff--we found a good place that I think brings a 
little more focus to the program. It gives FHA and HUD a bigger 
voice in saying, okay, this rises to the level of the False 
Claim Act, and therefore we would recommend or concur with 
Justice going forward.
    Mr. Luetkemeyer. You made a statement a minute ago that 13 
percent are from depository institutions and the other 87 would 
be from independent--
    Mr. Montgomery. Yes, sir. Credit unions.
    Mr. Luetkemeyer. Credit unions would fall--they are 
depository institutions?
    Mr. Montgomery. They would fall under the depositories.
    Mr. Luetkemeyer. So, independent would be what, the Quicken 
Loans of the world? Is that what you are talking about?
    Mr. Montgomery. Yes, sir. Lenders like Quicken. Some are 
privately-owned. Some are publically-traded.
    Mr. Luetkemeyer. Offline and online lenders and offshore 
and all that kind of stuff?
    Mr. Montgomery. Well, you have to be approved, obviously.
    Mr. Luetkemeyer. Okay.
    Mr. Montgomery. We have criteria for that.
    Mr. Luetkemeyer. It is an amazing statistic. It kind of 
took me by surprise here. I was not prepared for that.
    Mr. Montgomery. We were just happy that a lot of consumer 
groups, including the Center for Responsible Lending, the 
National Community Reinvestment Coalition (NCRC), and others 
were on our side on this topic.
    Mr. Luetkemeyer. Okay.
    Mr. Montgomery. And that helped.
    Mr. Luetkemeyer. Great. Thank you. I appreciate you 
explaining that.
    Also, with regards to the risk in your portfolio, obviously 
things are going well. We are increasing the capital account. 
But we have noticed that the credit scores seem to be going 
backwards. There are some earlier defaults and some debt-to-
income ratios are rising. Should we, as a Congress, be 
concerned about that? What are you doing to address that? Is 
that just the nature of the economy? What is going on there, 
because--
    Mr. Montgomery. I will try to boil down an hour-long 
response, sir. We conduct daily stress tests on our portfolio. 
And we have been concerned about the number of loans that come 
in with risk layering, which is a combination of high debt-to-
income ratio, low credit scores, and loans that came in from 
about August of 2016 up until we made a change to the TOTAL 
Scorecard.
    We are modeled at about a 1.4 capital ratio the last loan 
end. That is not where we want to be. Congress requires us to 
have a minimum 2 percent. So, we made some changes to the TOTAL 
Scorecard that went into effect in March of this year. They 
seemed to be having their intended effect. It seems like we 
stopped the 3-year slide in credit scores. They have actually 
leveled off and improved one point--
    Mr. Luetkemeyer. I want to ask one quick question before my 
time expires.
    The concern is that, even though you are very well-
capitalized right now, you apparently have more risk in your 
portfolio than you would normally have. So, in order to be able 
to accommodate more risk, you are going to have to have more 
capital in order to be able to continue to be a solvent entity 
and have enough reserves there to ride this out until you get 
this portfolio back in shape, I would assume. How long do you 
think it is going to take to do that?
    Mr. Montgomery. Certainly, the house price appreciations 
helped, and a strong economy. Again, we just want to make 
sure--we call it ``turning the dial''--we have access to 
credit. We want to make sure, should there be a downturn, that 
we have an ample amount of reserves to weather that.
    Mr. Luetkemeyer. Okay. Thank you very much.
    Mr. Montgomery. It is sort of a tricky dance, but we think 
we are managing it well.
    Mr. Luetkemeyer. Well, we will be watching. Thank you very 
much. I appreciate it.
    Chairman Clay. The gentleman's time has expired.
    The gentlewoman from Iowa, Mrs. Axne, is recognized for 5 
minutes.
    Mrs. Axne. Thank you, Mr. Chairman, and thank you, 
Commissioner Montgomery, for being here. I very much appreciate 
it.
    We have been talking a lot today, of course, about 
increasing homeownership and addressing the shortage of 
affordable housing across this country. So, one of the issues I 
want to take a look at is manufactured housing because, in many 
cases, it can cost up to 30 percent less, and in some cases, 
more, for folks to be able to afford that.
    If we are going to talk about it, though, we have to make 
sure it is a way to provide affordable housing and truly make 
sure that it is. I do not know if you are aware of what has 
occurred in Iowa over the last year or so, but I would love to 
give you a brief background.
    Unfortunately, a company named Havenpark Capital, which is 
a fund from Utah, has bought now seven manufactured housing 
communities in Iowa, and then they proceeded to raise the lot 
rents for the residents there between 20 and 70 percent. So, 
they came in and just raised the rate 20 to 70 percent for 
these families, many of whom are on fixed incomes.
    I visited one of those communities, Midwest Country Estates 
in Waukee, and saw firsthand the terrible position that these 
folks are really being put in. And just yesterday, I spoke to 
one of those residents, Matt Chapman, who is about to be paying 
70 percent of his income for housing.
    We know the standard definition of severely cost-burdened 
is paying 50 percent of your income on rent, and here is a 
constituent who owns his home outright, has no mortgage, and 
has to pay 20 percent more than the 50 percent that we think is 
severely cost-burdened. So, he does not know what he is going 
to do, and many of his neighbors just do not know how they are 
going to make this happen. It is just simply unaffordable for 
so many residents like him and others across the country.
    Many of these properties were purchased with federally-
supported loans, so we need to make sure that our constituents 
are not being taken advantage of because they cannot relocate. 
And these are the kinds of predatory practices that, 
unfortunately, are being allowed to continue.
    So, Commissioner, I have been working on trying to find 
solutions to prevent this from happening again. Given your 
experience in housing, I just wanted to ask you, what 
recommendations do you have that we should be putting in place?
    Mr. Montgomery. And I would be happy, by the way, to follow 
up when we have more time to discuss it.
    But manufactured housing is--22 million Americans live in 
manufactured housing. We regulate the construction of 
manufactured housing throughout the country. Between my time as 
Commissioner last time and this time, the technology, the 
construction standards, and all of that have made leaps and 
bounds, so much so that we are almost having a hard time 
keeping up with it.
    We have also been looking at the financing aspect relative 
to FHA. There is Title I and Title II, not getting too in the 
weeds here. Title I does not have a lot of volume in it, tends 
to be more sort of what I call chattel loans, versus the 
traditional FHA Title II.
    We think there is a way to make it more affordable because, 
you heard me reference earlier in my opening statement, the 
average income of a manufactured-home owner is between $30,000 
and $50,000 a year. And, again, it is part of the things we are 
looking at in sort of a pro-consumer aspect, ways that we can 
perhaps get some of that cost of financing down.
    We have less purview, being honest with you, on sort of the 
structure of communities. Again, more so the regulation of the 
actual manufacturing of it, of the structure.
    Mrs. Axne. Okay. I appreciate that, and I would love to see 
what information you have.
    At least three of these seven properties were bought with 
Fannie Mae loans, so it is not as if the Federal Government is 
not involved in it.
    I hate to see--we believe that they actually overpaid, as 
well, for the community that I was just talking with you about. 
I am sure they did. And I think that we could have--if we had 
had pieces in place, those owners could have pooled together 
and possibly purchased it for themselves and been able to stay 
in their homes.
    And not just to afford it, but when we see these kinds of 
predatory actions, they are asking children to literally give 
up their dogs because they are too big for the homes, according 
to their new rules.
    They are forcing families to tear down swing sets that they 
do not think are, I guess, good-looking enough. But these are 
not people who can afford those $2,000 or $3,000 Rainbow sets 
that some other people can.
    So, any help that you can give us, these people truly have 
been put in a position where they do not know what their answer 
will be. Many of them will not be able to afford this and will 
be forced out of their homes, including taking their children 
with them and not being able to find an affordable option.
    I would appreciate your follow-up on some of those things 
we just talked about and any other things that you think we 
could put in place.
    Mr. Montgomery. Absolutely. I will look forward to 
following up with you or your staff on it.
    Mrs. Axne. Thank you.
    Mr. Montgomery. Thank you.
    Chairman Clay. The gentlewoman yields back, and the 
gentleman from Colorado, Mr. Tipton, is recognized for 5 
minutes.
    Mr. Tipton. Thank you, Mr. Chairman. Commissioner, welcome.
    The FHA's recent report to Congress showed that the FHA's 
financial health is in just about the best shape it has been in 
since the financial crisis, and I appreciate your stewardship 
on that.
    But I did want to follow up on maybe some potential areas 
that could impact that, and I would like to talk about the 
Property Assessed Clean Energy (PACE) loans. These loans have 
been used in some cases to trick some seniors and other 
vulnerable citizens into taking out high-interest energy loans 
for green energy appliances and using their homes as 
collateral. In some of these cases, it has actually squeezed 
these Americans to the point of foreclosure.
    Do you believe that the use of these PACE encumbrances on 
FHA-insured loans poses a risk to the health of the MMIF and 
the FHA's current policy on PACE-encumbered loans?
    Mr. Montgomery. Thank you for your question. What makes us 
overly concerned about that is we do not know how many. As you 
know, we do not allow it on new FHA loans and have not for 
several years. But it is unknown, if you are an existing FHA 
borrower, how many try to take out PACE loans.
    We think solar power and all of that is fine. Our concern 
is that those loans prime ours. They step in front of the 
National Housing Act, which I think we would all agree is 
probably not a good thing. Again, working with the Federal 
Housing Finance Agency (FHFA), as well, because they are 
equally concerned about how can we work together to make sure 
that does not happen.
    Mr. Tipton. And I think there is across-the-board 
agreement, as you note, to be able to have good, sensible 
energy use to benefit our people.
    But would there be some benefit in being able to have some 
national clarity on PACE loans? Because we do have some States 
where they have authorized programs that have been enacted on 
ability to repay, laws and licensing requirements for the PACE 
lenders, and other States have not. So, would that national 
clarity be of some use?
    Mr. Montgomery. Again, we are infinitely concerned because 
of it priming our loan, which is sacred in our world, that we 
have to be in a first-loss position. So, we are concerned about 
it, but it's something, again, that we continue to work on with 
FHFA, and we certainly welcome the opportunity to work with 
you, as well, sir.
    Mr. Tipton. We appreciate that. I think, again, we all 
support all of the above energy policy, but we do not want it 
putting people into a position where they actually lose their 
homes.
    On another topic here, due to the lower FHA premiums, plus 
a more expansive qualified mortgage (QM) definition, currently, 
approximately 55 percent of the FHA purchase loans exceed a 43 
percent debt-to-income (DTI) ratio.
    And artificially high fees, such as Loan-Level Price 
Adjustments (LLPAs) charged by the GSEs of many of the 
borrowers, drive the FHA to secure mortgage financing for no 
other reason than the FHA loan is cheaper, at least initially.
    The combination of these policies does create an un-level 
playing field and advantages the 100-percent backed FHA program 
and gives the consumers ultimately fewer choices.
    Would you agree that these inconsistent and sometimes 
arbitrary differences are driving borrowers into the markets?
    Mr. Montgomery. We certainly look at risk characteristics, 
including the use of risk layering. DTI by itself, just like 
credit scores by itself, is not necessarily the prime decision 
tool, if you will. We look at them in the aggregate.
    As you know, touching this issue is the QM Patch, which is 
slated to go away in January of 2021, which would essentially 
push a lot more of those higher DTI loans toward us.
    So, without going down that path in the limited time, I 
will just say DTI is something we look very carefully at, 
knowing that by itself, it is not the end-all, be-all in terms 
of credit risk. But it certainly accounts for something. 
Whether or not we would need to put some sort of residual 
income test in like the Veterans Administration does, again, 
are all things we are looking at in a total access to credit 
review of the portfolio.
    Mr. Tipton. Thank you for that. And, I guess, finally, what 
I would like to know is--I come from a rural part of America, 
and a lot of our focus in these committee hearings is on urban 
America and on housing issues that are there. What actions is 
FHA taking to help rural communities across the country?
    Mr. Montgomery. Certainly, in terms of loan limits, looking 
carefully at what the loan limits are in those communities.
    And we mentioned manufactured housing as a viable 
opportunity. In multi-family, the GSEs tend to concentrate in 
urban areas, and FHA and USDA tend to focus more in rural 
communities in terms of developing multi-family properties.
    Mr. Tipton. Thank you, and I yield back, Mr. Chairman.
    Chairman Clay. The gentleman yields back.
    The gentleman from Florida, Mr. Lawson, is recognized for 5 
minutes.
    Mr. Lawson. Thank you, Mr. Chairman, and welcome to the 
committee, Commissioner Montgomery.
    So I can get a clear understanding, what is the average 
homeowner's loan that FHA insures for a family of two that is 
applying for a loan?
    Mr. Montgomery. Looking at the data from Fiscal Year 2019, 
our average borrower made about $62,000 a year, bought a 
$183,000 home, and more than likely, used about $8,000--or 
about half of them used down payment assistance, and that 
average was about $8,000.
    Mr. Lawson. Okay. And does that require that the--I think 
the down payment used to be, what, 10 percent, or less?
    Mr. Montgomery. For us, sir, it is 3.5 percent. We call it 
the minimum cash investment. But it is 3.5 percent.
    Mr. Lawson. Are those fixed loans?
    Mr. Montgomery. We do have an ARM product. Most people do a 
fixed product.
    Mr. Lawson. Okay. Now, in areas like where I am from, where 
there has been a lot of disaster from hurricanes and people's 
inability to recover right away, what programs have you 
implemented in order to try to help those homeowners so they 
will be able to maintain their property until they can get back 
on their feet?
    Mr. Montgomery. The primary thing that we want to do is--
FHA assistance typically comes in later, after FEMA, after SBA, 
after whatever insurance they have on the home.
    We have any number of products. As I mentioned in my 
opening statement, a product that we originally used in 
Hurricane Katrina, we used in Puerto Rico, the Standalone 
Partial Claim, which allows us to immediately go and assess a 
home buyer's situation and take any arrearages they have and 
put them as a soft second lien on that mortgage and not change 
the amortization, not change the term of the mortgage or 
anything.
    We had some pretty good success using that in New Orleans 
and also in Puerto Rico. We have now made that standard as of a 
couple of months ago, going forward, to use in other disasters.
    We also have a product that, if your home is completely 
destroyed, there is an FHA product, the 203(H), I believe, that 
allows you to get 100 percent financing if your apartment or 
whatever has been destroyed as a result of a hurricane.
    Mr. Lawson. My next question is centered around two 
individuals. Can two individuals who are not married apply for 
an FHA loan? And how would you handle that if they do?
    Mr. Montgomery. They have to either be married, either 
common law married--you could not as just roommates, your best 
friend or whatever, apply together. I think that is more of a 
bank requirement than ours.
    Mr. Lawson. Okay. Would FHA's Housing Financial 
Administration's Risk Sharing Program expand Ginnie Mae's 
authority and involvement in affordable housing at increased 
risk to the Federal Government?
    Mr. Montgomery. The multi-family risk share program, I 
think, is a perfect model of the Federal Government working 
together with developers and State HFAs. That program still 
exists.
    There was another part of it, the Federal Financing Bank, 
if that is where you were headed, that that is no longer 
permitted. But, the ideal solution would be for Ginnie Mae to 
sort of securitize those loans that are done using the FHA Risk 
Share Program, which has an extremely low default rate.
    Mr. Lawson. Okay. How do you go about calculating the debt 
to savings ratio for those who apply?
    Mr. Montgomery. We have what are called front-end ratios 
and back-end ratios, you know, looking at your bills with and 
without your mortgage payment. Front-end is 31; back-end is 43. 
With compensating factors, you can go as high as 57, 58 
percent.
    Mr. Lawson. Okay. With that, Mr. Chairman, I yield back.
    Chairman Clay. The gentleman yields back.
    The gentleman from Tennessee, Mr. Rose, is recognized for 5 
minutes.
    Mr. Rose. Thank you, Mr. Chairman.
    Commissioner Montgomery, thank you for being here with us 
today.
    First, I would like to commend you and Secretary Carson for 
your work to restore the financial health of the FHA. I believe 
we should all be pleased that the Mutual Mortgage Insurance 
Fund's capital ratio increased to 4.84 percent last year, which 
is, of course, well above the statutorily required 2 percent 
minimum, and the highest it has been since Fiscal Year 2007.
    Just yesterday, I met with the Tennessee Housing 
Development Agency, the THDA, to discuss a number of housing 
issues facing Tennessee. THDA helps ensure housing is available 
and affordable to people in every county, including many of the 
rural and often underserved counties in Tennessee's Sixth 
District.
    Providing down payment assistance is an important aspect of 
what State housing finance agencies do. HUD has legitimately 
raised concerns about the performance of FHA mortgages with 
down payment assistance, but I believe that down payment 
programs managed through State HFAs do considerably better than 
in those managed by some others. I know in Tennessee, THDA has 
been providing down payment assistance responsibly for over 4 
decades.
    Commissioner, as HUD contemplates new rules around down 
payment assistance programs, do you plan to take into 
consideration these kinds of distinctions rather than trying to 
implement a more sweeping approach?
    Mr. Montgomery. Thank you, Congressman, for that question. 
When George W. Bush was Governor, I worked at the State of 
Texas Housing Finance Agency, and we were probably the largest 
at the time. I have met with the National Council of State 
Housing Agencies (NCSHA). I have met with State HFAs. As a 
matter of fact, I am meeting with NCSHA on Monday while they 
are in town.
    As I have told them, as we look at DPA at large, the type 
of DPA provided by State and local HFAs is not my worry, not my 
concern. As I referenced earlier, when I had a similar 
question, I just want to make sure any DPA that is provided by 
other entities works within our program guidelines from a 
financial benefit perspective, which is not allowed, and from a 
jurisdictional requirement. And that is what we are carefully 
looking at. We all do this just to help ensure that it is done 
with the best interests of the borrower, not enriching someone 
providing down payment assistance.
    Mr. Rose. Thank you. As I have said before in previous 
committee proceedings, manufactured housing is incredibly 
important to my district. Manufactured homes account for 13.1 
percent of occupied housing units in my district, compared to 
7.1 percent in the greater United States.
    HUD's Housing Reform Plan recognizes that there is a need 
to update FHA's guidelines for its manufactured housing 
programs, but such changes have also been pending for a number 
of years. I want to echo Ms. Axne's concerns about the changes.
    And for you, what will you do to implement the necessary 
changes as soon as possible?
    Mr. Montgomery. One thing I think is long overdue, is we 
need to elevate the status of that office, and we would like to 
work with you on that to make it run by a Deputy Assistant 
Secretary, which it is not. We want to separate it out.
    As I mentioned before, when I toured a plant when I was 
Commissioner last time, and I toured one earlier this year, the 
technology upgrades have been tremendous in that industry.
    My affection for that industry was born--again, back to my 
State of Texas HFA days, where at some point, there were more 
new manufactured homes sold in Texas than there were stick and 
bricks homes, which is kind of hard to believe. But there was a 
point in time where that happened. I firmly believe it is a 
viable option and a darn good one to help families, mostly in 
rural communities.
    Mr. Rose. One thing that continues to concern me is that 
the volume of manufactured home loans being supported by FHA 
continues to decline. As you mentioned, Title I program loans 
are almost nonexistent. Although the vast majority of 
manufactured homes are financed as chattel, FHA financed only 
526 chattel homes last year. Without access to FHA financing, 
many families are unable to attain the dream of homeownership 
through manufactured housing.
    Commissioner, where are updates to the FHA's financing 
programs for manufactured housing on HUD's overall priority 
list?
    Mr. Montgomery. Part of our look at the FHA program in its 
entirety includes spending more time on Title I and on Title II 
as it relates to manufactured housing, which, you know, to be 
on a foundation.
    So, it is too early to give you any sort of direction which 
way we are going. We know the numbers are low. But again, we 
just want to make sure any changes we made are done with the 
consumers' best interests at heart.
    By the way, to get back to your previous question, we have 
picked up the pace in looking at these new sets of standards 
that have come out of the Manufactured Housing Consensus 
Committee regarding stairs, garages, carports, even second 
floors. I think we are getting caught up. But the committee is 
moving quickly. We are just trying to catch up with them.
    Mr. Rose. Thank you, and I yield back.
    Mr. Lawson. [presiding]. Okay. Thank you.
    The gentleman from Missouri, Mr. Cleaver, who is also the 
Chair of our Subcommittee on National Security, International 
Development and Monetary Policy, is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Commissioner, thank 
you for being here today.
    On Tuesday evening, Congresswoman Joyce Beatty from this 
committee, and Congressman William Lacy Clay from Missouri, who 
chairs this committee, and I had a Midwest summit. We brought 
people in here for a dinner summit meeting from all over the 
Midwest, the upper Midwest and lower Midwest, and we talked 
with them about a number of issues.
    Then, we listened to what they thought, and they did not 
surprise us in the fact that they believe that affordable 
housing, or the lack thereof, is in a crisis. I do not think 
that there is a need for much imagination to see that that is 
in fact the truth.
    And, so, in terms of all of the things that we need to be 
doing to correct that problem, I am a little concerned about 
HUD's Finance Reform Program. Even if you work with the GSEs, I 
am concerned that if you are trying to reduce the HUD 
footprint, the crisis will become even more critical.
    My belief is that this is the time for us to be more 
creative. We need to become more of a thrift--an agency that is 
only concerned about giving everybody money for them to buy 
homes, that is not what I am saying. We do not want you to be a 
spendthrift agency.
    But I would feel comfortable--and I think what I am saying 
is, millions of other people would, as well. If we had 
programs, as you are looking at reform, that are trimmed, but 
also sufficient enough to make a difference. And right now, we 
are going in the opposite direction.
    It is difficult to get developers to do something unless 
they--if you are going to do affordable housing in the urban 
core, you are going to have to have some kind of subsidy. 
Municipal subsidy, low-income tax credits. You are going to 
have to have something or it just won't work. The numbers do 
not work.
    So, can you assure me that we are not going to start 
eliminating Section 202 programs? We are not going to start--
well, you do not have any control over the CDBG, but many of 
the communities need CDBG in order to help developers get 
started, if only with infrastructure.
    So, can you fill me in on the reform program and what you 
think ultimately will happen?
    Mr. Montgomery. Certainly. Thank you, Congressman.
    In terms of multi-family housing, obviously 202 and 811.
    The RAD Program, which is helping renovate hundreds of 
thousands of units around the country.
    We have now launched a program for new construction for FHA 
with tax credits.
    We also are now permitting the RAD Program to be used with 
the 202 program. These have all happened in the last year.
    On the single-family side, there is not a lot we can do to 
help build supply. Although, through this affordability council 
that was started up a few months ago, we want to help kind of 
pull back the curtain on a lot of the local decision-making, 
whether it is zoning or set-asides. It is driving up the cost 
of housing in many communities to where they are building very 
little entry-level housing. And the cost to manufacture a 
mortgage, for example, has gone up almost twice from what it 
was 10 years ago.
    So, there are a lot of factors present out there that do 
give us concern, but many of them are born of decisions made at 
a State or local level that we have less control over.
    Mr. Cleaver. I agree. But I have towns in my district, like 
Higginsville, like Marshall, like Sweet Springs, like Orrick, 
like Mayview, where they have not had a new house built in 
decades, or certainly over a decade, and they need help.
    There used to be a program called Urban Development Action 
Grants (UDAG), that did not come out of your shop, but out of 
HUD, and those programs allowed for municipalities to help a 
developer get started, and programs. So, I think the HUD side 
is going to have to become more active, and maybe your request 
for them to become more active would result in more affordable 
housing.
    I appreciate the time. I wish that we had more.
    Mr. Montgomery. I would just add the Opportunity Zones. 
They are now seen as an excellent way to help expand housing 
and have made some adjustments, as I articulated in my opening 
statement, that I think will help create more supply and more 
investment in those Opportunity Zones.
    Mr. Lawson. Thank you.
    The gentleman from New York, Mr. Zeldin, is recognized now 
for 5 minutes.
    Mr. Zeldin. Thank you to Commissioner Montgomery for being 
here today, and thank you to Chairman Clay and Ranking Member 
Stivers for holding this hearing.
    FHA loans are essential products for Long Island families 
looking to purchase a new home that will help them build their 
own version of the American Dream, and most importantly, help 
them stay on Long Island.
    Oftentimes, these loans are made to first-time home buyers, 
the constituency that often has the means to make the monthly 
mortgage payments, but also often has the most difficulty 
having enough capital for a large down payment. These are 
middle-class people with good jobs and good credit scores, but 
maybe they are not liquid enough to put up a large down payment 
in a region with some of the highest real estate values in the 
nation.
    Over the past several years, we have seen traditional 
lenders, like banks, flee the FHA market due to overzealous 
enforcement of the False Claim Act by the previous 
Administration. This law was intended to prevent fraud against 
the U.S. Government, not for immaterial mistakes, like a 
misplaced comma on a mortgage application.
    I, along with my friend, Representative Gottheimer, 
introduced legislation last Congress to bring a fix to this 
frivolous liability. In May, I had a great conversation with 
Secretary Carson regarding that issue in this committee. Since 
then, HUD and DOJ have entered into an MOU on how to evaluate 
False Claim Act cases.
    Commissioner Montgomery, with HUD's recent announcement 
regarding entering into an MOU with DOJ on the use of the False 
Claim Act, do you expect to see an increase in the availability 
of affordable FHA loans?
    Mr. Montgomery. I would think that as more and larger 
traditional depositories re-enter the program, I would think 
that is good for consumers, especially those who already enjoy 
a relationship with that depository institution. I think some 
of them are concerned about the durability of our MOU with 
Justice.
    And, by the way, with our certifications, which we updated, 
as well, meaning what happens with the next Administration--I 
think that what we have done with the MOU and with our revised 
certifications, I think we are addressing that durability issue 
by giving HUD a voice in this process, or the Mortgagee Review 
Board, which has been around by statute for 20, 30 years or so, 
to help them win justice; or when we believe a particular 
circumstance rises to the level of the False Claim Act, that we 
make that determination together, not unilaterally, which I 
understand might have been happening previously.
    Mr. Zeldin. I think you are bringing some very interesting 
and important points up. To that point, are there any 
legislative reforms needed to complement this administrative 
action?
    Mr. Montgomery. Again, I want to make sure I am drawing a 
bright line that we are not going soft on people who violate 
our rules. It is this False Claim Act with its treble damages, 
its civil money penalties, that drove some of the largest banks 
away from our program that has been around since the Great 
Depression.
    Just in the interest of access to credit and fairness--
again, not trying to take sides between depositories and 
independents--I just think it is better for consumers, and 
certainly better for us, to have depositories back offering our 
program. And, to their credit, some have signaled a willingness 
to get back in, while others have not, which disappoints me. 
But we are not going to give up.
    Mr. Zeldin. An important part of a modern FHA is the FHA 
Information Technology Fund. Can you elaborate on how vital 
funding the FHA Information Technology Fund is?
    Mr. Montgomery. This is something that, when I was 
Commissioner last time, we tried to get funding for. I know the 
last Administration did, as well, so we were very ecstatic that 
we got a down payment of $20 million, and hopefully we will get 
the remainder. We need about $80 million altogether.
    We are going to completely change the way we conduct 
business now, which is hard-coded mainframes, heavy reliance on 
paper, and to move in the area of data-centric architecture, 
moving away from paper to fully electronic, single point-of-
entry, and on par hopefully with what Fannie Mae and Freddie 
Mac have done. In fact, they have been helpful, as has FHA, in 
this effort.
    We think we will realize some economies to scale, not just 
the ease of it and the streamline of it, but being able to 
better mind the data analytics behind the numbers. So, we are 
ecstatic to get the funding and will remain optimistic we will 
ultimately get everything we need.
    Mr. Zeldin. You certainly have been advocating for FHA 
modernization since you were first Commissioner under President 
George W. Bush, and it is important that you are continuing 
that effort. I thank you, Commissioner. Both the housing market 
and the taxpayers are in good hands with someone of your 
expertise and knowledge at the helm of the FHA.
    I yield back.
    Mr. Montgomery. Thank you, sir.
    Mr. Lawson. Thank you.
    The gentleman from Tennessee, Mr. Kustoff, is now 
recognized for 5 minutes.
    Mr. Kustoff. Thank you, Mr. Chairman, and thank you, 
Commissioner, for testifying today.
    We know that HUD released the annual report on the 
financial health of the Mutual Mortgage Insurance Fund. In the 
section detailing the emerging risk within the MMI Fund, the 
report does note that the projected lifetime claim rates for 
recent originations are at their highest levels in almost 10 
years. Well, going back to 2009.
    The report also highlights that this is due in part to 
early payment default rates increasing and that the average 
debt-to-income ratio increased for the sixth straight year.
    Commissioner, if you could, what are some of the other 
drivers that you think are behind the increase in the higher 
risk credit characteristics in recent originations?
    Mr. Montgomery. You will recall, the Qualified Mortgage--
the Dodd-Frank Act set the maximum DTI at 43 percent for 
reasons I am sure we all recall. The GSEs and us were given 
basically what they call the ``patch'' to go above that.
    I just want to make sure it is clear that high DTI, in and 
of itself, is not a key predictor of how a loan is going to 
perform. To answer your question, when it has been combined 
with other high-risk characteristics, including low credit 
scores, that risk layering is what has given us some pause and 
what led us to make some changes to our TOTAL Scorecard earlier 
this year, which seem to be working. We seem to have slowed 
down the drop in credit scores, and that had been going on for 
about 3 years. They actually went up a point for the first time 
in a while.
    Mr. Kustoff. You are saying the credit scores went up about 
a point?
    Mr. Montgomery. They were slow declines, or sort of steady 
state, for almost 3 years. And the changes that we put in place 
appear to, at least for the last 2 months, have stopped that.
    Mr. Kustoff. I heard what you just said about the DTI 
ratios. That, combined with early defaults, combined with where 
credit scores are now, should those three factors and others 
concern Congress?
    Mr. Montgomery. They concerned us, which is why we made 
those changes to the TOTAL Scorecard in February, to manually 
refer those loans that have those risky characteristics, which 
essentially means that the lender now has to lift open the hood 
and look much deeper into the finances before they will approve 
the loan.
    Mr. Kustoff. Kind of along a different line, how large of a 
role do cash-out refinancings play in FHA's endorsement 
portfolio?
    Mr. Montgomery. We are not anti-cash-out refinance. We were 
just concerned that we were becoming the government's ATM when 
a lot of Fannie and Freddie borrowers who were looking to 
refinance moved to refinance with FHA because the terms were 
better. So after, again, pouring over the data for several 
months, we recently made the change just to accept the policy 
that the GSEs currently use, which is 80 percent versus the 85 
percent. So now, all three of us are aligned.
    Mr. Kustoff. Very good. Can you give your opinion about how 
FHA can strike a better balance in doing business with both 
depository and non-depository lenders?
    Mr. Montgomery. Again, I think getting back to the previous 
question and others, making sure that the durability, that 
there is some longevity to this process with the Justice 
Department, which, again, using our existing Mortgagee Review 
Board, I think provides an elegant way to provide that 
durability to make sure that it is there to last.
    When new Administrations come in, MOUs tend to not have 
much of a shelf life. But what we built into the 
certifications, which I do not want to get too granular here, 
we think helps provide a more rigorous durability to what we 
are trying to accomplish. Again, not to let people walk away 
when they run afoul of our rules, but to make sure that the 
penalty fits the transgression, if you will.
    Mr. Kustoff. Thank you, Commissioner. We appreciate your 
service, and I yield back the balance of my time.
    Mr. Montgomery. Thank you, sir.
    Mr. Lawson. Thank you.
    The gentleman from California, Mr. Sherman, is now 
recognized for 5 minutes.
    Mr. Sherman. Thank you.
    I want to focus on PACE loans. These are loans in every 
sense of the word practically, but technically, they are an 
increase in your property tax bill. They are used to help 
finance energy-efficient upgrades, often air conditioning 
systems.
    As of January 2017, FHA no longer insures residential 
mortgages that have PACE loans attached to the property in a 
first position, as makes sense. You are in the business of 
being the first mortgage, and only with great creativity do we 
have a system where ``first'' can mean ``second,'' because the 
PACE is first, and then the first is second.
    I have a discussion draft I am circulating to say that for 
a PACE loan to be adopted, it needs the consent of the 
underlying mortgage holder. That seems only fair, if you 
bargain for first position, that you get to keep that first 
position.
    What do you think should be done with regard to PACE loans, 
both to protect the mortgagor and to protect the homeowner?
    Mr. Montgomery. Thanks for bringing up the mortgagor, as 
well. There is not much I can do relative to the terms of how 
they are able to get the, say in this case, solar equipment, if 
you will.
    Mr. Sherman. Yes. I know the CFPB is in the process of 
writing a rule, but I think we do an awful lot.
    Mr. Montgomery. Absolutely. And you are right. We permitted 
that on new FHA mortgages. It is the millions of existing ones 
that we are concerned about. And if you have some language in a 
bill or something, we would be happy to help you in that 
respect.
    Mr. Sherman. So, a new FHA mortgage not only cannot be 
issued or underwritten if there is already a PACE loan, but you 
actually have language that prevents some new PACE loan from 
being--
    Mr. Montgomery. For a new FHA mortgage, that is--
    Mr. Sherman. So if somebody signs up for an FHA mortgage 
today, or 6 months from now, they cannot do a PACE loan without 
the approval of the mortgage holder?
    Mr. Montgomery. Well, there is a seasoning requirement.
    Mr. Sherman. Okay.
    Mr. Montgomery. I can't remember exactly what it is. But 
our concern, again, is on existing FHA loans that take out PACE 
loans that we are unaware of. And then, if something happens, 
we find ourselves now not in the first position anymore.
    Mr. Sherman. Now, you guarantee mortgages. Others in the 
mortgage guarantee business stop charging a premium when you 
hit that 78 percent level. It is my understanding that you 
still charge, even if the homeowner has an awful lot of equity 
in the house and they don't really need mortgage insurance. Are 
you planning to change that?
    Mr. Montgomery. Sir, I appreciate your question, but I do 
not know of a mortgage insurance entity around that continues 
100 percent coverage, unless you quit paying premiums, which 
would be the case if that were to happen.
    FHA loans are also fully assumable, which is a great 
feature. But let's just say that it is beyond the 78 percent 
threshold. Someone could assume an FHA mortgage, get 100 
percent coverage, yet not be paying a premium.
    Mr. Sherman. Could you develop a system to reduce the 
amount the homeowner has to pay when the homeowner has a whole 
lot of equity in the property?
    Mr. Montgomery. That is a good question. And we have been 
looking at, as I referenced earlier, sort of premiums at large. 
Is it based on however long the average FHA mortgage is? Is 
there a way to find a little more balance? I would maintain, 
though, even though in the GSE space when private mortgage 
insurance goes away, there is a guarantee fee (g-fee) in place 
for the life of the loan.
    Mr. Sherman. Yes, but we are talking about a much lower 
rate when you have a lot more equity.
    I want to move on to one other thing. In the aftermath of a 
disaster, servicers frequently place loans in forbearance, 
providing time for the consumers to assess damages and recover. 
If the forbearance exceeds beyond 60 days, the loan is then 
reported as being in default and is recorded against the 
originating lender on the FHA neighborhood watch database, 
regardless of whether the home is in a disaster area. 
Particularly for the small lenders, even a handful of mortgages 
can lead to a significant impact on their default rate.
    How can FHA ensure that lenders are not penalized for 
providing appropriate forbearance for borrowers struggling to 
make payment in a disaster?
    Mr. Montgomery. Thank you, sir. We have been careful to 
strike that balance between what we believe was an industry-
leading loss mitigation program that worked well during the 
housing crisis. But translating that over into disasters, it is 
again something we are looking long and hard at, especially as 
it relates to disasters, which is why we made a recent 
announcement on the Standalone Partial Claim.
    Mr. Sherman. Perhaps you could expand on the answer in the 
record. Thank you very much.
    Mr. Montgomery. I would be happy to, sir. Thank you.
    Mr. Lawson. Thank you.
    The gentleman from Wisconsin, Mr. Steil, is now recognized 
for 5 minutes.
    Mr. Steil. Thank you, Mr. Chairman.
    Mr. Commissioner, I want to start by commending you for 
leading FHA's Mutual Mortgage Insurance Fund to its best 
position in recent years.
    FHA insurance is different from private mortgage insurance 
in that it remains for the life of the loan, whereas private 
insurance falls off as the borrower reaches a certain amount of 
equity in their home: 78 percent.
    Do you agree that the ongoing nature of the risk of default 
demands life-of-the-loan premiums for FHA products?
    Mr. Montgomery. I believe so. And as I referenced in the 
previous question, if we are going to maintain 100 percent 
coverage, then we have to keep taking premiums on--
    Mr. Steil. So is a reduction of life-of-the-loan coverage 
essentially the same as a premium reduction in your eyes?
    Mr. Montgomery. Again, if I understand your question 
correctly, the private mortgage insurance may go away at 78 
percent, but there is a g-fee included in that that is less 
talked about. So, there is still coverage, but it is 
something--it is done through what is called a g-fee with the 
GSEs.
    Mr. Steil. As I understand it, the FHA is supposed to help 
people obtain sustainable home mortgages by filling a gap in 
the market for mortgage insurance. As you know, there are 
several private insurances competing in this marketplace, which 
we have been discussing.
    Can you just kind of elaborate as to how the FHA's premium 
pricing currently compares to private mortgage insurance and 
how that competition is playing out, in your eyes?
    Mr. Montgomery. Sure. Thank you, Congressman.
    It is really almost two different types of coverages you 
referenced. When theirs falls off, ours stays in place for the 
life of the loan, provided, obviously, that you are paying the 
premiums. Theirs is partial coverage and ours is 100 percent.
    But I have cautioned that, when making sure that we are 
available in good times and bad, it is not our goal to supplant 
private capital and what private mortgage insurers are doing. I 
think we both perform necessary functions of the mortgage 
marketplace. I just want to signal that we are not there to 
compete with them, if you will. But, that said, we want to make 
sure the borrowers are ready to be borrowers, we have a 
circumstance that fits our profile, that we are there to help 
them.
    Mr. Steil. Thank you. I am going to shift gears slightly.
    How do you respond to calls to cut premiums or change 
policies in such a way that would increase the riskiness of 
FHA's portfolio?
    Mr. Montgomery. Do you have a specific example?
    Mr. Steil. Broadly speaking, where these things play out.
    Mr. Montgomery. That is part of my comment earlier about, 
we are a $1.4 trillion corporation, if you will, with a social 
mission and requirements set forth for us from Congress. That 
said, we want to make sure that we can help borrowers that need 
the program.
    So, this is something that we look at and deal with every 
day, what is a delicate balance between risk, defined many 
different ways; between the right premium structure; between 
market dynamics, which there is not a lot I can do in that 
respect. But making sure that we are there when borrowers need 
us.
    I will say this: The technology will help us get to a much 
better place in terms of looking at data more robustly and 
faster than we are able to do today.
    Mr. Steil. Thank you very much. I appreciate you being here 
today, and I yield back the balance of my time.
    Mr. Montgomery. Thank you.
    Mr. Lawson. Thank you.
    The gentleman from Texas, Mr. Gooden, is now recognized for 
5 minutes.
    Mr. Gooden. Thank you. I yield my time to Mr. Stivers of 
Ohio.
    Mr. Stivers. I thank the gentleman for yielding.
    Commissioner, again, thank you so much for being here. I 
don't think you have gotten a lot of questions about Housing 
Finance Reform proposals, have you? Did I miss a few questions? 
Maybe there was one, but there has not been a ton.
    I wanted to just tell you I was pleased that HUD had some 
Housing Finance Reform proposals that you issued earlier this 
year. They focused their attention on how FHA would continue 
its mission, although a reformed mission. It did talk about FHA 
continuing to effectively serve creditworthy, first-time, low-
income home buyers, is that correct?
    Mr. Montgomery. Yes, sir.
    Mr. Stivers. So, one of the recommendations listed in the 
report included restructuring FHA as an autonomous government 
corporation within HUD. Would you be able to expand on talking 
about how this restructuring would allow FHA to better either 
address personnel, technology, or contracting issues, which 
would allow you to continue that mission?
    Mr. Montgomery. Thank you very much for the question. Just 
to be clear, FHA would still be part of HUD and would still 
report to the HUD Secretary.
    Mr. Stivers. Right, but it would have a little more 
autonomy.
    Mr. Montgomery. It would be a wholly-owned corporation, 
similar to what Ginnie Mae is. We think the ability to have 
more--
    Mr. Stivers. Tell us what that would let you do. Help us, 
help everybody understand the benefits of that.
    Mr. Montgomery. I think we would have a little more 
flexibility in terms of procurement and hiring. We are the 
largest mortgage insurance entity ever, and we are looking at 
critical pay, the ability to pay some of our staff more, as 
well. So, beyond procurement, personnel, we just think having a 
little more flexibility would be very helpful.
    One area that would also be very helpful is to make sure we 
don't find ourselves in the predicament that we have today in 
terms of our technology. Obviously, the receipts would still be 
controlled by this body. But helping ensure that we have some 
consistent level of funding for our systems would go a long way 
to help and ensure that we do not have a similar problem to 
what we are encountering today that we are, of course, 
desperately trying to fix.
    Mr. Stivers. Thank you for that. I think that would be a 
helpful way to give you a little more authority and autonomy to 
do some things, including keeping your technology modern, which 
we have already talked about. The $20 million down payment on a 
$100 million problem. I wanted to give you a chance to expand 
on that a little bit.
    Commissioner, I don't know if you have had a chance to 
review Maxine Waters' Principles for Housing Finance Reform. 
Have you seen them?
    Mr. Montgomery. I have seen parts of them.
    Mr. Stivers. I will lay a few of them out, just so we are 
all on the same page.
    One of her principles is maintaining the the 30-year fixed-
rate mortgage option. Is that something you support as a 
principle?
    Mr. Montgomery. Maintaining the 30-year fixed-rate mortgage 
in the TBA market, yes, absolutely.
    Mr. Stivers. Great. A second one is ensuring there is 
private capital in place to protect taxpayers. Do you think 
that is a good idea?
    Mr. Montgomery. Yes.
    Mr. Stivers. Another one is providing stability and 
liquidity so that we can withstand a future financial crisis. 
Do you think that is a good idea?
    Mr. Montgomery. That is something we work on every day.
    Mr. Stivers. Great. And another one is maintaining access 
for all qualified borrowers so that they can achieve 
homeownership, the dream of homeownership. Is that something 
that you agree with?
    Mr. Montgomery. Absolutely. We want to make sure that 
borrowers are ready for homeownership and get the type of 
mortgage that is appropriate for their circumstance.
    Mr. Stivers. I ask you these questions because I asked them 
of Mr. Calabria and Secretary Mnuchin and Secretary Carson. 
They all also agreed with those principles.
    The point of bringing this up is that, even though we have 
not made any progress on housing finance reform since the 
financial crisis, which was now 11 years ago, there is a lot we 
all agree on. Chairwoman Waters, you, me, the three principals 
I spoke about, all agree on those principles.
    I think it is time to roll up our sleeves and pursue 
bipartisan housing finance reform, and I would like to work 
with you on that. That is the third thing I brought up today I 
want to work with you on, so I hope we can work together on 
that. Is that something you would be willing to work with us 
on?
    Mr. Montgomery. Absolutely. And I have never admitted this 
publically, but I will say it today. That is one of the reasons 
why I came back.
    Mr. Stivers. Great. I am glad you are here. Thank you for 
everything you have already done. I am very much looking 
forward to working with you on many things, including trying to 
do some real housing finance reform.
    Thank you. I yield back.
    Mr. Montgomery. Thank you.
    Chairman Clay. I thank the gentleman from Ohio.
    I look forward to working with you and the Commissioner on 
how we get to a place in this country where people can share in 
the American Dream of homeownership.
    At this time, I recognize the gentleman from Arkansas, Mr. 
Hill, for 5 minutes.
    Mr. Hill. I thank the chairman and the ranking member for 
allowing an interloper into the subcommittee's business today. 
Thank you for that.
    Mr. Montgomery, thank you for coming back from FHA. I thank 
you and Dr. Carson for doing a terrific job representing the 
taxpayers at HUD.
    There has been a lot of talk today about the MMIF fund and 
its health being well in excess of 2 percent, now over 4 
percent. So, congratulations on that.
    Philosophically, I hope you will let that capital continue 
to grow. I remember vividly in the early 2000s in the Bush 
Administration when the FDIC began to rebate and no longer take 
deposit insurance premiums, saying that Congress had already 
capped it. We know how that ended, and we were all asked to pay 
3 years of deposit insurance premiums in 2008 in one quarter 
because of that imprudent decision, alleging the statute only 
required blank. So, I like seeing a bigger number.
    I wanted to start out by asking you, how do you stress test 
that capital and adequacy number?
    Mr. Montgomery. We have a contractor, an actuarial 
contractor--actually, two of them, and then we have an 
independent actuarialist who looks at their work, as well. We 
also have a risk team that works with them. We put them through 
any number of stress tests.
    Mr. Hill. That includes falling housing prices or no 
appreciation?
    Mr. Montgomery. Absolutely. Looking at extreme economic 
situations.
    Mr. Hill. And that includes a discount rate on the net 
present value of counting future cash flows, which normal 
people do not do in capital, but you do?
    Mr. Montgomery. And that can work both ways as we--
    Mr. Hill. Yes, of course it does.
    Mr. Montgomery. So, yes, sir. We put it through dozens of 
different stress tests.
    Mr. Hill. Good.
    Mr. Montgomery. And those are all available in our annual 
report.
    Mr. Hill. I look forward to studying them in more detail. 
Is that done annually by the contractor?
    Mr. Montgomery. It is, and what we--
    Mr. Hill. Is it ongoing, almost quarterly?
    Mr. Montgomery. It is ongoing. As we know, the economy 
changes.
    Mr. Hill. Right.
    Mr. Montgomery. And we always try to stay ahead of that.
    Mr. Hill. Good.
    Mr. Montgomery. There is a lot of data out there that helps 
us, as well.
    Mr. Hill. There has been a lot of conversation today about 
non-bank originators. Now, shockingly, according to Chairman 
Luetkemeyer, over 80 percent of your originations now--and you 
talked a lot about false claims today and explained that in 
detail. I am interested in a different point of view about it, 
which is the quality of the underwriting between a depository 
that initiates an FHA loan versus a non-depository. Is there a 
big difference in the underwriting there?
    Mr. Montgomery. I would speak for our criteria, obviously.
    Mr. Hill. I understand.
    Mr. Montgomery. Ours stays the same. I don't want to speak 
for depositories or non-depositories as I think they strive to 
follow our guidelines and stay within the bounds that we 
require.
    Mr. Hill. When you look at your underwriting, which you 
have up there on the board in front of you, it has been talked 
about today, but you have seen, as you have said, an increase 
in a reduction in credit scores and--let's go to the next 
slide--an increase in debt-to-income ratios pretty 
substantially.
    You referenced a few minutes ago that FHA had looked at 
residual income tests like the VA has. Is that something you 
are actively considering?
    Mr. Montgomery. It is something we are looking at. I think 
it has been very helpful for the Veterans Administration, 
especially the fact that it varies based on region in the 
country. And, so, it is something that we are looking at.
    Again, I just want to stress that DTI, by itself, is not 
the true indicator, but when coupled with other factors, such 
as risk layering.
    Mr. Hill. When you see them all going up, it causes me some 
concern. I was glad to see your capital where it was. And I 
know you have made changes only recently in Fiscal Year 2019, 
so I understand that. But when I saw all the major indicators 
of underwriting deteriorating, it certainly got my attention. 
But I feel like you have covered that today pretty well.
    Mr. Montgomery. Yes, sir, and we have a fantastic risk 
team. We now have brought a retiree over from one of the GSEs, 
who was a chief risk officer there.
    Mr. Hill. Let me shift to one final point, and that is the 
issue of the Distressed Asset Stabilization Program. Selling 
assets boosts the MMIF, doesn't it?
    Mr. Montgomery. It depends on where they are sold in the 
process.
    Mr. Hill. If you have taken a property back and you are 
selling it, it is a net contribution?
    Mr. Montgomery. Yes. If it goes to real estate owned (REO).
    Mr. Hill. Right.
    Mr. Montgomery. Note sales, yes, but note sales are a 
little different than REO sales.
    Mr. Hill. But you would not want anything to encumber your 
ability from distressed sales to build capital, would you?
    Mr. Montgomery. I think one thing the previous 
Administration did and that we have continued to do is to find 
other alternatives to REO because the carrying costs of those 
are borne by us. The time that they will sit there is also 
borne by us. We have contractors we have to pay, certainly. So 
the ability to use claims without conveyance of title and note 
sales has been very helpful.
    Mr. Hill. It will be interesting. I will follow up with 
you.
    Mr. Chairman, thank you for your indulgence on the time. 
Thank you.
    Chairman Clay. Thank you. The gentleman yields back.
    I would like to thank our witness for his testimony today, 
and we appreciate you sharing with this subcommittee your 
thoughts on the future of where we go with the housing policy 
of this nation.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place his 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  now,  I  will  take  a  point  of  personal  privilege  to
say  congratulations  to  Mr.  Gooden  of  Texas,  or to you and
your wife on the addition of a new family member, your daughter.
So, congratu- lations to you.
Mr.  GOODEN.  Thank  you,  Mr.Chairman. I  appreciate it  very
much,  and  I  look  forward  to  bringing  her  here  someday
soon  to meet you all.
Chairman CLAY. Very good. What is her name? 
Mr. GOODEN. Milla Michelle Gooden.
Chairman CLAY. Very good. Mr. GOODEN. She was born last week.
Chairman CLAY. Congratulations, again. Mr. GOODEN. Thank you.
Chairman CLAY. This hearing is now adjourned. 
[Whereupon, at 4:39 p.m., the hearing was adjourned.]

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